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Payal Chawla and Hina Shaheen
Last year, the decision in the matter of Indus Mobile Distribution Pvt. Ltd v. Datawind Innovations Pvt. Ltd. [(2017) 7 SCC 678] was delivered by the Supreme Court. This decision was welcomed from the perspective of bringing quietus to the jurisdiction issue in domestic arbitration, and yet at the same time, criticized inter alia for being in the teeth of s. 2(1)(e) of the Arbitration and Conciliation Act, 1996 (Act).
While, the critique of Indus Mobile on the aspect of s.2(1)(e) is valid, in our submission, the judgment doesn’t entirely fall foul of the law. Further, Indus Mobile is a progressive judgment that has removed one of the impediments to parties choosing India as a preferred seat of arbitration.
Brief Facts of Indus Mobile
Disputes arose between the parties leading to the invocation of an arbitration. The respondent (Datawind Innovations) appointed a sole arbitrator, which was objected to by the appellant (Indus Mobile). Indus Mobile thus filed a petition under s.11 of the Act, for appointment of an arbitrator, before the Delhi High Court. The arbitration clause provided that the arbitration shall be ‘conducted at Mumbai’ and for the ‘exclusive jurisdiction of courts of Mumbai only’. Other important facts surrounding the issue in question were – Datawind Innovations had its registered office at Amritsar, and was supplying goods from New Delhi to Indus Mobile at Chennai. In effect, no cause of action in the ‘classical sense’, arose in Mumbai nor was any party resident there.
The Delhi High Court [2016 SCC Online Del 3744] held since, ‘no actual cause of action or part of cause of action had arisen in Mumbai’, the exclusive jurisdiction clause conferring jurisdiction on Mumbai could not be relied upon. The Supreme Court set aside the decision of the High Court with the ratio that the moment the seat is designated, it is akin to an exclusive jurisdiction clause”, even if no cause of action has arisen thereat.
Critique of Indus Mobile
In arriving at this conclusion, the Court in Indus Mobile relies on para 96 of BALCO v. Kaiser Aluminium Technical Services Inc. [(2012) 4 SCC 552] (“BALCO”).
In para 96, the Constitution Bench of the Supreme Court interpreting s. 2(1)(e) of then un-amended Act had held that ‘the term “subject matter of the arbitration” cannot be confused with “subject matter of the suit”. The term “subject matter” in Section 2(1)(e) is confined to Part I. It has a reference and connection with the process of dispute resolution. Its purpose is to identify the courts having supervisory control over the arbitration proceedings. Hence, it refers to a court which would essentially be a court of the seat of the arbitration process. In our opinion, the provision in Section 2(1)(e) has to be construed keeping in view the provisions in Section 20 which give recognition to party autonomy. Accepting the narrow construction as projected by the learned counsel for the appellants would, in fact, render Section 20 nugatory”. The Constitution Bench has also explicated that in s.20(1) and s.20(2) of the Act the term ‘place’ would mean ‘venue’ and in s. 20(3) the expression ‘place’ would mean ‘seat’.
However, the amendments carried out in 2016, did not carry these amendments in terms of, either para 96 of BALCO or as per the suggestions of the 246th Law Commission in regard to s. 20 of the Act. Both remained unchanged.
s.2(1)(e) of the Act reads –
“2. Definitions. – (1) In this Part, unless the context otherwise requires,
(e) “Court” means the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having, jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject- matter of a suit, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes;”[Emphasis supplied by us]
The language of the section inextricably links the jurisdiction of court in domestic arbitrations to suits and hence to the Code of Civil Procedure, 1908 (“CPC”). The subject matter of a suit can be determined only by resorting to the provisions of the CPC, particularly s. 20 of the CPC, which requires the jurisdiction to be either where the defendant resides or where a part of cause of action arises.
However, the court in Indus Mobile holds that the provisions of ss. 16 to 21 of the CPC are not attracted. The Indus Mobile judgement has received criticism on this score and it is widely opined that the court could not have deviated from the plain language of the statute. The definition of ‘court’ appears in Part I, which makes it mandatory for all domestic arbitrations to follow the same principles with regard to jurisdiction as in case of a suit. Interestingly, the Court in Indus Mobile was aware that the suggestions were not incorporated by the amendments and observed in this regard, “it was found unnecessary to expressly incorporate what the Constitution Bench of the Supreme Court has already done by way of construction of the Act.”
There is also some criticism that reliance on para 96 was incorrect since the observations of the Constitution Bench were in obiter. And in doing so, the Court incorrectly applied the law with respect to seat and venue applicable to foreign seated international commercial arbitration to the domestic arbitrations, without considering that the Act has clearly drawn a distinction between them. Part I of the Act deals with domestic awards while Part II deals with foreign awards. It is pertinent, however, to mention that several judgments have relied on para 96 of BALCO.
Defence of Indus Mobile & doctrine of ouster
Having said that, it is equally true, that there can be no dispute that the following are the settled positions of law:
It is pertinent to mention that Indus Mobile makes a reference to each of these elements, albeit, does not string it in the manner stated above. The ratio of the judgement, if reviewed in this context, appears to be the correct exposition of the law.
Perhaps, the Court in Indus Mobile could have avoided observing – –neither would any of the provisions of Section 16 to 21 of the CPC be attracted’. This observation is contrary to the ratio of Swastik Gases, where a three-judge bench in the context s.11 of the Act, found s.20 of the CPC to be ‘relevant’. Mere absence of this observation could harmoniously construe the gamut of seemingly conflicting legal propositions. As a matter of law, an attempt to harmoniously construe different legislations must be made in a manner that no provision or objective of any legislation is rendered otiose (ut res magis valeat quam pereat).
The Indus Mobile judgment is of particular importance to arbitration. To quote a previous article, “Had the Supreme Court affirmed the Delhi High Court’s decision, it would have put domestic arbitration in a rather inequitable position. As the law stands today, it is perhaps possible for two Indian parties to choose a foreign seat where no cause of action has arisen qua the dispute between the two parties. In such a situation, choosing an Indian state that didn’t have cause of action would have led to ambiguity on where the supervisory jurisdiction was vested, as such [the] chosen seat would not have the benefit of exclusivity. Consequently, Indian parties would be incentivised to choose a foreign seat over a neutral Indian seat. It would also discourage parties in international commercial arbitration from choosing India as a preferred seat of arbitration”
Let us not rush to judgment and seek to overturn a progressive judgment that espouses India’s arbitral dreams. Rather, let’s seek to ensure that the next set of amendments capture the law as espoused by Indus Mobile. In fact, towards this end, the courts might also consider recognising the designation of seat, as a part of ‘cause of action’ and put the controversy to rest once and for all. After all, what constitutes ‘cause of action’ has largely been settled by judicial precedent.