Game of Seat: India’s tryst with the seat vs. venue debate continues

Introduction

The identification of the seat of arbitration is a vital aspect of any arbitration proceeding. The seat determines the applicable law governing the arbitration proceedings. The law of the seat also serves as the ultimate body of rules concerning the conduct of the proceedings and the role of Courts in supervising the arbitration.

In recent years, the specification of ‘seat’ or ‘place or ‘venue’ in arbitration agreements has been highly debated. While several judgments have been pronounced by the Supreme Court on this issue, it was hoped that with Justice Nariman’s articulation of the law in BGS SGS Soma JV v. NHPC Ltd.[1] the Supreme Court had moved towards the right approach. In BGS, the Supreme Court had held that the designation of a ‘place’ would amount to choosing a seat of arbitration following the ruling in Bharat Aluminium v. Kaiser[2]  (“BALCO”). The Court also held that the designation of a ‘venue’, combined with a supranational body of rules governing the arbitration without any significant contrary indicia, would strongly indicate that the ‘venue’ was, in fact, the seat of arbitration. However, the observations in BGS were directly contrary to a coordinate three Judge Bench’s decision in Union of India v. Hardy Exploration[3], and  thus, the position has remained unsettled.

The Supreme Court’s latest judgment in Mankatsu Impex Private Limited v. Airviual Limited (“Mankatsu Impex”), unfortunately, adds to the prevailing lack of clarity on the subject.

Brief Background

Mankatsu Impex was rendered in the context of a petition filed under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”).

On September 12, 2016, Mankastu Impex Private Limited (“MIPL“) and Airvisual Limited (“AVL“) entered into a Memorandum of Understanding (“MOU“) in terms of which MIPL would be the exclusive distributer of AVL’s air quality monitors products for a period of five years.

AVL was subsequently acquired by an entity namely, IQAir AG (“IQAir“). IQAir informed MIPL that it had acquired all the technology and the associated assets of AVL. Furthermore, IQAir informed MIPL that it would not assume any contracts or legal obligations of AVL, and would work on a case to case basis with resellers to negotiate new contracts. MIPL invoked the terms of the MOU and stated that MIPL held exclusive rights of sale of AirVisual products for five years within the territory of India. IQAir rejected this assertion, thus leading to a dispute.

On December 8, 2017, MIPL, invoked the arbitration clause enshrined in Clause 17 of the MOU and proposed the name of a sole arbitrator. Clause 17 set out as follows:

“17.1 This MoU is governed by the laws of India, without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction.

17.2 Any dispute, controversy, difference or claim arising out of or relating to this MoU, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered in Hong Kong.

The place of arbitration shall be Hong Kong.”

IQAir responded to the Notice of Arbitration wherein it stated that IQAir has not assumed any contractual obligations and that the terms of the MOU were not enforceable against them. AVL replied to the Notice of Arbitration and argued that Clause 17 of the MOU provided for an arbitration administered and seated in Hong Kong.

MIPL did not agree with AVL’s interpretation of Clause 17 and reiterated that the arbitration was seated in India. MIPL thereafter filed a petition under Section 11 of the Act before the Supreme Court for appointment of an arbitrator.

Judgment and Analysis

The Supreme Court began its analysis by noting the significance of the seat of arbitration. The Court observed that the seat determined the applicable law governing the arbitration proceedings and also delineated the scope of judicial review over the arbitration award.

The key question before the Court was whether Hong Kong or India would be the seat of arbitration as per Clause 17 of the MOU.

MIPL argued that parties had not designated any place as seat of arbitration. MIPL then relied on Clause 17.1 to contend that the arbitration ought to be governed under Part I of the Act as the parties had chosen Indian law as the law governing the agreement, which, according to MIPL, extended to the arbitration proceedings.

The Court observed that the words ‘place of arbitration shall be Hong Kong’ were insufficient to designate Hong Kong as the seat of arbitration. The Court then looked at Clause 17.2 which provided that “….any dispute, controversy, difference arising out of or relating to the MoU shall be referred to and finally resolved by arbitration administered in Hong Kong…..”. The Court concluded that the words in Clause 17.2 that “arbitration administered in Hong Kong” constituted indicia that the seat of arbitration was Hong Kong.

In sum therefore, the Court held that once the parties had chosen Hong Kong as the seat of arbitration, laws of Hong Kong would govern the arbitration. The Court held that Clause 17.1 was only restricted to the proper law of the contract and did not extend to the arbitration proceedings.

Having held that Part I of the Act did not apply to the arbitration proceedings, the Supreme Court dismissed the petition for appointment of arbitrator.

Analysis and conclusion

In terms of the facts before it, the Supreme Court’s ultimate conclusion in Mankatsu Impex cannot be faulted with. Unfortunately, the Court’s reasoning in reaching that conclusion could have better.

The Court expressly observed that the mere expression ‘place of arbitration’ could not be the basis to determine the seat and Courts should look at other clauses in the agreement and conduct of parties to determine the seat of arbitration. With respect, this appears contrary to the Supreme Court’s decision in BALCO, where a 5 Judge Bench had observed that Section 20 of the Act upheld the territoriality principle of arbitration and that ‘place of arbitration’ would ordinarily be regarded as the seat of arbitration. Indeed, the Act does not mention the word ‘seat’ at all- it provides for a ‘place of arbitration’.  The Court’s reasoning in Mankatsu Impex was also contrary to the observations in BGS, which went a step further than BALCO and had held that designation of a venue, along with a supranational body of rules, would also amount to designation of seat unless there were contrary indicia.

This latest development in the place v/s seat v/s venue debate reinforces the established advice while drafting and negotiating dispute resolution clauses – parties should opt for simplicity and certainty. Thus, expressly using the words ‘seat of arbitration’ would perhaps go some way in minimising any risk of Courts playing interpretative gymnastics with such clauses.

Authors:
Abhijnan Jha, Senior Associate
Abhishek Singh, Associate

Footnotes:
This judgment is dated March 5, 2020, in Arbitration Petition No. 32 of 2018.
[1] (2019) SCC Online SC 1585
[2] (2012) 9 SCC 552
[3] (2018) 7 SCC 334

Date: March 20, 2020