The Supreme Court's Decision In BGS SGS SOMA: A Discordant Harmony?

NOTE 1: HOLDING THAT THE DECISION OF A BENCH OF CO-EQUAL STRENGTH IN HARDY EXPLORATION IS NOT GOOD LAW

In BGS, the Supreme Court held as follows: "We, therefore, declare that the judgment in Hardy Exploration and Production (India) Inc. (supra)^[2], being contrary to the Five Judge Bench in BALCO (supra)^[3], cannot be considered to be good law."

The decisions in both BGS SGS Soma and Hardy Exploration were delivered by Benches of 3 judges each. Several 5 Judge Constitution Benches^[4] have, however, held that judgment of a Bench is binding on another Bench of co-equal strength and if the latter disagrees with the judgment of the former, then it must refer the matter to be considered by a Bench of larger strength. It cannot by itself set aside, overrule or declare its previous decision by a Bench of co-equal strength to be not good law or per incuriam.

The court in BGS may have correctly formed the opinion that the decision in Hardy Exploration was contrary to that in BALCO, but it could not have held that the Hardy Exploration decision was "not good law". That finding may itself be not good law^[5].

NOTE 2: RELYING ON THE ERRONEOUS DECISION IN VIDEOCON INDUSTRIES

In unearthing applicable principles to determine the seat of arbitration, the court in BGS relied on its previous decision in Videocon Industries^[6]. In the latter case, the parties had agreed that "unless otherwise agreed", the venue of the arbitration would be in Kuala Lumpur, Malaysia. As per the contract, English law governed the arbitration agreement, the governing law of the contract was Indian law and the arbitration was to be conducted under the UNCITRAL Rules. In the course of the arbitration, due to the SARS epidemic, the parties agreed that the juridical seat would be changed to London, which was recorded in a consent order passed by the arbitral tribunal. The Indian Supreme Court held that Indian courts had no jurisdiction in the matter. It further held that the seat was in Kuala Lumpur and had not changed to London merely by a consent order as that had not been signed in accordance with the procedure prescribed in the contract. In BGS, the Court placed reliance on this reasoning.

But, with great respect, how did the Indian Supreme Court acquire jurisdiction to determine whether the seat was in London or Kuala Lumpur? Once it was clear that the seat was not in India, and the court found that the Indian courts had no jurisdiction, the matter ought to have ended there. Indeed, that is precisely what was held by the Malaysian Federal Court^[7], which held that Indian courts had no jurisdiction to decide this question and that the seat in fact had shifted from Kuala Lumpur to London.

It is not clear why the BGS court relied on the aforesaid part of the judgment in Videocon Industries, when it had no relevance to the issue arising before the court.

NOTE 3: HOLDING THAT SECTION 42 OF THE ACT HAS NO APPLICATION, UNLESS SEAT HAS NOT BEEN CHOSEN/DETERMINED AND ONE OF THE PARTIES PREVIOUSLY APPROACHED THE COURT EXERCISING JURISDICTION OVER A PLACE WHERE THE CAUSE OF ACTION HAD ARISEN

Section 42 of the Arbitration Act^[8] confers exclusive jurisdiction on a court before which any application in relation to an arbitration agreement has been first made and enjoins parties to make all subsequent applications only before that court and no other court. The BGS court held that section 42 does not have application when parties have designated the seat, as such designation would confer exclusive jurisdiction on the court exercising jurisdiction over such seat. The court further held that section 42 would apply in a situation where parties have not designated a seat and before the arbitral tribunal has determined the seat, a court having jurisdiction over part of the cause of action is approached for some relief, such as that under section 9 of the Act.

However, firstly there appears to be no basis to make the aforesaid distinction, as the language of section 42 plainly does not support the same. On the contrary, section 42 starts with a non-obstante clause, which overrides any discordant provision or law militating against its sweep. Secondly, what happens where parties have not designated a seat, and an application, say under section 9, is made in a court but subsequently the arbitral tribunal designates the seat at a place other than the place over which the section 9 court exercises jurisdiction? Would, in such case, the court of the seat decided by the tribunal have exclusive jurisdiction or the section 9 court have it so? How would section 42 apply in such a situation? These are questions that remain unanswered.

NOTE 4: PURPORTING TO LAY DOWN THE LAW TO DETERMINE SEAT IN INTERNATIONAL COMMERCIAL ARBITRATION WHEN THE FACT SITUATION BEFORE THE COURT CONCERNED A PURELY DOMESTIC ARBITRATION CASE

The court in BGS was dealing with a case purely of domestic arbitration. Both parties were Indian, the contract was to be performed in India and the arbitration was intended to be (and was in fact) held in India. The case had no foreign element.

Yet the court in BGS extensively discussed English and Indian case law concerning international commercial arbitrations where all parties were not from the same country. More than 35 paragraphs were devoted to discussing the law applicable to determination of seat in international commercial arbitrations.

At the end, the court held that the following principles apply in determining seat in international commercial arbitrations: Absent any significant contrary indicia, if the parties have designated the venue as the place for "arbitration proceedings", then this would make it clear that the venue is really the seat of the arbitration. Further, if the parties have stated that arbitration "shall be" held at the venue, then that would mean that the parties intended to anchor their arbitration at such venue, thereby making it the seat. Additionally, if the parties have provided that a supranational body of rules is to govern the arbitration, then that too would mean that the venue is the seat.

One cannot but admire the court's attempt to cull out these principles after an exhaustive review of the English and Indian case law on the subject. But would it amount to a binding ratio decidendi?

A Constitution Bench has reflected on the true nature of ratio decidendi in Krishena Kumar^[9] as follows:

"The doctrine of precedent, that is being bound by a previous decision, is limited to the decision itself and as to what is necessarily involved in it. It does not mean that this Court is bound by the various reasons given in support of it, especially when they contain 'propositions wider than the case itself required'." (emphasis supplied)

Similarly, a three-judge bench in Pawan Kumar Dubey^[10] has held as follows:

"It is the rule deducible from the application of law to the facts and circumstances of a case which constitutes its ratio decidendi and not some conclusion based upon facts which may appear to be similar. One additional or different fact can make a world of difference between conclusions in two cases even when the same principles are applied in each case to similar facts." (emphasis supplied)

Thus, the decision in BGS laying down the principle to be applied in determining the seat in international commercial arbitrations cannot be regarded as its ratio decidendi as that was not the fact situation with which the court was confronted and hence not binding. It is obiter dictum, though in fairness it must be said, that does carry considerable weight^[11].

NOTE 5: HOLDING THAT IN DOMESTIC ARBITRATIONS, CHOICE OF VENUE COUPLED WITH APPLICABILITY OF THE ACT MAKE THE CHOSEN VENUE, THE SEAT

As pointed out herein above, the court in BGS devoted a significant part of its attention to finding the principles applicable to determine the seat in international commercial arbitrations, when parties have only mentioned the venue in their contract. But it then held as follows:

"In an international context, if a supranational body of rules is to govern the arbitration, this would further be an indicia that 'the venue', so stated, would be the seat of the arbitral proceedings. In a national context, this would be replaced by the Arbitration Act, 1996^[12] as applying to the 'stated venue', which then becomes the 'seat' for the purposes of arbitration."

It is not understood how coupling the choice of a supranational body of rules with a stated venue to determine seat in the context of international commercial arbitrations can be likened to coupling the Act with the stated venue to determine seat in purely domestic arbitrations.

The two situations are radically different. In one, the supranational body of rules is a matter of choice. In the other the application of the Act is a matter of statutory diktat. It applies regardless of which Indian city is the seat of the arbitration. As such, when determining which of two or more Indian cities is the seat of the arbitration, the fact that the Act applies is common to all of them, and hence irrelevant to deciding that question. In one, the supranational body of rules determines the procedural aspects of conducting an institutional arbitration and powers and duties of arbitrators. That is why parties choose them. In the other, the Act is far wider in scope, inter alia, containing powers of courts in arbitration cases and hence not a matter of choice of parties. Further, even conceptually, a supranational body of rules cannot be inconsistent with the arbitration enactment of the seat. On the other hand, the Act has no limitation on its application in domestic arbitrations.

The Supreme Court appears to have lost sight of this vital distinction between the two situations.

NOTE 6: HOLDING THAT DELHI WAS THE SEAT OF THE ARBITRATION MERELY ON THE BASIS THAT ARBITRATION HEARINGS HAD TAKEN PLACE IN DELHI

In BGS, the agreement provided that "arbitration proceedings shall be held at New Delhi/Faridabad". The Court held that since, in fact, all arbitration hearings had taken place in Delhi and the award had been pronounced in Delhi, therefore the parties had chosen Delhi as the "seat" of the arbitration.

However, it is noteworthy that the principle which was upheld in BGS was only this: Absent any significant contrary indicia, if the parties have provided in the contract that a particular place "shall be" the venue of the "arbitration proceedings", then that would imply that the venue is really the seat of the arbitration. In BGS, the expressions "shall be" and "arbitration proceedings" were used for both Faridabad and New Delhi. Consequently, it could not be said that the contract indicated choice of one over the other.

There was no principle of law discussed in the judgment that merely because factually arbitration hearings are held in a particular place and the award is pronounced at that place, that leads to the conclusion that the parties have chosen such place as the seat. Indeed, the court discussed in extenso, judgments which held that parties could well agree to hold arbitration hearings at a particular place merely for convenience and not because they intended to regard such place as the seat^[13]. The location where arbitrations hearings are ultimately held is immaterial to determine which place the parties intended to be the seat when they entered into their contract.

Further, no part of the cause of action had arisen in Delhi. On the other hand, the contract had been signed in Faridabad and as such a part of the cause of action had arisen in Faridabad. In answering the issue pertaining to section 42 of the Arbitration Act, 1996, the court in BGS recognized that cause of action would be a factor in cases where parties have not designated the seat of arbitration. In this author's view, applying the principle espoused in BGS, if any relevant contrary indicia had to be looked at to decide where the seat could be, then arguably this was it. And that would have meant that the seat was in Faridabad and not in Delhi.

With seemingly contradictory rationale when deciding issue pertaining to application of section 42 and deciding the question of seat, the judgment confuses more and clarifies less.

NOTE 7: APPROVING BOTH THE DECISION OF THE ENGLISH COURT IN ENERCON GMBH AND THE DECISION OF THE INDIAN SUPREME COURT IN ENERCON INDIA, WHICH WERE ON THE SAME FACTS, BUT WHICH CONTRADICTED EACH OTHER

In Enercon GmbH^[14], the parties had chosen Indian law as the law governing the underlying contract and London as the venue of arbitration, but had also provided that the (Indian) Arbitration and Conciliation Act, 1996 would apply to the arbitration proceedings. The English Commercial Court (QBD) held that the juridical seat was in London. However, the Indian Supreme Court, in Enercon India^[15], on the same facts and pertaining to the same contract, found that the seat was in Delhi. The Supreme Court judgment, though delivered later in point of time, did not discuss the decision of the English Commercial Court on this aspect at all, perhaps because the English Commercial Court had stated that its opinion was obiter.

Disconcertingly, in BGS, the Supreme Court relied on both its previous decision in Enercon India^[16] and the obiter opinion of the Queen's Bench in Enercon GmbH^[17] despite the two of them being contradictory to each other. In BGS, the court also relied on the English decision in Process and Industrial Developments^[18], which in turn had relied upon the decision of the Queen's Bench in Enercon GmbH^[19].

It is difficult to reconcile the two Enercon decisions and in BGS this appears to have gone unnoticed altogether.

Conclusion

The court's painstaking and comprehensive review of the statute and case law to clarify basic principles to determine the seat of arbitration is unquestionably laudable. It is rare to find a world class blend of intellectual capacity and relentless hard work that has been demonstrated by this court. But in its anxiety to create a pleasing harmony, the court may have overlooked the dissonant notes discussed above. It is true, as pointed out by Judge Learned Hand in Helvering^[20], "…a melody is more than the notes…"But if only the court had played those right, this would really have been a classical masterpiece!!!