BY Devanshi Prasad AND Arjun Chakladar, THIRD-YEAR STUDENTS AT NLIU, BHOPAL
The question regarding the selection of ‘seat’ and ‘venue’ of arbitration is integral to the enforcement of the arbitral award, as well as the determination of the applicable law. However, there has been a lack of unanimity resulting in judicial ambiguity as seen in the Mankastu judgment surrounding the selection of the ‘seat’ and ‘venue’, which is analyzed and covered in the following article.
A contract containing an arbitration clause has three underlining laws governing it, namely the proper law or the law governing the performance obligations, and contractual terms and agreement. The procedural laws namely, the curial law regulating the conduct of the arbitration proceedings and the lexarbitri or the juridical seat of arbitration. It is the Court which has supervisory jurisdiction over all arbitral aspects of the contract.
The determination of the lexarbitri is a drawn-out and lengthy debate. Uncertainty in the contract to specify the discernible applicable laws leads to disparity and confusion surrounding the juridical seat of any arbitration. The Arbitration and Conciliation Act (‘the Act’) enacted in 1996 had failed to provide clarity to the concept. Courts have worked tirelessly to interpret the provisions and provide uniformity in the construction of its sections but the debate around delineation of seat and venue remains unresolved.
The Ambiguity Surrounding ‘Place’, ‘Venue’ and ‘Seat’ Under the Act
The Act does not define ‘seat’ but introduces the term ‘place’ in the statute. However, the same has not been well-defined and can be interpreted to have different meanings under various sections of the Act. This leads to ambiguity in deciding which court has the sole jurisdiction over the arbitration proceedings.
On reading Section 20 of the Act, the initial implication points that the party autonomy extends only to the choice of ‘venue’ of arbitration. However, the Apex Court in Bharat Aluminium Company v. Kaiser Aluminum Technical Services Incorporation(‘BALCO’) has partly cleared the confusion. It established the concepts of ‘seat’ and ‘venue’ under the Act. It is imperative to read the abovementioned two sections in consonance thereby leading to the conclusion that ‘place’ connotes ‘seat’ under Section 20(1) and (2), whereas, it would connote ‘venue’ under section 20(3).
It is common to use seat of arbitration interchangeably with place of arbitration. It determines which court has the jurisdiction to the exclusion of other courts in the arbitral proceedings. The venue on the other hand merely indicates the geographical location where the proceedings might be conducted. It may be a neutral venue decided entirely on the convenience of the parties. The seat exists independently and separately as to the venue of arbitration.
The conundrum of seat and venue of arbitration begins where the contract remains ambiguous or silent on the provision of a seat. The possibility of concurrent jurisdictions introduces the fatality of discord and disharmony into the settlement process of claims. A new peril arises in deciding which courts’ decision would prevail over the dispute. Therefore, the determination of the seat of arbitration is of utmost importance in any arbitral dispute.
Tests for Determining The ‘Seat’ Of Arbitration
The Courts effectively provided some respite in the whole debate by interpreting the vague sections of the Act. Two acceptable tests have been devised through precedents for conclusive determination of the seat. They are:
- Closest and most intimate connection, and
- Bright-line test.
The Sulamerica case establishes that when an agreement lacks an express or implied choice of law governing the arbitration agreement, the system of law which has the closest and most intimate connection is significant. The expressly selected substantive law of contract is the implied choice of law for the arbitration agreement. In the case of Enercon (India) Ltd. v.Energon GmbH (‘Enercon’), the division bench of the Supreme Court relied on the NavieraAmazonica case and devised the first set of tests. As per this, careful attention is to be paid towards party intention and whether the legal system where the proceedings are to be conducted have a close and intimate connection to the arbitral process. The test is applicable when the arbitration clause is silent or unclear and fails to ascertain the applicable law. The intention of the parties becomes the most decisive factor in clearing up the confusion. Further, the location where the arbitration is to be conducted is a relevant point of consideration.
Proceeding to the second test, the Shashou principle, laid down in Roger Shashoua &Ors. v. Mukesh Sharma elucidates when the ‘venue’ can be considered as the juridical ‘seat’ in any proceeding. The ‘venue’ must be expressly designated without providing any alternative situs as the ‘seat’. There must be no ‘contrary indicia’ or anything indicating the contrary combined with the arbitration being governed by a supranational body of rules.
This was conclusively applied by the three Judge Bench of the Apex Court in BGS SGS SOMA JV v. NHPC Ltd. (‘SOMA JV’). It stated that use of expressions like “arbitration proceedings” that “shall be held” at a “venue” emphatically denotes the ‘venue’ being the appointed ‘seat’, subject to no contrary indication of the same.
The judgment was successful in resolving the ‘seat’ and ‘venue’ dilemma. It demystified the ambiguous portion of the BALCO judgment which sought to introduce the concept of concurrent jurisdiction, and reiterated that once parties have chosen the seat of arbitration the same would indicate that the role of the seat is to have exclusive jurisdiction. It would mean that they have consented to ousting the jurisdiction of the courts of cause of action.
SOMA JV case solidifies the principle of party autonomy, and holds the judgment pronounced in Union of India v. Hardy Exploration and Production (India) Ltd. (‘Hardy’) to be bad in law. The Hardy case, limiting party autonomy holds that ‘venue’ would not ipso facto imply the appointment of ‘seat’ without a positive indicator in furtherance of the same intention. As a test, it is precisely contrary to the bright-line test. The ‘venue’ would become the ‘seat’ only where there is something submitted in concomitance of it. However, the compeer bench of the SOMA JV case cannot inexorably overrule the Hardy case principle.
Judicial Scenario Post SOMA JV
Even after the SOMA JV case, discrepancies in determining the seat of arbitration subsist. If we look at two recent judgments dealing with the issue, we find that there is not much clarity on the subject.
In Hindustan Construction Company Ltd.v. NHPC Ltd. and Ors.(‘Hindustan Construction’), the Apex Court relied upon the SOMA JV case and upheld that once a ‘venue’ is indicated to be the chosen ‘seat’, the court of that seat has jurisdiction to the exclusion of other courts.
However, the very next day, three-judge bench of the honorable Supreme Court passed its judgment in the case of Mankastu Impex Pvt. Ltd. v. Airvisual Ltd deviating from the judgment in the Hindustan Construction case. The dispute arose from a sale-purchase agreement and led to invocation of arbitration clause over disagreements regarding renewal of original terms of agreement. A section 11 application was filed in the Supreme Court for appointing the sole arbitrator. However, contentions were raised that the seat vests in Hong Kong, the venue of arbitration proceedings in the agreement. The Court held that the seat of arbitration was in Hong Kong. The finding was based on the clause appointing Hong Kong as the “place of arbitration” along with the clause providing for referring and finally resolving all controversies and disagreements in Hong Kong.
The Court side-stepped the bright-line test of SOMA JV and held that ‘seat’ and ‘venue’ must be distinguished and cannot be used interchangeably. The SOMA JV case’s reasoning that use of “arbitration proceedings” would inexorably conclude to the ‘venue’ being chosen as the ‘seat’ was not favored. Reliance was placed on the Hardy case analysis. A mere mentioning of the ‘venue’ or ‘place of arbitration’ does not conclusively relay intention to choose the ‘seat’; it must be substantiated by the conduct of the parties towards the same. Therefore, clauses must be read holistically to arrive at a conclusion. A stand-alone reading of the clause was insufficient for treating a ‘venue’ as the ‘seat’. Furthermore, the coordinate bench of SOMA JV case could not overrule the judgment rendered by the coordinate bench of the Hardy case.
The myriad of possible judicial interpretations determining the seat and venue of the arbitration still find a lack of unanimity on the concept. Therefore, parties should exercise caution in the drafting of such arbitration clauses in order to avoid any unnecessary deliberation on the same and clear any future ambiguity. The Courts in India have yet not provided a consistent clarification as to the question of seat versus venue. There still exists reluctance on the part of the courts to settle the conflicting opinions with regard to this question. The parties must ensure an express agreement, with regard to the seat of arbitration and to avoid the quagmire caused by the interchangeability of seat and venue. The Enercon and SOMA JV cases provide adequate tests however; the possibility of employing the test adopted in Hardy case inculcates chaos in the judicial process. The SOMA JV case tends to be more in line with the principles of party autonomy and therefore, should be lauded for its observations. The matter must be settled by a larger bench of the Supreme Court to reduce undue litigation on the issue, which it failed to do in the SOMA JV case.
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Well done sir.