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Seat of Arbitration & Territorial Jurisdiction of Courts

Vaibhav Niti
27 April 2020 11:02 AM GMT
Seat of Arbitration & Territorial Jurisdiction of Courts
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  • Domestic arbitration is regulated by Part I of the Arbitration and Conciliation Act, 1996 ["Act of 1996"] and Section 2(2) thereof states that Part I applies where the 'place' of arbitration is in India. Therefore, arbitration proceedings which takes place in India and where disputes are decided in accordance with the substantive laws of India is referred to as 'domestic arbitration'. The Act of 1996 inter alia gives the parties, autonomy to decide the place of arbitration under Section 20 and prescribes the extent judicial intervention under Section 5[1].

  • Purpose of Section 5 of the Act of 1996:

  • Section 5 is specific and has a definite purpose as it creates a bar on interference by judicial authorities[2]. There are specific provisions under the Act of 1996 which provides for judicial intervention. Perusal of the Act of 1996 would show that the Courts can interfere at initial stage under Sections 8 and 11 to ensure that a party does not sabotage the arbitration. Further, during the arbitration proceedings, the Court only has a supportive role to play and it is only once the arbitral award is delivered, that the Courts interfere either to modify/set aside the award or enforce it. However, the basic common thread which runs through all these stages of arbitration is that the Court where the 'seat/place' of arbitrator is situated, alone will have the territorial jurisdiction to entertain such applications or appeal.

  • Applicability of Code of Civil Procedure, 1908 for conferring jurisdiction on Court under the Act of 1996:

  • The purpose of deciding on a 'seat/place' of arbitration is that the parties agree to confer jurisdiction on a Court, within whose territory the arbitration proceedings is to be held, so that any subsequent challenge to the arbitral award or enforcement of arbitral award can be made before that particular Court. This is because the Courts have supervisory jurisdiction or control over all tribunals and authorities subordinate to it within its territorial limits[3]. However, it is to be considered as to whether parties, by an arbitration agreement, can confer jurisdiction on a Court where no part of cause of action has arisen that is, whether provisions of Section 9, 16 to 20 of Code of Civil Procedure, 1908 ["CPC"] can be given a complete go-bye and jurisdiction can be conferred on a Court where no cause of action has arisen.

  • It is no longer res integra that for deciding which Court will have the jurisdiction to entertain a petition or application or suit, the principles as laid in the CPC have to be followed and parties by consent, cannot confer jurisdiction on a Court where no part of cause of action has arisen or which inherently lacks jurisdiction[4].

  • However, when it comes to domestic arbitration, Section 19(1) of the Act of 1996 specifically excludes the applicability of CPC in as much as it states that the arbitral tribunal shall not be bound by its provisions. Further, Section 20 (1) and (2) gives autonomy to the parties or the arbitral tribunal to decide on the 'place' of arbitration and Section 30(4) states that the arbitral award shall mention its date and place of arbitration. Therefore, when parties are given complete autonomy to decide on the place of arbitration and the provisions of the CPC are not applicable, then how is jurisdiction to be conferred upon a Court under the Act of 1996? Section 2(1)(e)(i) of the Act of 1996 defines 'Court' as under:

In the case of an arbitration other than international commercial arbitration, the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil 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, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes;"

  • BALCO & concept of 'neutral place':

  • In Bharat Aluminium Col. (BALCO) v. Kaiser Aluminium Technical Service, Inc.[5] ["BALCO"], the Supreme Court interpreted Section 2(1)(e)(i) of the Act of 1996 and observed that the term "subject-matter of the arbitration" cannot be confused with "subject-matter of the suit" and that "subject-matter" referred therein is confined to Part I, whose purpose is to identify the courts having supervisory control over the arbitration proceedings. It refers to a Court which would essentially be a Court of the seat of the arbitration process. Further, it held that under the Act of 1996, the jurisdiction has been conferred 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, which may be a neutral place to both parties and where no cause of action has arisen. But, it also held that Section 2(1)(e) has to be construed keeping in view the provisions in Section 20 which give recognition to party autonomy and thus, the Courts, where the arbitration takes place, would be required to exercise supervisory control over the arbitral process.

  • While delivering the judgment in BALCO, the Supreme Court referred to the judgments laid down by the Court of Appeal, England in A v. B[6], C v. D[7] and Shashoua v. Sharma[8], wherein it was held that an agreement as to the 'seat/place' of an arbitration was analogous to an exclusive jurisdiction clause and it follows from this that a choice of 'seat/place' for the arbitration must be a choice of forum for remedies seeking to attack the award. Though, these judgments were referred and used in the context of determining 'juridical seat' in case of international arbitration but, the ratio which can be culled from the judgments, above referred, is that parties to the arbitration agreement can choose a neutral 'seat/place' of arbitration even if no part of cause of action has arisen there. Therefore, under the Act of 1996, jurisdiction can be conferred on a Court within whose territorial limit the cause of action has arisen and also, upon the Court where the 'seat/place' of arbitration is located which can be a neutral place chosen by the parties.

  • The judgment rendered in BALCO was relied upon by the Supreme Court in Enercon (India) Ltd. & Ors v. Enercon GmbH and Anr[9] ["Enercon"] wherein, the arbitration agreement stated London as the 'venue' of arbitration but, also provided that the Indian Arbitration Act would apply. The Supreme Court held that the 'juridical seat' of the arbitration is India by applying 'close connection test'. It held that if one has regard to the factors connecting the dispute to India, and in the absence of any factors connecting it to England, the only reasonable conclusion is that the parties have chosen London only as the 'venue' of the arbitration. All the other connecting factors would place the seat firmly in India. Thus, it specifically held that parties can choose a 'place' of arbitration where arbitration proceedings could be anchored.

  • These rulings were referred to in Indus Mobile Distribution Private Limited v. Datawind Innovations Pvt. Ltd. & Ors[10] wherein, the arbitration agreement provided that the place of arbitration shall be Mumbai and courts in Mumbai alone shall have exclusive jurisdiction. Under the agreement, certain goods were to be supplied to the Appellant by Respondent No.1 at Chennai from New Delhi and the Head Office of the Appellant was at Amritsar. Disputes arose and Respondent No.1 approached Delhi High Court under Section 9 and Section 11 of the Act of 1996 seeking certain reliefs. Both the applications were disposed of by observing that courts in Mumbai will not have jurisdiction since no part of cause of action has arisen within its territory. However, relying upon the 246th Law Commission Report (August, 2014) which recognized the difference in the concepts of 'seat/place' and 'venue' of arbitration under Section 20 of the Act of 1996, the Supreme Court held that the moment the 'seat/place' (not the 'venue') of arbitration is designated, it is akin to an exclusive jurisdiction clause and hence, only courts in Mumbai will have the exclusive jurisdiction for purposes of regulating arbitral arbitration proceedings. Hence, designation of 'seat/place' of arbitration in the arbitration agreement will over-ride the provisions of CPC for the purpose of conferring jurisdiction on Court.

  • Distinction between 'seat/place' of arbitration and 'venue' of arbitration removed:

  • In BrahmaniRiver Pellets Ltd. v. Kamachi Industries Ltd.[11], the Supreme Court was faced with a similar issue as to whether the Madras High Court will have the jurisdiction to entertain an application under Section 11 of the Act of 1996 when the parties, under the arbitration clause, agreed that the 'venue' of arbitration shall be Bhubaneswar. The Madras High Court entertained the application since the goods were to be delivered in Chennai/Ennore Ports. However, the Supreme Court set aside the judgment and effectively held that the 'venue' of arbitration would automatically determine the court which is entitled to exercise supervisory jurisdiction over the arbitration. Thus, going by the ratio of this judgment, change of venue could potentially have the effect of depriving a particular set of courts of jurisdiction and conferring it on another set of courts. This is contrary to the observation made in BALCO wherein, it was noted that each move of the Arbitral Tribunal does not itself mean that the seat of arbitration changes and the seat of the arbitration remains at the place initially agreed by or on behalf of the parties. In Brahmani River case, the Supreme Court could have based its reason by applying 'close connection test' as seller was in Bhubaneshwar, payment was to be made in Bhubaneshwar and contract had to be performed in Bhubaneshwar but, by equating 'venue' with the 'seat' of arbitration without giving specific reasons and without applying the test, it has rendered the judgment capable of being misused by the parties.

  • BGS Soma JV case:

  • It is in BGS SGS Soma JV v. NHPC Ltd.[12] (3J) ["BGS Soma"] that the Supreme Court settled the legal issue with respect to territorial jurisdiction of a Court to entertain a petition under the Act of 1996 when either 'seat/place' or 'venue' of arbitration is mentioned or both are mentioned in the arbitration agreement. In this case, the arbitration clause provided that the arbitration proceedings shall be held at New Delhi/Faridabad. Disputes arose and the arbitration proceedings were held in New Delhi and arbitral award was also delivered in New Delhi. Respondent filed an appeal under Section 34 before the District and Sessions Judge, Faridabad, Haryana but, later, with the constitution of Gurugram Commercial Court, the matter was transferred to it. The Commercial Court held that the cause of action has arisen at Faridabad as the agreement was executed there and the request for reference to arbitration was also received there, therefore, the courts at Faridabad would have exclusive jurisdiction. The Supreme Court interpreted the arbitration clause to find out the real intent of the parties that is, whether the expression "shall be held" indicated a 'venue' or a 'seat'. It held that the parties had chosen New Delhi as the 'seat' of arbitration under Section 20(1) and, therefore, the courts at New Delhi would have exclusive jurisdiction. Further, it held as under:

  • The parties are free to decide a 'seat/place' of arbitration irrespective of the place where cause of action has arisen and once, it is decided, the court at that place alone will have exclusive jurisdiction for the purpose of regulating arbitration proceedings.
  • Section 20(1) and 20(2) of the Act of 1996 refers to 'seat/place' of arbitration and Section 20(3) refers to 'venue' of arbitration. 'Venue' may be a place where arbitration meetings can be held since witnesses are there or it is convenient to parties and/or arbitrators. But, 'seat/place' of arbitration can be a neutral place or any place where cause of action has arisen and jurisdiction of the 'Court' will be dependent upon 'seat/place' of arbitration and not, 'venue' of arbitration. Hence, both are different.
  • Where only 'venue' of arbitration is mentioned and no 'seat/place' of arbitration is mentioned, the expression 'arbitration proceedings' would make it clear that the 'venue' is really the 'seat' of arbitral proceedings as it includes arbitral proceedings as a whole, including the making of award at that place.
  • The fact that the arbitral proceedings "shall be held" at a particular venue indicates that the parties intended to anchor arbitral proceedings to a particular place, signifying thereby that, 'place' is the 'seat' of the arbitral proceedings. This, coupled with there being no other significant contrary indicator that the stated venue is merely a 'venue' and not the 'seat' of the arbitral proceedings, would conclusively show that such a clause designates a 'seat' of the arbitral proceedings.

· Hardy Exploration – Not a good law:

It was on the basis of the above observations that the Supreme Court held that the judgment of a coordinate bench in Union of India v. Hardy Exploration and Production (India) Inc[13] ["Hardy Exploration"] does not lay down a good law. In the said case, the arbitration clause specifically provided that the 'venue' of arbitration shall be Kuala Lumpur and the arbitration shall be conducted in accordance with the UNCITRAL Model Law on International Commercial Arbitration of 1985. The Court had observed that (a) under the Model Law, either the juridical seat of the arbitral proceedings is indicated in the agreement between the parties, or if it is not, must be determined by the Arbitral Tribunal, (b) there is no confusion with regard to what the seat of arbitration and venue of arbitration mean. The arbitration Clause has to be read in a holistic manner so as to determine the jurisdiction of the Court. However, while making these observations, it went on to further hold that the word 'place' cannot be used as 'seat', and a 'venue' can become a 'seat' if something else is added to it as a concomitant and thus, came to a conclusion that Kuala Lumpur is not the 'seat/place' of arbitration. It was this criteria added by the Court to determine the 'venue' as a 'place' of arbitration which was specifically rejected by Supreme Court in BGS Soma and it was held that Kuala Lumpur, would be the juridical 'seat' of the arbitration as there is no other contrary indicator.

· The rule of 'judicial discipline' and 'propriety':

However, the judgment in BGS Soma holding Hardy Exploration as not a good law raises a serious issue of judicial discipline and propriety. It is a settled law that a coordinate Bench has to respect the judgments and orders passed by another coordinate Bench[14] and further, a Constitution Bench of the Hon'ble Supreme Court in Central Board of Dawoodi Bohra Community & Anr v. State of Maharashtra & Anr[15], has inter alia specifically held that the law laid down by the Supreme Court in a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or coequal strength and, it will be open only for a Bench of coequal strength to express an opinion doubting the correctness of the view taken by the earlier Bench of coequal strength, whereupon the matter may be placed for hearing before a Bench consisting of a quorum larger than the one which pronounced the decision laying down the law the correctness of which is doubted. The judgment in BGS Soma as well as Hardy Exploration was given by benches comprising of three judges and therefore, in BGS Soma, the Court should have referred the matter to larger bench instead of itself determining whether law laid down in Hardy Exploration is a good or bad law.

  • Departure from the old Arbitration Act & concept of 'juridical seat':

  • In Hardy Exploration, the Court while laying down the law, did not analyze an express departure made in the Act of 1996 from the provisions of the Arbitration Act, 1940 ["the old Arbitration Act"]. The old Arbitration Act did not refer to the 'juridical seat' of the arbitral proceedings at all. Section 14 of the old Arbitration Act provided that the arbitral award has to be signed and filed in a Court and that Court shall then issue notice to the parties of filing of award. The Court (under the old Arbitration Act) was defined as any Civil Court having jurisdiction to decide questions forming the subject matter of the reference to arbitration if the same had been the subject matter of a suit. Thus, jurisdiction could have been conferred on a Court only if cause of action arose within its territorial limit.

  • However, a sharp departure was made in the Act of 1996 which was implemented by adopting the UNCITRAL Model Law on International Commercial Arbitration ("Model Law"). For the first time, the Model Law introduced the concept of 'place of arbitration', gave the parties autonomy to decide the place of arbitration and provided that the arbitral award shall state its date and place of arbitration and the award shall be deemed to have been made at the place of arbitration[16]. The Act of 1996 incorporated Article 20 and 31(3) of the Model Law verbatim and the same is reflected as Sections 20 and 31(4) respectively. Hence, Part I of the Act of 1996 refers to the 'place' of arbitration that is, the juridical seat of arbitration. The definition of 'Court' remains unchanged but, replaces any and every civil court by only the principal civil court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary civil jurisdiction.

  • Thus, since the juridical seat of arbitration and its relationship to the jurisdiction of the Courts in matters relating to the arbitration proceedings was new and unclear, therefore, the Supreme Court in the above judgments interpreted Section 2(1)(e)(i) along with Section 20 of the Act of 1996 so as to give broad meaning to the definition of 'Court' and included within its ambit courts where 'seat/place' of arbitration is situated.

  • 'Venue' of arbitration cannot be morphed into 'seat/place' of arbitration:

  • Though, the legal proposition has been settled by the Supreme Court but, the principles cannot be applied in a straight jacket formula. It would depend on the facts and circumstances of each case as well as on the interpretation of the arbitration clauses. In Dwarika Projects Ltd v. Superintending Engineer, Karnal, PWD (B&R) Haryana[17], an agreement was executed between the parties at Karnal, Haryana for construction of Road Over Bridge (ROB). The agreement provided that the place of execution of the work shall be Karnal and the Courts at Karnal shall have jurisdiction in the matter. Disputes arose between the parties which resulted in initiation of arbitration proceedings. Majority of the arbitration proceedings took place in Delhi and some in Chandigarh as per the convenience of the parties. The arbitral award was also delivered in Delhi. The Delhi High Court held that there was no procedure agreed to between the parties stating that Delhi would be the jurisdictional place/seat of arbitration and there are many indicators in the agreement that parties never intended Delhi to be the 'seat/place' of arbitration. Further, Delhi and Chandigarh were merely 'venue' of arbitration. Choosing jurisdictional 'seat/place' of arbitration requires a deliberate act and a party cannot be taken by surprise and be told that 'venue' fixed for arbitration has morphed into the 'seat/place' of arbitration.

  • Designation of 'seat/place' of arbitration is a deliberate act:

  • The recent judgment of the Supreme Court in Mankastu Impex Pvt. Ltd. v. Airvisual Ltd.[18] relied upon the judgment laid down in BGS Soma. Though, this judgment is in the context of international commercial arbitration but, it makes observations regarding 'seat/place' of arbitration and 'venue' of arbitration. The question was regarding maintainability of a petition seeking appointment of arbitrator in an International Commercial arbitration where, the arbitration clause in the MoU stated that (a) MoU is governed by the laws of India and Courts at New Delhi shall have the jurisdiction, (b) any dispute under the MoU shall be referred to and finally resolved by arbitration administered in Hong Kong and, (c) the place of arbitration shall be Hong Kong. The Supreme Court observed that mere expression 'place of arbitration' cannot be the basis to determine that it is the 'seat' of arbitration. The said determination has to formed by taken into consideration (a) intention of the parties as to the 'seat' from other clauses in the agreement and (b) the conduct of the parties. It held that the words "arbitration administered in Hong Kong" is an indicator that the seat of arbitration is at Hong Kong and the laws of Hong Kong shall govern the arbitration proceedings. Thus, Indian courts will not have jurisdiction to appoint arbitrator.

  • Conclusion:
  • Thus, in domestic arbitration and by arbitration agreement, parties can confer jurisdiction on a Court even where no cause of action has arisen by designating a 'seat/place' of arbitration. The arbitral proceedings will be anchored to that place and the Court at the 'seat/place' of arbitration will have exclusive jurisdiction to interfere with the arbitral award or enforce it. Hence, 'juridical seat' of arbitration will be the guiding factor for a Court to determine its jurisdiction while entertaining a petition under Section 11 or for that matter, an appeal under Sections 34 or 37 of the Act of 1996.
(The author is an Advocate on Record, Supreme Court of India. He may be reached at vaibhavniti@gmail.com)

[1] Food Corpn. of India v. Indian Council of Arbitration, AIR 2003 SC 3011 : (2003) 6 SCC 564, Korp. Gems (India) Pvt. Ltd. v. Precious Diamond Limited, (2007) 2 CHN 544 : (2007) 3 Arb LR 32.

[2] MTNL v. Applied Electronics Ltd., (2017) 2 SCC 37.

[3] East India Commercial Co., Ltd. Calcutta v. Collector of Customs, Calcutta, AIR 1962 SC 1893.

[4] Hakam Singh v. Gammom (India) Ltd., (1971) 1 SCC 286, Rajasthan SRT v. Bal Mukund Bairwa (2), (2009) 4 SCC 299.

[5] (2012) 9 SCC 552.

[6] (2007) 1 All ER (Comm) 591.

[7] 2007 EWCA Civ 1282 (Civ).

[8] 2009 EWHC 957 (Comm).

[9] (2014) 5 SCC 1.

[10] (2017) 7 SCC 678.

[11] 2019 SCC Online SC 929 dated 25.07.2019.

[12] 2019 SCC OnLine SC 1585 dated 10.12.2019.

[13] 2018 SCC Online SC 1640 dated 25.09.2018.

[14] Sandhya Educational Society v. Union of India, (2014) 7 SCC 701.

[15] (2005) 2 SCC 673 (5J).

[16] Articles 20 and 31(3) of UNCITRAL Model Law.

[17] 2019 SCC Online Del 8445 dated 10.05.2019.

[18] Arb. P. No. 32 of 2018 decided on 05.03.2020.

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