Supreme Court: While deciding the instant petition filed under Section 11(6)(a) read with Section 11(12)(a) of the Arbitration and Conciliation Act, 1996, seeking a referral of the disputes that have arisen between the parties to arbitration and consequent appointment of an arbitrator by the Court; the 3-Judge Bench of Dr DY Chandrachud, CJ., JB Pardiwala* and Manoj Misra, JJ., held that more appropriate criterion for determining the seat of arbitration is that where in an arbitration agreement there is an express designation of a place of arbitration anchoring the arbitral proceedings to such place, and there being no other significant contrary indicia to show otherwise, such place would be the ‘seat’ of arbitration even if it is designated in the nomenclature of ‘venue’ in the arbitration agreement.
The Court further held that the moment ‘seat’ is determined, it would be akin to an exclusive jurisdiction clause whereby only the jurisdictional courts of that seat alone will have the jurisdiction to regulate the arbitral proceedings. The notional doctrine of concurrent jurisdiction has been expressly rejected and overruled by this Court in its subsequent decisions.
The Court further clarified that the ‘Closest Connection Test’ for determining the seat of arbitration by identifying the law with which the agreement to arbitrate has its closest and most real connection is no longer a viable criterion for determination of the seat or situs of arbitration in view of the Shashoua Principle. The seat of arbitration cannot be determined by formulaic and unpredictable application of choice of law rules based on abstract connecting factors to the underlying contract. Even if the law governing the contract has been expressly stipulated, it does not mean that the law governing the arbitration agreement and by extension the seat of arbitration will be the same as the lex contractus.
Background:
The petitioner entered into a Consumer Distributorship Agreement dated 09-11-2010 inter-alia for the distribution of handsets which are manufactured by the respondent and the same was executed by the parties in Kabul, Afghanistan. The Distributorship Agreement inter-alia stipulated that the said agreement will be governed by the laws of UAE and subject to the non-exclusive jurisdiction of the Dubai Courts. The said Distributorship Agreement also contains an arbitration clause which states that any dispute or difference pertaining to the said agreement or arising therefrom shall be resolved through arbitration alone, the venue of the arbitration shall be Dubai, UAE and that the arbitration shall be subject to the UAE Arbitration & Conciliation Rules. Pursuant to this Distributorship Agreement several transactions took place between the petitioner and the respondents for the purchase and distribution of mobile handsets.
Thereafter owing to an issue that began around 2012, arbitration clause was invoked between the parties. The petitioners nominated their arbitrators and called upon the respondents to accordingly appoint an arbitrator within 28-days. The petitioner further alluded that in the Distributorship Agreement more particularly Clause 27 the parties had not designated a specific court to the exclusion of all other courts to adjudicate the dispute, thus no exclusive jurisdiction had been conferred by the parties upon any particular court. It further stated that, as the cause of action had concurrently both in Afghanistan and India, the petitioner expressed its preference to resolve the dispute through arbitration administered under the jurisdiction of the courts in India.
Since no reply to the aforesaid notice of invocation of arbitration was elicited from either of the respondents, the instant petition came to be filed by the petitioner on 19-04-2023 before the Court for seeking appointment of an arbitrator under Section 11(6) of A&C Act.
Issues before the Court:
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Whether the instant petition under Section 11 of A&C Act is maintainable?
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Whether Part I of A&C Act is applicable to the arbitration clause contained in the Distributorship Agreement dated 09-11-2010?
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What is the seat of the arbitration in terms of the Distributorship Agreement dated 09-11-2010?
Court’s Assessment:
Delving into the history of arbitration law in India, the Court noted that prior to A&C Act three Acts governed the law of Arbitration in India — the Arbitration (Protocol and Convention) Act, 1937, which gave effect to the Geneva Convention, the Arbitration Act, 1940 for domestic arbitration and Foreign Awards (Recognition and Enforcement) Act, 1961 which gave effect to the New York Convention of 1958 and which dealt with challenges to awards made which were foreign awards. Thereafter, to consolidate and amend the law relating to domestic arbitration, international commercial arbitration, enforcement of foreign arbitral awards and to define the law relating to conciliation, and UNCITRAL Model Law and Rules, the A&C Act, 1996 was enacted.
There was no concept of “juridical seat” or “situs of arbitration” under the Act, 1940, rather the jurisdiction of courts was determined on the basis of the definition of “court” under Section 2(c) of the Act, 1940 which was defined as any civil court having jurisdiction to decide questions forming the subject-matter of the reference to arbitration if the same had been the subject matter of a suit. UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United Nations Commission on International Trade Law on 21-6-1985) the concept of ‘place of arbitration’ or ‘seat of arbitration’ was encompassed in Article 20. Similarly, Section 20 in the newly enacted A&C Act dealt with place of arbitration. However, legislature retained the definition of “court” from the Act, 1940 in Section 2(e) of the A&C Act 1996 with a minor tweak that instead of any civil court of the lowest grade competent to entertain the subject-matter, now only the principal civil court or the High Court of original jurisdiction which is competent to entertain the subject matter shall have jurisdiction.
“Due to this, the concept of juridical seat of the arbitral proceedings and its interrelationship with the jurisdiction of courts in respect of arbitral proceedings the Doctrine of Concurrent Jurisdiction emerged in the Indian Arbitration Regime”.
Notional Doctrine of Concurrent Jurisdiction and Applicability of Part I of the Arbitration & Conciliation Act, 1996– the Pre-BALCO Regime
The Court observed that NTPC v. Singer Company, (1992) 3 SCC 551, laid down the Doctrine of Concurrent jurisdiction in arbitration albeit in a limited sense inasmuch as the exercise of concurrent jurisdiction by two different but competent courts was limited only to matters of procedure and conduct of arbitration, and that the exercise of jurisdiction by courts at the seat or situs of arbitration over the arbitration agreement and its ancillaries was still regarded to be an exclusive jurisdiction.
Doctrine of Concurrent Jurisdiction in Arbitration was further expanded in Bhatia International v. Bulk Trading S.A, (2002) 4 SCC 105, wherein the Court examined the scope of Section 2(2) vis-a-vis Section 2(1)(e) & (f) of the Act, 1996 and held that Part I of the said Act applies to both (i) domestic arbitrations that take place in India and (ii) international commercial arbitrations that take place outside India. It held that unless the arbitration agreement states to the contrary, even if the seat or place of arbitration is outside India, the national courts in India will have concurrent jurisdiction in terms of Section 2(1)(e) along with the courts situated in the seat jurisdiction in terms of the arbitration agreement.
Venture Global Engineering v. Satyam Computer Services Ltd., (2008) 4 SCC 190, further expanded the doctrine of Concurrent Jurisdiction by holding Part I of the Act, 1996 is applicable to foreign awards as-well, and that even after the arbitration has concluded and the award has been passed, the courts in India will continue to have jurisdiction in terms of Section 2(e) of the said Act.
Post-BALCO Regime
The correctness of the decision in Bhatia International (supra) was challenged, and the same was ultimately referred to a larger bench, which then culminated into a 5-Judge Bench decision of the Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc, (2012) 9 SCC 552, wherein it was held that the conclusions reached in Bhatia International (supra) are neither supported by the text nor the context of the provisions of Section 1(2) and the proviso thereto or Section 2(2) of the A&C Act. It held that the applicability of Part I of the Act, 1996 is limited only to arbitrations that take place in India. However, to avoid the chaos that might ensue upon arbitrations agreements and proceedings thereto which are already underway pursuant to the ratio of Bhatia International (supra) and Venture Global (supra), this Court held that the law declared by it will only apply prospectively to all arbitration agreements that have been executed on or after 06-09-2012 i.e., the date of pronouncement.
The Court in Union of India v. Reliance Industries Ltd., (2015) 10 SCC 213, clarified the true import and effect of the decision in BALCO (supra). It held that although the doctrine of concurrent jurisdiction had been prospectively overruled in BALCO (supra) yet it would not mean or understood that all arbitration agreements prior to the date of pronouncement of BALCO (supra) will continue to be governed by Bhatia International (supra).
With the afore-stated legal position discussed, Pardiwala, J., explained that Part I of the Act and the provisions thereunder only applies where the arbitration takes place in India i.e., where either (I) the seat of arbitration is in India OR (II) the law governing the arbitration agreement is Indian law.
Criterion or Test for Determination of Seat of Arbitration: Conflict of ‘Venue’ versus ‘Seat’ of Arbitration
The Court explained that “closest connection test” is a legal principle used to determine which law governs an arbitration agreement when the parties have not expressly chosen a governing law or where there is a conflict between the choice of law by the parties. This test seeks to identify the jurisdiction that has the closest relationship with the subject-matter in question or simplicter the dispute between the parties by identifying which system of law has the closest and most real connection with the transaction or dispute between the parties. This test was first applied in NTPC (supra). Therein it was held that held that since the proper law governing the contract was expressly stipulated to be the laws in force in India and because the parties had specifically accepted the exclusive jurisdiction of the courts in Delhi in all matters arising under the contract it meant that the law governing the arbitration agreement would be same as the proper law governing the contract which contained the relevant arbitration clause.
“What has been conveyed in so many words by this Court in NTPC (supra) is that the law which governs the contract including the arbitration agreement, the courts of that system of law will have the supervisory jurisdiction over the arbitration”.
The Court observed that where the parties have expressly or impliedly provided the law governing the substantive contract, the arbitration agreement and the curial law, the law with which the agreement to arbitrate has its closest and most real connection would be the law of the seat of arbitration. Where the question before the courts involves ascertaining whether a particular place is the seat or venue of arbitration, the place with the closest connection with the law governing the arbitration agreement would be the seat of arbitration. “Interestingly, although this Court deliberately did not address whether seat is to be determined based on the closest connection with the law governing the arbitration agreement or the curial law since in the facts of the said case both the law governing the contract and the curial law were the same, yet this Court approvingly referred to two other decisions”.
Seat of Arbitration in the underlying Distributorship Agreement is in India?
Perusing the facts of the instant case, the Court noted that clause 26 of the Agreement explicitly stipulated that the curial law would be the UAE Arbitration and Conciliation rules and there being no other contrary indicia let alone a significant contrary indicia. The Court opined that the Dubai, UAE has not been designated merely as a venue but rather as the juridical seat of arbitration in terms of clause 26 of the Distributorship Agreement.
Furthermore, in light of the Shashoua Principle, the Court pointed out that since the parties herein have expressly chosen the curial law of arbitration to be the UAE Arbitration and Conciliation rules, there is no second opinion that the seat of arbitration in the underlying Distributorship Agreement is Dubai, UAE and not India.
Furthermore, the Court noted that since the Distributorship Agreement already designates Dubai, UAE as the seat of arbitration, the same would be akin to an exclusive jurisdiction clause with only the courts in Dubai, UAE having the jurisdiction over such arbitration.
Clause 27 of the Agreement in no manner can be construed to mean that there exists no ‘seat’ or ‘situs’ of arbitration and that parties merely because there is no court that has been conferred exclusive jurisdiction in respect of the said agreement.
“It is the seat of arbitration which determines which court will have exclusive jurisdiction and not vice-versa“.
Other Important Conclusions:
Based on the afore-stated assessment, the Court concluded that:
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Where the curial law of a particular place or supranational body of rules has been stipulated in an arbitration agreement or clause, such stipulation is a positive indicium that the place so designated is actually the ‘seat’, as more often than not the law governing the arbitration agreement and by extension the seat of the arbitration tends to coincide with the curial law.
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Merely because the parties have stipulated a venue without any express choice of a seat, the courts cannot sideline the specific choices made by the parties in the arbitration agreement by imputing these stipulations as inadvertence at the behest of the parties as regards the seat of arbitration. Deference has to be shown to each and every choice and stipulations made by the parties, after all the courts are only a conduit or means to arbitration, and the sum and substance of the arbitration is derived from the choices of the parties and their intentions contained in the arbitration agreement.
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The Court clarified that it does not mean that the Closest Connection Test has no application whatsoever, where there is no express or implied designation of a place of arbitration in the agreement either in the form of ‘venue’ or ‘curial law’, there the closest connection test may be more suitable for determining the seat of arbitration.
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Where two or more possible places that have been designated in the arbitration agreement either expressly or impliedly, equally appear to be the seat of arbitration, then in such cases the conflict may be resolved through recourse to the Doctrine of Forum Non Conveniens, and the seat be then determined based on which one of the possible places may be the most appropriate forum keeping in mind the nature of the agreement, the dispute at hand, the parties themselves and their intentions. The place most suited for the interests of all the parties and the ends of justice may be determined as the ‘seat’ of arbitration.
Hence the Court decided that instant petition is not maintainable.
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