- Rishabh Dheer[1]
The short point of the present article is to examine the findings of the Supreme Court in Mankastu Impex Private Limited v. Airvisual Limited[2] (‘Mankastu Impex’) in relation to determining the juridical seat of arbitration proceedings. The title of this article makes clear that in my opinion, the judgment leaves more questions than answering the same.
Before discussing Mankastu Impex, I find it apposite to mention two observations made by Justice Navin Chawla (Judge, High Court of Delhi) in a recent webinar on territorial jurisdiction in arbitration proceedings[3] that serve as a fitting prelude to the seat-venue conundrum – first, that this debate is akin to the Israeli-Palestinian conflict which never seems to get resolved, and that every time one feels that the conflict stands resolved comes another judgment creating more confusion in the minds of lawyers; and second, the seat-venue debate is “a litigating lawyer’s delight and a drafting lawyer’s nightmare.”
Note: Neither does this article discuss the seat v. venue debate scrutinized in BGS-SGS Soma JV v. NHPC Limited[4] (‘BGS-SGS Soma’) nor does it detail the findings of the Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc.[5] (‘BALCO’). A comprehensive discussion on these aspects can be found in my earlier article analyzing BGS-SGS Soma here. Also excluded from the purview of this article is the examination of Clauses 17.1 & 17.3 (infra) and the consequent finding of the Court in respect of Sections 2(2) & 11 of the Arbitration and Conciliation Act, 1996 (‘Act’).
BACKGROUND
A Memorandum of Understanding (‘MoU’) was executed between the Petitioner (a company incorporated under the laws of India) and the Respondent (a company incorporated under the laws of Hong Kong) pursuant to which the Respondent agreed to sell its complete line of air quality monitors to the Petitioner. Disputes arose between the parties and the Petitioner invoked the arbitration clause contained in the MoU and proposed an arbitrator’s name, subject to the consent of the Respondent. Separate proceedings under Section 9 were also initiated by the Petitioner against the Respondent before the High Court of Delhi. The arbitration clause i.e., Clause 17 of the MoU has been reproduced below:
17. Governing Law and Dispute Resolution
17.1 This MoU is governed by the laws of India, without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction.
17.2 Any dispute, controversy, difference or claim arising out of or relating to this MoU, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered in Hong Kong.
The place of arbitration shall be Hong Kong.
The number of arbitrators shall be one. The arbitration proceedings shall be conducted in English language.
17.3 It is agreed that a party may seek provisional, injunctive, or equitable remedies, including but not limited to preliminary injunctive relief, from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding.
In response to the Petitioner’s invocation of the arbitration clause, the Respondent contended that Clause 17 provided for the arbitration to be administered and seated in Hong Kong. Therefore, the Petitioner ought to have referred the dispute for arbitration in Hong Kong. The Respondent further contended that in light of the usage of the phrase “arbitration administered in Hong Kong” under Clause 17.2 of the MoU, the Respondent had not intended to refer disputes to an ad hoc arbitral tribunal but to an arbitration institution in Hong Kong.
It was in this backdrop that a petition under Section 11(6) of the Act came to be filed by the Petitioner before the Supreme Court for the appointment of a sole arbitrator in terms of Clause 17.2 of the MoU.
The Petitioner had two broad contentions – Firstly, the proposed arbitration between the parties was an “international commercial arbitration” in terms of Section 2(1)(f) of the Act, being seated in Delhi. Accordingly, the appointment of a sole arbitrator was sought in terms of Section 11(6) read with Section 11(9) of the Act; and secondly, pursuant to Clause 17.1 of the MoU, the parties had clearly agreed that the MoU would be governed by the laws of India and that the Courts at New Delhi would exercise jurisdiction.
The Respondent, on the other hand, made two submissions – Firstly, Part-I of the Act was inapplicable as the parties had, pursuant to Clause 17.2 of the MoU, categorically agreed that the “place of arbitration shall be Hong Kong” in addition to providing that the disputes “shall be referred to and finally resolved by arbitration administered in Hong Kong”. Hence, Indian Courts were proscribed from entertaining the petition for the appointment of an arbitrator and the Petitioner was required to approach the Hong Kong International Arbitration Centre; and secondly, placing reliance on BGS-SGS Soma, the Respondent submitted that the usage of the word ‘administered’ in Clause 17.2 of the MoU manifested that the arbitration would be seated in Hong Kong.
The Supreme Court held that the juridical seat of arbitration was Hong Kong in the following terms:
20. It is well-settled that “seat of arbitration” and “venue of arbitration” cannot be used inter-changeably. It has also been established that mere expression “place of arbitration” cannot be the basis to determine the intention of the parties that they have intended that place as the “seat” of arbitration. The intention of the parties as to the “seat” should be determined from other clauses in the agreement and the conduct of the parties.
21. In the present case, the arbitration agreement entered into between the parties provides Hong Kong as the place of arbitration. The agreement between the parties choosing “Hong Kong” as the place of arbitration by itself will not lead to the conclusion that parties have chosen Hong Kong as the seat of arbitration. The words, “the place of arbitration” shall be “Hong Kong”, have to be read along with Clause 17.2. Clause 17.2 provides that “....any dispute, controversy, difference arising out of or relating to the MoU “shall be referred to and finally resolved by arbitration administered in Hong Kong.....”. On a plain reading of the arbitration agreement, it is clear that the reference to Hong Kong as “place of arbitration” is not a simple reference as the “venue” for the arbitral proceedings; but a reference to Hong Kong is for final resolution by arbitration administered in Hong Kong. The agreement between the parties that the dispute “shall be referred to and finally resolved by arbitration administered in Hong Kong” clearly suggests that the parties have agreed that the arbitration be seated at Hong Kong and that laws of Hong Kong shall govern the arbitration proceedings as well as have power of judicial review over the arbitration award.
[emphasis supplied in bold]
ANALYSIS: A Fragmentary Judgment?
The principle enunciated by the Supreme Court, which forms the major portion of discussion in the subsequent paragraphs, is once again reproduced below:
“20. […] It has also been established that mere expression “place of arbitration” cannot be the basis to determine the intention of the parties that they have intended that place as the “seat” of arbitration. The intention of the parties as to the “seat” should be determined from other clauses in the agreement and the conduct of the parties.”
Let us now examine the judgment in Mankastu Impex in three main prongs:
1. Are the findings in Mankastu Impex contrary to BALCO?
At the outset, it is pertinent to highlight that the Constitution Bench in BALCO expressly recognized party autonomy and the territoriality principle. However, the three-judge Bench in Mankastu Impex concluded that the place of arbitration could not be the basis to determine the seat of arbitration – an antithetical finding to BALCO. Moreover, the Court did not elaborate on why it thought so. Instead, it straightaway proceeded in identifying altogether separate criteria for determining the seat (¶20).
The following points manifest why the Court’s finding in Mankastu Impex in that ‘place’ cannot be the basis to determine the ‘seat’ is incorrect –
(i) BALCO unequivocally states that Section 20 of the Act affords autonomy to parties to agree to any ‘place’ or ‘seat’, terms which as per the Constitution Bench “are often used interchangeably” (¶76). BALCO also quoted from Redfern and Hunter on International Arbitration[6] in support of the seat theory – “The concept that an arbitration is governed by the law of the place in which it is held, which is the ‘seat’ of the arbitration is well established in both the theory and practice of international arbitration”.
(ii) Despite the usage of the word ‘place’ in all three sub-sections to Section 20, BALCO expressly distinguished between ‘seat’ (by referring to Sections 20(1) & 20(2)) and ‘venue’ (by referring to Section 20(3)). Furthermore, the Act adopts the UNCITRAL Model Law which, too, only refers to ‘place’ of arbitration under Article 20. Similarly, the New York Convention[7] does not expressly use the word ‘seat’. Article V(1)(d) contained thereunder refers to “the law of the country where the arbitration took place”, which indicates that the Convention gives recognition to party autonomy. Similarly, Clause 2 of the Geneva Protocol[8] recognizes territoriality and party autonomy inasmuch as “[t]he arbitral procedure, including the constitution of the arbitral tribunal, shall be governed by the will of the parties and by the law of the country in whose territory the arbitration takes place”.
(iii) In an attempt to make the wording of the Act consistent with the international usage of the concept of a “seat” of arbitration, the 246th Report of the Law Commission of India inter alia proposed an amendment to Section 20(1) of the Act. It recommended the substitution of the word “place” with “seat and venue” in Section 20(1). However, this did not see the light of the day. In this context, the Court in Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited & Ors.[9] succinctly observed that this was “presumably because the BALCO judgment in no uncertain terms has referred to ‘place’ as ‘juridical seat’ for the purpose of Section 2(2) of the Act. It further made it clear that Section 20(1) and 20(2) where the word ‘place’ is used, refers to ‘juridical seat’, whereas in Section 20(3), the word ‘place’ is equivalent to ‘venue’. This being the settled law, it was found unnecessary to expressly incorporate what the Constitution Bench of the Supreme Court has already done by way of construction of the Act.”
(iv) In BGS-SGS Soma, the Court places party autonomy at the fore in parties’ selection of a seat. The Court emphasized on the principle enunciated in Roger Shashoua & Ors. v. Mukesh Sharma[10] – which the Court in BALCO also quoted approvingly – to conclude that an arbitration clause providing for arbitration in a particular city or country (I have consciously avoided using ‘venue’ or ‘place’ here) would carry with it an implied choice of such city or country being the juridical seat unless a significant contrary indicia could demonstrate that the parties had agreed upon a different seat.
(v) Even in Hardy Exploration and Production (India) Inc.[11] (‘Hardy Exploration’), the Court observed that when “a ‘place’ is agreed upon, it gets the status of seat which means the juridical seat. […] When only the term ‘place’ is stated or mentioned and no other condition is postulated, it is equivalent to ‘seat’ and that finalises the facet of jurisdiction. But if a condition precedent is attached to the term ‘place’, the said condition has to be satisfied so that the place can become equivalent to seat.” It must be clarified at this juncture that the oft-quoted test from Hardy Exploration for determination of ‘seat’ – of something else to be added to the ‘venue’ as a concomitant for it to become ‘seat’ – was used by the Court in light of the arbitration clause stipulating Kuala Lampur as the venue (and not ‘place’) for arbitration proceedings.
Therefore, the Court in Mankastu Impex seems to have confused ‘venue’ with ‘place’ and, in that process, steered away from BALCO. The ramification of holding that ‘place’ may not amount to ‘seat’, especially in a scenario where the arbitration clause only specifies the place of arbitration, potentially allows for an argument that parties did not intend for such place to be the juridical seat of arbitration proceedings.
In Mankastu Impex, given that (i) the arbitration clause categorically stipulated the place of arbitration as Hong Kong; & (ii) the Petitioner and the Respondent relied upon Hardy Exploration and BGS-SGS Soma, respectively, the Court could have utilized the opportunity in reading BALCO harmoniously with either or both Hardy Exploration and BGS-SGS Soma. By doing so, in any permutation and combination, the Court would have reached the same result i.e., Hong Kong being the juridical seat but with a cogent reasoning appended to the judgment. This is because in the facts of the case and in light of the dispute resolution clause, (i) the place specified in the arbitration clause (i.e., Hong Kong) having no condition precedent attached to it would have been equivalent to ‘seat’ as per the test in Hardy Exploration; and (ii) there being no contrary indication at all for postulating a different seat, let alone any significant contrary indicia, Hong Kong would have been the ‘seat’ even as per the test in BGS-SGS Soma.
The following table simplifies the legal position that the three co-equal Benches prescribe for determination of the juridical seat in arbitration proceedings:
Hardy Exploration
‘Place’ is equivalent to ‘seat’ when mentioned in the contract. However, if a condition precedent is attached, then the same has to be satisfied first for such ‘place’ to become the ‘seat’.
A ‘venue’ can become the ‘seat’ if something else is added to it as a concomitant.
BGS-SGS Soma
A ‘place’ or ‘venue’ specified in the arbitration clause would tantamount to ‘seat’ unless there is significant indication to the contrary to demonstrate that the ‘venue’ stated in the arbitration clause was merely a convenient geographical location.
Mankastu Impex
A reference to ‘place’ alone is not sufficient. The intention of parties has to be determined from other clauses in the contract as well as the conduct of the parties.
2. A judgment with insufficient reasoning, a peculiar dispute resolution clause, and ineffectual principles
At the cost of repetition, I find it necessary to highlight that the Court noted that providing for a “place of arbitration cannot be the basis to determine the intention of the parties” as to the seat. The Court then prescribed that the intention of the parties should, therefore, be determined “from other clauses in the agreement and the conduct of the parties.” (¶20)
Two aspects need to be considered under this head – first, the judgment is bereft of sufficient reasoning; and second, there appears to be no correlation per se between the reasoning and the conclusion of the Court inasmuch as the Court merely relied on the text of a rather peculiar arbitration clause in arriving at its finding by rephrasing it.
Bereft of Sufficient Reasoning: Unlike Hardy Exploration and BGS-SGS Soma (without going into their correctness), the judgment in Mankastu Impex does not engage with many of the aspects that the former two judgments examine in great depth. It is a short judgment which does not advert to three critical aspects:
(i) While noting that the place cannot determine the parties’ intention as to seat, the Court preceded its observation by using the phrase “[i]t has also been established that” (¶ 20). However, neither does the Court elaborate upon this aspect nor does it cite any previous decisions to clarify what exactly has been established. If the reader were to hazard a guess and infer the Court’s reference to Hardy Exploration, then in light of the fact that Mankastu Impex was interpreting a clause stipulating the place of arbitration, the Court ought to have pinpointed the principle within Hardy Exploration. This is on account of the fact that even though Hardy Exploration is commonly referred to for the test of ‘venue’ qua ‘seat’, it distinctly culls out the principle in respect of both ‘place’ (¶32-34) and ‘venue’ (¶35) becoming a ‘seat’.
(ii) There was no rationale for the Court to mention “conduct of the parties” (¶20) as a criterion for ascertaining the parties’ intention as the seat. In fact, a perusal of the judgment would in itself elucidate that the Court does not make use of its homemade criterion in arriving at any conclusion whatsoever – factually or principally. This can be corroborated from the fact that the Court would have reached the exact same conclusion with the exact same reasoning, or the lack thereof, in the absence of this criterion. What this, therefore, means is that a party applying the test in Mankastu Impex would have to go through an unwarranted checkpoint.
(iii) While the judgment does refer to precedents in support of the significance of the juridical seat in arbitration proceedings (a matter which was uncontested and is even otherwise well-settled), the question that the Court had to answer was qua the maintainability of the petition under Section 11 of the Act, for which it had to determine the seat of arbitration. In that context alone, the Court made no reference to any precedents, including BALCO.
Peculiarity of the Arbitration Clause: The Supreme Court was dealing with an arbitration clause inter alia providing for disputes being “finally resolved by arbitration administered in” a particular jurisdiction. The predominant – if not the only – basis for the Court in concluding that Hong Kong was the juridical seat was merely a reading of Clause 17.2 of the MoU which, even otherwise, was categorical in its purport. Pertinently, the Court does not use its own test ((¶20) in arriving at this conclusion. The following will elucidate my point:
Clause 17.2 of the MoU
Any dispute, controversy, difference or claim arising out of or relating to this MoU, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered in Hong Kong.
The place of arbitration shall be Hong Kong.
Findings by the Supreme Court
21. On a plain reading of the arbitration agreement, it is clear that the reference to Hong Kong as “place of arbitration” is not a simple reference as the “venue” for the arbitral proceedings; but a reference to Hong Kong is for final resolution by arbitration administered in Hong Kong. The agreement between the parties that the dispute “shall be referred to and finally resolved by arbitration administered in Hong Kong” clearly suggests that the parties have agreed that the arbitration be seated at Hong Kong […]
22. […] The words in Clause 17.2 that “arbitration administered in Hong Kong” is an indicia that the seat of arbitration is at Hong Kong. (sic.)
The Court’s finding reproduced above unambiguously evidences that the intention of the parties in choosing Hong Kong as the ‘seat’ is neither exhibited “from other clauses in the agreement” nor from “the conduct of the parties”. This raises certain questions the answers to which are anyone’s guess – How would the Court have decided the issue in the absence of the word ‘administered’ from the arbitration clause? Would the Court have prescribed a different test in the absence of Clause 17.2 altogether? Or, would the Court have concurred with the test laid down either in Hardy Exploration or BGS-SGS Soma for determining the seat had the arbitration clause simply provided for “place of arbitration” as Hong Kong? In future, how will High Courts across the country deal with cases where the juridical seat has to be determined, especially in light of the fact that the findings in Mankastu Impex are diametrically opposed to those in BGS-SGS Soma? And finally, is Mankastu Impex a classic example of the Court applying an incorrect formula, yet yielding a correct answer?
3. The Supreme Court missed the opportunity to refer the issue to a Constitution Bench
In arriving at its eventual conclusion, the Supreme Court inter alia noted (¶13) that “considering Clause 17 of the MoU in the present case and the definite clauses therein and in the facts and circumstances of the case, we are not inclined to go into the question on the correctness of BGS Soma or otherwise”. What emerges from this is that the Supreme Court, yet again, missed the opportunity to refer this issue (of seat, venue, place) to a larger Bench in the interest of certainty of law. At this juncture, it is apposite to mention that whether or not reference to a larger Bench should have been made by the Supreme Court in BGS-SGS Soma in light of its express disagreement with Hardy Exploration – a judgment by a Bench of co-equal strength – is, at best, a moot point now.
Consequently, as of March 2020, there are three judgments passed by co-equal Benches of the Supreme Court – Hardy Exploration (2018), BGS-SGS Soma (2019) and Mankastu Impex (2020) – that ostensibly lay down the ‘test’ for determining the juridical seat for arbitration proceedings. It is pertinent to note that the ‘test’ that each of the three judgments propounds is different. Therefore, there are not two but three conflicting judgments in operation now, creating further confusion on this issue in addition to increasing the prospect of chance litigation. In this context, it would be apt to recall that “increase in the frequency of conflicting judgments of the superior judiciary will do incalculable harm to the system inasmuch as the courts at the grass roots will not be able to decide as to which of the judgments lay down the correct law and which one should be followed.”[12]
Much like the reference to a Constitution Bench[13] in 2019 on the issue of the interpretation of Section 24 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 owing to two contradictory judgment delivered by two Benches of co-equal strength (one in 2014 and another in 2018), a reference of the seat-venue conundrum by the Court in Mankastu Impex to a Constitution Bench would have put a lid on the issue. This is particularly because the Court very well recognized that this issue had, in fact, snowballed into a major controversy inasmuch the Court recorded the Petitioner’s submission (¶13) that “Hardy Exploration and BGS Soma, both being by the three-Judges Bench, […] it was not open to the Bench rendering the decision in BGS Soma to hold that the decision in Hardy Exploration was incorrect and the learned Bench in BGS Soma ought to have referred the matter to larger Bench” before expressing its disinclination in dealing with the correctness of BGS-SGS Soma.
CONCLUSION
Clearly, the judgment in Mankastu Impex muddies the waters. The three co-equal Bench judgments will beleaguer Courts across the country especially in matters calling for the interpretation of a contentious dispute resolution clause.
While the most certain answer would lie in a Constitution Bench settling the controversy, a draftsman must clearly mention the ‘seat’ of arbitration in an agreement if the parties so intend in order to preclude the Lernean Hydra from reappearing.
[1] The author is an Advocate practicing in New Delhi. He can be reached at rishabhdheer@gmail.com. [2] Mankastu Impex Private Limited v. Airvisual Limited, 2020 SCC OnLine SC 301. [3] The Delhi High Court Bar Association on 16 April 2020 organized a webinar on “Territorial jurisdiction in Arbitration – Seat v. Venue: Unravelling the mystery of ‘Place’ that matters” where Justice Navin Chawla was the keynote speaker. [4] BGS-SGS Soma JV v. NHPC Limited, 2019 (6) Arb LR 393 (SC). [5] Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc., (2012) 9 SCC 552. [6] Blackaby, N., Partasides, C., & Redfern, A. (2009). Redfern and Hunter on International Arbitration. Oxford: Oxford University Press, 5th ed. (2009). [7] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958). [8] League of Nations (1928). Protocol on Arbitration Clauses, Geneva, September 24, 1923. [9] Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited & Ors., (2017) 7 SCC 678. [10] Roger Shashoua & Ors. v. Mukesh Sharma, [2009] EWHC 957 (Comm). [11] Union of India v. Hardy Exploration and Production (India) Inc., (2019) 13 SCC 472. [12] Official Liquidator v. Dayanand & Ors., (2008) 10 SCC 1, ¶ 70. [13] Indore Development Authority v. Manoharlal & Ors., 2020 SCC OnLine SC 316.