Supreme Court’s Ping Pong and the Need for a Conclusive Test to Determine the Arbitral Seat

July 11, 2020

[Anhad is a practising commercial lawyer based out of Chandigarh and Delhi, having graduated from National Law School of India University, Bangalore.]

 

The Supreme Court’s recent back and forth over the venue versus seat debate is reflective of the wide interpretative scope not only of ambiguously worded arbitration agreements, but also of hitherto settled arbitration law principles. It is perhaps also reflective of one of the reasons why parties may prefer arbitration over approaching courts to resolve their disputes.

 

Background

 

Over the past year and a half, three 3-judge benches (all different judges) of the Apex Court were called upon to determine the arbitral seat in cases where arbitration agreements referred only to one location, but did not expressly provide for the seat. Intriguingly, the court took different routes to ascertain the same in each case, placing reliance on distinct and seemingly contradictory principles in support of its decisions. What was common was the stated conformity with the landmark Constitution-bench decision in Bharat Aluminium Company Limited v. Kaiser Aluminium Technical Services (BALCO), which had recognised the significance of the arbitral seat as the centre of gravity of arbitration proceedings and as a determinative factor with respect to applicable laws, as against a mere venue for the conduct of one or more hearings.

 

In bringing Indian law in line with internationally recognised principles, the Constitution-bench in BALCO had approvingly referred to a catena of authorities, not least of which was Cooke J.’s dicta in Shashoua v. Sharma (Shashoua). In affirming the importance of the seat in arbitral proceedings, the Queen’s Bench had held in that case that where the parties’ agreement mentioned only one geographical place (combined with a supranational body of rules), in the absence of any significant contrary indicia, the same was to be taken to be the seat of arbitration. While BALCO was not directly concerned with a test for determining the seat, it came to be held by subsequent judgments (Enercon India and Roger Shashoua (India)) that its reliance on Shashoua was full and proper and that this ‘Shashoua principle’ for determining the seat of arbitration thereby stood approved by the Supreme Court since BALCO itself.

 

The Case for the Shashoua Principle

 

Given the critical role of the seat in international arbitrations, it does make intuitive sense that parties would much rather agree upon an arbitral seat than merely choose a venue for the proceedings, which may anyway be changed without any legal implications.  The view also finds support in Dicey, Morris and Collins on the Conflict of Laws (15th edn.), that a seat is sufficiently indicated by the place chosen by the parties, and that clear evidence to the contrary is required to not give effect to the same. Even commercial prudence would suggest that parties are more likely to specify that which is fixed and essential (i.e. the seat) than that which is flexible, legally inconsequential and not required to be explicitly stated (i.e. the venue).

 

[Notably, Singapore’s Court of Appeal in its recent decision in BNA v. BNB has reiterated and applied the same principles in determining that “arbitration in Shanghai” referred to Shanghai as the seat.]

 

Further, the first two sub-sections of Section 20 of the Arbitration and Conciliation Act 1996 (the provision is in pari materia with Article 20 of the Model Law) allow the parties to decide the ‘place of arbitration’, which has been held to refer to the seat (see BALCO and Indus Mobile v. Datawind).  On the other hand, in case of a mere venue, in terms of Section 20(3), no prior separate agreement or determination is required as such. Accordingly, even as per statutory provisions, bare logic would dictate that where the agreement specifies one place of arbitration, and no contrary determination is made by the tribunal, the parties must be taken to have agreed on the juridical seat and said place must be considered as such. However, it appears that the Supreme Court had other ideas.

 

The Court’s Approach

 

The question of jurisdiction of Indian courts came up before the Supreme Court in Union of India v. Hardy Exploration (Hardy), where Kuala Lumpur was the agreed ‘venue’ for the conduct of ‘arbitral proceedings’ which were to be governed in accordance with the Model Law. Indian law was stated to be the proper law of the contract. Interestingly, while the court did refer to Shashoua, it failed to apply its ratio in interpreting a fairly similar arbitration clause. In refusing to recognise Kuala Lumpur as the juridical seat, the court held that a mere reference to venue, in the absence of any other indicators, could not be construed as a reference to the arbitral seat. The court, having referred to a catena of decisions including BALCO and Enercon, also considered the effect of Section 20 in such cases, stating that it was incumbent upon the arbitral tribunal to arrive at a positive determination of the seat, since the parties had allegedly failed to do so in the contract. Interestingly, the Model Law Digest provides that in such situations (where neither the parties nor the tribunal have made a determination) the effective place of arbitration i.e., the location where the relevant proceedings take place, should be considered as the seat. Nevertheless, in the absence of an explicit determination of the seat by the arbitral tribunal and the apparent failure by the parties to do the same, the Supreme Court held that Kuala Lumpur could not be considered to be the seat and Indian courts could hence exercise jurisdiction (note that the court did not give a finding on where it actually considered the seat to have been). Accordingly, the court, in deciding Hardy, departed not only from the Shashoua principle as adopted by earlier decisions, but also from the seemingly settled understanding of Section 20 of the Act.

 

Subsequently, a few months later, the Supreme Court in BGS SGS Soma v. NHPC (BGS Soma) had the occasion to revisit the issue, albeit in the context of a domestic arbitration. After considering a catena of Indian and international authorities, the court in BGS Soma reiterated the acceptance and validity of the Shashoua principle in India. It also placed relevance on the phraseology of arbitration agreements to determine the parties’ intention in deciding upon the arbitral seat (for instance, a distinction was drawn between expressions such as “arbitration proceedings” as against “tribunal is to meet for hearing witnesses”). Further, in an attempt to bring Indian jurisprudence in line with established standards, the court went on to unequivocally state that for the said reasons, the decision in Hardy was not good law. Although it does appear that Hardy was per incuriam the BALCO decision (especially as interpreted by Enercon India and Roger Shashoua (India)), nevertheless, its explicit overruling in BGS Soma by a bench of the same strength raises questions about either’s precedential value. The court’s approach is evidently out of line with the well-established doctrine of binding precedent and Constitution-bench decisions in Chandra Prakash and Pranay Sethi, which have held that courts are bound by an earlier decision of a bench of co-ordinate strength, unless the matter is referred to a larger bench. Additionally, the fact that BGS Soma was decided in the context of a domestic arbitration also raises questions of the binding value of the decision in cases involving international commercial arbitration.

 

Unsurprisingly, parties arguing either side of the issue now sought to rely upon Hardy or BGS Soma respectively, with no clarity on which should prevail. The matter was raised before another 3-judge bench in Mankastu Impex v. Airvisual Limited (Mankastu), but the court, dealing with a case for appointment of an arbitrator, declined to address the apparent conflict. Nonetheless, it still needed to determine the arbitral seat in order to ascertain the applicable curial law in the case. The agreement inter alia provided for Indian proper law with New Delhi courts’ jurisdiction and “arbitration administered in Hong Kong”. While Hong Kong was accepted to have been the seat of arbitration selected by the parties, the decision was based solely on the wording of the arbitration clause (the phrase ‘administered in Hong Kong’ was taken to be a clear indicia of the seat). Interestingly, without referring to BGS Soma, the court held that the “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. (sic)” Arguably then, the Hardy line of reasoning seems to have been preferred by the court in Mankastu, but without having expressly rejected the ruling in BGS Soma. Consequently, there is still no clarity on what the position under Indian law is.

 

Conclusion

 

As India attempts to become a preferred destination for international arbitrations, such a welter of conflicting judicial rulings may not be ideal. Notwithstanding the appeal of the Shashoua principle and the decision in BGS Soma, it is hard to reconcile its lawful precedential value in light of the prior and subsequent decisions in Hardy and Mankastu respectively. Therefore, till the time a larger bench conclusively settles the issue, precisely worded arbitration agreements appear to be the only way to avoid this judicial quagmire.

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