The Importance of Determination of Seat under Indian Arbitration Law

[Saumitra Shrivastava is a IV year B.A. LLB (Hons,) student at HNLU, Raipur]

Introduction

In international commercial arbitration the concepts of place, seat and venue are of tremendous importance as they determine which law and whose jurisdiction would be applied in a case. The courts of a country could interfere in any arbitral proceedings only if they have jurisdiction to do so. For instance, Part one of the Indian arbitration legislation, i.e., the Arbitration and Conciliation Act, 1996 (the ‘Act’) has several provisions enabling Indian courts to interfere. However, they are only applicable where the place of arbitration is India (see section 2(2) of the Act) . This leads to several questions. When do we consider if the place of arbitration is India? How is it different from the seat or venue? Does deciding venue automatically decide seat? The Supreme Court has decided upon these questions on 25 September 2018 in the landmark judgment of Hardy Exploration v Union of India.

Interplay of Three Laws

In any international arbitration, there is an interplay of three kinds of laws:

  1. Applicable law (law governing the matrix of the contract);
  2. Law of arbitration agreement; and
  3. Lex arbitri (law of juridical seat).

In the aforesaid judgment, the classification was more or less the same:

  1. The proper law of the contract, i.e., the law governing the contract which creates the substantive rights of the parties in respect of which the dispute has arisen.
  2. The proper law of the arbitration agreement, i.e., the law governing the obligation of the parties to submit the disputes to arbitration, and to honour an award.
  3. The curial law, i.e. the law governing the conduct of the individual reference.

The parties generally specify these laws by specifying them in the agreement. When they decide the seat of the arbitration, they impliedly decide that courts (of the country in which seat is located) have jurisdiction over the proceedings. That decides which country’s courts would have supervisory jurisdiction over the arbitral tribunal. However, the problem arises when the contract does not specify same. In the present case, the seat was not decided.

Facts of the Case

Hardy Exploration Pvt. Ltd (‘HEPL’) entered into a contract with the Union of India in November, 1996 in relation to the extraction, development and production of hydrocarbons in a geographic block in India (“Block”). The arbitration clause did not specify the seat of the arbitration. Instead it specified Kuala Lumpur as the venue of the arbitration. Further the contract law was decided to be that of India. The curial law was specified to be the UNCITRAL Model Law on International Commercial Arbitration, 1985.

The contract between the parties provided:

32.1 This contract shall be governed and interpreted in accordance with the laws of India.

32.2 Nothing in this contract shall entitle the contractor to exercise the rights,                        privileges and powers conferred upon it by this contract in a manner which will contravene the laws of India.

33.9 Arbitration proceedings shall be conducted in accordance with the UNCITRAL Model Law on International Commercial Arbitration of 1985 except that in the event of any conflict between the rules and the provisions of this Article 33, the provisions of this Article 33 shall govern.

33.12 The venue of conciliation or arbitration proceedings pursuant to this Article                      unless the parties otherwise agree, shall be Kuala Lumpur and shall be conducted in English language. Insofar as practicable the parties shall continue to implement the terms of this contract notwithstanding the initiation of arbitration proceedings and any pending claim or dispute.

A dispute arose between the parties and arbitration proceedings commenced in Kuala Lumpur pursuant to the arbitration agreement. The award was passed by the tribunal in favour of HEPL and consequently signed by the parties in Kuala Lumpur on 2 February, 2013. The award was challenged under section 34 of the Act in Delhi High Court in July 2013.

Contentions of the Parties

HEPL submitted that the Indian courts have no jurisdiction over the award as the contract stipulated that Indian law would be applicable only for the contract.[1] Articles 32.1 and 32.2 of the arbitration agreement point towards the contractual rights of the parties. There was nothing in the agreement to suggest any indication towards Indian law as the law of juridical seat or curial law. In fact, Article 33.9 refers the arbitral proceedings to the application of Model Law and not the Indian law.

The Union of India contended that the UNCITRAL Model Law was adopted by the Indian Parliament by enacting the Act as evidenced by its Statement of Objects and Reasons. It was further submitted that the grounds mentioned in Article 34 of the UNCITRAL Model Law have been, mutatis mutandis, incorporated in section 34 of the Act.

The single judge of Delhi High Court decided in favour of HEPL stating that the courts of Malaysia would have jurisdiction as the venue of the arbitral proceeding was decided to be Kuala Lumpur. The Division Bench of the High Court confirmed the decision.

Law Regarding Seat and Venue in India

It is interesting to note that the Act does not even mention the terms ‘seat’ and ‘venue’. Section 20 of the Act merely talks about ‘place of arbitration’. It is only by a series of judgments of the Supreme Court that the law has been laid down on several questions revolving around the ambiguous section of the Act. In Bhatia International v. Bulk Trading, the Court distinguished between venue and the seat of the country and held that the ‘place’ in sections 20(1) and 20(2) refer to the seat and in section 20(3) it refers to venue.

In the present case, the venue was determined and not the seat. The arbitral tribunal of the Kuala Lumpur passed the award without determining the seat. There was no question of determination by either party in the arbitral proceedings.

Principles Laid Down in Bhatia International and BALCO

Of the many judgments submitted by the parties before the Supreme Court, the Court noted that the said controversy has to be governed by the principle laid down in Bharat Aluminium Company v. Kaiser Aluminium (‘Balco’) or by the agreement or by the principle of implied exclusion as has been held in Bhatia International.

The principle laid down in Balco states that when there is an absence of any specific choice on the law governing the arbitration agreement, the same would be determined by the substantive law of contract. The principle of implied exclusion in Bhatia International is that Part One is to apply also to international commercial arbitrations which take place out of India, unless the parties by agreement, express or implied exclude it or any of its provisions. In the present case, the substantive law of contract was Indian law. Further, it was held that there was no exclusion of Act by the parties.

Exclusion of the Act

The Supreme Court held that the seat and venue could not be used interchangeably and for excluding the ‘Part one’ of the Act, there has to be a positive act of determination of seat by the parties and, in case of their failure, by the arbitral tribunal. The mere meeting of parties and signing of the award by the party would not be equal to determination. The sittings at various places are relatable to venue and would not make them seat automatically.

Conclusion

Thus, the Supreme Court overruled the decision and held that the Indian courts have the jurisdiction to entertain the case under section 34 of the Act. For excluding the application of the Act, there has to be specific exclusion of Indian courts, which in the present case, was neither done by the parties nor by the tribunal.

The law has become somewhat clear on the question of the difference between seat and venue of the court. However it must be noted by the legislators that the Act still provides no reference to the concept of seat or venue of the arbitration and merely provides for the ‘place’ of arbitration. For the sake of clarity of law, especially for the international observers who by mere reading of the Act could conclude the place to be same as seat and venue, it must be amended to distinguish between these terms in sections 2(2) and 20 of the Act.

Saumitra Shrivastava

[1] Article 32.1, Contract

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