India: Part Two Of A Three-Part Series On Recent Developments In International Commercial Arbitration In India: Further Ambguity On The Concepts Of ‘Seat', ‘Venue' And ‘Place' Of Arbitration

Part One of this three-part series on developments in international commercial arbitration ("ICA") in India over the past three years (which can be accessed here) covered important topics such as the advent of the 2019 Amendment and the attitude of our courts with respect to the applicability of Part I of the Indian Arbitration and Conciliation Act, 1996 ("Act") to foreign seated arbitration. It also analysed a slew of contemporaneous conflicting judgments on the applicability of Section 9 of the Act to foreign seated arbitrations, and the interpretation of arbitration agreements with respect to its implicit / explicit exclusion.

The present part, Part Two, will analyse how our courts have severely complicated questions of interpretations of the terms 'seat', 'venue' and 'place', as they are found in arbitration agreements. In 2017, we seemed to have reached a fairly clear place in light of conclusive judicial pronouncements, but the recent catena of conflicting judgments of the Supreme Court ("SC") have stirred this ever controversial pot and given lawyers multiple new considerations while drafting arbitration agreements.

ICA in India, and across multiple international jurisdictions, is fulcrumed on the juridical 'seat' of the arbitration. Accordingly, in order to determine whether the laws codified in the Act will apply, or the laws of a foreign country will apply, one must determine the juridical seat of the arbitration, i.e., the lex fori.

1. The Pre-September 2018 Situation

As per Section 2(2) of the Act, if the place of the arbitration is outside India, Part I will not be applicable. This in itself lends some credence to the theory that the term 'place', as in Section 2(1) and 2(2) of the Act, is synonymous with the judicial seat of the arbitration. Even though they may not all pertain to ICA, certain judgments, i.e., BALCO,¹ Indus Mobile² and Reliance Industries³ have established the veracity of the proposition that the laws of the seat (a term which may in some cases be used interchangeably with the term 'place', provided there were no other factors that indicated otherwise) shall govern the conduct of the arbitration and the courts of the seat of arbitration have exclusive jurisdiction over all disputes arising out of the arbitration. Indus Mobile, after analysing various decisions, including BALCO states that the designation of a seat is akin to an exclusive jurisdiction clause. However, both BALCO, and Indus Mobile, along with other prolific judgments like Enercon⁴ make a clear differentiation between a 'seat', which refers to the juridical centre of arbitration proceedings, and 'venue', which referred to a geographical location of administrative convenience. But, due to a combination of judicial ambiguity and mis-guided drafting, arbitration agreements use all sorts of terms, i.e., 'seat', 'place', 'venue' (despite a catena of judgments, including Indus Mobile and BALCO, that made differentiations between them).

Further, to blur the lines even more, there have been certain recent judgments being passed which deviate from the rule that the courts of the seat of the arbitration have exclusive jurisdiction over proceedings arising out of the arbitration. For instance, the Delhi High Court in Antrix⁵ and the Madras High Court in IJM-SCL JV v. NHAI⁶ both relying on paragraph 96 of BALCO⁷, hold that even if the courts of the seat of arbitration have jurisdiction, the courts in the place where the cause of action / subject matter of the arbitration arises also have jurisdiction.

2. Hardy Exploration:

In September 2018, a three-judge bench of the SC in the case of Hardy Exploration⁸ changed the status quo. This case dealt with a contract governed by the laws of India. The arbitration agreement therein was to be governed by the UNCITRAL Model Law⁹ and the 'venue' of arbitration was Kuala Lumpur. The Model Law provides for parties to determine the place of arbitration, and in the event of the parties' failure to do so, the arbitral tribunal must determine the place of arbitration. In this case, the arbitral tribunal had convened arbitration meetings in Kuala Lumpur, but it had not made any specific statements regarding the place or seat of arbitration.

While determining the juridical seat of the arbitration, the SC made two crucial statements:

1. The term 'place' is used interchangeably with that of 'seat', and the place of an arbitration will be the seat of an arbitration, assuming there are no condition precedents attached to it. In the present case, there was no 'place' mentioned in the arbitration agreement, and the determination of the same was left to the parties and thereafter to the arbitral tribunal, which it did not undertake.
2. "A venue can become a seat if something else is added to it as a concomitant."

Applying these statements to the facts of the case, there was no 'place' specifically mentioned, and the conditions precedent for the determination of the same, i.e., the requirements of the Model Law, were not met. Furthermore, Kuala Lumpur was referred to as merely a 'venue', and there were no concomitant factors attached to it which would elevate it to the designation of juridical seat. Resultantly, the SC held that "the irresistible conclusion is that the Courts in India have jurisdiction" over disputes arising out of the arbitration agreement.

Here, it is important to note that aside from the substantive / proper law of the contract and the nationality of the parties, there was nothing connecting the arbitration to the laws of India. Despite this, the SC resorted to the equating the proper law of the contract with the law governing the arbitration proceedings, in the absence of a designated seat. Such reasoning is in fact in line with the judgment of Sumitomo,¹⁰ which was specifically rendered irrelevant by BALCO, and interestingly enough, this was pointed out by the SC in the earlier portion of its judgment in Hardy Exploration.

3. Brahmani River Pellets:

Thereafter, in August 2018, a Division bench of the SC, in the case of Brahmani River Pellets,¹¹ which pertained to a domestic arbitration, held that the courts of the 'venue' of arbitration will be the only courts entitled to hear any proceedings with respect to the arbitrations. This judgment pertained to the appointment of an arbitrator, through an arbitration agreement with no designated seat or exclusive jurisdiction clause, and held that an application for the same may only be made in the court of the venue of the arbitration. This judgment, which basically states that the juridical seat (which is akin to an exclusive jurisdiction clause) is the same as the venue of arbitration, is a significant departure from the position of law in Hardy Exploration (delivered by a three-judge bench), which holds that a venue can only become a seat in the presence of some concomitant factors.

4. BGS SGS:

Just when it seemed like there was some measure of clarity regarding how courts would interpret arbitration clauses which used terms like 'seat'/'venue'/'place', in light of Hardy Exploration, in December 2019, along came the much-discussed decision of the 3-judge bench of the SC in BGS SGS,¹² where the court inter alia promulgated a new test to determine whether a 'venue' was in fact a juridical seat. According to the SC herein, a venue / place mentioned in an arbitration agreement would be considered to be the seat of the arbitration, as long as there were no "significant contrary indicators". In order to arrive at this test, the SC relied heavily on a complete reading of BALCO, with specific emphasis on BALCO's reliance on the England and Wales High Court's decision in Roger Shashoua¹³ (which was also corroborated by the Indian SC¹⁴), which first espoused the process of assuming that the venue of an arbitration is tantamount to its seat, in the absence of any significant contrary indicators. In this vein, the SC in BGS SGS specifically stated that it considered the SC's decision in Hardy Exploration incorrect law because it was contrary to the findings of the Constitutional Bench of the SC in BALCO.¹⁵ Resultantly, there now appears to be an impasse as to which three-judge bench's decision on "whether a venue is a seat in the absence of additional factors?" will prevail.

BGS SGS also assumes significance because it declares that the Delhi High Court's decision in Antrix is incorrect law, and holds that only the court of the juridical seat (and not the court where cause of action has arisen) assumes exclusive jurisdiction over disputes arising out of an arbitration. It draws this conclusion as per a reading of the BALCO judgment as a whole (along with various subsequent judgments like Roger Shashoua, Indus Mobile, Reliance, etc.), and not paragraph 96 alone.

5. Mankatsu Impex

While Mankatsu Impex commented on this conflict between Hardy Exploration (i.e., 'place' is a seat in the absence of any condition precedents attached thereto / fulfilment of the condition precedents and venue is seat if there are additional concomitant factors pointing towards the same) and BGS SGS (i.e., place / venue is a juridical seat in the absence of any significant contrary indicia), it did not answer the question conclusively because it was apparently not applicable to the facts of the case. In any event, any answers would just make these waters murkier, considering that the judgment in Mankatsu Impex was also delivered by a three-judge bench.

Both Hardy Exploration¹⁶ and BGS SGS¹⁷ have seen immense traction in lower courts, and have started to take on immense precedential value despite the lack of clarity on the issues being litigated therein. Both these three-judge bench decisions have interpreted the Constitutional bench's judgment in BALCO differently. In our opinion, it is the BGS SGS ruling that accurately appreciated the letter and the spirit of the BALCO decision. It's divergence from Hardy Exploration was by virtue of its finding that Hardy Exploration incorrectly interpreted BALCO, which is the law of the land, and is hence an incorrect decision. However, some have argued that the judgement in BGS SGS does show the zeal of Supreme Court to clarify the law impacting the international commercial arbitration, arguably, without waiting for reference of the issue to a larger bench.

Stay tuned for Part 3 of this series on developments in ICA in India , wherein we discuss the attitude of the Indian judiciary towards the enforcement of foreign awards and the grey areas that have been formed therein by virtue of some new judgments.

Footnotes