The Emerging Ambiguity in Determination of Supervisory Courts for Arbitration Seated in India

[Nikhil Pratap is a lawyer practising at the Supreme of India, High Court at Delhi and other commercial tribunals in Delhi]

The Supreme Court in its recent judgments culminating in BGS SGS Soma JV v NHPC Ltd has attempted to provide finality to the issue of determination of the ‘supervisory courts’ for arbitrations seated in India (see here and here). In an attempt to enable convergence of all litigation related to arbitration into one single court, the Court has unsettled hitherto settled precedent in Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc. (‘BALCO’), which furnished concurrent jurisdiction to two sets of supervisory courts. Some commentators have hailed these judgments, as they will reduce litigation and create certainty and neutrality in litigation arising out of arbitrations (see here).

It is the author’s submission that the reasoning underlying the court’s decision in BGS-SGS is contrary to settled international and domestic principles and that the Court draws its conclusion from an incorrect understanding of ‘seat’ in an arbitration. Furthermore, the decision has also opened the proverbial Pandora’s Box for future litigation, not the least because it has effectively overturned BALCO, a judgment by a larger bench.

Before considering the fundamental issue in BGS-SGS, it is imperative to briefly reiterate the concept of ‘seat’ and ‘supervisory courts’ under the Arbitration and Conciliation Act, 1996.

Seat and Supervisory Courts under the Arbitration and Conciliation Act, 1996

It is now settled law in India that the ‘seat’ of arbitration is the country whose laws will govern the conduct of arbitration between parties. A territorial link between the ‘seat’ of arbitration and the law governing the arbitration has been firmly established in Indian jurisprudence. The Supreme Court, drawing from the international principles of arbitration and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Award, has time and again held that the law of the country in whose territory the arbitration takes place is normally the law which governs that arbitration. The Arbitration and Conciliation Act has adopted this ‘seat-centric’ model of arbitration, based on the UNCITRAL Model Law.

Once the seat of the arbitration is determined, the supervisory jurisdiction to hear such proceedings rests exclusively with the courts of the country where the seat of the arbitration is situated. In BALCO, the Supreme Court defined supervisory courts for the purpose of arbitration. Citing several parts of the judgment in Roger Shashoua v. Mukesh Sharma as well as the New York Convention and the UNCITRAL Model Law, 1985, the Supreme Court held that the regulation of conduct of arbitration and challenge to an award should be undertaken by the courts of the country in which the arbitration is seated, and such courts are the supervisory courts.

The crucial question which arises here is: which courts, within the country in which the arbitration is seated, have the exclusive supervisory jurisdiction to hear applications arising from such arbitration? The Supreme Court in BALCO settled the law on ‘territoriality’, ‘seat’ and ‘supervisory courts’ and held that the supervisory courts for an arbitration seated in India shall be ‘courts’ as defined under section 2(1)(e) of Part I of the Act. A ‘court’ under section 2(1)(e) of the Act is defined as the principal civil court of original jurisdiction, having jurisdiction to decide the questions forming the ‘subject-matter’ of the arbitration, if the same had been the ‘subject-matter’ of a suit. In other words, this meant that the supervisory courts for arbitrations seated in India would be determined as per the provisions of the Code of Civil Procedure, 1908 (‘CPC’).

Further, the Supreme Court also held that the ‘subject matter of arbitration’ under section 2(1)(e) will not only include the ‘subject matter of the suit’ but also include the location at which the arbitration is taking place. Thus, the Court, in clear and unequivocal terms, furnished concurrent supervisory jurisdiction to two sets of courts, i.e., courts having subject matter jurisdiction as per the provisions of the CPC and courts within whose jurisdiction the arbitration proceedings take place.

The apparent rationale in BALCO for expanding the definition of ‘courts’ under section 2(1)(e) of the Act in such a manner was to give further impetus to party autonomy. Parties to an arbitration would now have the ability to choose courts at a neutral forum to pursue litigation arising out of arbitration. Additionally, BALCO also enabled courts in India to have supervisory jurisdiction over international commercial arbitrations where parties stipulated the seat to be India, notwithstanding the fact that no jurisdiction is conferred on such courts as per the provisions of the CPC.

Therefore, according to the law in BALCO, if an arbitration (international commercial arbitration or otherwise) is seated in India and stipulates Mumbai as its location, the courts of Mumbai would have supervisory jurisdiction. Simultaneously, courts having jurisdiction over the ‘subject-matter’ of the arbitration under the relevant provisions of the CPC would also have concurrent or parallel supervisory jurisdiction.

Diluting the Principle of Seat and Supervisory Court

Recently, the questions for determining the supervisory courts for arbitrations seated in India were raised in various judgments of the Supreme Court such as Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited,Brahmani River Pellets Ltd. v. Kamachi Industries Ltd. and BGS-SGS. The Supreme Court, in these judgments, appreciated settled precedents, including BALCO and Enercon (India) Ltd v. Enercon GmbH and reiterated the principle of territoriality. However, despite having done so, the Court surprisingly deviated from the principles laid down in the very same precedents that it cited to buttress its conclusion.

In these recent judgements (more particularly in BGS-SGS), the Supreme Court has held that the location of the arbitration proceedings (as determined by the parties to the arbitration), is the ‘seat’ of the arbitration and that the courts of such seat or location shall have exclusive supervisory jurisdiction over the arbitration. The reasoning of the Supreme Court for such a conclusion is two-tiered. In the first step, the Supreme Court has reiterated the settled position of law and held that the supervisory courts for the purpose of arbitrations will only be courts where the ‘seat’ of the arbitration is situated. To support this proposition it has relied on BALCO and other case laws recognizing the principle of territoriality.

The problem however arises in the second step of the reasoning in BGS-SGS, wherein the Supreme Court defined ‘seat’ for the purpose of determining such supervisory courts. The Supreme Court appears to have progressed on the assumption that the ‘seat’ of an arbitration is the location or city of arbitration proceedings, and not the country where the arbitration is seated. By way of an example, the Court held that the seat of an arbitration being conducted in Mumbai is Mumbai, and therefore only the courts of Mumbai shall have supervisory jurisdiction over the arbitration.

In adopting such an interpretation of ‘seat’, the Supreme Court has conflated two wholly independent concepts: (i) the ‘seat’ of arbitration, i.e., the country whose law will regulate the arbitration proceedings and also the country whose courts will have supervisory jurisdiction over the arbitration proceedings, and (ii) the location of arbitration within India, which is not the same as the ‘seat’. The location of the arbitration is only relevant for determining the ‘supervisory courts’ under section 2(1)(e) of the Act, as per the ratio of BALCO.

As a result of the above interpretation, the concept of a ‘seat’, originally designed to determine the country whose law will be applicable to an arbitration, (especially an international arbitration) now stands diminished and reduced to a mere tool to determine the supervisory court having jurisdiction over the arbitration. The definition of ‘court’ under section 2(1)(e) of the Act is rendered redundant and courts having jurisdiction over the ‘subject-matter’ of the arbitration under the CPC are eviscerated of their jurisdiction as supervisory courts.

Therefore the Supreme Court in BGS-SGS, Datawind and Brahmani Pellets has altered the principles of territoriality as per settled international and domestic law. As a result, there is now a glaring loophole with respect to determining the supervisory courts for arbitration, where the parties do not stipulate a specific city or location for arbitration, but merely stipulate that the seat of arbitration will be India.

The emergent interpretation of ‘seat’ and ‘supervisory courts’ by the Supreme Court does not appear to be in tandem with the international and domestic principles, including principles laid down in BALCO, which is the decision of a larger bench. The recent judgments of the Supreme Court have muddied the clarity in law laid down in BALCO. Such an ambiguity in law is ultimately to the detriment of the bona fide litigant resorting to the alternative dispute resolution mechanism in India. An immediate rectification of such an ambiguity may be required in the interest of expediting and promoting dispute resolution by arbitration in consonance with the international principles of arbitration.

Nikhil Pratap

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