[Akash is a student at National Law School of India University.]
The Supreme Court of India (SC) recently dealt with a crucial issue in arbitration law i.e., if the parties fail to designate the seat of arbitration, how is the court supposed to determine it? The judgment in the case of Arif Azim v. Micromax Informatics (Arif) is another attempt by the SC at settling the law in this regard.
In this case, the seatless arbitration clause stipulated as follows:
Venue: Dubai, UAE;
Law governing arbitration: The UAE Arbitration and Conciliation Rules; and
Law of the contract: Laws of the UAE
The court treated UAE as the seat of arbitration by applying the triple-condition test that the court considered to have been laid down in BGS SGS Soma JV v. NHPC Limited (BGS) (paragraph 53). Simply put, this test requires the court to treat the venue as the seat unless a significant contrary indicia appears from the arbitration clause (the venue principle). To ultimately rely on this test laid down in BGS, the court’s main attempt was to highlight that this principle, which was originally laid down in the case of Shashoua and Others v. Sharma (Shashoua I) had been accepted in India.
In this article, I argue that the court’s reliance on the venue-principle drawing from Shashoua I is based on a misreading of precedents. I also highlight that the court missed engaging with the judgement in Union of India v. Hardy Exploration and Production (Hardy), thereby opening the decision to the criticism of being per incuriam.
A Misreading of Precedents: Enercon and BGS
In Arif, the court first cited the judgement in Enercon (India) Limited and Others v. Enercon Gmbh and Another (Enercon) to state that Shashoua I had been approved in India (paragraph 48). In fact, one of the first judgements that cited Enercon for this proposition was Roger Shashoua v. Mukesh Sharma (Shashoua II). However, this is an incorrect understanding of Enercon. In Enercon, the court applied the curial law principle i.e., the seat had to be determined on the basis of the place which had the closest connection to the curial laws (paragraph 90). This curial law principle was borrowed from the judgement of the English Court of Appeal in Naviera Amazonica Peruana SA v. Compania Internacional De Seguros Del Peru (Naviera). It is important to note that though the SC discussed the Shashoua I case, it expressly stated that Shashoua I followed the ratio laid down in Naviera (paragraph 115). Crucially, it did not approve the venue principle laid down in Shashoua I as ultimately it applied the curial law principle to determine the seat. Therefore, Shashoua I was understood in the Indian jurisprudence to be applying the ratio of Naviera i.e., the curial law principle. This understanding laid down in Enercon was followed in Harmony Innovation Shipping Limited v. Gupta Coal India Limited (Harmony) where the venue was designated as London, the substantive and curial laws to be the English law and the institute governing arbitration to be the London Maritime Arbitration Association. The court followed Naviera and concluded London to be the seat. It noted that the arbitration clause did not stipulate the applicability of any other laws and therefore, in light of the circumstances of the case, it led to the conclusion that parties intended London to be the seat as well. Therefore, in the context of Indian jurisprudence, Shashoua I has been understood to be upholding the curial law principle which requires the court to determine seat on the basis of the chosen curial law.
Secondly, to cull out the three-condition test, the court relied on the judgement in BGS. The court in BGS had relied on Enercon and Harmony shipping to conclude that when venue was designated in a seatless clause, the venue was really the seat. However, as argued above, the approach adopted in both Enercon as well as in Harmony was in polar opposition to how the court in BGS understood it to be. In both Enercon and Harmony, the courts primarily relied on the chosen curial law to determine the seat. Therefore, the end result of the judgement in BGS was that the court ended up conflating the concepts of seat and venue and applied a legal test citing precedents which had never really upheld the application of that test in Indian jurisprudence.
Moreover, the reasoning in BGS is perverse for other reasons as well. In BGS, the arbitration clause stipulated that the “arbitration shall be held” at Delhi / Faridabad (emphasis supplied). Since the parties had mentioned both Delhi and Faridabad in the arbitration clause, the court reasoned that Delhi should be treated as the seat of arbitration as all the three hearings of the tribunal were conducted in Delhi. This way of reasoning reflects the court’s avoidance of engagement with core concepts in arbitration law. Merely because the tribunal conducted majority of the meetings at one place over another, it would not magically make that place a seat instead of what it actually was- a venue. Consider, for example, a situation where the tribunal held one meeting in Faridabad and two meetings in Delhi. In this scenario, one may ask how the court would have determined the seat. The tribunal’s act, therefore, could be much better explained in terms of Section 20(3) of the Arbitration and Conciliation Act 1996 i.e., it merely chose a venue for conducting the proceedings.
Therefore, the principle laid down in BGS does not apply properly to the facts of BGS itself. In Arif as well, the court can be evidently seen to be grappling with the internal inconsistencies of BGS. For instance, the first condition of the three-condition test that court culled out from BGS is that the arbitration clause should designate or mention only one place. However, as discussed earlier, the fact situation in BGS involved an arbitration clause that had itself stipulated two places. Therefore, to say that BGS had laid down such a condition is illogical.
The Overlooked Binding Precedent: Union of India v. Hardy Exploration
One crucial judgement that the court seems to have missed is Hardy, which was a judgement authored by the same judge who had authored Shashoua II. Hardy was a 2018 judgement of the SC where the arbitration agreement stipulated the venue to be Kuala Lumpur, the substantive law of the contract to be Indian laws, and the law of the arbitration proceedings to be the UNCITRAL Model Law on International Commercial Arbitration (Model Law). Instead of presuming Kuala Lumpur to be the seat as well, which is what the consequence would have been if the court had followed the Shashoua I principle, the court further narrowed the venue principle. It referred to Article 20 of the Model Law and reasoned that it recognised the possibility of the tribunal determining the place of arbitration in case of a seatless arbitration clause. In this case, since the arbitral tribunal, which met in Kuala Lumpur, failed to make a positive determination as to the seat of the arbitration, the court observed that Kuala Lumpur was not the seat. Let us apply this approach to BGS where the law governing arbitration was the Arbitration and Conciliation Act 1996 whose Section 20 is based on Article 20 of the Model Law. Therefore, under the Hardy approach, the fact that the arbitral tribunal met in Delhi all three times would not have been sufficient to treat Delhi as the seat as well. It would have required the tribunal to make a positive determination to that effect. As a three-judge bench decision, Hardy was binding on the coequal BGS court.
Interestingly, the court in Arif did not discuss the principle laid down in Hardy. Although the court in BGS had held Hardy to be contrary to the judgement of the 5-judge bench in Bharat Aluminium Co v. Kaiser Aluminium Technical (BALCO), it does not make Hardy bad law since both Hardy as well as BGS were judgements by a 3-Judge bench. In Central Dawoodi Bohra v. State Of Maharashtra, a constitution bench of the SC had observed that “the law laid down by this Court in a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or coequal strength.” Hardy, therefore, was a binding precedent for the court in Arif as Arif was also delivered by a 3-judge bench. This ignorance of Hardy opens the judgement to the criticism that it is per incuriam which, according to the SC in Government of Andhra Pradesh and Another v. B Satyanarayana Rao, is a rule that “can be applied where a court omits to consider a binding precedent of the same court or the superior court rendered on the same issue.” Therefore, the pronunciation of Hardy as bad law in BGS did not mean that Hardy lost its precedential value. In this case, therefore, in ignoring the judgement in Hardy, the court has delivered a verdict that is arguably per incuriam.
Moreover, subsequent judgements of the SC have also departed from the BGS approach. For instance, in Mankastu Impex Private Limited v. Airvisual Limited (Mankatsu), the arbitration clause stipulated the place of arbitration to be Hong Kong and the governing laws to be Indian. It also stated that the “courts at New Delhi shall have the jurisdiction.” In Arif, the court understood Mankatsu to be applying the BGS principle. However, as argued elsewhere, the three-judge bench in Mankatsu clearly departed from BGS as here even though the SC recognised Hong Kong as the venue, it did not treat it as the seat merely on this basis. It was persuaded by the wordings of the arbitration clause which stated that the arbitration shall be resolved at Hong Kong as well. Therefore, the court looked at additional factors to infer parties’ intent instead of simply presuming the venue to be the seat. Moreover, despite the parties citing BGS, the court only referred to BGS to state that it would not comment on its correctness. Had the court agreed with BGS, it would not have hesitated in agreeing with it or in stating that the judgement was sound.
Conclusion
Since different approaches have been followed by benches of equal strength in answering a question of law, it is important that a bigger bench of the SC considers this question. In answering this, the SC should not end up conflating venue with seat. This is so because a choice of venue only signifies the place which parties considered to be convenient for conducting the arbitration. On the other hand, the most important aspect in choosing a seat is the legal framework of the place. Since the considerations in choosing the venue and seat are inherently so different, a choice of the former should not be presumed to be a choice of the latter as well.
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