MORATORIUM UNDER SECTION 14 OF IBC, 2016: PERSONAL GUARANTOR’S CONUNDRUMNovember 14, 2018
POLICY ANALYSIS OF ‘BETI PADHAO, BETI BACHAO SCHEME’November 21, 2018
The Supreme Court of India in Union of India v. Hardy Exploration and Production (Civil Appeal No. 4628/2018) (Hardy II) has dispelled the ambiguity surrounding the determination of the ‘seat’ of arbitration in the absence of parties designating the same, deciding that the ‘place’ or ‘venue’ of arbitration in an arbitration clause can only mean to be ‘seat’ when there is a “prescription for something else”.
In or around 1997, Hardy Exploration and Production (India) (Hardy) contracted with the Indian Government to provide access to Hardy for exploration and extraction of hydrocarbons from the south-eastern coast of India. The arbitration provision in the contract was as follows:
Governing law of the Contract or lex contractus: India
Venue of the Arbitration: Kuala Lumpur
Curial Law or lex fori: UNCITRAL Model Law on International Commercial Arbitration of 1985
Therefore, the contract was silent on the law governing the arbitration agreement, i.e. the lex arbitri and the seat of the arbitration agreement. Arbitration was commenced by Hardy upon disputes arising between the parties and an award (Arbitral Award) was issued in favour of Hardy granting specific performance of the contract and interest on its investment in India.
The Indian Government thereafter filed a challenge against the Arbitral Award under Section 34 of the Arbitration and Conciliation Act, 1996 (the Act) before the Delhi High Court (OMP No. 623/2013) which was subsequently dismissed by an order dated July 2015. The learned Single Judge of the Delhi High Court held that Kuala Lumpur was not merely the ‘venue’ but also the ‘seat’ and since the award was made at Kuala Lumpur, it had to be presumed that the venue was also the seat of the arbitration. This order of the Single Judge upon being dismissed by a Division Bench of the Delhi High Court [FAO (OS) 59/2016] was thus sought to be appealed by a Special Leave Petition before the Supreme Court, which was subsequently referred to a larger bench.
The only issue that arose for consideration before the Three Judge Bench of the Supreme Court was that whether the Indian Courts had the jurisdiction to entertain the Section 34 application filed by the Government against the Arbitral Award in favour of Hardy.
For ease of reference, the findings of the Court have been segregated into three sections:
Preliminary Findings: At the outset, the Court dealt with the submissions advanced before the Division Bench of the Supreme Court in reference to the decision in Sumitomo Heavy Industries v. ONGC [(1998) 1 SCC 305] (Sumitomo) not being examined in Bharat Aluminium Company & Co. v. Kaiser Aluminium Technical (BALCO) [(2012) 9 SCC 552]. It is pertinent to note that the decision in Sumitomo was delivered in the backdrop of the Arbitration Act of 1940 (1940 Act) and the Foreign Awards (Recognition and Enforcement) Act, 1961 (1961 Act). It was held therein that owing to the operation of Section 9(b) of the 1961 Act, the Act cannot be made applicable to any award arising out of an arbitration agreement governed by the law of India. Therefore, by implication, the Sumitomo ratio precluded the application of the 1961 Act to any arbitration agreement where the lex arbitri was Indian law.
Noting that the 1961 Act was since repealed and the 1940 Act amended, the Court held that Sumitomo has no application for determining jurisdiction of the arbitral seat as per the BALCO principle. Reference was also made to the principle of ‘implied exclusion’ as stated in Bhatia International v. Bulk Trading [(2002) 4 SCC 105] (Bhatia). The issue in Bhatia revolved around the jurisdiction of Indian Courts in a Section 9 application for interim relief. Espousing the principle of implied exclusion, the Court held that in an international commercial arbitration held out of India, provisions of Part I of the Act (dealing with domestic arbitrations) would apply “unless the parties by agreement, express or implied, exclude all or any of its provisions. In that case the laws or rules chosen by the parties would prevail”. Therefore, even though Bhatia erroneously held that Part I would apply even in cases of international commercial arbitration (which was subsequently rectified in BALCO), it introduced the concept of excluding Part I in foreign seated arbitrations, where the parties have, through implication opted for specific laws and rules to govern their arbitration agreement.
Jurisprudential Analysis: Referring to the principles enunciated in a catena of cases, the Court observed the following:
In Reliance Industries v. Union of India [(2014) 7 SCC 603] (Reliance I), once the parties consented to the seat of the Arbitration being at London and the lex arbitri to be English Law, the provisions of Part I of the Act were necessarily excluded.
In Union of India v. Reliance Industries [(2015) 10 SCC 213] (Reliance II), it was observed that even though the lex arbitri was not specified in the Contract between the parties, taking a holistic view of the agreement and conduct of the parties, Part I of the Act was necessarily excluded and London was designated as the seat of arbitration. The Bhatia case was relied upon to observe that Part I of the Act would not apply if it has been excluded either expressly or by necessary implication. “Part I is excluded by necessary implication if it is found on the facts of the case that either the juridical seat of arbitration is outside India or the law governing the arbitration agreement is a law other than Indian law”.
In Imax Corporation v. E-City [(2017) 5 SCC 331], the lex fori of the agreement was the ICC Rules of Arbitration and the place of the arbitration was left to be chosen by the ICC by mutual consent of the parties. The ICC chose London as the seat of arbitration and the awards were delivered at the place of arbitration. and thus the Court held that this was a clear case of the exclusion of Part I of the Act.
Finally, referring to Roger Shahshoua v. Mukesh Sharma [(2017) 14 SCC 722], where the lex contractus was Indian Law and the lex fori were the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, the Court noted that although the distinction between ‘venue’ and ‘seat’ remains, but when there is a prescription for venue and something else (the supranational ICC rules in this instance), it would be appropriate to determine the venue of the arbitration as its seat.
Upon a conspective reading of the judgments relied upon, the Court imported the principle of holistic interpretation and held that when the venue of the arbitration is appended with something else, such as a supranational body of rules for the conduct of arbitration, the place and/or venue of the arbitration qualifies as the seat of the arbitration.
Ruling: The arbitration clause in the present dispute provided for the lex contractus and the lex fori. The venue of the arbitration proceedings was Kuala Lumpur while the lex arbitri was not specified. It is under these circumstances that the Government argued that since the seat was not expressly defined, the reference to venue in the arbitration could not confer jurisdiction on Kuala Lumpur as the seat of the arbitration. Relying on Imax, the Court held that where the seat of arbitration was not expressly defined but the parties consent to the arbitration being conducted under specific institutional rules (such as the ICC Rules of Arbitration in Imax), it must be held that upon the decision of the institution to hold the arbitration in a particular place or venue, the seat of the arbitration shall by implication be accorded to the place or venue so decided.
In the present dispute, the place of the arbitration had to be agreed upon by the parties but was not. Upon failure, the Arbitral Tribunal was vested with the power to determine the place of the arbitration as per the UNCITRAL Model Law on International Commercial Arbitration of 1985. However, the Court in its ruling observed that there has been no ‘determination’ made by the Tribunal in reference to the seat of the arbitration. Merely holding arbitration meetings in Kuala Lumpur and signing the award does not amount to a determination of the ‘seat’ of the arbitration. The meetings held at the venue of the arbitration ipso jure does not accord Kuala Lumpur as the seat of the arbitration. The order passed by the Delhi High Court was resultantly set aside.
At the outset, it would be prudent to understand that by setting aside the Judgment of the Delhi High Court, the Apex Court has not conclusively determined that the ‘place’ or ‘venue’ of arbitration can never be implied to be read as the ‘seat’ of the arbitration. The ratio of this Judgment therein needs to be exclusively read in the unique facts and circumstances of this case. The Court has already noted in this Judgment that the terms ‘place’ and ‘seat’ are interchangeably used. In paragraph 33, the Court categorically observes that when a place is agreed upon, it gets the status of seat which means the juridical seat.
It would be apposite to reproduce the Court’s observations in para 33 of this Judgment:
“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 has to be satisfied so that the place can become equivalent to seat”.
Therefore, the Court has effectively removed the shadow of doubt over the concepts of ‘seat’ and ‘venue’ of the arbitration which has been the subject of extensive debate and interpretation before our Courts. By deciding that venue or place is to mean the seat of the arbitration unless there are prescriptive conditions attached to the venue, mere mention of the venue or place without something else cannot be evidence of the parties excluding Part I of the Act by implication. By defining when the ‘venue’ becomes the ‘seat’ (albeit in ambiguous terms), the observations of this Court can be incorporated in the drafting of arbitration clauses in the near future between parties to prevent a reference to the Courts for determining the appropriate forum for initiating proceedings. The tests of holistic interpretation and commercial interest can serve as effective guidelines for disputing parties to ensure that both the sides are ad idem in reference to the distinction between a place of arbitration and the seat of arbitration.
ABOUT THE AUTHOR:
Soham Banerjee is a Final Year student at Government Law College, Mumbai with a keen interest in Dispute Resolution and Arbitration. He extends his gratitude to Salona Mittal, Associate in the Disputes Team of Trilegal, Mumbai for his invaluable assistance in the drafting of this opinion