- N. Surya Narayanan and S. Teepanjali[1]
The purpose of this article is to find out how, and in what context, each of the three words can be, and is generally, interpreted by the courts to mean both ways, i.e., the juridical location and the physical location of the arbitration, and the probable counter-arguments to it.
CONCEPT OF ‘SEAT’
In Domestic Arbitrations (“DA”), or International Commercial Arbitrations (“ICA”), an argument which generally (if there is even a very small room for ambiguity) arises either when an award is sought to be enforced, or when an award is challenged, is that the Court which is hearing the case does not have jurisdiction, for it not being the court of the ‘seat’ of arbitration.
The concept of the ‘seat’ of arbitration needs no new explanation. With respect to an arbitration, while the main underlying contract might be governed by the law of one country, parties have the right to subject the arbitration clause to the laws of the other country as well (either the seat or that of the countries involved).
Generally, the law(s) of the seat of the arbitration is one of the laws which govern the arbitration. The concept of seat is of much prominence and importance in both DAs and ICAs, though in varying degrees. In the case of DAs, since the arbitration law is the same throughout the country and both parties belonging to the same country, the role of the ‘seat’ is limited to conferring supervisory jurisdiction on the courts of the seat (place mentioned), i.e., to supervise the conduct of the arbitration, including matters such as interim reliefs and challenges to the arbitral award (Enercon (India) Limited v. Enercon GMBH) [2]. In the case of ICAs, an agreement on a ‘seat’ not only confers supervisory jurisdiction to the agreed place but also plays a decisive role in determining which law will be the proper law of the arbitration agreement, in addition to various other aspects such as arbitrability, standards for annulment of awards, neutrality, choice of arbitrators and related issues.[3]
On the other hand, irrespective of what the seat of the arbitration is, the hearings, meetings and other proceedings of an arbitration can be held anywhere, as agreed to between the parties, and/or with the consultation of the arbitrators, and it is commonly known as the ‘venue’ of arbitration. This is for the sake of convenience of the parties and the arbitrators, in saving time, money and labour.
In India, the concept of ‘seat’ has been the core issue of various judicial decisions, from time to time, including the most-spoken-about five-judge Constitution Bench judgment of the Supreme Court in BALCO v. Kaiser Inc.[4] In short, according to the Court, the Arbitration and Conciliation Act, 1996 will apply to an ICA only if the seat of the arbitration is in India.
WHAT’S THE GOOD WORD?
Before entering into the analysis, it is important to peruse the terminologies used in Conventions and legislations concerning arbitration, with respect to the concepts of seat and venue.
Section 20 of the Arbitration and Conciliation Act, 1996 refers to ‘place of arbitration’. While sub-section (1) grants the parties the right to agree on a place of arbitration, sub-section (2) reads that failing such an agreement, the tribunal determines the ‘place of arbitration’ having regard to the circumstances of the case. The word ‘circumstances’ here basically includes the remaining terms of the contract and the conduct of the parties, including the communications exchanged between them. When Sub-Section (3) is considered, the word ‘place’ is used to denote the place where the tribunal is to meet. Therefore, it is clear, also in terms of the SC’s decision in BALCO, that Sub-sections (1) and (2) talks about what we refer to as the seat of arbitration, while (3) talks about what we refer to as the ‘venue’. Unsurprisingly, this provision has been adopted, in toto, from Article 20 of the UNCITRAL Model Law on International Commercial Arbitration. Even the New York Convention, in Article V(1)(d) refers to it as the ‘place’.
At the same time, legislations such as the ‘Arbitration Act 1996’ of the United Kingdom, in Section 3 of the Act, uses the word ‘seat of arbitration’, instead of a ‘place’ or a ‘venue’.
The approach of the courts towards these three words is as follows:
Seat:
Whenever the arbitration clause might use the word ‘seat’, it conveys a definitive intention of the parties to refer to the ‘juridical place’ of arbitration. Since there are no possibilities of the usage of the word ‘seat’ being equated to ‘venue’ or the ‘location of the proceedings’, the chance of the ‘seat’ argument being raised as a jurisdictional objection, in a DA does not exist. In an ICA, the rarest exception might be where the terms of the arbitration agreement and the contract clearly indicate that the curial law of the arbitration would be a particular law of a country (mostly either of the parties) and that the courts of the particular country would have exclusive jurisdiction to settle all the disputes (definitely either of the parties). This kind of exception does, almost, not occur in any case, since the parties would not use the word ‘seat’ and simultaneously expressly agree to the curial law being a particular arbitration law. But this exception was how the England and Wales High Court, in Braes of Doune Windfarm (Scotland) Ltd. v. Alfred McAlpine Business Services Limited[5], justified the designation of Glasgow, Scotland, as the seat by the parties, to be an agreement as to the venue of the arbitration.
Note: The above exception has to be understood keeping in mind, that in an ICA, the proper law of an arbitration agreement can be different from the curial law, which is the law of the seat, while in a DA, there is no such differentiation since both the seat and curial laws are that of the Arbitration and Conciliation Act, 1996.
Place:
The usage of the word ‘place’ starts with the presumption[6] that it, in essence, is the juridical seat of arbitration, since even the legislations and the conventions use the word ‘place’. Even in BALCO and various English decisions[7] (Shagang South-Asia (Hong Kong) Trading Co. Ltd. v. Daewoo Logistics), the view that the words ‘place’ and ‘seat’ are interchangeably used, and the usage of the word ‘place’ is an implied choice of the ‘seat’ finds much support. But there might be some arguments put forth about the context or the way the word ‘place’ is used. If there is an initial agreement on a place of arbitration, and no specific mentioning of another place as it’s seat, the place is deemed to be the seat.[8] What is to be keenly observed is in the Arbitration and Conciliation Act, 1996, wherever the intention was to refer to the ‘juridical seat’ the word ‘place’ was never singularly used but was always referred to as the ‘place of arbitration’, signifying the importance of the phrase. For example, the word ‘place’ can be used in an arbitration clause in different ways,
Clause 1: The place of arbitration shall be Chennai, India.
Clause 2: The arbitration shall take place in Chennai, India.
Clause 3: The arbitration shall take its place in Chennai, India.
Clause 4: The arbitral proceedings shall take place in Chennai, India.
Here Clauses 1 and 3, more or less resonate the same idea of it being the juridical seat, but Clause 2 gives room for the clause to also mean that it refers only to the hearings/proceedings, and was not meant to be the place, the courts of which would supervise/govern the arbitration. Therefore, a comparison of Clauses 1 and 3 would give a view that Clause 2 can also be interpreted to mean the ‘venue’ or the physical location of the arbitral proceedings.
One might also find a little support from the ruling of the Supreme Court in Union of India v. Hardy Exploration and Production (India) Inc[9] (3-judge bench) which ruled that the word place by itself cannot be used as seat and it does not ipso facto assume such a status. It can be so only if there are a few concomitant factors to support it being a seat.
But even this ruling of the court can be countered since the arbitration clause in the above case incorporated the word ‘venue’ and the court’s discussion was not strictly with respect to the word ‘place’ (even though it unintentionally used the word ‘place’ in the judgment).
But what followed in Mankastu Impex Private Limited vs. Airvisual Limited[10] further dilutes the presumption in favour of the word ‘place’. The Supreme Court held that,
“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.”
The Supreme Court seems to have erred in ruling so with respect to the term ‘place’, since even though the arbitration clause in this case contained the phrase ‘place of arbitration’, the Court’s discussion is also with respect to the term ‘venue’, but comes to the conclusion as quoted above. Further, even otherwise, reducing a statutory term/phrase to a stage of needing supplementary help from the other terms of the contract does not seem to be right. Of course, if the parties, use both words (‘seat’ and ‘place’) in the arbitration agreement, the city used with the seat can be taken to be the juridical seat and the ‘place’ might be the venue.
Now, when Clauses 2 and 4 are compared in order to compulsorily differentiate both, a prima facie view would be that Clause 2 would refer to the seat and Clause 4 would refer to the venue, since the word ‘arbitration’ conveys a more definitive intention to anchor the entire arbitration to the place, and not merely the proceedings, in the words of the English Court in Process & Industrial Developments Limited v. Federal Republic of Nigeria[11].
Venue:
While, in both the abovesaid cases of Mankastu and Hardy Exploration, what the court ruled was, in essence, something with respect to ‘venue’, the judgment in BGS SGS Soma JV v. NTPC Limited[12] (which came before Mankastu), further adds confusion to the existing conundrum.
“Wherever there is an express designation of a venue and no designation of any alternative place as the ‘seat’, combined with a supranational body of rules governing the arbitration, the inexorable conclusion is that the stated venue is actually the juridical seat”.
Even though it might be justifiable for the court to have held so, considering the fact that it is reasonable to expect the parties to agree on the ‘seat’ of arbitration, keeping in mind its importance, than the ‘venue’ of the hearings, in an arbitration agreement, if they have not agreed on both of these, the parties should also consider that when the statutory term specifically being used, and the jurisprudence generally favouring the use of the word ‘seat’ or the phrase ‘place of arbitration’, usage of the word ‘venue’ to refer to the ‘seat’ should be detested from.
But when such term has still been used in an arbitration clause, or when clauses incorporating none of the above terms, such as, “The Arbitration shall be held in Chennai, India” are used, the courts/tribunals can then refer to the other terms of the contract, or fall back on the ‘real and most closest connection’ test as followed by the court in Enercon (India) Ltd’s case[13], wherein the court examines as to which place, amongst the ones the parties submit to be the seat, has the closest connection to the arbitration as a whole.
OTHER FACTORS TAKEN INTO ACCOUNT:
There are various other factors that the courts have taken into consideration and can continue to consider when it is faced with the seat argument/defense.
(i) Institution: In the case of DA, the place of the arbitration centre to which the parties have referred the dispute to, can be taken to be as the seat of the arbitration, subject to an express agreement on the seat of the arbitration within India.
In the case of International Commercial Arbitrations, the rules of the Institution, such as LCIA (London Court of International Arbitration) Rules or the SIAC (Singapore International Arbitration Centre) Rules, must be given the first glance to see how the tribunal should decide on the question of seat in the absence of an express agreement between the parties on the seat. In such an absence, while Article 16 of the LCIA Rules, 2014 starts with a presumption of England being the seat, and such a presumption is rebuttable in view of the circumstances of the case, the SIAC Rules, 2016, in Rule 21, does not provide for a default seat, as against its previous edition of the Rules.
(ii) Neutral Place: An agreement on the seat of arbitration being a country other than the ones to which the parties belong to, can be construed as an expression of their intention to have their disputes decided by a tribunal which they have chosen, commonly on the grounds of expertise and privacy, and the efficiency of its supervisory law.[14]
This again is subject to the construction and interpretation of the other terms of the contract, and the court’s conclusion will definitely differ according to which of the triad terms, viz., venue, place and seat, is used in the ‘Seat-Clause’.
(iii) Government Contracts: A choice of a neutral place is common, especially those involving government contracts,[15] as the perceived effectiveness of the neutral arbitral process is often a vital condition in the process of negotiation of the contract.[16]
(iv) Commercial Purpose: The common commercial purpose, the context of the contract, circumstances of the parties and the background of the parties have to be taken into account.[17] For example, a contract for procurement of goods to be used in a country can be interpreted to have its seat in the subject country as it is not only territorially closely related to the contract but also forms the centre of the purpose of the contract.
SOLUTION TO RESOLVE THE AMBIGUITY:
The 246th Law Commission Report, in fact, suggested amendments to Section 20 of the Act wherein, the provision would read ‘Seat and Venue of Arbitration’, Sub-sections (1) and (2) would carry the terms ‘seat and venue’ while Sub-section (3) refers only to ‘venue’.[18] But due to the existing judgment in BALCO, the recommendations seems to have not been incorporated as an amendment to the act.
It is the right time for a Constitution Bench of the Supreme Court, to consider, analyse and solve its conflicting decisions in Hardy, BGS SGS Soma and Mankastu, and set down a standard for all these three terms, in a definitive manner, unlike its previous attempts.
Further, parties when entering into arbitration agreements, must make sure to use the term ‘seat’/’juridical place’, as it almost leaves no room for differing interpretations or arguments of ambiguity. It is also advisable for the parties to add a separate clause on ‘venue’ of arbitration, to the effect that it might either be a specific place(s) or an agreement to agree on a venue later, so that it becomes assured as to what the seat and the venue might be. Until then, the arguments can go either way, depending on contrary indications in the rest of the terms of the contract, with respect to all the three terms.
[1] The authors are 4th year students pursuing B.A. LL. B (Hons) in the School of Excellence in Law, The Tamilnadu Dr. Ambedkar Law University, Chennai. They can be reached at mailme_surya@yahoo.in and teepanjali.7@gmail.com, respectively. [2] Enercon (India) Limited v. Enercon GMBH, (2014) 5 SCC 1 (India). [3] Chapter 14: Selection of Arbitral Seat in International Arbitration', in Gary B. Born, International Commercial Arbitration (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 2055 – 2063. [4] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552 (India). [5] Braes of Doune Windfarm (Scotland) Ltd. v. Alfred McAlpine Business Services Limited, [2008] 1 Llyod’s Rep 608 (United Kingdom). [6] Shagang South-Asia (Hong Kong) Trading Co. Ltd. v. Daewoo Logistics, [2015] EWHC 194 (Comm) (United Kingdom). [7] Ibid. [8] Naviera Amazonica Peruana S.A. v. Compania International de Seguros del Peru, 1988 1 Llyod’s Rep 116 (United Kingdom). [9] Union of India v. Hardy Exploration and Production (India) Inc., (2019) 13 SCC 472 (India). [10] Mankastu Impex Private Limited vs. Airvisual Limited, 2020 SCC OnLine SC 301, ¶21. [11] Process & Industrial Developments Limited v. The Federal Republic of Nigeria, [2019] EWHC 2241 (Comm) (United Kingdom). [12] BGS SGS Soma JV v. NHPC Ltd., 2019 SCC OnLine SC 1585, ¶48 (India). [13] Refer Endnote 2. [14] Premium Nafta Products Ltd. & Ors v. Fili Shipping Company Ltd & Ors, [2007] UKHL 40 (United Kingdom). [15] Sulamérica Cia Nacional De Seguros S.A. v. Enesa Engenharia S.A., [2012] EWCA Civ 638 (United Kingdom). [16] STEPHEN M. SCHWEBEL, INTERNATIONAL ARBITRATION: THREE SALIENT PROBLEMS 1-60 (1 ed. Grotius Cambridge 1987). [17] Mitsubishi Heavy Industries Ltd v. Gulf Bank K.S.C, [1996] EWCA Civ 1281 (United Kingdom). [18] Indus Mobile Distribution Pvt. Ltd. vs. Datawind Innovations Private Limited, (2017) 7 SCC 678 (India).
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