The BGS Case: Cleared The Air Or Muddied The Settling Waters?

[Prince Todi is a 3rd year student at Hidayatullah National Law University, Raipur and Shruti Khanijow an Advocate at the Supreme Court of India]

In the past decade, there has been an exponential growth of arbitration in India. The fundamentals of party autonomy, neutrality and speedy disposal of disputes have not only attracted private parties but also states to prefer arbitration over conventional litigation. The intervention of courts, however, during and following the arbitral proceedings on account of a challenge to the award and its enforcement is an omnipresent affair. Hence, the determination of the appropriate court that has the supervisory and exclusive jurisdiction over the arbitral proceedings attains paramount importance, in particular in foreign seated arbitrations.

Late last year, the Supreme Court of India in BGS SGS Soma JV v. NHPC Ltd. held that the place or venue of arbitration shall be the seat of arbitration in absence of any contrary indicia, and only the court of the seat of arbitration shall have exclusive and supervisory jurisdiction over the arbitral proceedings (previously discussed here). In doing so, the Court: (a) recognized the fallibility in adopting a “cause of action” approach provided in BALCO; and (b) clarified the intent behind section 42 of the Arbitration and Conciliation Act, 1996 (the “Act”).

The Mist Created by BALCO

In international jurisprudence, the principle of territoriality is followed to determine the courts having exclusive jurisdiction. It provides that the place of arbitration is usually the seat of arbitration, which is analogous to an exclusive jurisdiction clause conferring jurisdiction upon the court of the seat. In this regard, Naviera Amazonica is a classic case wherein the UK Court of Appeal emphasized upon the territorial principle and provided that the court of the seat of arbitration is the only competent court before which any hearing concerning the challenge to an arbitration award can take place.

In compliance with the abovementioned international norms, the Supreme Court in BALCO held that Part I of Act did not apply to foreign seated arbitrations, thereby overruling Bhatia International. The Court also held that the seat of arbitration was the centre of gravity of arbitration, and an agreement to the seat amounted to an agreement to the court having exclusive jurisdiction. Although this appeared to have settled the law of land, paragraph 96 of BALCO gave birth to another mist by conferring exclusive supervisory jurisdiction to two sets of courts, viz.: (a) court of the seat of arbitration, and (b) courts where the cause of action arose.  The ‘cause of action’ approach was based on the premise that the legislature deliberately used the phrase ‘subject matter of dispute’ in defining “court” under section 2(1)(e), implying conferment of jurisdiction upon the courts at the place where the cause of action arose.

Following BALCO, the Delhi High Court in Antrix Corporation provided for concurrent jurisdiction to the court of seat and court of the place where the cause of action arose. It reasoned that the language of section 42 of the Act indicated the possibility of more than one competent forum to hear all applications; the one approached first had the sole jurisdiction to hear all other subsequent applications. It further provided that, had it been otherwise, the very existence of section 42 would be infructuous and against parliamentary intent. Against this backdrop, the ruling in BALCO again indirectly enabled the Indian courts to exercise jurisdiction in foreign seated arbitrations, ultimately defeating the principle of territoriality.

Revisiting BALCO

Nariman, J. in BGS rejected the above approach as being against the well-established international principles and notions of party autonomy. He relied upon Indus Mobile to suggest that section 20(1) of the Act signifies party autonomy by giving the parties the right to choose the place of arbitration and, consequently, the courts having supervisory jurisdiction. It is in this context that the definition of “court” under section 2(1)(e) needs to be interpreted. In Indus Mobile, the Court construed seat as a place neutral to the contesting parties and held that the moment seat is designated, it carries with it the designation of the courts having exclusive jurisdiction, irrespective of whether the cause of action arises there or not. Further, the Court referred to the 246th Law Commission report which suggested substituting ‘place’ with ‘seat’ in sections 20 and 31(4) of the Act, thereby indicating that once the place of arbitration was determined, it was clear that the parties have also chosen the courts of the seat for the purpose of interim orders and challenges to the award.

In the authors’ opinion, the Court in BGS has followed the correct approach in conferring exclusivity to the court of seat. Section 31(4), being similar to Article 31 of UNCITRAL Model Law, provides that the arbitral award shall state the place where the award is rendered. A bare perusal of this provision indicates that there exists only one place of arbitration, i.e., seat and, consequently, only one court has supervisory jurisdiction. Conversely, there exist fundamental flaws in conferring concurrent jurisdiction upon courts. Such an approach can lead to multiple litigation owing to the fact that the cause of action may have arisen at multiple places. For instance, if a contract is entered into in New Delhi for the supply of goods at Hong Kong and arbitration is seated at Singapore, this could, in addition to Singapore, confer jurisdiction to courts at New Delhi and Hong Kong, which would ultimately lead to increased litigation and compromise the neutrality of the parties. Besides, the notion of party autonomy in section 20 shall stand defeated since courts other than those at the seat would exercise jurisdiction.

In Shashoua and Reliance Industries, the respective courts in the UK and India reiterated that an agreement to the curial law of the seat was analogous to the courts of the seat having supervisory jurisdiction over the arbitration, so that any challenge to an interim or final award was to be made only in the courts of the place designated as the seat of the arbitration. In this regard, it is imperative to note that Shashoua was explicitly approved in BALCO, but still the Court deviated and provided for concurrent jurisdiction. Besides, the fact that in the case of international commercial arbitrations held in India, the exclusive jurisdiction vests only with the High Court, whether or not any cause of action arises within the jurisdiction of such High Court, leads to the conclusion that the legislature never intended to confer concurrent jurisdiction upon courts.

Remedying the Interpretation of Section 42

While declaring interpretation given by Antrix Corporation as erroneous, the Court in BGS held that section 42 is meant to avoid conflicts in jurisdiction of courts by placing supervisory jurisdiction over all arbitral proceedings in one court exclusively, i.e., the court of the seat of arbitration and, therefore, no existence of concurrent jurisdiction could be construed under section 42.

The authors opine that the term ‘court’ used in section 42 encompasses the competence of the court as a prerequisite to the exercise of supervisory jurisdiction over the arbitral proceedings. Since only the court of the seat is the competent court, it nullifies any ambiguity regarding the existence of another court. The same principle was laid down in Neyveli Lignite wherein it was held that even if an application is filed at a court of first instance, but if the same court is without competent jurisdiction, then it cannot be held to be the court of first instance and thereby a subsequent court will have jurisdiction over matters arising from the arbitral proceedings.

Analysis and Conclusion

Prior to the enactment of the Act, the concept of seat or place of arbitration was alien to Indian jurisprudence and, therefore, a court could exercise jurisdiction to decide questions forming the subject matter of arbitration if the same had been a subject matter of the suit. With the introduction of the Act based on the Model Law, significant amendments were made but the definition of “court” remained the same thereby leading to ambiguity. Against this backdrop, it is imperative to note that the term ‘subject matter of dispute’ was used in the Arbitration Act of 1940 and has become obsolete in its application to cross border disputes. Thus, it can be safely concluded that the conundrum owes its origin to a hybrid resulting from partial adoption of Model Law principles and the rules predating the Act.

The Supreme Court’s ruling in BGS indeed indicates a shift to a seat-oriented approach in consonance with the international norms and is a step in the right direction. The decision upholds the notions of party autonomy and will enthuse parties engaged in foreign seated arbitrations. This is further supported by Supreme Court’s recent decision in Vijay Karia where the Court clarified that, in a foreign seated arbitration, the task of domestic courts is restricted to enforcement proceedings and no challenge or application for interim relief can be made in such courts. However, the question of parties invoking an exception to this rule to secure interim reliefs remains unanswered. Further, whether the decision will meet a retrospective application remains to be seen, as any such measure may lead to another round of litigation in ongoing arbitrations.

Prince Todi & Shruti Khanijow

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