India: Implications Of Designating 全eat' In Domestic Arbitration

'Seat' or 'place of arbitration' or 'locus of arbitration' is quintessential component of any International Commercial Arbitration.1 It is the seat of arbitration which determines the proper law ("lex arbitri") governing the arbitration (in absence of any express agreement) and which court will exercise the supervisory jurisdiction over the whole arbitration process.2 The importance of seat of arbitration is very well known in the world of International Commercial Arbitration ("ICA").3 Although the position in Indian law is settled with regard to the importance and consequences of designating seat in ICA4, however, its importance in Domestic arbitration is widely contested. This Article particularly analyses the implications of designating 'seat' in Domestic Arbitration only and will refrain from commenting its significance in ICA

Indus Case

The Hon'ble Supreme Court in Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited & Ors,5 ("Indus case") got the chance to comment upon the significance of 'seat' in domestic arbitration

The brief facts that gave rise to controversy in this case were that the arbitration agreement between the parties provided that "...dispute shall be finally settled by arbitration conducted under the provisions of Arbitration and Conciliation Act, 1996....shall be conducted in Mumbai only". Further, there was an exclusive jurisdiction clause also: "all disputes and differences of any kind whatever arising out of or in connection with this agreement shall be subjected to exclusive jurisdiction of Mumbai only." It is pertinent to note that the Respondent no. 1 and Appellant has their registered offices in Amritsar, contract was of supplying of goods from Delhi to Chennai. Due subsequent disagreement between the parties, the respondent no. 1 filed a section 9 application and section 11 application in Delhi high court. Delhi high court granted relief under the aforesaid application to the respondent no. 1 and hold that Delhi High court has the jurisdiction to hear the matter. Against this decision the Appellant moved a Special leave petition before the Supreme Court ("Court"). The Court while disposing the matter held that Delhi High court will have no jurisdiction as the "the moment the seat is determined, the fact that the seat is at Mumbai would vest Mumbai courts with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties".

Antrix case

Effect of seat, forum selection (or absence of forum selection clause) also came before the Delhi High Court in Antrix Corporation ltd v. Devas Multimedia Pvt Ltd6.. In this case Antrix before the initiation of arbitral proceedings has filed a section 9 application ["the first Section 9 Application"] before the High Court of Karnataka in Bangalore for the restraining the Devas from proceeding for arbitration in ICC. Meanwhile during the pendency of the first Section 9 Application, arbitral tribunal was already constituted and proceedings were initiated before ICC tribunal. ICC tribunal passed arbitral award in favour of Devas a sum of $562.5 million with simple interest at 18% p.a. from the date of award to the date of payment. Antrix applied under Section 34 of the Act challenging the Award dated 14.09.2015. Devas filed a Section 9 application in the Delhi high court [the Second Section 9 Application]. It was in the Second Section 9 application that single judge of the Delhi High Court (Commercial Division) passed an interim order granting certain reliefs in to Devas. Antrix preferred appeal against last mentioned interim order. Antrix preferred appeal against last mentioned interim order passed under the Second Section 9 application. Before the Commercial Appellate Division, inter alia, the issue was raised whether Delhi High Court has the requisite jurisdiction to pass the said order?

The Court went into the detail analysis of Section 2(1)(e), Section 42, and BALCO judgment. It is pertinent to note that the court lays down the correct interpretation of Section 42 in light of practice of designating 'seat' of arbitration in Domestic Arbitration. Below are the findings of the court:

  1. Section 42 presupposes that the existence of two or more competent courts. Hence, when one competent court seizes of the jurisdiction of the dispute the other courts no longer can exercise the jurisdiction on the same matter. (This is the rule of convenience and also for preventing conflicting decision arising out of parallel proceedings.)
  2. If the designating seat is equated with designating an Exclusive Jurisdiction clause it will render the purpose of Section 42 otiose as there will be only one competent forum left to hear all the applications in relation to anarbitration every time either parties or an Arbitrator/Arbitral Tribunal designates a seatThus, such an interpretation in domestic arbitration will run contrary to the intent of parliament.
  3. Finally, the court held that mere designating seat is not enough to cloth a particular court with exclusive jurisdiction. Only in case where 'exclusive jurisdiction clause' and 'seat' are one and same then only Seat will have the exclusive jurisdiction otherwise both seat and other courts will have the concurrent jurisdiction over the arbitration and Section 42 will come into play.

Analysis

International Commercial arbitration is mostly delocalized; seat is important factor that is used to localize the arbitration. In contrast, domestic arbitration is already localized. Further, is it possible, under the scheme of the Act, to construe Section 2(1)(e) and Section 42 in isolation without considering the general principle of law governing the jurisdiction of court?

It is trite that 'consent can neither confer (in case court doesn't have an inherent jurisdiction)7 nor take away the jurisdiction of the court which it inherently (or exclusively) has'.8 Thus, it has been a settled law in India that by mutual consent one cannot give jurisdiction to the court which it inherently lacks. Thus, first question before exercising jurisdiction is "whether the court has inherent subject matter jurisdiction or not?" Thus, which court in India will exercise Jurisdiction has to be decided as per the settle principle of laws laid down in Section 15 to Section 20 of Code of Civil Procedure, 1908("CPC"). ("First principle")

Second principle of law is, it two or more courts inherently have jurisdiction then parties by consent can confer jurisdiction on one of those courts.9 It is this part which gives contractual freedom to parties to decide the court which will govern their dispute before hand in a commercial contract in the form of exclusive jurisdiction clause. Such a practice is to make the resolution of contractual dispute more certain and absolve parties from future (legal) deliberations with regard to place to sue. ("Second principle")

Third principle is the foundation of all arbitration. It deals with separatability of arbitration agreement.10 This principle has been well recognized in Section 16 of the Act. The basic premise of this is that arbitration agreement is a separate agreement within the main agreement. Thus, it can be subject to different law ("lex arbitri") than the law of main or matrix contract. Extension of this principle is that Different courts can have jurisdiction with regard to one commercial agreement: one supervising the whole contract and the other supervising only Arbitration agreement.11] ("Third principle")

Fourth, 'seat' and 'venue' are two different concepts. Seat determines the substantive and procedural law governing arbitration while venue has no substantial role than the suiting the convenience of parties and arbitral tribunal.12 Further, venue has no role in determining the supervisory jurisdiction of the courts even in domestic arbitration13 ("Fourth Principle")

Lastly, the whole controversy revolves around the observation made in para 96 of Bharat Aluminium v. Kaiser Aluminium,14 ("BALCO") by the Hon'ble Supreme Court. In which the court held that Section 2(1)(e) has to be construed in light of Section 20. Thus, recognizes two courts to have jurisdiction one where arbitration takes place and the other where cause of action arises. It is the illustration which the court has given in para 96 which has created whole controversy with regards to the applicability of concept of seat in domestic arbitration. It is clarified that BALCO has its applicability in the context of ICA and has to be construed in that light only. :

Applicability of Antrix and Indus case

S.No.

Situation(s)

Which court (s) will have jurisdiction

Where Seat is not designated by the parties (or arbitral tribunal as the case may be) and there is no exclusive jurisdiction clause in the contract:

Court which will have jurisdiction as per first and second principle.15

Where seat is not designated by the parties (not decided by the Arbitral tribunal as well) but there is an exclusive jurisdiction clause in the contract:

Court as per First, Second and third principle will have the jurisdiction.

It is submitted since lex arbtri in a domestic arbitration which is necessarily between Indian parties, governed by Indian Law, third principle loses its force as law governing arbitration agreement and law governing the matrix contract will necessarily be the same.16

Thus, the result of situation no. 2 will be similar to that of Situation no. 1

Where seat of arbitration is designated and there is exclusive jurisdiction clause as well and both designate the same place or the court

This is situation is well governed by Indus case. In this case the court which will have jurisdiction will have to be decided keeping in the mind first, second and third principle.

As per Indus case, Courts in Seat will have the exclusive jurisdiction. However, for legal analysis, this situation required further elaboration:

  • As noted in BALCO and Indus courts in seat will also have jurisdiction over the subject matter of suit and will be a court within the meaning of Section 2(1)(e).
  • The purpose of designating seat is to confer jurisdiction over the court which it otherwise doesn't have. It was evolved because in ICA parties chose to have a neutral seat, which is not related to contract, a place where no cause of action has arose.17
  • It is trite that arbitration has to be parties oriented but it is also settled that express consent of parties cannot override the intent of a statute especially, Section 42 which starts with a non obstante clause, that is irrespective what is mentioned in Section 20 of the Act which confers parties autonomy to designate a place of arbitration (which was read to mean Seat in BALCO)
  • Every forum selection clause has to pass through the First principle test.
  • As noted in third principle that Arbitration agreement and matrix contract is different. Thus, Voidability of matrix agreement will not affect the arbitration agreement. Going by this (applying principles in BALCO) exclusive jurisdiction clause of contract may or may not apply to arbitration. In the early case of Sumitomo Heavy Industries Ltd v. ONGC Ltd18 it was held that law governing matrix contract and Arbitration agreement is one and the same. However this position has been changed since BALCO and other cases19.
  • It is the submission of the author that exclusive jurisdiction clause in matrix contract has no relation to arbitration agreement unless such clause is made applicable to arbitration agreement by express or implied consent of parties.
  • It is submitted that courts will have to check the enforceability of exclusive jurisdiction clause in light of first principle, since exclusive jurisdiction clause, which otherwise is unenforceable (being contradictory to first principle), will be enforceable because parties have designated seat at that place. It is trite that which law forbids to do directly, it is also not allowed to do indirectly. It has to be kept in mind that SEAT is evolved to localize ICA not domestic arbitration (where parties have same background).

Where Seat of arbitration designated by parties is different and exclusive jurisdiction clause is different.

This situation is also to be determined by joint application of first, second and third principles. This was the situation in Antrix case. Accordingly, both Courts will have concurrent jurisdiction over the subject matter and the Court which will seize jurisdiction first by virtue of Section 42 will be the Court for subsequent applications.

In this case, however the court has failed to answer what will happen in a situation where exclusive jurisdiction is void because of first principle, then whether the court at seat will have the exclusive jurisdiction. this question will be answered in situation no. 5

Where only seat is designated and there is no exclusive jurisdiction clause

This situation is not covered within Antrix and Indus case. Antrix said seat only has concurrent jurisdiction, while going by Antrix case the situation will be that seat, and courts as per first principle will have the concurrent jurisdiction.

However as per Indus it is the seat which will have the exclusive jurisdiction.

It is view of the author that 'seat' in domestic arbitration is not equivalent to exclusive jurisdiction clause. It will have to be decided on the case to case basis whether parties intended it to be exclusive jurisdiction clause in the light of surrounding circumstances.

Hence, the view in Antrix will apply in this situation.

Conclusion

It is beyond doubt that in arbitration the parties have to be accorded maximum autonomy, but as it is said, autonomy has restrictions. This view is consistent with the scheme of Act where some provisions are mandatory; some provisions are party autonomy oriented. Designating seat as exclusive jurisdiction clause in domestic arbitration is practically not feasible from commercial point of view. No party will bargain for dispute resolution process that will be burdensome for them and will ultimately run contrary to the intention of parties for entering into arbitration. It is because, once the court decides that a particular court will have a jurisdiction then by virtue of section 42, that court will be the 'designated' court for all application be it may Section 27,Section 9 or Section 34...etc. The situation is be not 'commercially' beneficial specifically when seat is neutral seat and there is no correlation between the place of arbitration and subject matter in disputes. The courts in earlier situations like Swastic gas have enforced the exclusive jurisdiction clause because it passed the first and second principle test.

However, whatever theoretically or legally situation may be with regard to concept of seat in domestic arbitration, its implications are wide ranging. On the basis of Law as it stands as of now (in light of Antrix and Devas), it is concluded that:

If parties want to designate a neutral seat (keeping in mind the future implications on arbitration process and application of section 42), should designate the same as exclusive jurisdiction clause as well.

Footnotes

1 Reliance India Limited v. Union of India, (2014) 7 SCC 603; Enercon (India) v. Enercon Gmbh, (2014) 5 SCC 1; Harmony Innovation Shipping Limited v. Gupta Coal India Limited and Another, (2015) 9 SCC 172.

2 Sulamerica CIA Nacional De Seguros S.A. v. Enesa Engenharia S.A. [2012] EWCA Civ 638

3 G. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 1886 (KLUWER LAW ARBITRATION 2009).

4 sire Balco

5 Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited & Ors, Civil appeal nos. 5370-5371 of 2017.

6 FAO(OS) (Comm) 67/2017, CMA 11214 & 17730/2017

7 Vithalbhai (P)Ltd v. Union of India, (2005) 4 SCC 315.

8 P. Dasas Munni Reddy v. P. Appa Rao, (1975) 2 SCR 725.

9 Hakam Singh v. Gammon (India) Ltd, (1971) 1 SCC 286.

10 National Agriculture Coop Marketing Federation India Ltd v. Gains Trading Ltd, (2007) 5 SCC 692, カ6.

11 See generally, Enercon (India) v. Enercon Gmbh, (2014) 5 SCC 1.

12 See generally, Roger Shashoua v. Mukesh Sharma, 2017 (Civ Appeal No.28412843, Supreme Court.

13 PCP International Limited v. Lanco Infratech Limited, 2015 SCC Online Del 10428.;.

14 Bharat Aluminium v. Kaiser Aluminium, (2012) 9 SCC 552

15 Municipal Corporation of city of Kalyan and Dombivile v, Rudrance Infrastructure Ltd. (2017) 6 Mah LJ 753 in this case no seat was designated by the parties.

16 It is submitted that two Indian parties still cannot consent to foreign governing law. (see, Sasan Power Ltd., v. North American Coal Corporation India Private Limited, (2016) SCC 10 813.; TDM Infrastructure Private Limited v. UE Development India Private Ltd, (2008) 14 SCC 271.)

17 N. BLACKABY ET AL., REDFERN AND HUNTER ON INTERNATIONAL ARBITRATION ァ6.83 AT 385 (2009);

18 Sumitomo Heavy Industries Ltd v. ONGC Ltd, (1998) 1 SCC 305.

19 Supra note 1.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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