Seat Of Arbitration: Have We Been Unseated

The critical significance of “Seat”, particularly in International Commercial Arbitration in the present prevalent regime of “localized arbitration”, is more or less settled.

Even the test resorted to, i.e., the “closest and most intimate connection” test, for the purpose of determining the “Seat” in International Commercial Arbitration, when parties to the lis have not expressly agreed to one, has also been uniformly recognized globally. In fact, most of the statute in the world, including the Indian Arbitration Law, i.e. the Arbitration & Conciliation Act, 1996 have, in one form or the other, articulated the said test in their respective statute.

Interestingly, the UNCITRAL Model Law, at its draft stage, in Article 20 initially provided that “Failing such Agreement, the place of arbitration shall be determined by the Arbitral Tribunal”. But, the final version of the said article added the genesis leading to formulation of aforesaid test, in the following words, at the end of the said draft article: “having regard to the circumstances of the arbitration, including the convenience of the parties”, at the suggestion of the representative of India, which proposal found considerable support. [Summary record of the discussions held on 13.06.1985 leading to the Commission Report – A/40/17 (21.08.1985) adopting Article 20 as so amended].

What is being sought to be discussed in the present piece is whether, in an International Commercial Arbitration, with the governing law of arbitration being  the Arbitration & Conciliation Act, 1996, is it legally permissible for the Arbitral Tribunal or the Court to undertake the exercise of determining the “Seat”, even though the parties to the lis have expressly agreed to a place of arbitration, on the ground that the said pre-agreed place is not the “Seat” but really the “venue” in which the parties have agreed that the hearing should take place.

As law declared by the Supreme Court stands today, the said issue stands answered in the affirmative.

The Supreme Court in the case of Enercon (India) Ltd. Vs. Enercon GMBH – (2014) 5 SCC 1, has not only undertaken the said exercise of determining the “Seat” of arbitration and that too by employing the aforesaid “closest and most intimate connection” test, even though the agreement between the parties expressly provided that “venue shall be in London”, but went ahead and held  that “the seat of arbitration would be in India and London would only be the venue to hold the proceedings of arbitration”.

It is true that on applying the said “closest and most intimate connection” test in the facts of Enercon (India) Ltd case, namely, the law governing the arbitration; the substantive law of contract; as well as curial law being the Indian Law, the result which was arrived at by the Supreme Court in the said case may be correct.

But, that still does not justify the Supreme Court to in fact undertake the said exercise and hold India and not London to be the “Seat” when admittedly there was an express pre-fixed agreement between the parties as to the venue being London.

The Supreme Court did not consider the scheme of the Arbitration & Conciliation Act, 1996, particularly Section 20 of the Act in its correct perspective.

• Section 20 of the Arbitration & Conciliation Act, 1996 reads as under:

20. Place of arbitration.-(1) The parties are free to agree on a place of arbitration.

(2) Failing any agreement referred to in sub-section (1), the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties.

(3) Notwithstanding sub-section (1) or sub-section (2), the arbitral tribunal may, unless otherwise agreed by the parties, meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for inspection of the documents, goods or other property.

• Under the scheme of the Arbitration & Conciliation Act, 1996, it is Section 20 of the said Act which deals with both “Seat” as well as the “venue” of Arbitration. It has now been a consistent view of the Supreme Court, including in the Constitution Bench judgment of BALCO Vs. Kaiser Aluminium Technical Services Inc. – (2012) 9 SCC 552, that while Sections 20(1) and 20(2) are concerned with “Seat”, Section 20(3) is referable to “venue” (pr.100).


• A comparison of the aforesaid three sub-sections of Section 20 would make it clear that in case of “Seat” the parties can expressly prefix the same under an agreement, failing which the Arbitral Tribunal will determine the same, whereas, in the case of “venue”, there is no provision for the parties to prefix the same under an agreement.


• The term “unless otherwise agreed between the parties”, as occurring in Section 20(3), is not concerned with parties autonomy to pre-fix a venue, but is confined to an express agreement to the contrary “to exclude this facility” (A/CN.9/245, para 76 of Summary record of the discussions of the fourth session of the Working Group) of empowering the tribunal to undertake the exercise of fixing a place as venue, for certain purposes, other than the “seat”.


• In other words, subject to the aforesaid rider, the venue is always determined by the Arbitral Tribunal on the basis of factors set out in Section 20(3).


• Hence, when there is an express prefixed agreement between the parties as to a place of arbitration, the said place, in view of the aforesaid scheme of the Act, including on the logic of elimination, necessarily and compulsorily in all circumstances, has to be the “Seat” and can never be the “venue”.


• It may be that on applying the “closest and most intimate connection” test, based on the law governing the arbitration and/ or the underlying contract, the result could be that the “Seat” is a place other than the said prefixed agreed place; but then, on a combined reading of Sections 20(1) and (2) of the Act, undertaking the said exercise itself is precluded when it is a case of pre-fixed agreement as to the “Seat”.


• There is nothing unusual about the aforesaid position, as in the International Commercial Arbitration, it is a recognized proposition that “there is equally no reason in theory which precludes parties to agree that an arbitration shall be held at a place or in a country X but subject to procedural law of Y” (NavieraAmazonica Peruana S.A.).


• In fact, in the much-celebrated case of Union of India Vs. McDonnell Douglas Corpn. – (1993) 2 Ll Rep. 48, it was held that the English Court had the supervisory jurisdiction based on prefixed agreement between the parties, namely, “the seat of arbitration proceedings shall be London, United Kingdom”, even though in the said case admittedly the underlying contract, as well as the arbitration, was governed by Indian Law.


• In other words, the Court declined to oust the jurisdiction of the English Court even when the said overwhelming factors [incidentally the same as existing in the case of Enercon (India) Ltd.], relevant for declaring India as the “Seat” for arbitration, on the basis of “closest and most intimate connection” test, were present.


• The determination of “Seat” and that too on applying the “closest and most intimate connection” test, is permissible and accordingly contemplated under Section 20(2) only and only when the parties have failed to agree on a prefixed place / “Seat” of arbitration.


• Moreover, in the case of NavieraAmazonica Peruana S.A., there was no express agreement as to a prefixed place of arbitration and therefore, a case completely different from the Enercon (India) Ltd.


• Also, and in any event, in Enercon (India) Ltd. case, while declaring London as the venue, there was no discussion much less any finding rendered viz-a-viz the requirement of venue as provided in Section 20(3) of the Act.

The Supreme Court did not notice that the provisions dealing with “Seat” and “Venue” under the English Law were materially different from the corresponding scheme under the Arbitration & Conciliation Act, 1996.

• The aforesaid view of the Supreme Court in Enercon (India) Ltd is based entirely on judgments rendered by the English Courts in Naviera Amazonica Peruana S.A. Vs. Compania Internacional De Seguros Del Peru – (1988) 1 Ll Rep. 116 (CA); Braes of Doune Wind Farm (Scotland) Ltd. Vs. Alfred McAlpine Business Services Ltd. – (2008) EWHC 426 (TCC); and Shashoua Vs. Sharma – (2009) EWHC 957 (Comm.)


• As indicated above, Section 20 of the Arbitration & Conciliation Act, 1996, deals with “Seat” and “venue” of arbitration.


• On the other hand, while Section 3 of the English Arbitration Act, i.e., Arbitration Act, 1996, deals with “the seat of arbitration”, Section 34 deals with “venue” of Arbitration. The said provisions read as under:

3: The seat of the arbitration.

In this Part “the seat of the arbitration” means the juridical seat of the arbitration designated—

(a) by the parties to the arbitration agreement, or

(b) by any arbitral or other institution or person vested by the parties with powers in that regard, or

(c) by the arbitral tribunal if so authorised by the parties,

or determined, in the absence of any such designation, having regard to the parties’ agreement and all the relevant circumstances.

34. Procedural and Evidential Matters

(1) It shall be for the Tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree to any matter.

            (2) Procedural and Evidential matters include-

            (a) When and where any part of the proceedings is to be held;

            (b) …………………….    ……………..      ……………..

• It is thus clear that even though under Section 3 of the English Arbitration Act, like Sections 20(1) and 20(2) of the Arbitration & Conciliation Act, 1996, the parties are free to prefix a “Seat”; failing which the arbitral tribunal/institution/designated person can determine the same by applying the “closest and most intimate connection” test, unlike the Arbitration & Conciliation Act, 1996, the said provision also defines “Seat” to be the juridical seat of the arbitration. The said distinction has, in fact, being noticed by the Supreme Court in Reliance Industries Ltd. Vs. Union of India – (2014) 7 SCC 603 – pr.74).


• Hence, under the scheme of the English Arbitration Act, a prefixed place for arbitration, may not ipso facto amounts to prefixing the “seat of the arbitration” in as much as the said place has to fulfill the condition of being a “juridical seat”.


• Another crucial distinction between the English Arbitration Act and the Arbitration & Conciliation Act, 1996, is that, unlike absence of a provision under the Arbitration & Conciliation Act, 1996, for prefixing a venue by agreement between the parties ( as already discussed above), under the provisions of the English Arbitration Act, namely, Section 34(1) r/w Section 34(2), the parties’ right to pre-fix a venue is specifically provided for as is clear from the words, “the Tribunal is to decide the said venue of the arbitration proceedings, subject to the rights of the parties to agree” qua the same.


• In other words, the said provisions expressly contemplate the parties by agreement prefixing venue and the Arbitral Tribunal undertaking the exercise of fixing a venue only in the absence of such an agreement.


• Hence, under the scheme of the English Arbitration Act (Section 3 read with Section 34), when the parties expressly prefix a place, the said place cannot ipso facto be the ‘Seat’, as there can be express agreement of pre-fixation of not only the seat but venue as well.


• In other words, when a party expressly prefix a place, the same can either be a venue or a “Seat” depending upon the result of the “closest and most intimate connection” test, as provided in Section 3 of the Arbitration Act, 1996.


• It is because of the said peculiar scheme of the English Arbitration Act that, in principal, a prefixed place of arbitration need not always be the seat of arbitration, if other relevant factors, including other provisions of the agreement, on the touchstone of “closest and most intimate connection” test, point out to a place, other than the said prefixed place of arbitration, as the seat of arbitration.


• Pertinently, both Braes of Doune Wind Farm (Scotland) Ltd. and Shashoua are cases rendered in 2008 and 2009, i.e., under the regime of Arbitration Act, 1996.


• In so far as NavieraAmazonica Peruana S.A. case is concerned, even though the same is prior to the regime of Arbitration Act, 1996, but then it had a critical distinguishing feature (as has already been discussed above).


• In fact, the recommendation on part of the Law Commission viz-a-viz amendment of Section 20, which ultimately did not find place in the 2015 amendment to the Arbitration & Conciliation Act, 1996, but which otherwise would have effectively made the scheme of the Arbitration & Conciliation Act similar to the English Arbitration Act, by extending the parties right to prefix venue in addition to the seat, further demonstrate that the ratio of the aforesaid English Courts judgments could not have been imported into the scheme of Indian Arbitration Law. The said recommendation on part of the Law Commission reads as under:

“Amendment of Section 20-

12. In Section 20, delete the word "Place" and add the words "Seat and Venue” before the words "of arbitration".

(i) In Sub-section (1), after the words "agree on the" delete the word "place" and add words "seat and venue"

(ii) In Sub-section (3), after the words "meet at any" delete the word "place" and add word "venue".

[NOTE: The departure from the existing phrase "place" of arbitration is proposed to make the wording of the Act consistent with the international usage of the concept of a "seat" of arbitration, to denote the legal home of the arbitration. The amendment further legislatively distinguishes between the "[legal] seat" from a "[mere] venue" of arbitration.]”

PART-II

The Supreme Court, in another case of Indus Mobile Distribution Pvt. Ltd. Vs. Datawind Innovations Pvt. Ltd. – (2017) 7 SCC 678, while dealing with a purely domestic arbitration has interpreted the provision under “Dispute Resolution Mechanism” in the relevant contract in question, namely, “such arbitration shall be conducted at Mumbai…”, in the following terms:

“A conspectus of all the aforesaid provisions shows that the moment the Seat is designated, it is akin to an exclusive jurisdiction clause. On the facts of the present case, it is clear that Seat of Arbitration in Mumbai and clause 19 further makes it clear that jurisdiction exclusively vests in the Mumbai Courts”.

The said declaration of law, in the context of purely domestic arbitration, may not be correct.

The aforesaid conclusion was arrived at by the Supreme Court by relying upon passages of an earlier Constitution Bench judgment of the Supreme Court in Bharat Aluminium Company Ltd. Vs. Kaiser Aluminium Technical Services, Inc. – (2012) 9 SCC 552, as well as the finding to the aforesaid effect as to exclusive jurisdiction clause in another but later Supreme Court judgment in the case of Enercon (India) Ltd. Vs. Enercon GmBH – (2014) 5 SCC 1.

In so far as the said Constitution Bench judgment in Bharat Aluminium Company case is concerned, the passage therein (para 123 of SCC)  on which reliance was placed upon in Indus Mobile case, in turn, is inspired by the following observations:

“In the aforesaid case, the Court of Appeal had approved the observations made in A Vs. B, (2007) 1 All ER (Comm.) 591, wherein it is observed that:

‘….. an agreement as to the seat of an arbitration is analogous to an exclusive jurisdictional clause. Any claim for a remedy….. as to the validity of an existing interim or final award is agreed to be made only in the Courts of the place designated as seat of arbitration’.

In so far as the case of Enercon (India) Ltd. is concerned, therein the Supreme Court did hold that (para 138 of SCC) “once the seat of arbitration has been fixed in India, it would be in the nature of exclusive jurisdiction to exercise the supervisory power over the arbitration”; but, in the very next sentence, the Supreme Court followed it up with a significant observation that “this view of ours will find support from the judgment of the Court of Appeal in England in recognizing the difficulties that the parties will face in case of Courts in India and England have concurrent jurisdiction”.

It is thus clear that the reasoning of the Supreme Court in the case of Indus Mobile case, while arriving at the conclusion as to Mumbai Courts having exclusive jurisdiction and such a clause being akin to an exclusive jurisdiction clause, in the first place, was actuated on account of importing the reasoning given in the context of international commercial/ foreign arbitration to a purely domestic arbitration.

This is clearly a mistake.

In the case of an international commercial/foreign arbitration, the role of seat, is very critical and, as discussed above in Part-I, seat is the center of gravity of any arbitration proceedings particularly in the present regime of “localized arbitration”; whereas, the said significance of seat is not relevant  in a purely domestic arbitration in India, where the law governing the arbitration, both the substantive as well as the curial facet, is uniform across the country (sans) Jammu & Kashmir; and the same does not really depend upon whether the Arbitration is being held and/or the seat of arbitration is in Mumbai or Chennai or Delhi or for that matter Meghalaya.

The said concept of exclusive jurisdiction in a case of international commercial/foreign arbitration is also evident from the manner in which Art. V(1)(e) of New York Convention, ostensibly providing for two alternative Courts, namely, Courts in the country “in which the award was made” and the Courts under the law of which “the award was made”, has been interpreted.

Even though the said two Courts have been held to be “the first alternative” and the “second alternative”, respectively, it has been consistently interpreted and so has been the consistent view of the international commentators that the “second alternative” relates exclusively to the procedural law arbitration which produced the award and not to other possible laws (such as the substantive law governing the parties to the dispute or the law governing the parties’ arbitration agreement) and the Courts have generally been extremely reluctant to conclude that the parties have agreed upon the procedural law other than that of the arbitral seat. Consequently, although it is theoretically possible for an award to be subject to annulment outside the arbitral seat, by virtue of Art. (V)(1)(e) (second alternative), in reality, this is highly unusual, once in a blue moon occurrence. ( paras 133,136,144-146 of BALCO)

In fact, in case of Part-I arbitration, the Court having jurisdiction in the context of purely domestic arbitration is defined in Section 2(1)(e) of the Arbitration & Conciliation Act, 1996. The said definition of “Court”, and that too in the context of Section 20 of the Act, dealing with “place of arbitration” has, in turn, been interpreted by the Constitution Bench judgment in the BALCO case in the following terms:

“96 …… In our view, the legislature has intentionally given jurisdiction to two courts, i.e. the Court which would have jurisdiction where the cause of action is located and the Courts where the arbitration takes place….. In such circumstances, both the courts have jurisdiction, i.e. the Court within whose jurisdiction the subject matter of the suit is situated and the Courts within whose jurisdiction of which the disputed resolution i.e. arbitration is located”.

The said clear enunciation of law viz-a-viz a pure domestic arbitration also seems to have missed the attention of the Supreme Court while making the aforesaid declaration in the case of Indus Mobile.

The said view in Indus Mobile would also render S. 42 of the Arbitration and Conciliation Act, 1996 otiose in as much as in every arbitration particularly under “localised arbitration” regime, there would always be a seat of arbitration. In which case, it would be the Court of the said seat, which, as per Indus Mobile judgment, would have exclusive jurisdiction. Hence, the question of any party approaching any other Court would not arise and therefore the significance of the Court which has been “first approached”, namely, it having jurisdiction over other Courts for future recourse, something otherwise expressly contemplated in S. 42 of the Arbitration and Conciliation Act,  would never come into play.

Ramesh Singh is an Advocate; currently Standing Counsel, GNCTD

[The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of LiveLaw and LiveLaw does not assume any responsibility or liability for the same]