Supreme Court of India resolves the ‘venue’/‘seat’ of arbitration conundrum

-Harshvardhan Tripathi*


India has witnessed a rapid evolution in the judicial opinion on the choice of ‘seat’/ ‘venue' of arbitration in recent times. The conceptual distinction between the ‘seat’ and the ‘venue’ is of immense importance and has implications for both, international commercial arbitration and domestic arbitration based in India. Most importantly, the choice of a ‘seat’ of arbitration provides exclusive jurisdiction to the Courts of the seat to regulate the arbitral proceedings arising out of the agreement between the parties. On the other hand, the choice of a venue has no such legal consequence and is merely a convenient place for the stakeholders to meet and conduct the arbitral proceedings. The venue can be changed as per the convenience of the parties and has no legal impact on the arbitration or the court proceedings arising out of it.


Jurisprudential Development in seat vs venue debate so far


The Arbitration and Conciliation Act, 1996 (‘Act’) uses the word ‘place’ of arbitration instead of ‘seat’ or ‘venue’ of the arbitration. Section 20 of the Act provides that either the parties can choose the place of arbitration mutually, in which case it would fall under Section 20(1) of the Act, or otherwise the Arbitral Tribunal can determine the place of arbitration under Article 20(2). In the same vein, the parties can choose a convenient place for holding arbitration proceedings as per Article 20(3) of the Act.


Even though ‘seat’ and ‘venue’ have not been incorporated explicitly in the Act, the Supreme Court of India (‘SC’) in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services, Inc., (‘BALCO’) held the ‘place’ mentioned in Section 20(2) refers to the seat of arbitration, and in Section 20(3) refers to the venue of the Arbitration.In order to bring clarity and align the Act in line with BALCO, the Law Commission of India in its 246th Report suggested substituting ‘place’ in Section 20(2) with seat and with ‘venue in Section 20(3). However, these changes were not implemented in the 2015 Amendment and the statute still does not make an explicit reference to the ‘seat’and‘venue’ of arbitration.


Although ‘seat’ and ‘venue’ have not been actively legislated upon, these concepts have been discussed and developed significantly by the Courts in India. For the purpose of this article, the key development in the seat vs venue conundrum in the context of domestic arbitration in India are discussed below


In the 2017 decision of Indus Mobile Distribution Private Ltd v. Datawind Innovations Private & Ors (‘Indus Mobile’) the SC transplanted the international concept of ‘seat’ of arbitration in the context of domestic arbitration and ruled that if the arbitration clause confers exclusive jurisdiction upon the Courts of a particular city/state it is tantamount to designating that place as the ‘seat’ of arbitration and Courts of only that city/state will have the supervisor power over the conduct of the arbitration proceedings and provide relief.


Principles laid down by the England and Wales High Court in Shashoua v Sharma were incorporated by the SC in the 2017 decision of Roger Shashoua & Ors v Mukesh Sharma, (‘Roger Shashoua’). The main principles that emerge out of Roger Shashoua are


1. The venue of arbitration is not automatically the same as the seat of arbitration.


2. The exception to (1) is a situation when the arbitration agreement defines the ‘venue’ of arbitration and mentions the supranational body of rules governing the arbitration without designating a seat explicitly. In such a scenario, if there are no other significant contrary indicia i.e. any information that leads to the opposite conclusion, then the venue of the arbitration is actually the seat of arbitration. The Courts have to analyze this issue based on the facts of each case.

In the 2018 ruling of the Union of India v. Hardy Exploration and Production (India) Inc., (‘Hardy Exploration’) a three-judge bench of the SC laid down the following principle of determining the seat of arbitration


1. The venue of arbitration is not automatically the same as the seat of arbitration However if a concomitant factor is added to the venue, only then can the venue be equivalent to the seat of arbitration (‘concomitant factor test’).


2. If the arbitration agreement mentions the ‘place’ of arbitration, that in itself is not sufficient to consider it equivalent to the seat of arbitration. The presence of any contrary evidence would lead to the place not being the same as the seat of arbitration.


3. If the arbitration agreement mentions a condition precedent in connection to the place of arbitration, then the condition must be satisfied and only then can the place of arbitration be the same as the seat.


In the 2019 decision of Brahmani River Pellets v. Kamachi Industries, (‘Brahmani’), the SC blurred the distinction between seat and venue as laid down in BALCO and held that merely specifying the venue of arbitration is sufficient to infer that the parties also intended to designate the venue as the seat of arbitration. Brahmani ignored the concomitant factor test of Hardy Exploration and simply equated the venue with the seat of arbitration.


This question was revisited by the three-bench judge bench of SC in BGS SGS SOMA JV v NHPC Ltd., (‘BGS’). In BGS, the Court further developed the Roger Shashuatest and held that ‘venue’ of arbitration can also be the seat of arbitration if :


1. The seat of arbitration has not been designated in the arbitration agreement, and;


2. There is an express designation of ‘venue’ in the arbitration agreement combined with a supranational body of rules governing arbitration, and;


3. There are no significant contrary indicia


The Court held that intention of the parties with respect to choosing a place as the seat of arbitration is to be gathered from the language of the arbitration agreement. BGS declared that Hardy Exploration was not in line with the 5 judge bench decision in BALCO, and therefore it was not good in law.


In 2020, A three-judge bench of the SC in Mankastu Impex Pvt. Ltd. v. Airvisual Ltd., (‘Mankastu’)again aligned the reasoning with the concomitant factor test inHardy Exploration and held that place of arbitration does not automatically refer to the seat of arbitration. The Court has to gather the intention of the parties in connection to the seat of arbitration from a holistic reading of the arbitration agreement. In addition to the arbitration agreement, the conduct of the parties is also to be considered.


The conundrum surrounding the seat/venue of the arbitration resurfaced recently in the context of domestic arbitration in M/s Inox Renewables Ltd v Jayesh Electricals Ltd.(“Inox”) (2021), where the division bench of the Supreme Court of India found that when the parties decided to shift the venue mentioned in the arbitration agreement from Jaipur to Ahmedabad through a mutual consensus, they intended the new ‘venue’ to in fact be the ‘seat’ of arbitration and not a mere ‘venue’. Therefore, the Courts of the ‘seat’ i.e. Ahmadabad will have exclusive jurisdiction to deal with the Section 34 application filed by M/s. Inox Renewables Ltd. (“Appellant”).


Background Facts:


The first contract was a purchase order agreement’ (“POA”) entered between M/s Gujarat Fluorochemicals Ltd. [“GFL”] and Jayesh Electricals Ltd. [“Respondent”] in 2012 for the manufacture and supply of power transformers at wind farms. The purchase order contained an arbitration clause that specified Jaipur as the venue for Arbitration and courts in Rajasthan to have exclusive jurisdiction to supervise the arbitration proceedings.


However, in 2012 GFL transferred its entire business to the Appellant through a ‘business transfer agreement’ (“BTA”), to which the Respondent was not a party. This second agreement between GFL and Appellant fixed Vadodra as the seat of arbitration and gave exclusive jurisdiction to Courts in Vadodra.


Procedural History:


When the dispute between the appellant and respondent arose, the respondent approached the Gujarat High Court under Section 11 of the Indian Arbitration and Conciliation Act, 1996 (“Act”) for the appointment of an arbitrator. Accepting the request, the Gujarat High Court appointed a retired judge of the Gujarat High Court as the sole arbitrator.


The arbitrator passed the award in 2018 in favour of the respondent. Aggrieved by the findings of the award, the appellant filed a Section 34 petition in Ahmedabad to set aside the award passed by the sole arbitrator. The Commercial Court of Ahmedabad held that it did not have the jurisdiction to entertain the Section 34 application because the arbitration clause in the BTA vests the Courts of Vadodara with the exclusive jurisdiction.


The Appellant filed an appeal in the Gujarat High Court against this decision. The division bench of the High Court opined that the Commercial Court of Ahmedabad had erred by looking at the arbitration clause in the BTA. As mentioned before, the respondent was not a party to the BTA, and therefore the Commercial Court should have looked at the arbitration clause in the POA instead of the BTA.


After pointing this out, the High Court held that the Courts of Rajasthan have been vested with the exclusive jurisdiction as per the arbitration clause in the POA. Therefore, the High Court dismissed the application filed by the appellant.


Appeal against this decision came before the division bench comprising J Nariman and J Hrishikesh Roy.


Reasoning:


The Apex Court first looked at the observation made by the arbitrator in para 12.3 of the award with respect to the venue/place of the arbitration:

12.3

.

.

.

However, the parties have mutually agreed, irrespective of a specific clause as to the [venue, that the place] of the arbitration would be at Ahmedabad and not at Jaipur. The proceedings, thus, have been conducted at Ahmedabad on the constitution of the Tribunal by the learned Nominee Judge of the Hon’ble High Court of Gujarat.”(Emphasis applied)


It concluded that “by mutual agreement, parties have specifically shifted the venue/ place of arbitration from Jaipur to Ahmedabad.”


Reaffirmation of the principle expounded in BSG SGS Soma


The Supreme Court heavily relied on its previous decision in BGS SGS, wherein it was held that in the absence of any “significant contrary indicia” (i.e. significant contrary information), if the arbitration agreement names a place as a venue of arbitration, it is indicative of the parties intention to anchor the proceedings in that place and make it the seat of arbitration.


In Inox, such contrary indicia was absent and there existed evidence of the positive intention of the party to designate Ahmedabad as the seat of arbitration:


1. The parties approached the Gujarat High Court for the appointment of the Sole arbitrator, which indicates that the parties had mutually formed the intention to override the exclusive jurisdiction clause in the arbitration agreement to make Ahmedabad the status of the seat of arbitration.


2. The arbitrator’s finding recorded the finding that the unequivocal intention of the parties was to shift the ‘seat’ of the arbitration from Jaipur to Ahmedabad through mutual consent. This finding was not objected to by the Respondent at that stage. Besides the finding, the conduct of the parties reveals that Ahmedabad was not merely a convenient venue for holding a few proceedings. The parties consciously novated their choice of seat.


3. The award was passed at Ahmedabad and was accordingly recorded in the arbitration award as the place of pronouncement and delivery of the award.


Following the rule in BGS SGS, the Court reached the correct inference that in this case, Ahmedabad displayed attributes of the ‘seat’ of the arbitration and not merely the ‘venue’, and this was in fact intended by the parties through their mutual consent. It is appreciable that the Apex Court did not adopt a literal interpretation of the arbitration clause like the Gujarat High Court, and rather paid attention to the intention that the parties expressed in choosing to make Ahmedabad the new seat for arbitration through mutual consent.


Applying the Concomitant factors test to the facts of Inox


Before Inox, there seems to be developing two distinct lines of judicial opinion in determining the seat of arbitration: one line follows the principle in Roger Shahshua as consolidated in BGS SGS and believes that venue of the arbitration can also be the seat if there are no significant contrary indicia, and the other line of judicial opinion favours the concomitant factor test of Hardy Exploration along with the addition made by Mankatsu to it. Inox has clearly chosen to follow the BGS SGS line of judicial opinion. However, it would be instructive from an academic perspective to apply the contrasting approach in Hardy Exploration to inspect how it might have affected the Court’s conclusion in Inox.


The Apex Court had adopted a contrasting approach to BGS SGS in its three-judge bench decision of Union of India v. Hardy Exploration and Production (India) Inc. (“Hardy Exploration”) in 2018, wherein it had observed that the venue can become the seat of arbitration only if ‘something else is added to it as a concomitant’.


Even though BGS SGS held Hardy Exploration to be contrary to Supreme Court’s ruling in BALCO, it cannot be said that Hardy Exploration has been overruled because of the equal bench strength in Hardy Exploration and BGS SGS. As held in the 2004 Supreme Court decision of five bench in Central Board of Dawoodi Bohra Community &Anr v. State of Maharashtra &Anr, a bench of coequal strength can only doubt the correctness of a previous bench of coequal strength, but cannot overrule it or hold a previous decision by such coequal bench to be per incurium. Until the question is finally settled by a bench of 5 judge strength, it cannot be conclusively said that Hardy Exploration has been overruled by BGS SGS.


The ‘concomitant’ factors in favour of Ahmedabad were:


1. That the parties first approached the Gujarat High Court in Ahmedabad for the appointment of the arbitrator and expressed clear intent of designating Ahmedabad as the seat of the arbitration.


2. A similar intention was reiterated before the sole arbitrator and the same was recorded in the award.


These factors also satisfy the test laid down in Mankatsu wherein the three-judge bench of SC followed Hardy Exploration’s dictum and held that the venue of arbitration does not automatically become its seat. The test in Mankatsu gave primacy to the intention of the parties which could be gathered from a holistic reading of the arbitration clause and considering the conduct of parties. Considering the chain of events holistically, the arbitration clause was novated. Even the conduct of the parties as evident from the above two points clearly indicates that the parties intended Ahmedabad to be the seat of arbitration.


Can the seat of arbitration be shifted only through a written agreement?


The Court in Inox correctly distinguished the instant fact scenario from the 2011 division bench decision of Videocon Industries Limited vs. Union of India & Anr.(“Videocon”). In Videocon, the arbitration agreement contained an amendment clause that allowed for amendment or modification of contract only through a written agreement between the parties. Giving heed to this explicit requirement imposed by the arbitration agreement, the Apex Court had held that if the parties wanted to amend the contract and change the seat of arbitration through mutual agreement, it could only be done when the agreement is recorded in writing. However as J Nariman aptly pointed out in Inox, the ruling in Videocon cannot be extended to those cases where a similar clause in the arbitration agreement mandating ‘amendment only through written agreement’ is absent. Hence, Videocon does not lay down the general principle of law that the place of arbitration can only be shifted through a written agreement, and is rather a fact-specific decision that has no applicability to the factual matrix in Inox.


A surprising conversion of venue to the seat of arbitration?


Although the decision in Inox lays down the correct law, it has not sufficiently dealt with an important facet highlighted by division bench of Delhi High Court in its 2019 ruling of Dwarika Projects Limited v. Superintending Engineer, Karnal, PWD (B&R), Haryana that ‘the parties cannot be taken by surprise and be told that the venue for arbitration had morphed into the juridical seat of arbitration.’ The arbitral tribunal should fix the jurisdictional seat of the arbitration only after deliberation with the parties involved. Can it then be said that the Respondent was not ad idem with the appellant and therefore was taken by surprise about Ahmedabad being the seat of the arbitration as opposed to a mere venue?


It seems unlikely that the respondent was taken by surprise, because at the time of the appointment of the arbitrator, it had made joint submissions before the Gujarat High Court along with the appellant, and displayed consensus of making Ahmedabad both the seat and the venue of the arbitration. Thus, the respondent consciously novated the venue of arbitration specified in the purchase order, with a new choice of ‘seat’ through their express averments before the Court.


Conclusion


Litigation on the determination of the seat/venue conundrum is becoming increasingly rampant. This case highlights the need for the arbitration clauses to be drafted carefully and with precision. Arbitration clauses should specify the ‘seat’ and ‘venue’ of arbitration distinctly to ensure that the effectiveness and finality of the arbitration mechanism are not eclipsed by long-drawn litigation proceedings afterwards.


Furthermore, clarity can be brought into Section 20 itself by implementing the suggestions of the 246th Law Commission of India Report. Usage of the word ‘Place’ has caused immense confusion and therefore to bring the Arbitration Act in line with the judicial interpretation, ‘place’ should be replaced with ‘seat’ in Section 20(2) and with ‘venue’ in Section 20(3).


The Arbitral Tribunal can also play a pivotal role in this respect to reduce litigation on the vexed question of determining the seat/venue of arbitration. Similar to Inox, wherein the Sole Arbitrator recorded the intention of the parties to affix Ahmedabad with the status of the seat in the Arbitral Award itself, Arbitral Tribunals in other proceedings can record the party’s intentions in clear unambiguous language. If the matter then goes before the Courts, such clear expression with respect to the party’s intention would greatly facilitate the Courts in deciding the question.


Inox will be binding on such cases before the Indian Courts where the seat of the arbitration has not been declared and only the venue of arbitration has been identified in the arbitration clause. If the conduct of the parties shows that the venue was in fact intended to be the seat, then the Court would consider the venue to be tantamount to the seat of arbitration in such cases. It is indeed appreciable that by determining the seat of arbitration in the context of the intention displayed by the parties and by looking at the conceptual essence of a seat vis-à-vis venue of arbitration, the Supreme Court of India in Inox has successfully managed to digress from the narrow reasoning adopted by the Gujarat High Court that took a literal interpretation of the arbitration clause. Such an approach is welcome and it can be expected that this case law will set the evolving Indian jurisprudence on the seat/venue conundrum of the arbitration on the correct course of development.


*-Harshvardhan Tripathi is a 5th-year student at NALSAR University of Law, Hyderabad.


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