Arbitration in India: The Seat is Still Vacant
Vishnu Chandran January 8, 2016
The Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act”), which was passed by the Parliament towards last year-end has come into force after its notification in the official gazette on January 1, 2016. The Amendment Act, brings about a slew of changes to the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and addresses several concerns that had befallen the Indian arbitration regime. The thrust of the Amendment Act is towards the completion of arbitration proceedings in a time bound and efficient manner with minimal court interference.
While the Amendment Act ticks most boxes, it has failed to address the contentious issue regarding the differentiation of ‘seat’ and ‘venue’ of arbitration.
The ‘seat’ of arbitration is of cardinal significance as it determines the law governing the arbitration procedure and the courts which would have supervisory jurisdiction over the arbitration process. While internationally, it is well understood that ‘seat’ of arbitration (which refers to the juridical seat) is different from the ‘venue’ of arbitration (which is the place at which the arbitration proceedings/hearings are held), the Arbitration Act does not differentiate between the two and uses the term ‘place’ in reference to both ‘seat’ and ‘venue’ of arbitration.
This has led to a flawed understanding of the concepts of ‘seat’ and ‘venue’ in India and arbitration clauses being drafted between parties which would often use the term ‘venue’ interchangeably with ‘seat’. As a consequence, the courts in India have been peppered with several cases emanating from this issue.
The Supreme Court in the much-discussed case of Bharat Aluminium Co. vs. Kaiser Aluminium Technical Services Inc. (“Balco Case”) had highlighted the difference between ‘seat’ and ‘venue’ of arbitration, and held that the courts of the country in which the ‘seat’ of arbitration is located shall regulate the conduct of arbitration and challenge to an arbitration award; and that ‘venue’ only refers to the place where the arbitrators may hold proceedings for their and the parties’ convenience.
The issue of ‘seat v. venue’ came up as one of the primary discussion points before the Supreme Court in Enercon (India) Limited v. Enercon GmBH (“Enercon Case”). In the case, the disputed contract had an arbitration clause which did not specify the ‘seat’ of arbitration, though the agreement mentioned that the venue of the arbitration proceedings shall be London. Further, it was mentioned that provisions of the Arbitration Act shall apply with respect to arbitration. The court noted in the case that the substantive law of the contract was Indian law, law governing the arbitration was Indian law, the contract was to be acted upon in India; enforcement of the award was to be done in India, and the relevant assets were in India. Thus, applying the “closest connection” test, the Supreme Court held that the ‘seat’ of arbitration should be India and accordingly the Indian courts, and not the British courts, should have jurisdiction over the dispute. The court disregarded the argument that
London was intended to be the ‘seat’ by holding that London was merely the choice of convenient venue for the parties for the hearings.
In the context of domestic arbitration, the issue arose last year before the Delhi High Court in PCP International Limited v. LANCO Infratech Limited (“PCP-Lanco Case”). In the case, the contract between two Indian parties had an exclusive jurisdiction clause conferring the jurisdiction to the courts in New Delhi and the arbitration clause specified New Delhi as the venue for arbitration. The court observed that though the parties to the contract conferred exclusive jurisdiction to the courts in New Delhi, it was not the place where the contract was executed, or contract was to be performed, or payments under the contract were to be made, or the respondent was located. Consequently, applying (i) the principles under Code of Civil Procedure, 1908 for determining the jurisdiction of courts and (ii) the legal position that the parties by consent cannot confer jurisdiction on a court which does not have any such jurisdiction, it was held that courts in New Delhi would not have jurisdiction to grant interim injunctions during the arbitration process.
The petitioner in the case relied on the Balco Case which held that “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,” and argued that the courts in New Delhi should have jurisdiction since the venue of arbitration is New Delhi. However, rejecting this argument, the court held that the Balco Case gave jurisdiction to courts located at the ‘seat’ of arbitration; and that the arbitration clause in the instant contract merely specified the ‘venue’ for holding the arbitration proceedings and New Delhi was not to be construed as the ‘seat’ of arbitration.
One may note that the Supreme Court in the Enercon Case gave prime importance to the law governing the arbitral proceedings in determining the ‘seat’ of arbitration and reiterated the position that “it would be rare for the law of the arbitration agreement to be different from the law of the ‘seat’ of arbitration”. However, the above test to determine the ‘seat’ of arbitration would not be relevant in case of domestic arbitrations as the law governing arbitration across India is the Arbitration Act. The court in the PCP-Lanco Case did not delve into determining the ‘seat’ of arbitration; and the question of what would be the ‘seat’ in a domestic arbitration, if the ‘venue’ is specified and the ‘seat’ is not, remains unanswered.
Based on the above, one would say that the legal positions on (i) whether the ‘seat’ of arbitration in an international commercial arbitration would be the place whose law governs the arbitration agreement or whether any other considerations such as the substantive law of contract, location of the parties, etc. should be looked into while determining the ‘seat’, and (ii) what would be the ‘seat’ in a domestic arbitration in case the ‘venue’ is specified in the arbitration agreement, are not yet fully crystallised.
Given this background, the government had a great opportunity to resolve this uncertainty by adequately explaining the concept of ‘seat’ of arbitration and differentiating between ‘seat’ and ‘venue’ vide the Amendment Act. This was, in fact, one of the recommendations of the 246th Law Commission which had submitted its report last year on the amendments required to the Arbitration Act.
Such amendment would have made the provisions of the Arbitration Act more consistent with the international standards and would have washed away the cloudiness surrounding the understanding of the difference between ‘seat’ and ‘venue’ in India.
In addition, in a recent decision in the case of Sasan Power Ltd v. North America Coal Corporation India Pvt Ltd, the Madhya Pradesh High Court broke new ground and held that two Indian parties could resolve disputes through a foreign seated arbitration with foreign substantive law and the same was not opposed to the public policy of India. If this ruling were to be upheld by the Supreme Court, there could be situations where two Indian parties choose foreign laws like the SIAC or ICC rules for an arbitration to be held in India (as venue). In such a scenario, it becomes imperative to have adequate clarity on the concept of ‘seat’ of arbitration to determine whether the courts in India or such foreign place would have jurisdiction over such arbitration.
Hence, the government choosing to ignore the recommendation of the Law Commission and not defining the concept of ‘seat’ of arbitration through the Amendment Act would go down as a missed opportunity.
- Celebrating an Amazing Decade of The Lexygen Experience!
- Takeover Code & Exemptions for Debt Restructuring
- Markets on the Internet and Foreign Investment
- Fund Managers: Welcome to India
- Business Income or Capital Gains? Question Resolved!
- Startup funding: All you want to know about term sheets
- Companies Law Committee Report, 2016 – Recommendations Galore!
- Reorganization and Arrangement under the DTAA – Get it right
- Startup India – Is the Action Plan Adequate?
- Ola, Uber & the CCI: This one’s for the road
- AIF Committee Recommends Revamp of Regulations
- Green Bonds – Use them to clean up
- Exit Offers for Dissenting Shareholders
- Arbitration in India: The Seat is Still Vacant
- POEM: The Shifting Sands of Substance & Form (or, A Tale of Two Circulars)
- A Warm Welcome to Payment Banks
- CCI Amends the ‘Investment Exemption’
- External Commercial Borrowing – On which ‘Track’ are you?
- FDI in Defense: Recent Reforms
- FDI in e-commerce: The confusion continues
- Draft Civil Aviation Policy: Wind beneath the Wings of the Indian Aviation sector?
- FDI – Steps in the right direction?
- FDI in AIFs – will there be any takers for hedge funds?
- Companies Act, 2013: Craving Compliance Clarity
- Paypal: Not the RBI’s pal
- The CCI, Investment Funds & Affirmative Rights
- Proposed changes to Bankruptcy Laws – A Step in the Right Direction
- FATCA – Impact on Domestic Funds