Supreme Court Reopens the Issue of “Venue” versus “Seat”

[Shreesh Chadha is a final year student at Jindal Global Law School, Sonipat]

The dichotomy between the “venue or place of arbitration” and “seat of arbitration” has been the subject matter of a plethora of judgements by the Supreme Court. This issue was recently reopened before the Supreme Court, and has resulted in contrary positions of law, warranting serious reconsideration.

A full bench of the Supreme Court has, on 5 March 2020, reiterated the position of law on “seat of arbitration” propounded by another full bench of the Supreme Court in Union of India v. Hardy Exploration and Production (India) Inc.The recent ruling in Mankastu Impex Private Limited v. Airvisual Limitedhas distinguished the full bench decision in BGS SGS SOMA JV v. NHPC Ltd.on the issue of whether the “venue of arbitration” is the “seat of arbitration”.

This post will elucidate the principles propounded by the three judgements mentioned above, and how the most recent ruling in Mankastu Impex is likely to set the floor for a referral to a Constitution Bench of the Supreme Court.

Conflict between Hardy Exploration and BGS

The seeming conflict between the two judgements has been discussed on this blog here, and is being summarised herein. Hardy Exploration arises out of a production-sharing contract entered into by Hardy Exploration and Production (India) Inc. (“HEPI”) and the Government of India. Disputes arose between the parties and HEPI invoked the arbitration clause. The award came to be declared and signed in Kuala Lumpur. The Union of India applied for setting aside the award under section 34, part I, Arbitration and Conciliation Act, 1996 (“Act”) on the basis of the “applicable law” clause in the contract stating that the governing law should be Indian law. On the other hand, the arbitration clause read that the arbitral proceedings shall take place in Kuala Lumpur. The conflict between “venue” and “seat” arose in this context.

The Supreme Court in Hardy Exploration held that the arbitration clause should be read holistically to gauge the intention of the parties with respect to “seat of arbitration”. If the “seat” is not explicitly mentioned, then it has to be deduced from the arbitration clause and related factors. Therefore, if only the “venue” is mentioned in the arbitration clause, the same cannot be held to be the “seat”, unless an express mention making it the “seat” exists. The basis of this reasoning was that the words “seat” and “place” of arbitration can be used interchangeably.

On the other hand, the BGS SGS judgement held that if the arbitration clause mentions the “venue” of arbitration in conjunction with the words “arbitration proceedings”, then the same shall be understood to mean the “seat” of arbitration. Contrary to the ruling in Hardy Exploration, the bench in BGS SGS held that a contradictory intention is required to come to the conclusion that the “venue” is not the “seat” when the parties have agreed to an exclusive jurisdiction clause in their contract. On the observation of “place” and “seat” being used interchangeably, the bench in BGS SGS propounded that the judgement of Hardy Exploration is at variance with the constitution bench decision in Bharat Aluminium Co. (BALCO) v. Kaiser Aluminium Technical Service, Inc., which explicitly held that the two words connote different intentions – “venue or place” means the location of the arbitration proceeding but “seat” means the governing law for the purpose of the proceedings. Thus, the full bench of the Supreme Court in BGS SGS opined that the law laid down by the judgement in Hardy Exploration is incorrect.

Supreme Court in Mankastu Impex

The judgement arises out of a sale-purchase agreement entered into between the petitioner and respondent. The dispute arose out of a shift in the management of the respondent, and the resultant back and forth over renewal of terms of the original agreement. The petitioner invoked the arbitration clause and submitted to the jurisdiction of the Delhi High Court by filing an application for interim relief under section 9 of the Act. The contention of the respondent was that the clause in the agreement mentioned Hong Kong as the venue for arbitration. The matter reached the Supreme Court by virtue of a section 11 application filed by the petitioner for appointment of a sole arbitrator.

The factual matrix in which the question of “venue” versus “seat” arose is almost identical to the one in Hardy Exploration. The applicable law clause stated that the governing law for the purpose of the agreement is the Indian law, whereas the arbitration clause mentions Hong Kong as the venue for the arbitral proceedings. Coordinate bench decisions of BGS SGS and Hardy Exploration were relied on by the petitioner and respondent respectively.

While agreeing with the reasoning in BALCO, the Supreme Court reiterated that the difference between the terms “venue” and “seat” are crucial, and that they cannot be used interchangeably. The judgement also re-affirms the reasoning of Hardy Exploration in that surrounding factors and a holistic reading of the arbitration clause in the agreement must be taken into consideration to determine what the “seat” of arbitration is. The bench went one step ahead to hold that the intention of the parties with regards to the applicable law (seat) is to be determined from their conduct as well as the other clauses of the agreement.

Eventually, the conclusion reached was that, on a reading of the agreement, it is apparent that the parties intended Hong Kong to not only be the “venue” of arbitration but also the “seat”. Thus, relying on Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd., it was held that since the “seat” of arbitration proceedings is Hong Kong, the applicable law is the law of Hong Kong, and a section 11 application does not lie with the Supreme Court of India. The applicable law clause, which stated that the governing law for the agreement shall be Indian law, was distinguished on the construction of the clause and due to section 2(2) of the Act, which excludes the application of section 11 to international commercial arbitrations seated outside India.

Conclusion

The judgement in Mankastu Impex does address the conflict between Hardy Exploration and BGS SGS, but concludes, and rightly so, that the doctrine of binding precedent is not applicable to coordinate bench decisions. Thus, the observation in the judgement of BGS SGS, holding that the law laid down by Hardy Exploration is incorrect, does not amount to the latter judgement being overruled.

Nevertheless, by partly accepting the view in BALCO and reading it with the judgement of Hardy Exploration, in holding that an explicit mention of “venue or place” of arbitration does not lead to the assumption that said “venue or place” is the “seat” of arbitration, the bench of the Supreme Court in Mankastu Impex has disregarded the judgement of BGS SGS.

Considering that all the three judgments discussed hereinabove are three-judge benches, they are coordinate benches and cannot be held to conclusively decide the dichotomy of “venue versus seat”. The apparent conflict needs to be resolved by at least a five-judge bench of the Supreme Court, so that the issue is settled once and for all.

Shreesh Chadha

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