Determination of the lex: An opportunity lost

Bar & Bench November 11 2018

Payal Chawla

The much-awaited decision in the matter of Union of India v. Hardy Exploration and Production (India) Inc. was delivered by a three-judge bench of the Supreme Court on September 25, 2018. Since I had written a three-part series on the (then) pending decision, I thought it was apropos to do a concluding part, upon the delivery of the judgment.

As regards the issue on whether India ought to have been the ‘seat’ in the peculiar facts and circumstances in the case at hand, the three-judge bench holds that India is the ‘seat’. Although, the parties were not desirous of the three-judge Bench answering the reference and requested the Court to only proceed on the particular merits of the case, the Court, despite the request, deemed it ‘appropriate to put the controversy to rest as the two-Judge Bench thought it appropriate to refer the matter to a larger Bench’. I am therefore, disappointed, that having chosen to do so, the Court lost the opportunity to set the law on the aspect of the preponderance of the order of the lex, when ‘seat’ is not explicitly agreed between the parties.

In failing to define guidelines for courts to follow, on the dominant law i.e. lex arbitri, lex contractus or lex fori (curial law), when ‘seat’ has not been explicitly chosen by the parties, the Court has merely added one more judgment to the assortment of ‘various decisions by Benches of variable strength’ on the subject [(Union of India v. Hardy Exploration and Production (India) Inc. 

And then there are other issues with the judgement.

Factual inaccuracy

Notably, the Supreme Court, both in the three-judge Bench as well as the two-judge Bench decisions, has incorrectly noted the facts qua the orders of the Single Judge and the Division Bench of the Delhi High Court. 

The facts leading the matter to the Supreme Court are as follows - The Union of India filed objections under s.34 of the Arbitration and Conciliation Act, 1996, before the Delhi High Court, challenging the arbitral award dated 02.02.2013. Hardy Exploration took objections inter alia to the territorial jurisdiction of Delhi. The Union of India, conceding that having an office alone in Delhi was not sufficient to confer jurisdiction and accordingly sought liberty to withdraw the petition and move the same before an appropriate forum.

The petition was accordingly dismissed as withdrawn on July 9, 2015. Post this withdrawal, the Union of India filed a Review before the Delhi High Court. The single judge of the Delhi High Court finding no infirmity with the order dated July 9, 2015, since the withdrawal ‘by the petitioner’ was on its own volition’, dismissed the Review vide order dated January 20, 2016.

Both orders dated July 9, 2015, and January 1, 2016, were challenged by the Union of India before the Division Bench of the Delhi High Court (Division Bench) under s.37(2) of the Arbitration & Conciliation Act, 1996. The Division Bench was of the view that ‘strictly speaking’, there was no ‘error apparent on the record’, that ‘there can be no quarrel with the decision of the learned single Judge insofar as the review order is concerned’ and that ‘the present appeal could be decided on this short point alone’.

However, it appears that the Union of India, ‘pleaded with’ the court, relied on ‘several authorities to indicate that a concession on a point of law would not be binding on the petitioner ‘, argued that ‘this was not a case of a foreign award and, therefore, Part I of the said Act was applicable which included Section 34’ and ‘submitted that this court also had territorial jurisdiction to entertain the said petition’.

Further, since both sides led ‘elaborate arguments with regard to the applicability/non-applicability of Part I of the said Act’, the Division Bench went on to examine the ‘issue in detail’. That said, it still remains unclear how jurisdiction was conferred on Delhi, in the absence of pleadings in this regard.  

In the appeal, the two-judge bench of the Supreme Court (“two-judge Bench”), however, made no mention of the sua sponte withdrawal of the s.34 Petition by the Union of India or the lack of territorial jurisdiction of Delhi. The two-judge Bench instead stated,

The Single Judge by order dated 09.07.2015 upheld the respondent's preliminary objection and held that keeping in view the terms of the agreement in question coupled with the law laid down by this Court in several decisions governing the issues arising in the case, Indian Courts have no jurisdiction to entertain the application filed by the appellant under Section 34 of the Act to question the legality and correctness of the award in question and accordingly dismissed the appellant's application as being not maintainable in Indian Courts”.

Such a finding by the two-judge Bench was an error since no such finding was made by the Single Judge in his order dated July 9, 2015. The two-judge Bench further records,

…. the Division Bench concurred with the reasoning and the conclusion arrived at by the Single Judge”. Most respectfully, such a finding is also contrary to the record.

The aforesaid facts were followed by the three-judge Bench, thus compounding the error. In my humble view, the above incorrect noting of facts affects the substantive rights of the parties. And if I’m correct, this would be a fit case for seeking a review of the judgment.

Further, since the parties in question were not keen on the three-judge Bench answering the reference, but were desirous that the Court proceed only on the particular merits of the case, the entire controversy could have been cut-short taking into account the motu proprio withdrawal by the Union of India.

On merits

The salient facts of the case at hand were:  The agreement between the Union of India and Hardy Exploration was silent on the ‘seat’ and the lex arbitri; the Agreement, however, did provide for Indian laws to be the lex contractus; the lex fori (curial law) was the UNCITRAL Model law and the venue of arbitration was Kuala Lumpur.

According to Article 20 of the UNCITRAL Model law, the parties were free to agree on a place of arbitration (which did not take place in the present facts and circumstances). Further, Article 31 stated that ‘the award shall state its date and the place of arbitration as determined in accordance with article 20(1)’ and the ‘award shall be deemed to have been made at that place’. 

The Division Bench of the Delhi High Court relying on Article 20(1) read with Article 31 of the UNCITRAL Model Law, held that Kuala Lumpur was not merely the ‘venue’, but also the ‘seat’. Even though the agreement executed between the parties, was prior to June 12, 2012, relying on the observations of the Supreme Court in para 21 of Union of India v. Reliance Industries Limited and Part 1 of the Act, the Division Bench was of the view that the principle laid down in Bhatia International v. Bulk Trading SA had no application to the issue at hand. Accordingly, the Division Bench of the Delhi High Court dismissed the s.34 objections filed by the Union of India.

The three-judge Bench of the Supreme Court was also of the view that the Bhatia principle has no application to the present facts and circumstances.  The controversy must be dealt with by either the ‘BALCO principle or by the agreement or by the principle of implied exclusion as has been held in Bhatia International’. Relying on the decision of Harmony Innovation Shipping Ltd. v. Gupta Coal India Limited, the three-judge Bench held that a ‘venue can become a seat if something else is added to it as a concomitant’. In the absence of such additional concomitant, Kuala Lumpur was merely a venue and not ‘seat’ and consequently, India had jurisdiction. 

In my most respectful submission, both the Division Bench of the Delhi High Court and the three-judge Bench have taken a simplistic view of the issue.  The Division Bench in relying on the UNCITRAL Model law, has impliedly treated the lex fori (curial law) to be determinative in the absence of clear determination of ‘seat’. On the other hand, the lex fori seemed to have had no bearing on the three-judge Bench in its decision. 

The two-judge bench of the Supreme Court after considering the plethora of judgments on subject narrowed down the reference to ‘one question’ –

"namely, when the arbitration agreement specifies the “venue” ... but does not specify the “seat”, then on what basis and by which principle, the parties have to decide the place of “seat”?"

[Emphasis supplied by the author]

Although, the three-judge Bench says that they answered the ‘reference accordingly’, but in reality, have they?

To my mind, until the Supreme Court finally puts the issue, rightly enunciated by the two-judge Bench to rest, we are likely to see protracted litigations given the latitude of discretion in the current jurisprudence on this aspect. 

In deciding the issue, the Apex Court must take into consideration and decide issues such as - which lex is supreme in the absence of explicit agreement on ‘seat’ by parties - Is it lex arbitri? If no lex arbitri is agreed by the parties will it follow lex contractus (as was the case in the facts of the present case)? Which law will take precedence after lex arbitrilex contractus or lex fori? Can procedural law have precedence over substantive law in arbitrations? 

Questions for today. Answers, perhaps, for another day.

About the author: Payal Chawla is the founder of JusContractus a Delhi based full-service law firm, with primary focus on arbitrations. or feedback, contact payalchawla@juscontractus.com. 

This article is for informational purposes only, and is not intended to provide, and should not be relied on for legal advice. Readers are advised to seek independent legal advice in accordance with their peculiar facts and circumstances.