ARTICLE
24 January 2025

Shifting Paradigms In Arbitration Jurisdiction: Apex Court Upholds The Supremacy Of The Shashoua Principle Over The Close Connection Test

SO
S&A Law Offices

Contributor

S&A Law Offices logo
S&A Law Offices is a full-service law firm comprising experienced, well-recognized and accomplished professionals. S&A Law Offices aims to provide its clients (both domestic and international) with top-quality counsel and legal insights, which combines the Firm's innovative approach with comprehensive expertise across industries and a broad spectrum of modalities. Being a full-service law firm, we take pride in having the capability of providing impeccable legal solutions across various practice areas and industries and makes an endeavor to provide a 360 degree legal solution. With registered office at Gurugram and other strategically located offices in New Delhi, Mumbai, and Bengaluru, along with associate offices across India, S&A is fully equipped to provide legal services on a pan-India basis.
The Hon'ble Supreme Court of India has clarified that for determining the seat of arbitration, the "Shashoua Principle" is more relevant than the "Close Connection Test".
India Litigation, Mediation & Arbitration

The Hon'ble Supreme Court of India has clarified that for determining the seat of arbitration, the "Shashoua Principle" is more relevant than the "Close Connection Test". In doing so, the Hon'ble Court has held that the more relevant criterion for determining the seat of arbitration would be when in an arbitration clause or agreement, there is an express stipulation for a 'place of arbitration' anchoring the arbitration proceedings to such a place and there is no other contrary indicia to show or suggest any other place, then such place would become the seat of arbitration even if the term used to designate such a place is 'Venue'.

A. BACKGROUND OF DISPUTE:

Arif Azim Co. Ltd (herein after referred to as 'Petitioner'), a company based in Afghanistan, entered into a Consumer Distributorship Agreement (herein after referred to as 'the Agreement') with Micromax Informatics FZE (herein after referred to as 'Respondent No.1') for distribution of handsets which were manufactured by the Respondent No.1. Thereafter, certain disputes arose between the parties, and the Petitioner issued notice for invocation of arbitration in terms of Section 21 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'A&C Act, 1996') and the Dispute Resolution clause of the Consumer Distributorship Agreement. In terms of the Dispute Resolution clause, the arbitration was subject to UAE Arbitration and Conciliation rules and the venue of the arbitration was Dubai, UAE. Further, as per the Law and Jurisdiction clause of the Agreement, the Agreement was to be governed by and construed in accordance with laws of UAE and was subject to the non-exclusive jurisdiction of the Dubai Courts. In the said notice invoking arbitration, the Petitioner pointed out that since no exclusive jurisdiction had been conferred by the parties upon any particular court and the cause of action had concurrently arisen both in Afghanistan and India, the Petitioner preferred to resolve the dispute through arbitration under the jurisdiction of the courts in India. However, after having received no reply to the said notice, the Petitioner filed the petition before the Hon'ble Supreme Court under Section 11(6) of the A&C Act, 1996, seeking appointment of arbitrator due to the failure of Respondents in nominating its arbitrator as per mutually agreed terms and procedure.

The issues that fell for the consideration of the Hon'ble Supreme Court were:

  1. Whether the petition under Section 11 of the A&C Act, 1996, was maintainable?
  2. Whether Part I of the Act, 1996 is applicable to the arbitration clause contained in the distributorship Agreement dated 09.11.2010?
  3. What is the seat of arbitration in terms of the Distributorship Agreement dated 09.11.2010?

B. ANALYSIS AND FINDINGS:

I. DISCUSSION OF THE COURT:

While discussing the history of the A&C Act, 1996, the Hon'ble Court reiterated how Part-I of the A&C Act, 1996 which contains the exercise of power to appoint an arbitrator under Section 11 of the A&C Act, 1996 is dependent upon whether the Part-I is applicable in the facts and circumstances of the dispute or not.

The Hon'ble Court then went on to discuss the Notional Doctrine of Concurrent Jurisdiction and Applicability of Part I of the A&C Act, 1996 in detail. The Hon'ble Court divided the discussion into two separate parts. The first being pre-BALCO1 Regime and the second being, Post- BALCO Regime.

In the pre-BALCO regime, the Closest Connection Test was applied for the first time by the Hon'ble Supreme Court in National Thermal Power Corporation v. Singer Company2 (herein after referred to as 'NTPC Case'). In terms of the test, when no governing law has been chosen by the parties, the jurisdiction which has the closest and the most real connection with the transaction or dispute between the parties, would be the governing law. The Hon'ble Court in the NTPC case while discussing the Doctrine of Concurrent Jurisdiction observed that when the parties have agreed to two distinct choices of law, one governing the arbitration agreement and the other governing the arbitration proceedings, then the appropriate courts under both the laws will have concurrent jurisdiction for matters governed by their respective system of law. The Doctrine of Concurrent Jurisdiction was further expanded by the Hon'ble Supreme Court in Bhatia International v. Bulk Trading S.A.,3 (herein after referred to as 'Bhatia International case'), wherein the Hon'ble Court held that Part I of the A&C Act, 1996 would apply to both domestic arbitrations that take place in India, as well as internation arbitrations that take place outside India. The Hon'ble Court further held that unless the arbitration agreement states to the contrary, even if the seat or place of arbitration is outside India, the courts in India would have concurrent jurisdiction along with courts situated in the seat jurisdiction.

However, the Bhatia International case was referred to a larger bench, which culminated into the landmark decision of Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc4 (herein after referred to as 'BALCO judgment'). The Hon'ble Court in the BALCO judgement held that that the Part I of the A&C, 1996 is limited only to arbitrations that take place in India. The Hon'ble Court enumerated how 'subject matter of the arbitration' and 'subject matter of the suit' refer to jurisdiction on the basis of cause of action and jurisdiction on the basis of place of arbitration respectively.

Hence, what emerges from the numerous decisions of the Hon'ble Court is that Part I of the A&C Act, 1996 and the provisions under the same apply where arbitration takes place in India i.e. where either the seat of arbitration is in India or the law governing the arbitration agreement is Indian law. The decision of the Hon'ble Court also categorically holds that irrespective of the date of execution of the agreement, Part I will only be applicable where arbitration takes place in India.

Further, the Hon'ble Court then proceeded to discuss the Roger Shashoua (1) v. Sharma5 , commonly known as the Shashoua principle, to determine whether the seat of arbitration designated under the aforesaid Consumer Distributorship Agreement was in India and if not, whether the said arbitration agreement could be said to be governed by the Indian laws. In the case of Roger Shashoua (1) , the England & Wales High Court had held that when there is an express designation of the arbitration venue with no designation of any alternative place as the seat, combined with a supranational body of rules governing the arbitration and no other significant contrary indicia, the inexorable conclusion would be that such venue in-fact is the juridical seat.

The decision of Roger Shashoua (1) was relied upon by the Hon'ble Supreme Court in the case of Roger Shashoua (2) v. Mukesh Sharma6 wherein the Hon'ble Court held that the test applied in the NTPC case was no longer a good law in view of the repeal of Section 9(b)7 of the Foreign Awards (Recognition And Enforcement) Act, 1961 Act and opined that mention of a venue of arbitration was not merely a mention of a location but reflects the intention of the parties to make it a juridical seat. The Hon'ble Court further held that that the principle enunciated in Roger Shashoua (1) had been expressly approved by the 5-Judge Bench decision of this Court in BALCO judgment.

Further, the Hon'ble Supreme Court in the case of BGS SGS SOMA JV v. NHPC LTD.8, while applying the Shashoua principle formulated a test as to when 'venue' can be construed as the 'seat' of arbitration. The Court opined that if the Arbitration agreement or clause designates only one place which anchors to the arbitral proceedings and there exists no other significant indica to show that the place designated is merely a venue and not the seat, then the place that has been designated as a 'venue' can be construed as the 'seat' of arbitration. The aforesaid test as laid down in the case of BGS SGS Soma (Supra) was approvingly applied by Supreme Court in Mankastu Impex Private Ltd. v. Airvisual Ltd.9

The Hon'ble Supreme Court further applied the Doctrine of Forum non Conveniens on the issue relating to the seat of Arbitration for adjudicating upon the Consumer Distributorship Agreement and held that even if it is assumed that Clause 27 of the Consumer Distributorship Agreement confers concurrent jurisdiction to both the courts in the UAE and other courts, allowing the petitioner to approach the Hon'ble Court under the non-exclusive jurisdiction for appointment of an arbitrator, the Court may still decline to exercise its jurisdiction if a more appropriate forum exists.

Analysing the Closest Connection test and the Shashoua Principle in the light of aforesaid rulings read with Clause 27 of the Consumer Distributorship Agreement10 in the present case, the Hon'ble Supreme Court held that since the Consumer Distributorship Agreement already designates Dubai, UAE as the venue of arbitration and by the extension the seat of arbitration, in absence of any contrary indicia, the courts of Dubai only would be akin to an exclusive jurisdiction clause. As a result, the petition filed under Section 11 of the A&C Act, 1996 was held to be not maintainable because the venue of arbitration was in Dubai, not India.

II. FINDINGS OF THE COURT:

The Hon'ble Supreme Court has clarified the following positions of law:

iii. Part I of the A&C Act, 1996 only applies to arbitrations that either have a seat of arbitration in India or the law governing the arbitration agreement are the laws of India. The Hon'ble Court also held that the date of execution of the agreement, being pre or post 2012, would be immaterial, in as much as, its application has been excluded by the parties in the arbitration agreement either explicitly by designating the seat of arbitration outside India or implicitly by choosing the law governing agreement to be any other law other than Indian Law.

iv. When 'seat' is determined, it would equate to exclusive jurisdiction clause. The Hon'ble Court enumerated that only the courts of the seat alone would have the jurisdiction to regulate the arbitral proceedings and further clarified that the Doctrine of Concurrent Jurisdiction has been overruled by the courts.

v. The 'Closest connection test' for determining the seat of arbitration was no longer a viable criterion for determination of the seat in view of the Shashoua Principle. Even if there is an expressly stipulated law governing the contract, it does not imply that the law governing the arbitration agreement, and the seat of arbitration will be the same.

vi. In an arbitration agreement, where there is a designation of a place of arbitration anchoring the arbitral proceedings to such a plavce, and there is no contrary indicia to show otherwise, such place would be the 'seat' of arbitration even if it is designated in the nomenclature of 'venue' in the arbitration agreement.

vii. Courts cannot sideline the specific choices made by the parties, just because the parties have stipulated a venue without any express choice of a seat.

viii. Closest connection test would have application and might be more applicable when there is no express or implied designation of a place of arbitration in the agreement either in the form of 'venue' or 'curial law'.

ix. When two or more places have been designated in the arbitration clause or agreement, whether impliedly or expressly, conflict may be resolved through the recourse to Doctrine of Forum Non Conveniens.

The Hon'ble Court finally held that the petition filed under Section 11 of the A&C Act, 1996 was not maintainable as neither the seat of arbitration was in India, nor the arbitration agreement was governed by laws of India.

C. CONCLUSION:

Over the years, there have been conflicting views taken by various Courts over the issue of seat and venue of arbitration. However, the issue has been clarified by the Hon'ble Supreme Court in this case, relying on the BALCO judgment, and the Hon'ble Court has rightly held that the place designated as the venue, in absence of contrary indicia, should be interpreted as the seat of arbitration and no contrary view can be taken. The Hon'ble Court further clarified that it is only when the parties have not specified a governing law or venue or seat, the jurisdiction with the closest connection to the subject-matter may be considered. The judgement correctly upholds the principle of party autonomy by giving due importance to the choices made by the parties in the agreement and not treating the choices as an inadvertence at the behest of the parties. The judgement emphasized that the courts can only facilitate arbitration as per the sum and substance of the intention of the parties to the agreement.

Indian courts cannot exercise jurisdiction over international arbitrations unless India is the seat or Indian law governs the agreement and this judgment provides greater certainty in international arbitration, particularly regarding jurisdictional issues and the interpretation of arbitration agreements. This judgment acts as a caution to parties in drafting of the arbitration agreements or clauses clearly defining the seat and venue of the arbitration, so as to rightly reflect the intention of the parties especially in cross-borders disputes in order to avoid unnecessary litigation.

Footnotes

1 Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc, (2012) 9 SCC 552.

2 National Thermal Power Corporation v. Singer Company, (1992) 3 SCC 551,

3 Bhatia International v. Bulk Trading S.A., (2002) 4 SCC 105

4 supra.

5 [2009] EWHC 957 (Comm)

6 (2017) 14 SCC 722

7 "9. Saving .-Nothing in this Act shall-

....

( b ) apply to any award made on an arbitration agreement governed by the law of India." (repealed)

8 (2020) 4 SCC 234

9 (2020) 5 SCC 399

10 "Clause 27- This Agreement shall be governed by and construed in accordance with the laws of UAE and shall be subject to the nonexclusive jurisdiction of the Dubai Courts".

Disclaimer: This article was first published in the S&A Law Offices - 'Indian Legal Impetus' newsletter in December 2024.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More