'Seat' & 'Venue' In Domestic Arbitration : A Critical Look At SC Decision In Brahmani River Case

Stemming from the above comes the question of - which court possesses jurisdiction in arbitration cases?

Insofar as international commercial arbitrations are concerned, court proceedings arising out of and in connection with the conduct of Arbitration are generally vested with the Courts of the seat of arbitration, including any challenge to the arbitral award. Even after such a well-established doctrine in place, in case after case we see that the jurisdiction of a particular court becomes as hotly contested as the merits of the dispute which caused the parties to arbitrate.

A five-judge bench of the Supreme Court in BALCO^[2] was seized with the issue as to whether Part I of the Arbitration Act would apply to foreign seated arbitrations. Answering the question, the Court held that provisions contained in Part I of the Arbitration Act will not apply to cases where parties has opted for an arbitral seat outside India. Resultantly, Indian Courts cannot exercise jurisdiction in a foreign seated arbitration, except for certain exceptions brought in by way of 2015 amendments^[3].

While it can be said that BALCO has more or less, put to rest the controversy surrounding the designation of seat and its bearing on international commercial arbitration. The said judgment has also paved the way for concept of seat to command centre stage in domestic arbitrations, despite a legislative intent to the contrary.

The BALCO Effect:

Until BALCO, stipulation of seat in arbitration clauses had no bearing on domestic arbitrations. Since the provisions of the 1996 Act are applicable uniformly across the territory of India, jurisdiction of a court was determined by taking recourse to section 2(1)(e) of the Act and relevant provisions of the Civil Procedure Code, 1908^[4]. However, in BALCO, the Supreme Court opined that "subject-matter of arbitration" cannot be confused with "subject-matter of the suit", the former has reference and connection with the process of dispute resolution. Thereafter the Court proceeded to rule that jurisdiction is vested with two courts i.e., the court having jurisdiction over the cause of action and courts where arbitration takes place (courts of designated seat).

The aforesaid observation along with the peculiar illustration^[5] used by the Supreme Court (obiter or otherwise), have clothed jurisdiction upon the courts located at the seat of arbitration even in a purely domestic context, which in Court's own words would not otherwise exist^[6].

Subsequent interpretation:

With BALCO came two contesting interpretations, depending on what was favourable to one's case:

1. Designation of seat is akin to an exclusive jurisdiction clause and confers exclusive jurisdiction to the seat courts.

or

1. The cause of action court and seat court have parallel jurisdiction, with section 42 of the Act restricting the jurisdiction to either of the courts which has been approached first.

In Indus Mobile v Datawind^[7], the issue before the Supreme Court was whether in cases where seat of arbitration has been agreed upon, coupled with the fact that exclusive jurisdiction also vests with courts located in the seat territory, it would amount to ouster of all other courts including courts where entire or part of cause of action has arisen. The court held that the moment "seat" is determined it would vest exclusive jurisdiction in the courts located in that territory.

It may be argued that decision in Indus Mobile is required to be understood in light of the facts and question involved in that case. Even though the reasoning supplied by the Supreme Court appears to be entirely based on designation of seat, however the fact that an exclusive jurisdiction clause also existed in the facts of the case has left some scope to contend that mere designation of seat will not confer exclusive jurisdiction. Such an argument has found favour with the Delhi^[8] and Calcutta^[9] High Courts. It remains to be seen whether Indus Mobile can be reconciled with BALCO.

Has the controversy rested?

Recently in Brahmani River Pellets Ltd. v Kamachi Industries^[10], the Supreme Court held that even in cases where arbitration agreement provides for "venue" of arbitration, jurisdiction of all other courts can be excluded.

In this case, arbitration agreement provided for Bhubaneswar as the "venue" of arbitration. One party moved the Madras High Court under section 11 of the Act seeking appointment of sole arbitrator. The High Court held that in the absence of any clause restricting jurisdiction to a particular court, it is empowered to exercise jurisdiction and proceeded with appointing an arbitrator.

Supreme Court in appeal overturned the Madras High Court's decision holding that the stipulation that Bhubaneswar is the "venue" of arbitration, amounted to an exclusive jurisdiction clause under the agreement.

There are certain grave errors in the judgment which will be dealt with in the subsequent heading while analysing the larger issue of seat of arbitration conferring exclusive jurisdiction onto its courts.

Analysis:

The recent judgments point towards the direction that designation of seat in arbitration agreement will confer exclusive jurisdiction to courts located in that territory even in cases not involving international commercial arbitrations. The rationale for such an interpretation may be based on the possibility that two foreign parties designate India (or any of its cities) as seat, having no nexus with the subject matter of dispute or cause of action. In such a case, if a plain reading of section 2(1)(e) is taken recourse to i.e. "subject matter of arbitration" and "subject matter of suit" are one and the same, then no courts will have jurisdiction in the traditional sense.

While such a construction was necessitated in context of international arbitration, enlarging the concept of seat to purely domestic disputes was unwarranted and resulted in unsettling well established principles for determining jurisdiction of a court. Some may argue that two separate standards cannot be applied for delineation of courts for the purposes of international and domestic arbitration. However, as a matter of fact the amended Act does provide for differing jurisdiction depending upon the nature of arbitration.^[11]

As far as Brahmani River is concerned, there are several apparent errors even if one were to assume Indus Mobile to be correct. The fundamental error committed by the Supreme Court was in not appreciating the well settled distinction between "seat" and "venue" of arbitration, that was recognized in Indus Mobile. While it can be said that agreeing upon a "seat" of arbitration may have legal consequences - including in respect of jurisdictional issues pertaining to courts - specifying a particular place as "venue" has no such consequence. The provision of "venue" in an arbitration agreement is a facet to make the process more convenient to the stakeholders as it merely postulates the place where arbitral proceedings may physically take place. The "venue" can be changed many times subject to consent and convenience of the parties and arbitrator(s), having no legal impact on the arbitration or court proceedings arising out of it.

In Union of India v. Hardy Exploration^[12], a three judge bench of the Supreme Court after analysing relevant judgments pertaining to "seat" and "venue" of arbitration, have held that venue can become a seat if something else is added to it as a concomitant.^[13]

In Brahmani River, there appears to have been nothing in the facts or the arbitration agreement which would imply that reference to venue ought to be construed as exclusive jurisdiction clause. Hence, the said judgment appears to be per incuriam the larger bench decision in Hardy Exploration. Further it has misapplied even the relied upon judgment in Indus Mobile.

The Supreme Court's decision in Brahmani River is likely to have wide ranging ramifications for arbitration clauses in agreements, and potentially even for ongoing arbitrations and arbitration related court proceedings. It also puts an added responsibility on those drafting arbitration clauses to ensure that designation of court, 'seat' and 'venue' are consistent with the Supreme Court's decisions.

(Arjun Krishnan is an Advocate-on-Record at Supreme Court and Partner of Samvad Partners; Ankur Singh is a Senior Associate of Samvad Parnters)