The Supreme Court's recent judgement in Union of India v. Hardy Exploration and Production (India) Inc. (decided on 25 September 2018) highlights the risk in not providing for an express choice of law governing the agreement to arbitrate and/or overlooking to stipulate the 'seat' of arbitration. The judgement discusses the legal concepts underlying the expression 'seat', 'venue' and 'place' of arbitration and is a welcome contribution to the law of international arbitration in India.
Facts of the Case
Hardy Exploration and Production (India) Inc. ("Hardy") entered into a production-sharing contract (PSC) with the Government of India (GOI). The substantive law governing the PSC was Indian law. But the law governing the arbitration clause embedded in the PSC, was silent. The arbitration clause provided 'Kuala Lumpur' as the 'venue' of the arbitration, but did not specify the 'seat' or 'place' of arbitration. It instead contemplated that the arbitration proceedings were to be conducted in accordance with the UNCITRAL Model law on International Commercial Arbitration, 1985 ("Model Law").
A dispute arose between the parties which was arbitrated under the substantive law of India before a three-member tribunal at Kuala Lumpur. The arbitration culminated in an award published in Kuala Lumpur against the GOI. GOI commenced annulment proceedings in the Delhi High Court under Section 34 of the Arbitration and Conciliation Act 1996 ("Act"). Hardy opposed review on the ground that the Indian courts could not annul such an award under Section 34 of the Act as the 'seat' of arbitration was Kuala Lumpur. Hardy contended that annulment proceedings (if any) could only be brought before the Malaysian courts as conduct of the arbitral proceedings outside India implied that the 'seat' was outside India and the award could not be reviewed by the Indian courts. The Delhi High Court agreed with Hardy and held that GOI's challenge to the award under Section 34 of the Act was not maintainable. GOI's appeal to a Division Bench of the Delhi High Court also failed. GOI then sought and obtained leave to appeal to the Supreme Court.
The Supreme Court was against this background called upon to determine whether the 'seat' of arbitration was Malaysia or India.
Findings and analysis of the Supreme Court
The Supreme Court held that a holistic understanding of the arbitration clause was imperative for determining the jurisdiction of a court when faced with a challenge to an award.
The Court on reviewing its past judgments on this point reiterated that the term 'place' could be equated to the 'seat' of arbitration, provided there was an express determination either by the parties or the tribunal that Kuala Lumpur would be the juridical 'place' of the arbitration, as contemplated by Article 20 of the Model Law. The fact that the parties and the tribunal had not made any definitive determination of the 'place' of arbitration but were simply content to treat the 'venue' of the hearings at Kula Lumpur, weighed against Hardy's argument that the seat of the arbitration was in Malaysia.
In the Court's view, 'venue' could not ipso facto be regarded as the 'seat' of arbitration. Similarly, the 'place' of arbitration would not automatically be equated to 'seat'. The test according to the Court was whether there was a 'determination' of the 'place' of arbitration under Article 20 of the Model Law. Determination of the seat of arbitration required a positive act in the form of an opinion. As the parties had not explicitly agreed to a 'place' of arbitration nor had the arbitral tribunal determined the 'place' or expressed an opinion regarding the same while passing an award, the Court felt that Kuala Lumpur could not impliedly or by default, be regarded as the 'seat' of the arbitration.
The Supreme Court accordingly held that the seat of the arbitration was India, as Indian law (which governed the PSC) would also apply to the agreement to arbitrate. Consequently, the Indian courts would have jurisdiction to review or annul the award under Section 34 of the Act.
This much-anticipated decision illustrates the confusion and ensuing complications following the venue-seat-place puzzle in international arbitration cases. The judgement serves as a welcome reminder that failure to provide an express choice of law clause for the agreement to arbitrate or clearly identify and expressly stipulate the 'seat' of the arbitration in an agreement to arbitrate, has serious consequences, as it could entail an award being domesticated and subject to review by the Indian courts.
Posted on 11 October 2018 by Zarir Bharucha
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