India: Supreme Court Settles The Law With Regard To ‘Seat vs Venue' Of Arbitration

Last Updated: 28 February 2019
Article by S.S. Rana & Co. Advocates

The Hon'ble Supreme Court in the case of Union of India v Hardy Exploration and Production, held that the contractual clause between the parties to the contract stipulating Kuala Lumpur as the 'venue' of arbitration did not amount to a choice of juridical seat between the parties. The decision rendered by the three judge bench of the Apex Court tends to provide clarity on the 'venue vs seat' conundrum in arbitration cases.

Facts

A production-sharing contract (PSC) was entered into between Hardy Exploration and Production (India) Inc. (hereinafter referred to as 'Hardy Exploration') and the Indian Government (UOI) for the extraction, development and production of hydrocarbons in a geographic block in India. Dispute arose between the parties, on account of which the matter was referred to arbitration under PSC. As per PSC, the venue of arbitration was provided as Kuala Lumpur, unless otherwise agreed between the parties. The Arbitral Tribunal rendered its award in favor of Hardy Exploration' and the award was signed and delivered in Kuala Lumpur.

The award was challenged by UOI under Section 34 of the Arbitration and Conciliation Act,1996 (hereinafter referred to as 'the Act') before the Delhi High Court and in its rebuttal, Hardy Exploration contended that the High Court had no jurisdiction to entertain an application under Section 34 of the Act and on the other hand, Hardy Exploration sought enforcement of the award before the Delhi High Court. On July 09, 2015, the Learned Single Judge after considering the terms of the agreements between the parties and the legal precedents held that the Indian Courts had no jurisdiction to entertain the said application.

The order passed by the Single Judge was further challenged before the Division Bench of the Delhi High Court, which was further dismissed by the said Bench.

An appeal by Special Leave Petition was preferred by UOI in the case Union of India v Hardy Exploration and Production (India) Inc., whereby the Division Bench of the Supreme Court after considering the issues involved in the said case, referred the matter to the larger Bench of the Supreme Court in exercise of its power under Order VI Rule 2 of the Supreme Court Rules, 2013.

Issue before the Apex Court

The issue to be dealt and decided by the Hon'ble Supreme Court of India was when the arbitration agreement between the parties provided for the venue for holding the arbitration sittings by the arbitrators but does not specify the "seat", then on what principles, the Court had to decide the seat of the arbitral proceedings.

Observations and Conclusion

After considering the submissions made by the respective parties in the case at hand, the Apex Court, before delving into the issue raised before it, had placed reliance in various settled proposition of laws on the difference between seat and place and venue of arbitration (venue).

  • The case of Sumitomo Heavy Industries Ltd. v. ONGC Ltd and Ors. reported in [(1998) 1 SCC 305], as relied upon by the UOI that in the absence of an express seat, the challenge to an arbitration must be governed by the proper law of contract was rejected by the Supreme Court by stating that it was decided as per the Arbitration Act, 1940, and subsequent developments in Bharat Aluminum Company v Kaiser Aluminum Technical Services Inc. reported in [(2012) 9 SCC 552] had rendered Sumitomo case ineffectual.
  • Reliance was placed in the case of Bhatia International v. Bulk Trading S.A. and Anr. wherein it was held by the Court that Part 1 of the Act applied even to international commercial arbitrations seated outside India unless the parties had expressly or impliedly agreed to exclude Part I of the Act.
  • The Judgement rendered by the Court in Bhatia International (Supra) was overruled by the Court in the case Bharat Aluminum Company v Kaiser Aluminum Technical Services INC or (BALCO), whereby the Court held that Part 1 of the Act applied only to the arbitrations seated in India or within the territory of India.
  • In the case of Union of India v Reliance Industries, the Court placed reliance in the case of Harmony Innovation Shipping Limited v. Gupta Coal India Limited and another and held that Part I of the Act would be excluded if: (i) the juridical seat is outside India; or (ii) the law governing the arbitration agreement is a law other than Indian law.
  • The Supreme Court noted that an arbitration clause must be read holistically to understand its intentions to determine the seat of arbitration. As per the Article 32 of the arbitration agreement, the contract between the parties was to be governed as per the laws of India and as per Article 33 of the agreement, it was stated that "33.9 Arbitration proceedings shall be conducted in accordance with the UNICITRAL Model Law on International Commercial Arbitration of 1985 except that in the event of any conflict between the rules and the provisions of this Article 33, the provisions of this Article 33 shall govern.

    33.12 The venue of conciliation or arbitration proceedings pursuant to this Article unless the parties otherwise agree, shall be Kuala Lumpur and 25 shall be conducted in English language. Insofar as practicable the parties shall continue to implement the terms of this contract notwithstanding the initiation of arbitration proceedings and any pending claim or dispute."
  • The Court analyzed Article 20 and Article 31(3) of the UNICITRAL Model Law. "Article 20. Place of arbitration. —(1) The parties are free to agree on the place of arbitration. Failing such agreement, the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties. (2) Notwithstanding the provisions of paragraph (1) of this article, the arbitral tribunal may, unless otherwise agreed by the parties, meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for inspection of goods, other property or documents.

    Article 31. Form and contents of award- (3) The award shall state its date and the place of arbitration as determined in accordance with article 20(1). The award shall be deemed to have been made at that place."

    It was observed by the Court that as per Article 20, if the parties do not agree with respect to the place of arbitration, the same had to be determined by the Arbitral Tribunal and as per article 31(3), the award passed shall state the date and place of arbitration in accordance with Article 20(1).
  • Reliance was placed in the case of IMAX corporation v E-City Entertainment (India) Pvt. Ltd., whereby the Court observed that in the said case the seat of arbitration had not been specified in the arbitration clause and the only stipulation given the contract was that the arbitration was to be conducted as per ICC Rules. In IMAX corporation (supra), Court held that the parties had agreed to have seat of arbitration as decided by the ICC and the ICC had chosen the seat to be 'London' and was duly complied with by the parties.
  • The Court held that if the parties had not agreed upon with regard to the place of arbitration, the Tribunal had to determine the same keeping in mind the convenience of the parties and the determination should be stated in the 'form and content of award'. The Court stated that in the case in hand there was no determination with respect to the seat of arbitration. The Court observed that when only the term 'place' was mention in the agreement between the parties then, the place of the arbitration would be equivalent to 'seat' of arbitration. But, if a condition precedent had been attached to the term 'place' in the agreement, then the said condition had to be satisfied to consider 'place' as 'seat' of arbitration.
  • The Court while relying in the case of Ashok Leyland Limited v. State of T.N. and Another, stated that the expression of determination signified an expressive opinion and there had been no adjudication and expression of an opinion. The Court held that the place cannot be used as seat and Kuala Lumpur was not a seat or place of arbitration. The seat and place cannot be used interchangeably when no conditions are postulated.
  • In such circumstances, the Court decided that it was the "irresistible conclusion' that the jurisdiction to hear a challenge of the award lies with the Courts of India and the order of the Delhi high Court was set aside.

For further information please contact at S.S Rana & Co. email: info@ssrana.in or call at (+91- 11 4012 3000). Our website can be accessed at www.ssrana.in

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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