Seat of Arbitration and its communion to lex – larger bench to decide: Part I

Payal Chawla

On May 1, 2018, the Supreme Court referred the issue of manner of determination of a ‘seat’, when the ‘seat’ is not expressly agreed to by the parties, to a larger bench, in the matter of Union of India v. Hardy Exploration and Production (India) Inc. [(2018) 7 SCC 374].

In cases where the arbitration agreement specifies the “venue” for holding the arbitration sittings by the arbitrators, but does not specify the “seat”, the question then arises, ‘on what basis and by which principle’, the “seat” should be determined, because the ‘seat’ ‘has a material bearing for determining the applicability of laws of a particular country for deciding the post-award  arbitration proceedings’.

The Court was of the view that the matter needs to be referred to a larger bench, given the conflicting decisions and law laid down by the Supreme Court ‘in several decisions by the Benches of variable strength’.

Facts of Hardy Exploration:

In 1997, Hardy Exploration and Production (India), Inc. (“Hardy Inc.”) entered into a contract with the Union of India, to allow Hardy Inc. to search for and potentially extract hydrocarbons from certain areas off of India’s south-eastern coast. The contract contained a detailed arbitration provision.

The arbitration clause inter alia provided for a three-member arbitral tribunal. The ‘venue’ of arbitration was Kuala Lumpur. No ‘seat’ was provided in the contract. The clause stated that the ‘contract shall be governed and interpreted in accordance with the laws of India’.

Therefore, the contract explicitly provided that the lex contractus was Indian. It also provided for a lex fori i.e. the UNCITRAL Model Law on International Commercial Arbitration of 1985. The contract was, however, silent on the lex arbitri.

When disputes arose between the parties, Hardy Inc. initiated arbitration proceedings. The Tribunal passed an Award in favour of Hardy Inc.and passed an order of specific relief and interest on its original investment, as well as certain costs.

The Award was challenged in an s.34 before the Delhi High Court in July 2013. Hardy Inc., on the other hand, sought enforcement of the Award in November 2013 before the Delhi High Court, which proceedings are pending.

As regards the s.34 proceedings, those have had an interesting life. The Union of India filed a petition before the Delhi High Court. After two years, the Union of India, when faced with objections of jurisdiction, withdrew the petition on the grounds that Delhi was not the appropriate jurisdiction on 09.07.2015 [It was felt that Madras High Court in Chennai, would be the correct jurisdiction, being geographically closest to the Block (or the cause of action)].

Post the withdrawal, the Union of India filed a Review before the Hon’ble Delhi High Court. Since the s.34 was ‘withdrawn by the petitioner on its own volition’, the Court found no infirmity with the order and dismissed the Review, vide order dated 20.01.2016.

Both orders dated 09.07.2015 and 20.01.2016 were challenged by the Union of India before the Division Bench under s.37(2) of the Arbitration & Conciliation Act, 1996. Even though the Division Bench was prima facie of the view that ‘strictly speaking’, the order dated 09.07.2015 was correct and that there was no ‘error apparent on the record’, the Court still went on to decide the issue.

The Division Bench held that Kuala Lumpur was not merely the ‘venue’, but also the ‘seat’, and therefore the principle laid down in Bhatia International v. Bulk Trading S.A.[(2002) 4 SCC 105] had no application to the issue at hand, and Part 1 would not apply.

In essence, the Court held that since the Award was made at Kuala Lumpur, that was the ‘seat’. The Court also impliedly treated the lex fori or the curial law, to be determinative, in the absence of clear determination of ‘seat’. The lex contractus seemed to have had no bearing on the Court in its determination.

In October 2016, the Union of India filed for leave to appeal before the Supreme Court, which issue has now been referred to a larger bench for consideration.

[As an aside, in the meantime, Hardy Inc. filed a petition seeking confirmation of the arbitral award before the District Court, District of Columbia, the United States under the Federal Arbitration Act. India opposed the confirmation, claiming that the enforcement of the award’s specific performance order would be violative of the U.S. public policy, as would confirmation of the interest portion of the award, which India claimed is punitive and coercive, rather than compensatory. Agreeing with the submissions of the Union of India, the Court declined to confirm the grant of specific performance and grant of interest, as being violative of U.S. public policy].

On the facts of the case, particularly the withdrawal of the s. 34 by the Union of India, it is unclear how the appeal is maintainable, but that said, the issue of ‘seat’ determination, as a principle of law, is long overdue and ripe for consideration.

Meaning of lex-contractus, lex-arbitri and lex-fori:

An ‘arbitration case with a foreign element, three systems of law are potentially relevant. Namely: (i) The law governing the substantive contract. (ii) The law governing the agreement to arbitrate, and the performance of that agreement. (iii) The law of the place where the reference is conducted: the lex fori’ – Black Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1982] 2 Lloyd’s Rep. 446. Quoted more recently with approval in Court of Appeal in Sulamérica Cia Nacional De Seguros S.A.v. Enesa Engenharia S.A.[2013] 1 WLR 102

Lex contractus is the law governing the main contract or in other words the law governing the performance of the main contract.

Lex arbitri literally translated from Latin means ‘law of the arbitration’- for example, the Arbitration and Conciliation Act, 1996 or the UK Arbitration Act, 1996.  – This is the ‘proper law of the arbitration agreement, i.e. the law governing the obligation of the parties to submit the disputes to arbitration, and to honour an award’.

‘The proper law of the arbitration agreement governs the validity of the arbitration agreement, the question whether a dispute lies within the scope of the arbitration agreement; the validity of the notice of arbitration; the constitution of the tribunal; the question whether an award lies within the jurisdiction of the arbitrator; the formal validity of the award; the question whether the parties have been discharged from any obligation to arbitrate future disputes’ [Mustill and Boyd titled Law and Practice of Commercial Arbitration in England, 2nd Edition].

Although, generally, the lex contractus and lex arbitri would be the same, but because an arbitration agreement is a separate contract, it is possible for the lex arbitri to be different from the lex contractus. Hypothetically, it is possible for the parties to state in their contract that the governing law (i.e. the lex contractus) would be Indian Law (eg. The Indian Contract Act, 1872), but that the arbitration would be governed by the (UK) Arbitration Act, 1996 (lex arbitri).

Lex Fori, also known as curial law, on the other hand, governs the procedural aspect of the conduct of the arbitration proceedings’ [Yograj Infrastructure Ltd. v. Ssangyong Engineering & Construction Co. Ltd. [(2012) 12 SCC 359]. It is the ‘law governing the conduct of the arbitration.

This is usually referred to as the curial or procedural law, or the lex fori’ [Balco v. KaiserAluminium Technical Services Inc. [(2012) 9 SCC 552]. In Sumitomo Heavy Industries Ltd. v. ONGC Ltd. [(1998) 1 SCC 305], a three-judge bench of the Supreme Court explained that curial law ‘governs the procedural powers and duties of the arbitrator; questions of evidence and the determination of the proper law of the contract’.

 The meaning of Lex fori or curial law can often be confusing. The expressions lex arbitri, lex fori and curial law have been used interchangeably in several judgments, both English and Indian. In reality, however, there is a difference between the two, albeit there are overlaps.

Lex arbitri is the substantive law of the arbitration agreement, and lex fori is the procedural law of the arbitration. By way of example, the Arbitration and Conciliation Act, 1996, can be both the lex arbitri and lex fori. In so far as the Act deals with the substantive law of the arbitration it would be the lex arbitri, and portion of the said Act that deals with procedural aspects, would be lex fori.

In a scenario where parties have provided for both the Arbitration and Conciliation Act, 1996 and say the Nani Palkhivala Arbitration Centre Rules, the former would be the lex arbitri and the latter would be the lex fori. Where the lex fori is in conflict with the lex arbitri, the lex arbitri will prevail and such portion of the lex arbitri would be treated as the lex fori.

[Note: Given the length of the article, the same has been divided into three components, each part will be released over next few days. The judgment in Union of India v. Hardy Exploration and Production (India) Inc. Civil Appeal  No(s). 4628/2018 reserved on 05-09-2018]

Payal Chawla is the founder of JusContractus a Delhi based full service law firm, with primary focus on arbitrations and is a director of the Nani Palkhivala Arbitration Centre. The author recognises the assistance of Ms. Aastha Bhardwaj, Advocate at JusContractus. The author also acknowledges the comments of Mr. Niranjan Venkatesan, Barrister at One Essex Court, which were critical in giving a final direction to the article.

For 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.