Determining 'Seat' In International Arbitration : Supreme Court Takes Shift From 'Closest Connection Test', Says Express Designation Of Place Matters
In a key ruling on International Commercial Arbitration, the Supreme Court held that when an arbitration agreement grants non-exclusive jurisdiction to a foreign court, that court is considered the "seat of arbitration." The Court reaffirmed the BALCO principle that Indian courts lack supervisory jurisdiction under Part I of the Arbitration & Conciliation Act, 1996, for arbitrations...
In a key ruling on International Commercial Arbitration, the Supreme Court held that when an arbitration agreement grants non-exclusive jurisdiction to a foreign court, that court is considered the "seat of arbitration." The Court reaffirmed the BALCO principle that Indian courts lack supervisory jurisdiction under Part I of the Arbitration & Conciliation Act, 1996, for arbitrations seated abroad.
Taking a shift from the 'Close Connection Test' to determine the seat of the arbitration, the Court observed that “the more appropriate criterion for determining the seat of arbitration in view of the subsequent decisions of this Court is that where in an arbitration agreement there is an express designation of a place of arbitration anchoring the arbitral proceedings to such place, and there being no other significant contrary indicia to show otherwise, such place would be the 'seat' of arbitration even if it is designated in the nomenclature of 'venue' in the arbitration agreement.”
In essence, the Court held that when an arbitration agreement grants non-exclusive jurisdiction to a foreign court without specifying any other court, that foreign court effectively gains exclusive jurisdiction to supervise the arbitration proceedings i.e., it effectively becomes the 'seat of the arbitration'.
“In the present case as discussed in the foregoing paragraphs, the Distributorship Agreement, more particularly Clauses 26 & 27 respectively makes it abundantly clear that the seat of arbitration is in fact Dubai, UAE, furthermore both the law governing the contract and the curial law are not Indian laws. In such scenario, even if the argument of the petitioner that the non-exclusive jurisdiction clause had been incorporated to confer jurisdiction on other courts too is accepted in toto, even then this Court will not have any jurisdiction to exercise its powers under Section 11 of the Act, 1996 as neither the seat is India nor is the arbitration agreement governed by Indian laws. Since Part I of the Act, 1996 is inapplicable, the parties cannot confer any jurisdiction to a court which otherwise has no jurisdiction even if such conferment is permissible as per the Distributorship Agreement.”, the court held.
The bench led by CJI DY Chandrachud and comprising Justice JB Pardiwala and Justice Manoj Misra heard an arbitration petition filed under Section 11(6) of the Act for an appointment of the arbitrator. The petitioner being a foreign entity invoked the arbitration clause against respondent no.1-entity incorporated in UAE being wholly owned subsidiary of respondent no.2-Indian Public Ltd. company.
The arbitration clause conferred non-exclusive jurisdiction to the Courts of Dubai to decide the dispute arising from the substantive contract, however, it doesn't specifically mention about the vesting of supervisory jurisdiction to the Indian Courts and neither the law governing the contract nor the curial law was Indian Law.
The petitioner argued that granting non-exclusive jurisdiction to the Dubai Courts would not take away Indian Courts' jurisdiction to act as some supervisory courts or a 'seat of arbitration'. It was submitted that since the parties had agreed not to confer exclusive jurisdiction to courts in Dubai, neither of the parties to the agreement construed the arbitration clause as designating courts in Dubai as the seat of arbitration. It was also contended that the non-exclusive jurisdiction clause had been specifically incorporated to confer jurisdiction on other courts too.
Rejecting the petitioner's argument, the judgment authored by Justice Pardiwala emphasized that the moment the parties conferred a non-exclusive jurisdiction to the Dubai Court without conferring jurisdiction to the Indian Courts, then the Indian Courts would lose significance and the Dubai Court would act as a supervisory court to regulate arbitration.
Relying on the BGS SGS SOMA JV v. NHPC LTD. (2020) as approvingly referred in Mankastu Impex Private Ltd. v. Airvisual Ltd. (2020), the Court opined that when “only one place has been designated in the arbitration clause, and such place has been categorically fixed inasmuch as there is no scope for the place designated as venue to change in terms of Clause 26 (Arbitration Clause), and furthermore, the said clause has explicitly stipulated that the curial law would be the UAE Arbitration and Conciliation rules and there being no other contrary indicia let alone a significant contrary indicia, we are of the considered opinion that the Dubai, UAE has not been designated merely as a venue but rather as the juridical seat of arbitration in terms of clause 26 of the Distributorship Agreement.”
“It is the seat of arbitration which determines which court will have exclusive jurisdiction and not vice-versa.”, the court said.
“From the above exposition of law, the following position of law emerges: -
(i) Part I of the Act, 1996 and the provisions thereunder only applies where the arbitration takes place in India i.e., where either (I) the seat of arbitration is in India OR (II) the law governing the arbitration agreement are the laws of India.
(ii) Arbitration agreements executed after 06.09.2012 where the seat of arbitration is outside India, Part I of the Act, 1996 and the provisions thereunder will not be applicable and would fall beyond the jurisdiction of Indian courts.
(iii) Even those arbitration agreements that have been executed prior to 06.09.2012 Part I of the Act, 1996 will not be applicable, if its application has been excluded by the parties in the arbitration agreement either explicitly by designating the seat of arbitration outside India or implicitly by choosing the law governing the agreement to be any other law other than Indian law.
(iv) The moment 'seat' is determined, it would be akin to an exclusive jurisdiction clause whereby only the jurisdictional courts of that seat alone will have the jurisdiction to regulate the arbitral proceedings. The notional doctrine of concurrent jurisdiction has been expressly rejected and overruled by this Court in its subsequent decisions.
(v) The 'Closest Connection Test' for determining the seat of arbitration by identifying the law with which the agreement to arbitrate has its closest and most real connection is no longer a viable criterion for determination of the seat or situs of arbitration in view of the Shashoua Principle. The seat of arbitration cannot be determined by formulaic and unpredictable application of choice of law rules based on abstract connecting factors to the underlying contract. Even if the law governing the contract has been expressly stipulated, it does not mean that the law governing the arbitration agreement and by extension the seat of arbitration will be the same as the lex contractus.
(vi) The more appropriate criterion for determining the seat of arbitration in view of the subsequent decisions of this Court is that where in an arbitration agreement there is an express designation of a place of arbitration anchoring the arbitral proceedings to such place, and there being no other significant contrary indicia to show otherwise, such place would be the 'seat' of arbitration even if it is designated in the nomenclature of 'venue' in the arbitration agreement.
(vii) Where the curial law of a particular place or supranational body of rules has been stipulated in an arbitration agreement or clause, such stipulation is a positive indicium that the place so designated is actually the 'seat', as more often than not the law governing the arbitration agreement and by extension the seat of the arbitration tends to coincide with the curial law.
(viii) Merely because the parties have stipulated a venue without any express choice of a seat, the courts cannot sideline the specific choices made by the parties in the arbitration agreement by imputing these stipulations as inadvertence at the behest of the parties as regards the seat of arbitration. Deference has to be shown to each and every choice and stipulations made by the parties, afterall the courts are only a conduit or means to arbitration, and the sum and substance of the arbitration is derived from the choices of the parties and their intentions contained in the arbitration agreement. It is the duty of the court to give weight and due consideration to each choice made by the parties and to construe the arbitration agreement in a manner that aligns the most with such stipulations and intentions.
(ix) We do not for a moment say that, the Closest Connection Test has no application whatsoever, where there is no express or implied designation of a place of arbitration in the agreement either in the form of 'venue' or 'curial law', there the closest connection test may be more suitable for determining the seat of arbitration.
(x) Where two or more possible places that have been designated in the arbitration agreement either expressly or impliedly, equally appear to be the seat of arbitration, then in such cases the conflict may be resolved through recourse to the Doctrine of Forum Non Conveniens, and the seat be then determined based on which one of the possible places may be the most appropriate forum keeping in mind the nature of the agreement, the dispute at hand, the parties themselves and their intentions. The place most suited for the interests of all the parties and the ends of justice may be determined as the 'seat' of arbitration.”
Conclusion
The court concluded that the agreement's language clearly indicated Dubai as the intended seat of arbitration, not merely a venue for hearings. This interpretation was consistent with the contract's provisions applying UAE laws and granting jurisdiction to Dubai courts. Consequently, the petition under Section 11 of the Arbitration Act was dismissed, reaffirming the decision of Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (BALCO) underscoring that Indian courts cannot intervene in arbitration proceedings where the parties have designated a foreign seat unless explicitly specified otherwise.
Appearance
Mr. R. Sathish Adv. for the petitioner
Mr. Mudit Sharma Adv. for the respondent
Case Title: M/S ARIF AZIM CO. LTD. VERSUS M/S MICROMAX INFORMATICS FZE, ARBITRATION PETITION NO. 31 OF 2023
Citation : 2024 LiveLaw (SC) 871