In a recent decision dated 13 April 2021 in M/s Inox Renewables Ltd v Jayesh Electricals Ltd (Civil Appeal No. 1556 of 2021), a two-judge bench of the Supreme Court of India held that it is open for parties to an arbitration agreement to change the seat of arbitration by mutual agreement. Such an agreement, even if not in writing, would be considered valid if it is recorded in the award and not challenged by either party.
Referring to BSG SGS SOMA JV v NHPC Limited (2020) 4 SCC 234 (BGS SGS), the Court reiterated that the selection of a seat by the parties is akin to an exclusive jurisdiction clause conferring jurisdiction on the courts at such seat over all matters connected with the arbitration.
Background of the Dispute
On 28 January 2012, Jayesh Electricals Limited (Jayesh Electricals) executed a purchase order (PO) with one Gujarat Fluorochemicals Limited (GFL). The PO contained an arbitration clause which stipulated Jaipur as the "venue" of arbitration and clarified that any party aggrieved by the arbitral award may seek recourse before the "courts in the State of Rajasthan".
Pursuant to a business transfer agreement dated 30 March 2012, Inox Renewables Ltd (Inox Renewables) took over the entire business of GFL including the rights and obligations under the PO. Jayesh Electricals was not a party to this agreement. This business transfer agreement designated Vadodara as the seat of the arbitration.
Subsequently, disputes arose between the parties. On 5 September 2014, Jayesh Electricals approached the Gujarat High Court at Ahmedabad for appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (the Act). On a joint request made by the parties for the appointment of a sole arbitrator, the Gujarat High Court made the appointment on 28 July 2018.
On 28 July 2018, the arbitrator appointed in the matter passed an award directing Inox Renewables to make certain payments to Jayesh Electricals. As to the place or seat of arbitration, the award recorded the following:
"12.3 There is no controversy as to the constitution of the Tribunal between the parties and the parties have agreed to get their dispute resolved by a sole arbitrator. As per arbitration agreement, the venue of the arbitration was to be Jaipur. However, the parties have mutually agreed, irrespective of a specific clause as to the [venue, that the place] of the arbitration would be at Ahmedabad and not at Jaipur. The proceedings, thus, have been conducted at Ahmedabad on constitution of the Tribunal by the learned Nominee Judge of the Hon'ble High Court of Gujarat."
Aggrieved by the portion of award directing it to make payments to Jayesh Electricals, Inox Renewables filed proceedings challenging the Award under Section 34 of the Act before the relevant Commercial Court at Ahmedabad (Commercial Court). Neither party appears to have challenged the arbitrator's observations regarding the place of arbitration.
By an order dated 25 April 2019, the Commercial Court dismissed Inox Renewables' petition mainly on the ground that courts in Vadodara and not Ahmedabad would have jurisdiction over the matter. In reaching this conclusion, the Commercial Court, it seems, relied on the business transfer agreement between GFL and Inox Renewables.
Inox Renewables challenged the aforesaid order vide a Special Civil Application filed before the Gujarat High Court under Article 227 of the Constitution of India. The Gujarat High Court, however, refused to set aside the order of the Commercial Court and instead dismissed the Application by an order dated 9 October 2019.
Inox Renewables carried the aforesaid decision of the Gujarat High Court in appeal before the Supreme Court.
Decision of the Supreme Court
The Supreme Court set aside the order of the Gujarat High Court mainly for the following reasons:
- The Supreme Court, after referring to the arbitrator's observations in the award with respect to the place of arbitration, found that the parties had by mutual agreement shifted the place or seat of the arbitration from Jaipur to Ahmedabad. The Supreme Court's finding was based solely on the contents of the arbitral award.
- The Supreme Court rejected the Respondent's (Jayesh Electricals) submission that the seat of arbitration could have been changed only by a written agreement. The Supreme Court noted that there was no such requirement under the parties' contract. That this fact was recorded in the arbitral award was sufficient for the Court to uphold the change of the seat, more so, since neither party had challenged the arbitrator's ruling as to the seat of arbitration.
- Relying on its previous decision in BGS SGS, the Court held that the moment the parties chose Ahmedabad as the place or seat of arbitration, it was akin to an exclusive jurisdiction clause, thereby vesting the courts at Ahmedabad with exclusive jurisdiction to deal with the arbitration.
- The Court observed that the shifting of the venue from Jaipur to Ahmedabad was really a shifting of the venue/place with reference to section 20(1) of the Act and not section 20(3) thereof.
- As to the jurisdiction clause in the PO conferring jurisdiction on the courts in the state of Rajasthan, the Supreme Court observed that the Rajasthan courts were vested with jurisdiction only because parties had originally chosen Jaipur as the seat of arbitration. The Court clarified that once the seat stood changed to Ahmedabad, the courts at Rajasthan would cease to have any jurisdiction.
This decision of the Supreme Court once again highlights the need to be cautious when deciding the venue, place and seat of arbitration. The importance of the parties' choice in this regard cannot be gainsaid. As clarified by the Supreme Court repeatedly, choosing a seat of arbitration is akin to an exclusive jurisdiction clause. Where parties do not use the word "seat" but designate a "venue" or "place" of arbitration in the arbitration agreement/ clause, such venue / place will be considered to be the seat in the absence of any contrary indication in the agreement/ clause.
The linkage between the seat, place or venue of the arbitration with the jurisdiction of courts continues to confound users of arbitration. While part of the problem is poor drafting of arbitration clauses, the lack of an express provision in the Act cannot be overlooked.
While the implications of a choice of seat in international arbitrations is well known amongst arbitration practitioners, the extension of this purely international concept to domestic arbitrations in India, by the Supreme Court, has created problems. The law in India in this regard is entirely judge made. An express provision in the Act may clarify matters. We hope our lawmakers will step up and take note.
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