Venue = Seat? Indian Supreme Court's Dismal Stirring of Settled Precedents
[Achyutha GM is a student at Gujarat National Law University.]
On 25 July 2018, a big blow was given by the Supreme Court of India (Supreme Court) in Brahmani River Pellets v. Kamachi Industries (Brahmani River) to settled precedents clarifying the distinction between seat and venue of arbitration. The court equated the choice of a venue with the seat of arbitration conferring exclusive jurisdiction to the respective High Court. This post seeks to critique the decision in light of previous judgments of the Supreme Court and current developments in the field of arbitration law.
An agreement was executed between Brahmani River Pellets Limited (Appellant) and Kamachi Industries Limited (Respondent) for the sale of 40,000 WMT of iron ore pellets, and payment was to be made in Bhuvaneshwar. The goods were to be picked up at a port in Orissa and the destination was in Chennai. The Appellant refused to supply the said goods in light of disputes regarding price terms. The Respondent claimed for damages citing its difficult procurement of the pellets at higher rates. The Appellant refused any liability claiming that the contract was modified later and that the Respondent breached the terms of the agreement. The arbitration clause provided for the venue to be Bhuvaneshwar.
Due to a lack of any consensus on the appointment of an arbitrator, the Respondent filed an application under Section 11(6) of the Arbitration and Conciliation Act 1996 (Act) before the Madras High Court for the same. The Appellant contended that only Orissa High Court possessed jurisdiction over the matter based on the exclusive arbitration agreement drafted in the instant case. The Madras High Court appointed an arbitrator and held that in the absence of an express exclusion of jurisdiction of other courts, both the High Courts would possess jurisdiction.
Contentions of the parties
The Appellant argued that where the parties have agreed on a place/venue of arbitration, it amounts to a juridical seat. Reliance was placed on this court’s decisions in Indus Mobile and Hardy Corporation which held that in a domestic arbitration, where a seat has been agreed upon by the parties, it would amount to exclusive jurisdiction of the court of the seat.
On the contrary, the Respondent argued that since the cause of action has arisen in both the places, both the High Courts possessed jurisdiction over the matter. Support was drawn from the court’s decision in Bharat Aluminium Co., wherein it held that a mere mention of ‘venue’ does not confer exclusive jurisdiction to a particular court. There must exist concomitant circumstances supporting the stance including use of words such as ‘alone’, ‘exclusive’ etc.
The court’s decision
The court considered many precedents on the issue and ultimately misapplied the law. The court relied on Swastik Gases wherein it was held that not using the words ‘alone’, ‘exclusive’ etc. does not make any material difference. Further, relying on the maxim unius est exclusio alterius, the court held that parties’ agreement to conduct arbitration in Kolkata granted exclusive jurisdiction to the Calcutta High Court. The court in Brahmani River gave undue weightage to this rationale and held that the parties’ agreement of having Bhuvaneshwar as the venue was their choice of seat of arbitration. In doing so, the court ignored that the contract expressly conferred jurisdiction to the Orissa High Court and that the Madras High Court erred in assuming jurisdiction in the matter.
In a nutshell, the Supreme Court in the present case equated the choice of a venue with the seat of arbitration. This can have wide unfavourable implications on arbitrations seated at a particular place having venues at different places. Blatantly disregarding earlier decisions, this court is likely to open a barrage of issues previously settled.
Previously settled test for determining the seat of arbitration
A well-defined distinction has been laid down by the Supreme Court over the course of various judicial pronouncements regarding the concept of seat and venue. The law of the seat has significant ramifications in arbitration proceedings as it governs the arbitrability, selection of arbitrators, interim and provisional measures, supervisory jurisdiction of courts over the matter, etc. It determines the law applicable to the arbitral process. Hence, it becomes relevant to analyse the standard used for determining the seat of arbitration.
The court in Indus Mobile rightly interpreted the meaning of Section 20 of the Act in the context of the term ‘place’. It was held that the expression ‘place of arbitration’ in Section 20(1) and (2) is a reference to the juridical seat of arbitration whereas the term ‘place’ in Section 20(3) is a reference to the venue of arbitration which includes place of hearing, expert consultation, etc. It was clarified that an exclusive jurisdiction clause of a court could be inferred only from a selection of seat and not that of a venue.
In Hardy Exploration, the contract provided for a venue of Kuala Lumpur, Malaysia. The Supreme Court held that in the absence of any concomitant factors upon the choice of a venue, the determination of the venue as seat is not possible. It noted that a determination of seat would necessarily require a positive act or omission to support such a choice excluding the application of Part I of the Act. In the absence of additional factors, the court found the seat of arbitration to be India.
To substantiate this claim, there are two more cases which offer an insight. In Harmony Innovation, the court came to the conclusion that London would be the seat based on additional factors such as the arbitrator’s appointment being from the London Arbitration Association and the governing law of the contract being English Law. Further, in Eitzen Bulk A/S, the court considered that the parties wanted to exclude the application of Part I of the Act by providing in the arbitration clause that the arbitration shall be settled in London and by choosing the application of English law for the arbitration.
The Supreme Court came up with the test of closest connection to determine the seat of arbitration in Enercon v. Enercon. The concerned arbitration agreement provided for the application of the Act and London as the venue. The court outrightly disregarded the venue for such determination. It held that, in the absence of factors connecting the dispute to London and in the presence of factors linking it to India, the only fitting inference would be that of parties’ choice of India as the seat of arbitration.
What went wrong with the decision
Factors such as the choice-of-law clause, the market terms and the place of performance have often been used to connect a dispute to a jurisdiction. The means do not justify the ends in the present decision. The court could have used a more justifiable method by connecting the dispute to Orissa – the port of arrival was in Orissa and the payment by letter of credit was made in Orissa. The court could have relied on the closest connection test to come to this conclusion. Instead, in the absence of any other supporting factors, the court held the choice of a venue to be an exclusive jurisdiction clause.
Although some of the earlier precedents discussed relate to international disputes, the test applies while determining the seat at a domestic level. This is due to the idiosyncrasies of various states and the difference in the rules and procedures applicable to the courts in each state in India. There might be certain factors conducive to the parties’ contractual relationship leading to the determination of the seat. Therefore, it is important to identify it using this test to truly effectuate parties’ intention.
The unsettling decision of the court becomes problematic broadly in two situations. One, when the venue of arbitration changes from one place to another within or outside India. It is often in arbitral proceedings that the venue is changed due to factors such as convenience, resources, experts, etc. Two, when a foreign seated arbitration has venues in India. Equating the venue with the seat of arbitration would imply an exclusive conferment of jurisdiction to the courts of the venue. Resultantly, the domestic courts of India would assume jurisdiction and unnecessarily interfere with the arbitration proceedings under Part I of the Act.
There is concurrence among authorities that arbitration proceedings can be conducted and concluded without having to visit the geographical location of the seat. It is clearly established in the Indian arbitration law that the venue refers to the physical location while the seat refers to the juridical home, i.e. the laws applicable to the arbitral process. The choice of a venue has to be corroborated by additional factors to be considered as the seat of arbitration. Hence, the intrinsic connection declared between the seat and the venue by the court in this case becomes artificial and illogical. The damage done to arbitration jurisprudence in Brahmani River stands dismissive of settled legal principles and the decision is wanting of a reconsideration.