The Viewpoint: Seat of Arbitration vs Territorial Jurisdiction – Dichotomy Continues

The first Indian Act on arbitration law came to be passed in 1899 known as Arbitration Act, 1899. It was based on the English Arbitration Act, 1899. Thereafter, the Arbitration Act, 1940 ("1940 Act") was enacted to consolidate and amend the law relating to arbitration.

The 1940 Act was based on the English Arbitration Act, 1934. While several changes were made to the English Arbitration law, there were, however, no corresponding changes the law of arbitration as it existed in India under the 1940 Act. The law of arbitration in India remained static.

Juridical seat of arbitration, as a concept, did not find place in the 1940 Act. Under the 1940 Act once an award was signed and filed in court, a judgement in terms of the award would follow. The court before which the award was to be filed was a court having jurisdiction to decide questions forming the subject matter of the reference to arbitration if the same had been the subject matter of a suit.

The 1940 Act was repealed by The Arbitration Act, 1996 (“1996 Act”). While the preamble of the 1996 Act stated that the provisions of UNCITRAL Model Law¹ have been adopted for the purpose of “establishment of a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations” a perusal of the provisions of the 1996 Act, particularly those in relation to the place of arbitration and jurisdiction of the courts, will show that elements of both the 1940 Act along with the UNCITRAL Model Law were adopted in the 1996 Act.

A juxtaposition of the provisions of the 1996 Act with the 1940 Act and the UNCITRAL Model Law, will reveal that Section 20 and Section 31(4) of the 1996 Act are a complete replica of Article 20 and 31(3) of the UNCITRAL Model Law and Section 2(1)(e) and Section 42 of the 1996 Act are predominantly Section 2(c) and Section 31(4) of the 1940 Act, with minor modifications.

Despite the fact that a significant importance was given to juridical seat of arbitration under the 1996 Act, the jurisdiction of the Courts over such arbitral proceedings remained with the civil court and high court exercising original jurisdiction. The conflict between the juridical seat and jurisdiction of the court remained as a result of which the distinction between seat and venue wasn’t properly distinguished.

In 2012, a five-judge bench of the Supreme Court in Bharat Aluminium Company vs. Kaiser Aluminium Technical Services Inc ² (BALCO) clarified the distinction between seat of arbitration and the jurisdiction of the Courts as under:

“…. In our view, the legislature has intentionally given jurisdiction to two courts i.e. the court which would have jurisdiction where the cause of action is located and the courts where the arbitration takes place. This was necessary as on many occasions the agreement may provide for a seat of arbitration at a place which would be neutral to both the parties. Therefore, the courts where the arbitration takes place would be required to exercise supervisory control over the arbitral process. …. In such circumstances, both the Courts would have jurisdiction, i.e., the Court within whose jurisdiction the subject matter of the suit is situated and the courts within the jurisdiction of which the dispute resolution, i.e., arbitration is located.”

The above observation in BALCO were understood to give concurrent jurisdiction over the arbitral proceedings to (i) courts possessing the subject-matter/cause of action jurisdiction and (ii) courts where the place/seat of arbitration was designated.

What ensued post BALCO, was a clash between the territoriality principle, as espoused under Section 20 of the 1996 Act and the cause of action/subject-matter jurisdiction of the courts, as per Section 2(1)(e) of the 1996 Act.

The cases that followed post BALCO clarified that concurrent jurisdiction is vested in the courts of seat and venue, only in case of domestic arbitrations when the seat of arbitrations is in India as there is no risk of conflict of judgments of different jurisdictions, as all courts in India would follow the Indian Law.³

In International Commercial Arbitrations however venue can often be different from the seat of arbitration. In such circumstances, the hearing of the arbitration will be conducted at the venue fixed by the parties, but this would not bring about a change in the seat of the arbitration. Once the seat of arbitration has been fixed, in international commercial arbitrations, it would be in the nature of exclusive jurisdiction to exercise the supervisory powers over the arbitration. The considerations for designating a convenient venue in international commercial arbitration cannot be understood as conferring concurrent jurisdiction over the arbitration proceedings or disputes in general.⁴

However, a division bench of the Supreme Court⁵ in Indus Mobile Distribution Private Limited vs Datawind Innovations Private Limited⁶ (“Indus Mobile”) while dealing with the issue of seat and jurisdiction under domestic arbitration held that,

".... once seat of arbitration is designated it is akin to an exclusive jurisdiction clause …. Under the Law of Arbitration, unlike the Code of Civil Procedure which applies to suits filed in courts, a reference to “seat” is a concept by which a neutral venue can be chosen by the parties to an arbitration clause. The neutral venue may not in the classical sense have jurisdiction — that is, no part of the cause of action may have arisen at the neutral venue and neither would any of the provisions of Sections 16 to 21 of CPC be attracted. In arbitration law however, as has been held above, the moment “seat” is determined, the fact that the seat is at Mumbai would vest Mumbai courts with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties."

The division bench of the Calcutta High Court⁷ however deferred with the dictum in Indus Mobile. The Calcutta High Court held that in Indus Mobile, the choice of seat of arbitration and the exclusive jurisdiction clause, both provide for the courts of Mumbai and does not deal with a situation where the seat and the exclusive jurisdiction are two different courts. Further, Calcutta High Court observed that Indus Mobile failed to see the distinction between international arbitration and domestic arbitration and the laws which are applicable to the international arbitration cannot be applied directly to the domestic arbitration.

The Calcutta High Court while recognizing party autonomy held that it is not open to the parties by agreement to confer by their agreement jurisdiction on a Court which it does not possess under the Code. When two Indian parties enter into an arbitration agreement where the seat of the arbitral reference is in India, the choice of such seat has no impact on the lex arbitri since the arbitration law is uniform all over the country. The concept of juridical seat of arbitration is irrelevant in any domestic arbitration since the arbitration law does not change from one place to another within this country.

Further, if a party to an agreement which is governed by a forum selection clause is of the opinion that the forum selection clause is inoperative or incapable of being enforced because the designated court is not authorised under the law to receive the action, the petition or the plaint must clearly say so and indicate the reasons why the designated court would be incompetent under the law to entertain any action arising out the agreement.

A similar view was taken by the Division Bench of Delhi High Court in Antrix Corporation Ltd v. Devas Multimedia Pvt. Ltd.⁸ (“Antrix”) where the court observed that if the parties had designated the seat as New Delhi and also provided an exclusive forum selection clause in favour of the courts at New Delhi, could it be said that this court would have exclusive jurisdiction over all applications filed under the Arbitration Act. Merely choosing a seat, cannot amount to exercising such a right of exclusive forum selection. If seat were equivalent to an exclusive forum selection clause in Part-I arbitrations, then every time parties would designate a seat, that would in effect mean that Section 42 would have no application.

In light of the above judgements and other similar judgement of the Mumbai High Court the conflict between Juridical Seat and Jurisdiction of Court continued.

The above rationale of the Calcutta, Mumbai and Delhi High Courts however did not meet favour with the Supreme Court. In BGS SGS Soma JV v. NHPC Ltd (“BGS”)⁹ the Supreme Court while holding that the law stated by the Bombay and Delhi High Courts is incorrect, overruled the judgements and clarified that:

1. It is incorrect to state that BALCO reinforces the concurrent jurisdiction. BALCO clearly and unmistakably states that the choosing of a “seat” amounts to the choosing of the exclusive jurisdiction of the Courts at which the “seat” is located.

2. Section 42 of the 1996 Act is meant to avoid conflicts in jurisdiction of Courts by placing the supervisory jurisdiction over all arbitral proceedings in connection with the arbitration in one Court exclusively. This is why the section begins with a non-obstante clause, and then goes on to state “…where with respect to an arbitration agreement any application under this Part has been made in a Court…” It is obvious that the application made under this part to a Court must be a Court which has jurisdiction to decide such application. The subsequent holdings of this Court, that where a seat is designated in an agreement, the Courts of the seat alone have jurisdiction, would require that all applications under Part I be made only in the Court where the seat is located, and that Court alone then has jurisdiction over the arbitral proceedings and all subsequent applications arising out of the arbitral agreement. So read, Section 42 is not rendered ineffective or useless.

3. Where it is found on the facts of a particular case that either no “seat” is designated by agreement, or the so called “seat” is only a convenient “venue”, then there may be several Courts where a part of the cause of action arises that may have jurisdiction. Again, an application under Section 9 of the Arbitration Act, 1996 may be preferred before a court in which part of the cause of action arises in a case where parties have not agreed on the “seat” of arbitration, and before such “seat” may have been determined, on the facts of a particular case, by the Arbitral Tribunal under Section 20(2) of the Arbitration Act, 1996. In both these situations, the earliest application having been made to a Court in which a part of the cause of action arises would then be the exclusive Court under Section 42, which would have control over the arbitral proceedings.

The Supreme Court went a step further and clarified that:

1. Whenever there is the designation of a place of arbitration in an arbitration clause as being the “venue” of the arbitration proceedings, the expression “arbitration proceedings” would make it clear that the “venue” is really the “seat” of the arbitral proceedings, as the aforesaid expression does not include just one or more individual or particular hearing, but the arbitration proceedings as a whole, including the making of an award at that place.

2. Where the language indicates that arbitral proceedings “shall be held” at a particular venue would also indicate that the parties intended to anchor arbitral proceedings to a particular place, signifying thereby, that that place is the seat of the arbitral proceedings. This, coupled with there being no other significant contrary indicia that the stated venue is merely a “venue” and not the “seat” of the arbitral proceedings, would then conclusively show that such a clause designates a “seat” of the arbitral proceedings.

3. In an International context, if a supranational body of rules is to govern the arbitration, this would further be an indicia that “the venue”, so stated, would be the seat of the arbitral proceedings.

4. In a national context, this would be replaced by the Arbitration Act, 1996 as applying to the “stated venue”, which then becomes the “seat” for the purposes of arbitration.

While, the Supreme Court has provided the much needed clarity on the aspect of seat of arbitration and exclusive jurisdiction of courts, by reiterating the law laid down in Indus Mobile, however, in my humble view, in doing so party autonomy has been given a go by. The Supreme Court ought to have considered that in the case of domestic arbitrations where the seat of the arbitral reference is in India, the choice of such seat having no impact on the lex arbitri since the arbitration law is uniform all across the country, the term “seat” shall be construed as “venue” where the arbitration agreement provides for an exclusive jurisdiction clause.

Duvva Pavan Kumar is an advocate based out of Hyderabad practising before the High Court and NCLT. He is the founder of The Law Chambers.

Shraddha Gupta and Preetham Kunapareddy assisted in the preparation of the article.

Footnotes:

1. The UNCITRAL Model Law introduced the concept of “Place” and “Seat” of arbitration proceedings and laid importance to party autonomy in choosing the place of arbitration.

2. (2012) 9 SCC 552

3. Enercon (India) Ltd. and Ors. v. Enercon GmbH and Anr. (2014) 5 SCC 1

4. Reliance Industries Ltd. v. Union of India (2014) 7 SCC 603; Videocon Industries Limited v. Union of India and Anr. MANU/SC/0598/2011

5. Justice Pinaki Chandra Gosh and Justice Rohinton Fali Nariman

6. (2017) 7 SCC 678

7. Debdas Routh v/s Hinduja Leyland Finance Ltd. & Anr. AIR 2018 Cal 322

8. 2018 SCC OnLine Del 9338

9. 2019 (6) ArbLR393 (SC)