Seat versus Venue: A Damsel Distressing Domestic Arbitrations

Introduction

Arbitral proceedings are governed by three kinds of laws, (i) proper law of contract which governs the substance of the dispute; (ii) law of arbitration agreement which governs the obligation to submit disputes to arbitration; and (iii) lex arbitri i.e. the curial law which is the procedural law governing the conduct of arbitration. “Seat of arbitration” determines the curial law along with the court which would exercise supervisory jurisdiction over the arbitral proceedings. Seat establishes a connection with the legal system of a country which can be referred to as its “home”. It does not necessarily imply a geographical location which is typically referred to as the “venue” of arbitration.

International Commercial Arbitration (ICA), as defined under Section 2(1)(f) of the Arbitration and Conciliation Act, 1996 (the Act) is where at least one of the parties, belongs to or is a habitual resident of a foreign country. In ICAs the parties can define three different laws for all three categories stated above as per their convenience.

All arbitrations which are not ICA are considered to be domestic arbitrations. In such arbitrations, the laws of India govern all three categories stated above. However, the Supreme Court has recently carved out a sub-category in domestic arbitrations through PASL Wind Solutions (P) Ltd. v. GE Power Conversion India (P) Ltd.¹, allowing Indian parties to choose a foreign seat of arbitration. Such awards are considered as foreign awards enforceable under Section 48 of the Act. This article is not concerned with this sub-category.

The seat, as stated above, determines the lex arbitri providing exclusive jurisdiction to the courts at the seat. In ICA having a neutral seat i.e. a place where no cause of action arose, becomes an obvious choice of the parties to avoid any objection regarding impartiality of the arbitrator/Judges. In ICA, the “seat” unlike the “venue”,has major legal implications but is geographically irrelevant.

In the view of the author, no such purpose is served by introducing the concept of “neutral seat” in domestic arbitrations, where the Act invariably serves as the curial law irrespective of its location, and the Indian law serves as the substantive law as per Section 28 of the Act. All the courts having jurisdiction in classical sense have the exact same powers, or in some cases even more powers than the courts at a neutral location. In other words, in domestic arbitrations, “seat” is only a geographic consideration relevant only for the convenience of parties and has no legal relevance.

Part I of the Act, which is applicable to domestic arbitrations, does not mention the terms “seat” or “venue”. Section 20 of the Act rightly defines “place of arbitration” and uses the term interchangeably to mean either seat or venue. However, the concept of a neutral seat was imported to the arena of domestic arbitration recently through the judgment in Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd.². This has only led to increasing confusion over an inconsequential academic debate with respect to determination of the seat and the Court with supervisory jurisdiction. Further, poorly drafted agreements inevitably add to this turmoil. Over the past two decades, the courts have given various principles to determine the seat, however, multiple conflicting opinions have only added to the pre-existing uncertainty.

Determination of seat in ICA

The English Courts in Roger Shashoua v. Mukesh Sharma³, devised a test to determine the seat. Generally referred to the Shashoua test, it provides that wherever there is an express designation of a “venue”, and no designation of any alternative place as the “seat”, and no other significant contrary indicia, the inexorable conclusion is that the venue is in fact the juridical seat of the arbitral proceeding.

Thereafter, the Supreme Court in BALCO v. Kaiser Aluminium Technical Services Inc.⁴ relied on Shashoua test and clarified that “seat” is the situs of arbitration. It determines the curial law and the Court which would exercise supervisory jurisdiction over the arbitral proceedings. On the other hand, “venue” merely represents the geographical place where arbitration proceedings are conducted. When an agreement expressly designates a “venue” and does not refer to a “seat”, then, in the absence of a significant contrary indicia, the “venue” would be considered as the “seat” of arbitration. Further, both the court within the jurisdiction of which the seat is located and the court in whose jurisdiction the cause of action arose would have concurrent jurisdiction to oversee the arbitral proceedings.

In Enercon (India) Ltd. v. Enercon GmbH⁵, the arbitration clause mentioned London as the venue of arbitration. However, all the three laws applicable to the arbitration proceedings were stated to be Indian laws. This implied that the seat of arbitration must be India. The Bombay High Court held that both Indian and English courts would have concurrent jurisdiction. However, the Supreme Court set aside the judgment of the High Court and held that only Indian courts will have jurisdiction over the arbitration. An agreement as to the seat is analogous to an exclusive jurisdiction clause. It determines the courts that will have exclusive jurisdiction to oversee the arbitration proceedings. Moreover, the seat normally carries with it the choice of that country’s arbitration/curial law.

In Reliance Industries Ltd. v. Union of India⁶ although the agreement expressly provided that London would be the seat of arbitration, the Delhi High Court entertained Section 34 application on the ground that the proper law of contract was law of India. The Supreme Court, while setting aside the impugned order reiterated that seat is analogous to an exclusive jurisdiction clause. Once the parties had consciously agreed that the juridical seat of arbitration would be London and that the arbitration agreement would be governed by the laws of England, it was no longer open to them to contend that Part I of the Act would also be applicable.

Thereafter, Union of India v. Hardy Exploration & Production (India) Inc.⁷, holds that, when the agreement specifies venue but not the “seat”, the arbitration clause must be read in a holistic manner to determine the seat. The place will not automatically become the seat. When only the term “place” is stated or mentioned and no other condition is postulated, it is equivalent to “seat” and that finalises the facet of jurisdiction. But if a condition precedent is attached to the term “place”, the said condition must be satisfied to make the place equivalent to seat.

Determination of seat in domestic arbitrations

The concept of “seat” and “venue” was imported to domestic arbitrations by a two-Judge Bench of the Supreme Court in Indus Mobile case⁸. In this case, the registered office of the respondent was in Amritsar and goods were supplied from Delhi to Chennai. However, the arbitration clause stated that the arbitration shall be conducted at Mumbai. The Court held that a neutral venue can be chosen as a seat. Further, “seat” is akin to exclusive jurisdiction clause and the court having jurisdiction over the seat will have exclusive jurisdiction for the purposes of arbitral proceedings.

This was reiterated in Brahmani River Pellets Ltd. v. Kamachi Industries Ltd.⁹, wherein, the venue of arbitration was Bhubaneswar and cause of action arose in Bhubaneswar and Chennai. Madras High Court upheld its jurisdiction on the ground that mere designation of “seat” by parties would not oust the jurisdiction of other courts. Further, in the absence of any express clause excluding jurisdiction of other courts, both Madras and Orissa High Court would have jurisdiction. However, the Supreme Court relied on Indus Mobile case¹⁰ and held that since parties agreed to having Bhubaneswar as the venue of the arbitration, the intention of the parties was to exclude all other courts. The non-use of the words like “exclusive jurisdiction”, “only”, “exclusive”, “alone” is not decisive and does not make any material difference.

This position was reiterated in Hindustan Construction Co. Ltd. v. NHPC Ltd.¹¹, wherein the seat of arbitration as per the contract was New Delhi but the contract was executed in Faridabad and part cause of action arose there. Further, the first application pertaining to the arbitration proceedings was filed at Faridabad. The issue was whether Section 42 would be attracted and courts at Faridabad or Delhi would have exclusive jurisdiction over further applications. The Supreme Court held that once the seat of arbitration is designated, such clause becomes the exclusive jurisdiction clause as a result of which only the courts where the seat is located would have jurisdiction to the exclusion of all other courts. Therefore, even if an application was first made to the Faridabad Court, that application was made to a court without jurisdiction.

Rift in the position

The issue was again taken up by a three-Judge Bench of the Supreme Court in BGS SGS Soma JV v. NHPC Ltd.¹² In this case, the Court partially upheld the findings in BALCO case¹³. It reiterated that when a place of arbitration is designated as being the “venue” of arbitration proceedings, the expression “arbitration proceedings” would make it clear that the “venue” is really the “seat”, as this expression means the entire arbitration proceedings, including the making of an award, unless there is a significant contrary indicium. However, the Court expressly overruled the decision regarding concurrent jurisdiction of courts in BALCO case¹⁴ and held that once the parties choose a “seat”, it would amount to an exclusive jurisdiction clause. The jurisdiction of all other courts would be ousted irrespective of where the cause of action arose.

Not much later, in Mankastu Impex (P) Ltd. v. Airvisual Ltd.¹⁵ a Division Bench of the Supreme Court revisited the position in BGS Soma case¹⁶. In this case, the agreement was to be governed by the laws of India, the courts at New Delhi had jurisdiction but the dispute was to be referred to and finally resolved by arbitration administered in Hong Kong; the place of arbitration shall be Hong Kong. The Court while deciding whether the seat was New Delhi or Hong Kong upheld the principle of exclusive jurisdiction of the courts governing the seat. However, relying on Hardy Explorations case¹⁷, it held that mere expression of place of arbitration would not entail that the parties intended it to be the seat. The intention of the parties has to be determined from their conduct and other clauses of the agreement. Therefore, Hong Kong was held to be the seat of arbitration as the parties used the terms “arbitration administered in Hong Kong”.

Thus, BGS Soma case¹⁸ and Mankastu Impex case¹⁹ propounded polar opposite criteria to determine when can venue be considered as the seat of arbitration. On one hand Mankastu Impex case²⁰ provided that the venue cannot be regarded as seat until and unless other provisions of the contract positively point towards that conclusion. Whereas BGS Soma case²¹ provided that the venue will be considered as the seat unless there is a significant contrary indicium. However, BGS Soma case²² propounded the law in case of domestic arbitrations and Mankastu Impex case²³ was in the context of an ICA.

However, on 24-03-2022, a two-Judge Bench of the Supreme Court in Ravi Ranjan Developers (P) Ltd. v. Aditya Kumar Chatterjee²⁴ revised the entire position again.

In this case, the agreement was executed and performed at Muzaffarpur. It stipulated that the sitting of the Arbitral Tribunal shall be at Kolkata. There was no reference to any other place in any other clause. The Court held that since no cause of action arose in Kolkata, it cannot be said to be the “seat”. Parties cannot confer jurisdiction on a court which inherently lacked jurisdiction. Hence, Kolkata was held to be mere “venue” for holding the sittings of Arbitral Tribunal.

Although, the Court did not expressly overrule any of these abovementioned judgments, it arrived at much more practical findings regarding domestic arbitrations, notwithstanding they were beyond its jurisdiction and diametrically opposite to the findings in previous cases. The judgment in Ravi Ranjan Developers case²⁵ has since been distinguished by the Delhi High Court in various cases while determining the seat of arbitration. Recently, an Expert Committee headed by Dr T.K. Viswanathan has suggested reforms in the Act vide its report dated 07-02-2024. Two of these recommendations pertain to the present debate. The first one is to replace the word “place” of arbitration by the term “seat”, everywhere in the Act except Section 20(3) which would be replaced by the term “venue”. Further, it also suggests a change to the definition of the term “court” in the Act to specifically allow parties in domestic arbitration to choose neutral seat and thereby grant exclusive jurisdiction to a court which inherently lacked jurisdiction. This could potentially create several practical problems in the enforcement of the award. Moreover, it suggests that in instances where seat is not defined in the contract for domestic arbitration, the court having the subject-matter jurisdiction of arbitration, shall have jurisdiction. However, these amendments will not do away with this academic debate but will definitely put it to a rest.

Conclusion

One of the essential features of ICAs is that parties are free to choose a neutral venue. Such neutral venue may not in the classical sense have jurisdiction. However, the same construct of choosing a neutral seat to avoid any bias of home court has no applicability in domestic arbitrations where the arbitrator in Delhi or Mumbai or any other city/State for that matter has to follow the Act invariably. Further, the process before the supervisory courts also remains unhinged by the choice of seat. Hence, strictly speaking, in domestic parlance, the concept of “seat” is merely a geographical construct. The only difference which a neutral (air quotes) seat entails is a different supervisory court which would anyways have the same powers and/or limitations as any other court where cause of action arose. In fact, for enforcement purposes, as held in Ravi Ranjan Developers case²⁶ it is practically more viable to choose a “seat” where the respondent resides or has assets, to avoid any complications arising out of Section 42 of the Act.