Decoding the Judicial Logjam Surrounding the ‘Seat’ of Arbitration

[Soham Banerjee is an Associate (Dispute Resolution) in a law firm in Mumbai and Salona Mittal is an advocate at the Bombay High Court]

There is no gainsaying the fact that determination of the ‘seat’ of arbitration is a vexed question in law, having undergone multiple (and often conflicting) judicial interpretation. Identifying the seat of arbitration is a crucial exercise, since the determination of the seat of arbitration ipso facto brings along with it the supervisory jurisdiction of the courts where such seat is located [See Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc. (“BALCO”), (2012) 9 SCC 552].

Legislative Framework

Before proceeding further, it would be appropriate to cull out the three systems of law, typically found in an arbitration agreement:

  1. The law governing the contract (lex loci contractus);

  2. The law governing the arbitration agreement (lex arbitri); and

  3. The procedure or rules under which the arbitration is to be conducted (lex fori or curial law).
Pertinently, the Arbitration and Conciliation Act, 1996 did not make any specific reference to the ‘seat’ of arbitration. Section 20 of the Act however makes reference to the ‘place’ of arbitration and a perusal thereof would make it ex facie evident that the Act envisages only the ‘place’ of arbitration which shall be chosen by the parties and designated in the arbitration agreement. This does not however bind the arbitral tribunal to hold all its meetings or hearings only at the place of arbitration. As experience suggests, international commercial arbitrations [see section 2(1)(f) of the Act] are often held at places other than the designated place of arbitration. Importantly, however, shifting of the hearing to different places for the sake of convenience would not concomitantly entail a shift in the designated place of arbitration agreed upon by the parties [see BALCO at paragraph 98]. Accordingly, the reference to ‘place’ in section 20(1) and 20(2) should be construed as ‘seat’, whereas the reference to ‘place’ in section 20(3) ought to be construed as the ‘venue’ of arbitration.

Judicial Precedents

We begin with the BALCO principle which excluded the applicability of Part – I of the Act to international commercial arbitrations. BALCO expressly held that the reference to a foreign ‘seat’ of arbitration was sufficient to exclude the applicability of Part I. The Court held that the reference to the ‘place’ in sections 20(1) and 20(2) must necessarily be read as the ‘seat’ of arbitration, whereas the reference to the ‘place’ in section 20(3) must be read to mean the ‘venue’ of arbitration. Further, the Court ruled that the law of the ‘seat’ is normally the law that governs the arbitration. Accordingly, the Court observed that:

  1. arbitrations are anchored to the seat or place of the arbitration;

  2. courts at the seat of the arbitration exercise exclusive and supervisory jurisdiction over the arbitral proceedings; and

  3. venue of the arbitration is not equivalent to the seat of the arbitration [See paragraphs 75 and 76].
In Reliance Industries v. UOI,(2014) 7 SCC 603,the arbitration agreement provided for the venue to be London (which the parties later consented to as the seat) and was governed by the laws of England, while the substantive law was Indian law. The Court held that even though the law of the contract was Indian law, the parties had consciously decided to anchor the arbitration proceedings as per the laws of England. Since the arbitration agreement is severable from its underlying contract, the seat of the arbitration had to necessarily be London. [See paragraphs 42 to 45].

In Enercon India v. Enercon GmBH, (2014) 5 SCC 1, the governing law of the contract was Indian law, the venue of the arbitration was London and the provisions of the Indian Arbitration Act were to apply. The Supreme Court, relying upon the ‘close and intimate connection test’ propounded by the English Court of Appeal in Naviera Amazonica Peruana S.A. v. Compania Internacional De Seguros Del Peru, 1988 (1) Lloyd’s Rep 116, determined the ‘seat’ of arbitration to be India. Since the lex contractus, lex arbitiri and lex fora were Indian, the Court predicated its decision on the presumption that London was only the ‘venue’ of the arbitration agreement. It, however, observed that such a presumption was rebuttable if the ‘venue’ was supported by a transnational set of rules to transform it into the seat [See paragraphs 97 to 107].

In Imax Corporation v. E – City Entertainment, (2017) 5 SCC 331, the law governing the contract was Singapore law (lex contractus). Curiously, the arbitration clause only provided that the arbitration would be conducted according to the ICC Rules of Arbitration. Subsequently, London was designated the seat by the court of ICC. The Supreme Court, validating the arbitration clause, held that in the absence of contrary indicia it is to be presumed that the parties have intended the lex contractus and the lex arbitri to be the same as the law of the country in which the arbitration is conducted and that, in the present case, application of Part I had been excluded. [see paragraphs 21 to 30].

In Roger Shahshoua v. Mukesh Sharma, (2017) 14 SCC 722, the parties specified London as the ‘venue’ and the arbitration proceedings to be conducted in accordance with ICC Rules of Arbitration. The Supreme Court recognized the difference between venue and seat and held that when a court determines that there is a prescription for venue and ‘something else’, the juridical seat of arbitration needs to be determined on the facts of the case. In the instant case, since London was the venue was supported by ICC Rules as the procedure governing the arbitration, the inescapable conclusion was that the parties intended London as the ‘seat’ of arbitration [see paragraphs 29 and 30].

It would be pertinent to note that the above findings were rendered in the context of international commercial arbitration. The Supreme Court in Indus Mobile v. Datawind, (2017) 7 SCC 678, had occasion to determine the seat in a domestic arbitration. In this case, the arbitration clause provided for arbitration in Mumbai with courts at Mumbai having exclusive jurisdiction. Notably, the cause of action did not arise in Mumbai and neither of the parties resided in Mumbai (i.e., the classical test of jurisdiction under sections 16 to 21 of the Code of Civil Procedure, 1908). However, relying upon BALCO, the Court observed that the designation of a seat is akin to an exclusive jurisdiction clause, even in the absence of the cause of action having arisen within their territory [see paragraphs 9 to 19].

Hardy Exploration – Settling the Debate on Seat and Venue

Interestingly, the decision in Brahmani River Pellets Limited v. Kamachi Industries Limited  was preceded by the Supreme Court in UOI v. Hardy Exploration, (2019) 13 SCC 472. The decision in Hardy Exploration (three-judge bench) was made on a reference by a two-judge bench in light of the several decisions of the Supreme Court of variable strength on the issue of seat and venue. In answering the reference, the Court held that the arbitration clause has to be read in a holistic manner to determine the jurisdiction of the court. Further, the mention of ‘venue’ with something else appended thereto implies (depending on the nature of prescription) the exclusion of Part – I of the Act. Although rendered in the context of an international commercial arbitration, the fact that Brahmani River overlooked the principles in Hardy Exploration set at naught the years of jurisprudence establishing the difference between a seat and venue of arbitration.

Factually, in Hardy Exploration, the venue of the arbitration was at Kula Lumpur, the rules governing the arbitration were the UNICTRAL Model Laws and the law governing the contract was Indian Law. The arbitration proceedings were held and the award was delivered in Kuala Lumpur. The Court held that since the tribunal merely held meetings at and signed the award in Kuala Lumpur, there was no “positive determination” of the place of arbitration by the tribunal (as required by the UNCITRAL Model Laws). The seat was therefore held to be in India.  

The Court’s rationale was that when a “place” is mentioned or agreed upon, it obtain the status of ‘seat’. However, if a condition precedent is attached to the place of arbitration (such as the positive determination of the place by the tribunal), the said condition needs to be satisfied for the ‘place’ to become ‘seat’. [see paragraphs 32 to 34].

Incidentally, the greatest criticism of Hardy Exploration stems from the fact that the Court missed out on a golden opportunity to settle debate surrounding seat and venue of arbitration by failing to specify the possible categories of ‘condition precedents’ and by not enumerating the concomitant factors necessary to transform a place or venue into the seat respectively.

Brahmani River – Deviating from the Hardy Exploration Principle

In Brahmani River Pellets v. Kamachi Industries, (2019) SCC OnLine SC 929, the venue of the arbitration in a domestic arbitration was Bhubaneshwar. The Court surprisingly conflated the concepts of seat and venue by obliterating the difference between them as established by BALCO and the subsequent judgments as above. It held that the mere designation of a venue (without any other concomitant factors) was sufficient indication of the party’s intention to confer Bhubaneshwar as the seat of arbitration [see paragraphs 16 to 19].

BGS Soma – Rekindling the Seat and Venue Conundrum

A three-judge bench of the Supreme Court in BGS SGS Soma v. NHPC, (2019) SCC OnLine SC 1585, very recently held the ratio of Hardy Exploration to be bad law and reopened the debate surrounding the determination of the seat of arbitration. The arbitration clause stated that arbitration was to be held in New Delhi/Faridabad. By referring to Roger Shashoua v. Mukesh Sharma, [2009] EWHC 957 (Comm), the Court held that wherever there is an express designation of ‘venue’ and there exist no other significant contrary indicia, then the venue ipso facto becomes seat. Accordingly, the Court held that since the arbitral award was signed in Delhi and there were no contrary indicia (indicating that the parties did not intend the venue to be the seat), Delhi was designated as the seat of the arbitration.

While the ruling in BGS Soma is an extension of the Brahmani River principle, the authors believe that the reliance on Roger Shahshoua is misplaced for the reason that, in Roger Shahsoua, London was held to be ‘seat’ after reading the ‘venue’ (London) of the arbitration concomitantly with the transnational body of rules (ICC Rules) governing the arbitration. Therefore, there was no ipso facto designation of the venue as the seat of the arbitration, in the absence of any contrary indicia. Interestingly, the venue + concomitant line of reasoning has been used to overrule Hardy Exploration [see paragraph 97].

In any event, being a bench of similar strength, the Supreme Court in BGS Soma could not have, by the law of precedents, overruled Hardy Exploration. In case of disagreement, the matter ought to have been referred for consideration by a larger bench.

Mankastu Impex – Indication of the Emerging Trend

In  Mankastu Impex v. Airvisual Limited, (2020) SCC OnLine SC 301, the Supreme Court has held that mere mention of the ‘place’ of arbitration does not ipso facto make it the ‘seat’, unless there are other conditions in the agreement which suggest that the parties intended to designate the ‘place’ with the status of the ‘seat’. Thus, the Mankastu principle evidently flies in the face of BGS Soma.

The lex contractus in Mankastu was Indian law and the courts at New Delhi were to exercise supervisory jurisdiction. The place of arbitration was Hong Kong and the disputes were to be resolved through arbitration administered in Hong Kong. The Court inter alia observed that the seat and venue of arbitration cannot be used interchangeably and that mere expression “place of arbitration” cannot be the basis to determine the intention of the parties that they have intended that place as the ‘seat’ of arbitration. Accordingly, the Court held that, ordinarily, mere reference to Hong Kong as the ‘place’ of arbitration, would not have been sufficient to confer upon it the status of a seat. However, in the facts of the case, since the disputes were to be resolved through arbitration administered in Hong Kong, the inescapable conclusion was that the parties had agreed that the arbitration be seated at Hong Kong.

While the ‘place’ of arbitration was ultimately held to be the ‘seat’ in the instant case, it would be pertinent to note that the Court arrived at its finding owing to the peculiar facts and circumstances of the case. The reasoning advanced by the Court suggests that mere reference to ‘place’ will not ipso facto determine ‘seat’ of the arbitration and is to that limited extent, a reaffirmation of the Hardy Exploration principle and a stark deviation from BGS Soma.

Conclusion

While the position in Mankastu appears to have realigned the position in respect to determination of seat to that of Hardy Exploration and Roger Shashoua, the position advanced by BGS Soma does not stand conclusively overruled. Per contra, since Hardy Exploration and BGS Soma are both of coordinate benches, it cannot be conclusively determined at this point in time whether Hardy Exploration is indeed bad law, unless the same is referred to a larger bench for consideration. Pertinently, though this question had been raised in Mankastu, the Court did not enter into discussion on the same.

Therefore, what emerges from the above is the existence of two lines of judgments – one, the Hardy Exploration principle which uses venue + concomitant factors and place + condition precedent to determine seat, which has been recently fortified by the Mankastu judgment – and two, the BGS Soma principle which ipso facto considers the reference to place or venue as designation of seat in absence of contrary indicia. The principle that ultimately receives final sanction of the law is an issue which would require greater judicial scrutiny by our courts and multiple rounds of litigation and would ultimately turn on the facts of the case. However, until such clarity is received, the need of the hour is to draft watertight arbitration clauses whose validity does not depend on fact-specific judicial interpretation but can be easily pigeon-holed into either of the positions, as stated in Hardy Exploration and BGS Soma.

Soham Banerjee & Salona Mittal

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