Supreme Court, in its recent decision (of February 14, 2014) in the case of Enercon India Ltd v Enercon GmBH & Anr, has inter alia held that the “seat” of the arbitration would be the country whose law is chosen as the law of arbitration by the parties and the courts of the seat of arbitration will have the sole jurisdiction to exercise supervisory powers over the arbitration process. It further held that the courts of the “venue” of arbitration will not have concurrent jurisdiction.
INTRODUCTION – CONCEPT AND SIGNIFICANCE OF “SEAT” OF ARBITRATION
In case of an international commercial arbitration2 , at several times, an issue arise as to what is the law governing the substance of the dispute between the parties, the law governing arbitration which includes the construction and validity of the arbitration agreement and the procedure of arbitration?
Proper law of contract
The law of a particular country or some other considerations agreed between the parties may govern the rights and obligations arising out of the parties’ substantive agreement. If a national law is selected, it is referred to as the governing or proper law of contract. The proper law is determined in accordance with the general principles of the conflict of laws, namely the law chosen by the parties, or in the absence of such choice, the law of the country with which the agreement is most closely connected as inferred from the intention of the parties to the contract depending upon surrounding factors.
Law governing arbitration & procedural law
The law governing the arbitration has importance because it determines the validity, effect and interpretation of the arbitration agreement and such law is relied upon by the arbitrator to determine the scope of his powers and the procedure to be followed by the arbitral tribunal (unless the parties have expressly agree submit themselves to an arbitral institution like and follow the procedure prescribed by such institution which is different from the law governing the arbitration – procedural law of arbitration).
Concept of “Seat” of arbitration and its significance
The “seat” of the arbitration determines the applicable law governing the arbitration including the procedural aspects. When the parties specify an applicable law for the arbitration agreement, that law governs the arbitration agreement including the procedural aspects of arbitration. However, if the parties have not specifically chosen the law governing the conduct and procedure of arbitration, expressly or by necessary implication, the conduct of the arbitration will be determined by the law of the place of the “seat” of arbitration. The regulation of conduct of arbitration and challenge to an award would have to be done by the courts of the country in which the “seat” of arbitration is located as such Court would be the supervisory court possessed with the power to annul the award.
The seat will also determine the extent to which the local court will involve itself in the arbitral process and the degree to which an arbitral award may be challenged and the extent to which judicial review is available to parties. Both factors will govern the extent to which an award is considered final.
The Supreme Court in its decision given in the case of Bharat Aluminuium Company Ltd v. Kaiser Aluminium Technical Service Inc. has held that the choice of another country as the seat of arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings. If the arbitration agreement is found or held to provide for a seat / place of arbitration outside India, then even if the contract specifies that the Indian Arbitration Act shall govern the arbitration proceedings, Indian courts cannot exercise supervisory jurisdiction over the arbitration or the award. It would only mean that the parties have contractually imported from the Indian Arbitration Act, those provisions which are concerned with the internal conduct of their arbitration and which are not inconsistent with the mandatory provisions of the English procedural law or curial law.
Difference between “seat” and “venue” of arbitration
The “seat” of arbitration may well be quite independent of the place or the “venue” where the hearings or other parts of the arbitral process occur or take place. The seat of arbitration it is of vital importance, for it is the courts of the seat that have the supervisory jurisdiction over the arbitral process. Identification of the seat of arbitration (as opposed to the location where hearings are to take place, which is often referred to as the venue of arbitration) is one of the most important features of an arbitration clause. The selection of the seat determines the law governing the arbitration procedure and often, more importantly, the process and rights relating to enforcement of the arbitration award.
It is not necessary for the seat of arbitration and the venue of the arbitration to be the same location (though often they are) and even when hearings take place during the course of the arbitration in several different countries, the chosen seat of arbitration will remain unaffected independent of the geographical place where the hearings take place.
There is distinction between the proper law of the underlying contract and of the arbitration agreement itself (which is a separable and separate agreement). If there is no express law of the arbitration agreement, the law most likely to be the law is the law of the seat of arbitration rather than the law of the underlying contract and the law of the seat is most likely to be the law of the venue chosen by the parties.
FACTS OF THE CASE
A dispute arose around the non-delivery of supplies – allegedly governed by an Intellectual Property Licence Agreement (“IPLA”) containing an arbitration clause. The relevant aspects of the arbitration clause in dispute were as under: (i). the governing law of the IPLA was Indian law; (ii). the venue of the arbitration was London; and (iii). the provisions of the Indian Arbitration Act were to apply. There were a series of parallel proceedings initiated both in India and in England seeking declarations on the validity of the arbitration clause and asking for anti-suit injunctions.
In one of the orders, the Bombay High Court concluded that though London was not the seat of arbitration, the English Courts would have concurrent jurisdiction since venue of arbitration was London.
Out of the various issues to be resolved by the Court, one of them was assuming that the seat of arbitration was India, whether the English Courts would have concurrent jurisdiction as the venue of arbitration is in London?
SUPREME COURT’S JUDGMENT
The Court held that the express mention in the arbitration clause that London was the “venue” of the arbitration could not lead to the inference that London was to be the “seat”. This was so in particular because although London was termed as the “venue”, the law governing the substantive contract, the law governing the arbitration agreement and the law governing the conduct of the arbitration were chosen to be Indian law and the closest and most real connection was with India. Once the seat was in India, Indian Courts would have exclusive supervisory jurisdiction and English Courts cannot have concurrent jurisdiction.
The Court observed that given the parties’ choice of Indian law particularly for the conduct of the arbitration, the parties were not likely to have intended to have fixed the seat of arbitration in London.
The Supreme Court also relied on its judgment given in the case of Bharat Aluminuium Company Ltd v. Kaiser Aluminium Technical Service Inc. (supra) to support its conclusion. It held that since the parties has specifically applied portions from Part I of the Indian Arbitration Act, which, in the context of the aforesaid case was only effective where the seat of arbitration was India, the parties must have intended for the seat to be in India.
An anti-suit injunction was therefore granted restraining the respondents from continuing English proceedings.
ANALYSIS AND COMMENTS
Although this judgment re-establishes the difference between “seat” and “venue” of the arbitration in deciding the law which would govern the arbitration and now the law is quite clear on this issue, in order to avoid any potential legal hurdles and contractual ambiguities, while drafting an arbitration clause in a particular contract, particularly in case of international commercial arbitration, utmost care is required to be taken and it is vital to keep the following points in mind: (a). The parties must have clarity on law governing the arbitration agreement and to state the same specifically in the contract; (b). Parties must specifically agree upon the seat of the arbitration clause and not to use any other words like “venue” or “place” interchangeably; (c). In the event the parties intend to have the arbitral hearings at locations other than the seat of arbitration, then specifically mention in the contract that the seat of arbitration and the governing law of arbitration will remain unaffected even if the hearings happen at various places. (d). If parties wish to adopt specific procedures for arbitration process or otherwise wish to follow the procedures of any specific institutions like SIAC etc, then specifically mention the same in the contract. (e.) The law governing arbitration and the procedural law of arbitration must preferably be the same.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.