Arbitration was introduced as an alternative dispute resolution method to the court. Fundamentally, the concept’s foundation lies in ‘party autonomy’, ‘confidentiality’, and ‘speedy and efficient resolution’. Owing to this flexible and convenient nature, it has gained popularity among multinational companies and businesses in this globalised world and has become one of the preferred modes of dispute resolution. It provides autonomy to the parties to choose the law applicable on the contractual agreement, place where they want to conduct proceedings, or court to approach when any dispute arises. Parties agree on the substantive law (i.e. law applicable to the dispute between the parties), lex arbitri or the curial law (i.e. the law which governs the procedure to be followed in the arbitration etc. In essence, ‘lex arbitri’ refers to the law of the seat of the arbitration. In light of the significance of the same, as elucidated below, the distinction between seat and venue gains significance.
SEAT V VENUE: WHAT IS IT ALL ABOUT?
In any arbitration, be it domestic or international; parties may approach a court for, inter alia, an interim relief, taking directions to seek evidence, for appointment of arbitrator et al. The seat, all in all, determines “the law that governs the procedural aspect of arbitration” and “the court that would exercise supervisory jurisdiction over the arbitral proceedings”. Venue, however, is a place/location chosen by parties for conducting arbitration hearings. It may vary based on the convenience of the parties. To clarify, let’s say two companies A and B, incorporated in England and India respectively, entered into an agreement to construct hotels in China. They chose New Delhi as the seat of arbitration and Russia as the venue of arbitration in their agreement. It means that the Indian Arbitration and Conciliation Act, 1996 (“A&C Act”) will be applicable to procedural matters and Indian courts would have the supervisory jurisdiction when any dispute arises between them. Russia, herein, is merely a place chosen by the parties for the purpose of arbitration proceedings as per the convenience of the parties.
The seat and venue of the arbitration play a significant role in legal framework of any arbitration proceedings. Even though the A&C Act does not define the term ‘seat’ and ‘venue’ but its essence is evident in the principles laid down in precedents by the Hon’ble Supreme Court and Hon’ble High Courts. Several disputes concerning ‘seat’ and ‘venue’ have arisen before the Indian Courts. The main reason behind this confusion lies within Section 20 of the A&C Act. The provision refers to ‘place’ which is misinterpreted with ‘seat’ and ‘venue’. The said misinterpretation happens due to the manner in which dispute resolution clauses are drafted by parties in their agreements. Vague clauses create ambiguity in relation to interpretation of designated seat of arbitration, as intended by the parties. For instance, ‘the Arbitration shall be administered in New Delhi and the ‘place’ of arbitration is New Delhi while the disputes arising shall decide before the Bombay High Court’. This is a clear example of ‘vaguely drafted clause’ where there is no clarity between ‘seat’ and ‘venue’. When the courts are faced with an interpretation of such clauses, they have to interpret the agreement and determine the ‘seat’ by interpreting the intention of parties through other clauses and language used in the contract. However, in the process of interpreting such vague clauses, the courts have created conflicting precedents and interchangeably used seat and venue creating additional confusion.
PRECEDENTS INTERPRETING SEAT AND VENUE IN AN ARBITRATION
In the Bharat Aluminum Co. v. Kaiser Aluminum Technical Services Inc. (“BALCO Case”), the Court first time differentiated between ‘seat’ and ‘venue’ in Section 20 of the A&C Act. The Court approved the Shashoua principle as per which once the parties have selected the ‘place’ as the venue of the arbitration without mentioning about the seat, it can be inferred that the ‘venue’ is the seat of the arbitration provided that there exists no indication to the contrary and a certain supranational body of rules has been selected for arbitration.
However, the controversy began in 2018, in the case of Union of India v. Hardy Exploration and Production Inc. (“Hardy Case”) The Court deviating from the landmark BALCO Case and Shashoua principle stated that the “venue” can be “seat” only if there exists some other concomitant factor supporting it as seat. Herein, the “Kuala Lumpur” was designated as venue but there exists no indication substantiating it as the “seat”. Thus, Kuala Lumpur was not declared as the seat of the arbitration.
In 2019, another three-judge bench BGS SGS Soma Jv v. NHPC Ltd. (“BGS Soma Case”), diverged from the Hardy Case and upheld the Shashoua principle. It held that the Hardy Case was not good law. The Hon’ble court held that when the particular place has been expressly specified as “venue” of arbitration, then the same should be considered as the “seat” of the arbitration subject to any contrary indication that venue is not the seat of the arbitration.
Later, in 2020, the Supreme Court faced a similar issue in Mankashu Impex Pvt. Ltd. v. Airvisual Ltd. (“Mankanshu Case”)., i.e. whether the ‘venue’ of the arbitration is the ‘seat’ of the arbitration. In this case, the Agreement mentions that ‘the arbitration would be administered in Hong Kong and the place of the arbitration was Hong Kong’. It also stated that the courts of New Delhi shall have the jurisdiction over the matter. It took a different approach and declared Hong Kong as the seat of the arbitration because the agreement clearly states that the arbitration should be administered in Hong Kong. It was held that by only mentioning place of arbitration, one cannot presume it as the seat of the arbitration. Other factors like clauses of the agreement and the intention of the parties while entering into the contract are guiding factors which aid in ascertaining the seat of the arbitration.
Recently, in S.P. Singla Constructions Pvt. Ltd. v. Construction and Design Services, UPJL (“SP Singla Case”), the Hon’ble Delhi High Court followed the principle laid down in BGS SOMA Case. In this case, the agreement between the parties provided for “Lucknow” as the venue of the arbitration and the application of ICADR Rules, New Delhi to the dispute. It was held that the ICADR Rules would be applicable only after the constitution of arbitral tribunal. Hence, ‘Lucknow’ was declared as the seat of the arbitration and the courts therein were held to have the exclusive jurisdiction.
WHAT IS THE ISSUE?
While the decisions of the Hon’ble Supreme Court in the Hardy Case and Mankashu Case may have been held to not be good law, the same have not been overruled by a larger bench of the Hon’ble Supreme Court as all are three-judge bench rulings.
From the afore-mentioned precedents, it may be appreciated that a need for such interpretation arises from vague dispute resolution clause, terminological inconsistency et al. Arbitration is preferred over litigation because of its features including, inter alia, confidentiality, speedy dispute resolution, and minimum court interference. However, such vaguely drafted clauses have increased court interference and delayed the dispute resolution process, defeating the fundamental objectives of arbitration.
Further, in the SP Singla Case, the Hon’ble Delhi High Court interpreted the rules of ICADR, an arbitration institution, and held that the same provided for the seat of the dispute to be governed by the agreement between the parties. WeVaad, an online dispute resolution platform, strikes a balance between providing a seat of arbitration and allowing autonomy to the parties to govern the same. Firstly, it provides a draft dispute resolution clause to the parties to be incorporated in their agreement. The said dispute resolution clause clearly enlists the seat and venue of the arbitration and thereby, avoids any misinterpretation of the dispute resolution clause in the future. Secondly, the Rules provide for the seat of the arbitration, which may be distinguished, as per the agreement between the parties at the first hearing of the arbitration.
How to avoid such confusion after disputes have arisen between the parties
It will be beneficial for the parties to ensure that the dispute resolution clauses, specifically the arbitration agreements are drafted to clearly provide for substantive law and seat of the arbitration. The principles laid down by the Hon’ble Supreme Court are the guiding principles in how such clauses must be drafted to clearly enlist seat and venue/place of the arbitration.
A ruling by a larger bench of the Hon’ble Supreme Court/legislative amendment in this regard would be a welcome step. Until then, it is important that the aforementioned principles are kept in mind while drafting such clauses to avoid any ambiguity that may require court intervention for interpretation.