Concept of Seat and Venue under the Arbitration and Conciliation Act, 1996

Globalisation has made the world a small place. With drastic increase in transnational transactions, there has also arisen an urgent need for a  mechanism for quick and efficient method of adjudicating disputes, and that explains the rise of the era of international commercial arbitrations. Transactions involving entities belonging to different nationalities invite the supervisory jurisdictions of their respective nations. It is in this context that it becomes necessary to explain the concept of seat and venue under the Arbitration and Conciliation Act, 1996 (the 1996 Act), judicial precedent that has comprehensively interpreted the 1996 Act, and the subsequent amendment to the 1996 Act in 2015.

International commercial arbitrations

The 1996 Act defines the term “international commercial arbitration” under Section 2(1)(f)[1]. Due to the involvement of parties of different nationalities, there is always an issue of conflict of laws between two or more jurisdictions. The doctrine of party autonomy plays a vital role in avoiding such conflicts between jurisdictions. It permits the parties to choose the seat of arbitration, the venue of the arbitration and the law that is applicable to the contract itself.

Although the dominant issue pertains to conflict of laws and law of arbitration, as much as it is concerned with choice of law and arbitral proceedings, it is essential to also briefly discuss the law of contract for addressing the issue of legality of clauses in a contract which exclude jurisdiction of courts.

Contract law

It is a well-settled position of law in India[2] that parties by contract cannot oust the jurisdiction of courts absolutely, as such clauses are contrary to public policy and are void. However, referring disputes to an Arbitral Tribunal for adjudication instead of courts is not barred. Such reference is permitted as it does not entirely oust the jurisdiction of courts. Reference of potential disputes to arbitration only creates a mechanism for dispute resolution whereby questions of fact and law may be decided by an Arbitral Tribunal. This adjudication is finally subject to a court’s approval. Lord Denning’s observation in Lee v. Showmen’s Guild of Great Britain[3] summarises the aforesaid position:

… parties cannot by contract oust the ordinary courts from their jurisdiction. They can, of course, agree to leave questions of law, as well as questions of fact, to the decision of the domestic tribunal. They can, indeed, make the tribunal the final arbiter on questions of fact, but they cannot make it the final arbiter on questions of law. They cannot prevent its decisions being examined by the courts. If parties should seek, by agreement, to take the law out of the hands of the courts and put it into the hands of a private tribunal, without any recourse at all to courts in case of error of law, then the agreement to that extent is contrary to public policy and void.

The Contract Act, 1872 protects contracts which refer disputes to arbitration from being declared void[4]. The parties being permitted to exclude jurisdiction of courts for adjudication of disputes, the next question that arises is regarding the permissibility to choose the law applicable to the contract and arbitral proceedings.

As mentioned earlier, party autonomy is the cornerstone of the law of arbitration. The signatories to the contract are free to decide not only the law that is applicable to the contract, but also the law applicable to the arbitration agreement (lex arbitri), and the procedural law governing the arbitration (curial law)[5].

The Court of Appeal in England in Naviera Amazonica Peruana SA v. Compania International de Seguros del Peru[6] has summarised the relevant laws that are applicable to a contract involving an arbitration agreement, which are as follows:

(i) law governing the substantive contract (applicable law);

(ii) law governing the agreement to arbitrate, and the performance of that agreement (juridical seat or lex arbitri); and

(iii) law governing the procedure of the arbitration  (curial law).

In international commercial arbitrations, incorporating clauses that choose the aforesaid laws clearly and distinctly is of vital importance. Not every dispute which arises pursuant to an agreement is covered by arbitration. The arbitration clause may specify the kind of disputes which may be referred to arbitration. Therefore, the courts exercising jurisdiction over the disputes which can be referred to arbitration and courts exercising jurisdiction over any other disputes not covered by the arbitration agreement can be different. Specifying the law applicable to the contract, lex arbitri and the curial law helps ascertain the courts which have supervisory jurisdiction. It is possible that courts in the aforementioned situations may be different; therefore, not stating the same in express terms can prove to be perilous for parties.

The aforesaid laws are discussed hereinafter.

Applicable law — Contract

A contract creating obligations between parties requires a legal system in accordance with which the obligations may be fulfilled. The law governing the performance of the obligations under the contract may be distinct from the law that is applicable to the arbitration clause. The term “applicable law” or “proper law of the contract” is the law that governs the discharge of the contract itself. In case of disputes arising, the Arbitral Tribunal applies the applicable law to determine the substantive dispute[7]. Applicable law or the proper law of the contract are terms which refer to a legal system in which a contract may be executed.

Applicable law — Arbitration agreement

A clause referring parties to arbitration in case of a dispute arising between them is treated as a separate agreement. Although the clause is part of the main contract, the clause stands on a different pedestal and is therefore treated as a separate agreement. Therefore, any dispute pertaining to the validity of the contract itself, does not render the arbitration agreement inoperative, except in cases involving egregious fraud that perpetrates the main agreement itself[8]. The law applicable to the arbitration clause can be classified in two categories, namely, the juridical seat (lex arbitri), and the curial law.

Juridical seat or lex arbitri

The law that is applicable to the arbitration proceeding is the law of the juridical seat of the arbitration or more commonly referred to as lex arbitri. The lex arbitri would determine the courts which can exercise supervisory jurisdiction over the arbitration proceedings. Parties may choose as the seat of arbitration proceeding, a legal system which has no nexus with the parties simply to obviate the possibilities of bias or unfamiliarity, that may exist in a system which naturally exercises jurisdiction over a party.

“Lex arbitri” may be best explained by referring to the judgment in XL Insurance Ltd. v. Owens Corning[9]. An American party A entered into a contract with a British party B. The substantive law of the contract was New York State law and the agreement to arbitrate was subject to the English Arbitration Act, 1996. Insured party A brought proceedings before the Delaware Court for indemnification of certain losses which were insured. Insurer B initiated proceedings in London seeking to restrain A from pursuing proceedings in Delaware. The English Court held that the choice of law (proper law) being different from the lex arbitri would not invalidate the arbitration clause. Since the parties have chosen to seek refuge under the English Law for arbitration, the provisions of the English Arbitration Act would be applicable and English Law shall solely govern the matters falling within the scope of the arbitration agreement/clause, including formal validity of arbitration agreement and the jurisdiction of the arbitrators.

Curial law

The procedural law applicable to the conduct of arbitration is known as the curial law. It is synonymous with the procedural law in litigation. Curial law will almost always be the same as lex arbitri. It governs the internal arbitration procedures like commencement of proceedings, appointment of arbitrators, pleadings, manner of conducting evidence, etc.

Arbitration and Conciliation Act, 1996 (the 1996 Act)

The 1996 Act is fraught with vague and ambiguous sections. The provisions of the 1996 Act themselves did not incorporate the concepts of seat and venue and the same have largely been developed by judicial precedent. Although, a constant intervention by the judiciary is an anathema to the process of arbitration, it has almost proved to be beneficial for the development of the law in India. Due to lacunae in the Act, the Law Commission submitted its 246th Report suggesting a plethora of amendments radically reforming the entire 1996 Act. Despite having recommended comprehensive changes, very few suggested amendments were actually enacted by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) (the 2015 Amendment).

Before adverting to the case law that has supplied interpretations to the 1996 Act and the 2015 Amendment, a brief analysis of the provisions of the 1996 Act are necessary to understand the lacunae in the legislation, the judicial precedent remedying the lacunae, and the new position of law under the 2015 Amendment.

The 1996 Act is divided in four parts. Parts I, II and IV of the 1996 Act govern arbitrations, and Part III governs conciliation. For the sake of the present article, Part I is relevant. Part I of the 1996 Act, espouses all the provisions governing the conduct of arbitration proceedings taking place in India, and the extent of judicial intervention which may be sought to assist the process.

A conflict between two jurisdictions would necessarily arise only in international commercial arbitrations. The term “international commercial arbitration” is defined under Section 2(1)(f) of the 1996 Act and is self?explanatory. The provisions relevant for understanding conspectus of seat and venue under the 1996 Act are Sections 2(2) and 20. Section 2(2) in an ominously cryptic manner reads as follows:

2(2). This Part shall apply where place of arbitration is in India.

On a bare perusal of the said section, it seems that the 1996 Act was applicable only to arbitrations which were taking place in India. Whether “place” meant seat (conferring jurisdiction to Indian courts) or merely venue was clearly ambiguous begging judicial interpretation. Further, Section 20 also in a similarly ambiguous manner while granting parties the autonomy to decide the “place” of arbitration, failed to distinguish between seat and venue. The section reads as follows:

20. Place of arbitration.—(1) The parties are free to agree on the place of arbitration.

(2) Failing any agreement referred to in sub-section (1), the place of arbitration shall be determined by the Arbitral Tribunal having regard to the circumstances of the case, including the convenience of the parties.

(3) Notwithstanding sub-section (1) or sub-section (2), the Arbitral Tribunal may, unless otherwise agreed by the parties, meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for inspection of documents, goods or other property.                                                                                                                                (emphasis supplied)

The word “place” necessarily should connote different meanings in the sub-sections. A bare perusal of the section would imply that the parties are at liberty to choose only the “place” (meaning venue) of arbitration and nothing further. This thoroughly undermines and restricts the autonomy of parties to choose the convenient legal systems and the manner in which arbitrations can be conducted. The concept of party autonomy under Section 20 was ultimately consolidated by the Supreme Court by furnishing it with proper interpretations. An analysis of the judgments is vital to understand the evolution of the 1996 Act.

Bhatia International v. Bulk Trading SA[10]

Briefly stating facts, the parties had entered into a contract wherein the arbitration clause provided that the arbitration was to be as per rules of International Chamber of Commerce (ICC). Disputes having arisen between the parties, the respondent initiated the arbitration proceedings at ICC. In addition to such initiation, the respondent also filed an application under Section 9 of the 1996 Act seeking an injunction against the appellants restraining them from alienating in any manner their business assets and properties. The District and High Court both held that the courts in India have jurisdiction to adjudicate the application despite the “place of arbitration” being outside India. These orders were challenged before the Supreme Court. The simple contention raised by the appellant before the Supreme Court based on a plain reading of Section 2(2) was that, unless the international commercial arbitration is taking place in India, Part I will not apply.

What should have been contended for the sake of conceptual clarity was that the expression “place” used in Section 2(2) of the 1996 Act connotes “seat” and not merely the “venue” of the arbitration. The implication of such submission would have been that the 1996 Act is a seat-centric legislation, and therefore Part I would apply to international commercial arbitration, only when the seat of arbitration was in India. Conferring such interpretation on Section 2(2) would have obviated any inconsistency with the rest of the Act that the court apprehended. Instead, the court under the garb of “judicial art imbued with creativity and realism” interpreted Section 2(2) in a manner because of which the distinction between “seat” and “venue” (in this case the word “place” means venue) was obliterated. According to the interpretation cast by the Supreme Court, an international commercial arbitration where an Indian party is involved, being proceeded with in any part of the world, would confer jurisdiction on Indian courts to exercise powers under Part 1 of the 1996 Act.

Although the intention of the Court seemed to be noble so far as it wanted to grant parties a remedy to secure or freeze assets which would in the future help realising their claims, the consequences were far reaching. Rightly, a Constitutional Bench of the Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.[11] held as follows.

Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc.[12] (BALCO)

The Supreme Court, while dealing with a poorly drafted legislation, vide this judgment provided conceptual clarity to the legislation. The Supreme Court interpreted the word “place” to mean “seat” or “venue” depending on the section in which the word was used. The Court while dealing with Sections 2(2) and 20, extensively laid out the concept of seat and venue, which have already been discussed hereinabove.

Expressly overruling the interpretations cast on Section 2(2) in Bhatia International[13], the Court observed that the section has to be interpreted to mean that only when the seat/place of arbitration is in India, will Part I apply, restoring the distinction between seat and venue. Further consolidating the doctrine of seat and venue under the 1996 Act, the court clarified that the term “place” used in Sections 20(1) and (2) would connote “seat” and the term “place” used in Section 20(3) would connote “venue”. Reading Section 2(2) with Section 20, the Court inevitably concluded that the Act has no extraterritorial application.

The Court was conscious of the fact that the legislation being seat-centric, parties will be rendered remediless in case they want to secure the assets of the party against which a claim lies, by filing an application under Section 9. However, making available the remedy of Section 9 to parties who have chosen the seat to be outside would involve interpreting Section 9 in a manner that it was never intended to be. Any other interpretation being conferred on Section 9 would only amount to judicial overreach and therefore the court rightly stated that such errors, if any, are matters to be redressed by the legislature.

Subsequently the Supreme Court in its judgment in Enercon (India) Ltd. v. Enercon GmbH[14], and another judgment in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.[15], reiterated and further established the law laid down by BALCO. Enercon[16] clarified the position of law in case the parties have failed to or improperly mentioned the law applicable to the arbitration agreement. The court, placing reliance on the judgment in Naviera Amazonica[17] adopted the “closest and most intimate connection test”. This test states that when it is unclear as to which law is applicable to the arbitration agreement, the intention of the parties is essential in determining the seat. Further, the legal system in which the arbitration is taking place or the system which has the closest and most intimate connection with the arbitration proceedings is relevant. The Supreme Court while placing reliance on Naviera Amazonica[18] reproduced the following paragraph which makes the situation amply clear.

100. … Where the parties have failed to choose the law governing the arbitration proceedings, those proceedings must be considered, at any rate prima facie, as being governed by the law of the country in which the arbitration is held, on the ground that it is the country most closely connected with the proceedings.

Report 246 — Law Commission of India

The Law Commission of India in 2014 suggested sweeping amendments to the 1996 Act, that would radically change the arbitration jurisprudence developed in India. The Report discussed in great detail the need to amend Sections 2(2) and 20. The changes suggested replacing the word “place” with the words “seat” and “venue”, in accordance with the explanation provided by BALCO[19].

The amendment further proposed addition of a proviso to Section 2(2) permitting parties to choose to remain under the supervisory jurisdiction of Indian courts. The proviso was suggested to make Section 2(2) a derogable provision in order to extend the doctrine of party autonomy. The recommended proviso read as follows:

Provided that subject to an express agreement to the contrary, provisions of Sections 9, 27, 37(1)(a) and (3) shall also apply to international commercial arbitration, even if the seat of arbitration is outside India, if an award made, or that which might be made in such place would be enforceable and recognised under Part II of this Act.

The Report further suggested replacing the word “place” in Section 20(1) with the words “seat” and “venue”, replacing the word place with “seat” in Section 20(2) and with “venue” in Section 20(3). However, these amendments were not enacted. Nonetheless, the same does not prove to be perilous since the section has been extensively interpreted by the Supreme Court in BALCO[20].

2015 Amendment

Although not entirely relevant for the present subject, it is essential to state that the 2015 Amendment is not at all conducive for the philosophy of arbitration. The Assembly Debates contain absolutely no discussions on any questions of law, and is mostly confined to policy. The 1996 Act has been subject to constant judicial scrutiny and various interpretations of the provisions of the 1996 Act find their rationale in judgments. Despite such history of constant judicial intervention for supplying interpretation, none of the problems concerning the legal ramifications of the amendment were discussed in Parliament.

Not having discussed any legal ramifications that the amendment might have, and, passing the legislation with only policy in mind, it is not surprising that several cases concerning interpretation of the amended provisions are pending before the Supreme Court of India. The Law Commission Report had suggested certain changes which would have rendered the arbitration process easier. Not having incorporated the substantial changes suggested by the Report, the legislation once again remains to be in flux, necessitating constant judicial interpretation.

Not all the amendments discussed hereinabove have been incorporated in the 1996 Act. Inclusion of the words “seat” and “venue” would have further established the proposition laid down in BALCO[21], safeguarding the interpretation from further scrutiny and adverse interpretations. The Amendment Act has, however, incorporated the proviso to Section 2(2) suggested by the amendment. Inclusion of the proviso does not fundamentally alter the nature of the 1996 Act, which, as per BALCO[22] is a seat-centric legislation. Having granted the parties the autonomy to choose to retain the jurisdiction of Indian courts, the amendment has redressed the lacuna that existed in the 1996 Act. The parties involved in foreign seated international commercial arbitrations can file proceedings under Section 9 in order to secure the assets which may be necessary to realise their claims.

Conclusion

In view of the aforesaid, a summary of the position under Indian law is as follows:

(a) The seat of arbitration determines the courts which would exercise jurisdiction over the arbitration proceeding.

(b) The parties may by consent make Section 9 applicable even when the arbitration is not held in India. But, in absence of such an agreement, the 1996 Act solely operates within the territory of India.

(c) The substantive law applicable to the contract is distinguishable from the law applicable to the arbitration agreement. The parties may choose the law applicable to the arbitration agreement, which may be different from the substantive law applicable to the contract itself.

(d) In case the parties have not mentioned the law applicable to the arbitration agreement, the test of “the closest and most intimate connection” adopted in the judgment of Enercon India[23] is to be applied. The jurisdiction in which the arbitration is conducted and the intention of parties are the determining factors while applying the closest connection test.

 

* Advocate, Chambers of Senior Counsel Mr Chander Uday Singh, Supreme Court of India.

[1]  S. 2(1)(f) “international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—

(i) an individual who is a national of, or habitually resident in, any country other than India; or

(ii) a body corporate which is incorporated in any country other than India; or

(iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or

(iv) the Government of a foreign country;

[2]  ABC Laminart (P) Ltd. v. A.P. Agencies, (1989) 2 SCC 163.

[3]  (1952) 2 QB 329, 342 (CA).

[4]  S. 28 Agreements in restraint of legal proceedings void:

Exception 1.—Saving of contract to refer to arbitration dispute that may arise. —This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

[5]  NTPC v. Singer Co., (1992) 3 SCC 551.

[6]  (1988) 1 Lloyd’s Rep 116 (CA).

[7]  Arbitration of Commercial Disputes: International and English Law and Practice, Andrew Tweeddale, Keren Tweeddale, pp. 180-181.

[8]  A. Ayyasamy v. A. Paramasivam, (2016) 2 SCC 386.

[9]  (2000) 2 Lloyd’s Rep 500 : (2001) 1 All ER (Comm) 530.

[10]  (2002) 4 SCC 105.

[11]  (2012) 9 SCC 552.

[12]  Ibid.

[13]  (2002) 4 SCC 105.

[14]  (2014) 5 SCC 1.

[15]  (2016) 4 SCC 126.

[16]  (2014) 5 SCC 1.

[17]  (1988) 1 Lloyd’s Rep 116 (CA).

[18]  Ibid.

[19]  Page 52 — Law Commission Report.

[20]  (2012) 9 SCC 552.

[21]  Ibid.

[22]  Ibid.

[23]  (2014) 5 SCC 1.

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