Seat v Venue of Arbitration: A Quest for Clarity (Part II)

This guest post is authored by Disha Lohiya. She is currently studying in the third year at National Law University, Jodhpur.

Seat v Venue of Arbitration: A Quest for Clarity (Part II)

In the first part of this post, the author delved into the meaning and scope of the terms seat, place, and venue of arbitration. She also discussed decisions of the Supreme Court to examine tests for determining the juridical seat of arbitration and how, if the parties have agreed to a seat, how the seat courts assume exclusive jurisdiction over the dispute.

The author has continued her analysis in this part, starting with the Supreme Court’s decision in Union of India v Hardy Exploration and Production (India) Inc.

Seat vs venue: an eternal debate?

In Union of India v. Hardy Exploration and Production (India) Inc., [“Hardy Exploration”], the arbitration clause provided that the venue of arbitration will be Kuala Lumpur. No seat was designated. The contract was to be governed by Indian law. The court noted that the arbitration agreement must be read in a holistic manner in order to ascertain the court’s jurisdiction.

Firstly, it held that the venue could be tantamount to the juridical seat only if something else is added to it as a concomitant. In Hardy Exploration, the arbitrators held the proceedings and signed the award in Kuala Lumpur. Other than this, there was no indication to show that the parties intended Kuala Lumpur to be the seat of arbitration. The Supreme Court held that the geographical place of arbitration could not ipso facto be treated as its seat and only when the term place is stated and no condition is postulated, it is equivalent to seat.

Although if any condition precedent is attached to the word place, the said condition must be first fulfilled for the place to become equivalent to seat. Since there was no consensus between the parties with respect to the seat of arbitration and there was no decision by the arbitral tribunal as provided by the arbitration clause, the requirements were found unsatisfied. Kuala Lumpur was deemed only as the venue of arbitration. In the circumstances, the Supreme Court observed that (i) the arbitration was seated in India; (ii) Part I of the Arbitration Act applied; (iii) Indian courts therefore had jurisdiction to decide a challenge against the award under Section 34 of the Arbitration Act.

                Hardy Exploration overruled?

Controversies concerning the venue or seat of arbitration was significantly narrowed down in a three-bench judge judgment of Supreme Court in BGS SGS SOMA JV v. NHPC Ltd., [“BGS”]. The arbitration clause explicitly mentioned that the arbitration proceeding shall be held in New Delhi/Faridabad. The arbitration took place in Delhi while a part of the cause of action had occurred in Faridabad. The dispute was whether New Delhi is the seat of arbitration or only a venue.

If there is an express designation of venue, together with a supranational body of rules governing arbitration, and no other significant contrary indica nor an alternate place is designated as a seat, then the inexorable conclusion is that the stated venue is intended to also act as the juridical seat. In reaching to the conclusion that New Delhi was indeed the seat of the arbitration, the Supreme Court contemplated that not only the award was signed at New Delhi but also the proceedings were carried out in New Delhi, despite the fact that a part of the cause of action had occurred in Faridabad.

The Supreme Court further expounded that the intention of the parties can be determined from the language used in the arbitration agreement. It also held that the law laid down by Hardy Exploration was a bad law as it was contrary to the five-bench judgment of BALCO. Had BALCO been followed in Hardy Exploration, Kuala Lumpur would actually have been the seat.

However, since the Court in Hardy Exploration carried the same bench strength as in BGS Soma, it would be impearetive for this matter to be settled by a larger bench of the Supreme Court. Until then, it may not be appropriate to say that Hardy Exploration has been overruled. Besides, BGS Soma arose out of a domestic arbitration while Hardy Exploration arose out of an international commercial arbitration. It may be argued that the principles applicable to the one may not be applicable to the other. 

                Mankatsu manoeuvre

Shortly after BGS Soma, another three-judge bench of the Supreme Court was required to determine the seat of arbitration in Mankastu Impex Pvt. Ltd. v. Airvisual Ltd., [“Mankastu”] – albeit in the context of an application filed under Section 11 of the Arbitration Act. The arbitration clause stipulated that Hong Kong shall be the place of arbitration; and that any dispute shall be referred to and eventually settled by arbitration conducted in Hong Kong. The clause also stated that the courts at New Delhi shall have jurisdiction. When disputes arose, the Petitioner approached the Supreme Court under Section 11(6) of the Act for the appointment of a sole arbitrator. The Respondent argued that Indian courts do not have the jurisdiction to appoint an arbitrator since the parties had agreed to Hong Kong as the seat of arbitration. As such, only the courts of Hong Kong could appoint the arbitrator, if at all.

While the Supreme Court held that Hong Kong was the parties’ intended seat of arbitration, it was clarified that the mere designation of a venue would not be enough to elevate it to the juridical seat. It would ne imperative to look at some other concomitant factors as well before concluding that the designated venue was the intended seat. Other clauses of the arbitration agreement, such as the governing law and rules of arbitral institutions, and the conduct of the parties must be factored in while determining the parties’ intention.

In Mankatsu, the court based its finding on the fact that the parties had also specifically agreed that that the arbitration will also be administered in Hong Kong. In such circumstances, it was also found that the parties’ reference to courts of New Delhi will not affect the parties’ intention to have the arbitration administered in Hong Kong.

Roles of institutions

InImax Corporation v. E-City Entertainment (India) Pvt. Ltd., [“Imax Corporation”], the parties had agreed to arbitrate in accordance with the ICC Rules but was silent on the choice of seat. The rules mentioned that the seat will be determined by the ICC International Court of Arbitration [“ICC Court”] if the parties do not agree on the same. The ICC Court decided that London was the seat in compliance with the rules of the ICC. The arbitral institution’s choice of seat was upheld to be valid and binding as it was made in consultation with the parties. Consequently, the choice of institutional arbitral rules which, in turn, have chosen London as the seat of arbitration has led to the exclusion of Part I of the Act in the absence of any contrary indication.

The Contradictions of Hardy Exploration, BGS Soma, and Mankastu

The SC’s decisions in Hardy ExplorationBGS Soma, and Mankastu reflect the following contradictions:

  1. Hardy Exploration held that venue of arbitration need not be the seat of arbitration unless there are concomitant factors which shows that the parties intended for the venue to also be the seat.
  2. On the other hand, BGS maintained that in the absence of any significant contrary indicia, a venue of arbitration will be the juridical seat.
  3. Hardy Exploration anticipates the presence of some positive variables which indicates the venue to be its seat. BGS Soma prescribes the absence of any negative variables indicating otherwise
  4. Mankastu is in line with Hardy Exploration’s reasoning; in that it maintains the requirement of a holistic reading of the arbitration clause for deciding the seat. It also builds on this idea by holding that courts must also take into account parties’ conduct in order to ascertain their intention and implied preference on the seat.

Test(s) for deciding seat of arbitration in India

Having analysed the above decisions, it is submitted that the following factors may (or must) be examined to determine the seat of arbitration:

  1. The Law that governs the main agreement. (Enercon)
  2. Principle of closest and intimate connection. (Enercon)
  3. Exclusive jurisdiction clause mentioned in the domestic arbitration. (Indus Mobile)
  4. Choice of institutional arbitral rules, where the institution gets to determine the seat (Imax Corporation)
  5. Supranational body of rules regulating the agreement. (Roger Shashoua)
  6. Absence of any other significant contrary indicia. (Roger Shashoua; BGS)
  7. The language utilized in the arbitration agreement. (BGS)
  8. The satisfaction and fulfilment of the conditions attached to venue, if any. (Hardy Exploration)
  9. Presence of concomitant factors which suggests that the parties intended for the venue to also be its seat. (Hardy Exploration)
  10. Other clauses in the arbitration agreement and conduct of parties. (Mankastu)

Concluding remarks

The controversy around seat and venue of arbitration far from being settled. There is no universal standard for the determination of seat.

Improperly drawn up arbitration agreements, i.e. pathological arbitration clauses, have added to this uncertainty. Perhaps, to the extent this is possible, it may be prudent for Indian courts or the Legislature to set down some standard rules for drafting arbitration clauses.

An easier way would be for the Legislature to re-examine the findings of the 246th Law Commission Report and suitably amend the provisions of Section 20 of the Arbitration Act to replace the term place with the operative words seat and venue.  Once this is done, the parties would be extra cautious in mentioning the seat and venue thus resolving the conundrum to an extent at the contract drafting stage itself.

In any case, it is hoped that the Supreme Court will settle and put to rest this seemingly unending debate in the near future.

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