Seat of Arbitration and its communion to lex – larger bench to decide: Part II

Seat of Arbitration and its communion to lex – larger bench to decide: Part II

Read Part I of the Article here.

Part II

NTPC v. Singer

I begin with National Thermal Power Corporation v. Singer Company [(1992) 3 SCC 551] decided on 7th May, 1992. The decision of NTPC v. Singer was delivered in the context of the Arbitration Act, 1940, and was part of the pre-Bhatia International (supra) regime.

The salient features of the contract in relation to the dispute between NTPC and Singer were – New Delhi was the venue, the lex contractus and lex arbitri were both Indian law and the lex fori /curial law was the Rules of International Chamber of Commerce (‘ICC’).

The twist in the tale arose because of Article 12 of the (then) ICC Rules which read:

The place of arbitration shall be fixed by the International Court of Arbitration, unless agreed upon by the parties.”

Although, the parties had never expressed their intention to choose London as the ‘seat’, but, in the absence of any agreement on the question, London was chosen by the ICC Court as the place of arbitration. Except to be the place of arbitration, London had no significant connection with the contract or the parties.

The judgment in NTPC v. Singer in essence held:

  1. The Court observed – “It was in Delhi that the agreement was executed. The form of the agreement is closely related to the system of law in India. Various Indian enactments are specifically mentioned in the agreement as applicable to it in many respects. The contract is to be performed in India with the aid of Indian workmen whose conditions of service are regulated by Indian laws. One of the parties to the contract is a public sector undertaking. The contract has in every respect the closest and most real connection with the Indian system of law and it is by that law that the parties have expressly evinced their intention to be bound in all respects.”
  2. The court applied the ‘closest and most intimate connection’ test to the entire contract or in other words to the dispute, in determining the supervisory jurisdiction of the courts. [Emphasis supplied by the author].
  3. The Court held that parties have expressly chosen Indian law and the exclusive jurisdiction of the courts in Delhi, therefore the substantive law was Indian and the arbitral award could not be a foreign award.
  4. The Court also held that where lex arbitri was not expressly chosen by parties, the same would follow lex contractus, particularly if the arbitration agreement was embodied in the main contract.
  5. The Court impliedly gave primacy to lex contractus over lex fori.

Despite the lucid exposition of the law by the Court in NTPC v. Singer, the law has since traversed on all the above counts.

Supremacy of Seat in India 

Until 2012, Bhatia International held the fort. According to the ratio of Bhatia International, a party, in the context of international commercial arbitration, had to necessarily, explicitly or implicitly, exclude Part 1 of the Arbitration and Conciliation Act, 1996 i.e. the lex arbitri of India.

Therefore, in order to decide whether the courts in India had supervisory jurisdiction over an arbitration, the lex arbitri of India necessarily needed to be excluded by the parties. Else, Indian courts would retain jurisdiction. Therefore, under the Bhatia regime lex arbitri was the determinative lex for Indian courts.

However, on September 6, 2012, the Constitution Bench delivered the judgment of Balco v. Kaiser (supra). Post Balco v. Kaiser, ‘seat’ or the ‘locus arbitri’ became determinative for deciding whether India had supervisory jurisdiction over an arbitration or not, in the context of international commercial arbitration.

More recently, the Balco v. Kaiser principle was extended to domestic arbitration by the decision of Indus Mobile Distribution Pvt. Ltd v. Datawind Innovations Pvt. Ltd. [(2017) 7 SCC 678]

With Balco v. Kaiser, the supervisory jurisdiction of courts in India became ‘seat-centric’, giving primacy to ‘seat’.

A word about England in this context – while India, post Balco v. Kaiser, is decisively ‘seat-centric’, England only treats ‘seat’ as an important component in deciding supervisory jurisdiction of courts.

Lex arbitri – the most important lex in determining ‘seat’

In the post Balco or ‘seat-centric’ era, where no ‘seat’ has been explicitly selected by the parties, it becomes imperative to discern the ‘seat’. But the question is – what is the manner of determining the ‘seat’, when ‘seat’ is not expressly designated?

This has been a vexing question worldwide, and there are a plethora of decisions on the subject. [For the interested reader, the majority of the conspectus of decisions have been detailed in Enercon (India) Ltd. v. Enercon GmbH [(2014) 3 SCC 551], Roger Shashoua v. Mukesh Sharma [(2017) 14 SCC 722] and more recently in Hardy Exploration(supra)]. In this article, I have discussed only those decisions I considered most relevant to the issue at hand.

In 1988, the Court of Appeal in the UK would deliver the decision in Naviera Amazonica (supra)which would go on to become perhaps the most quoted and relied-upon decision in regard to the determination of supervisory jurisdiction of courts, at least in India.

In Naviera Amazonica, the question arose whether the insurance policy contained a London or Lima seated arbitration clause. The Court held the arbitration clause to be governed by English law. The governing law of the insurance policy was English law and the arbitration was also to be governed by English Law. The Court held that Lima, where the arbitration was required to be held, was merely the venue of arbitration.

The Court observes,

Where the parties have failed to choose the law governing the arbitration, those proceedings must be considered, at any rate prima facie, as being governed by the law of the country in which the arbitration is held, on the ground that it is the country most closely connected with the proceedings’.

Prima facie, i.e. in the absence of some express and clear provision to the contrary, it must follow that an agreement that the curial or procedural law of an arbitration is to be the law of X has the consequence that X is also to be the ‘seat’ of the arbitration. The lex fori is then the law of X, and accordingly, X is the agreed forum of the arbitration. A further consequence is then that the courts which are competent to control or assist the arbitration are the courts exercising jurisdiction at X’.

[Emphasis supplied by the author]

Accordingly, the Court in Naviera Amazonica observes that the most important aspect in determination of supervisory jurisdiction of the court is the ‘substantive law of the agreement to arbitrate’ i.e. the lex arbitri.

Since in the facts of Naviera Amazonica, in the wording of the arbitration clause ‘the parties had agreed expressly that their agreement to arbitrate should be subject to English law’, the Court holds that court in England will have jurisdiction.

The Court also appears to suggest that where the lex arbitri is not readily discernable, lex fori becomes the next most relevant lex in the determination of ‘seat’.

Some years later, in India, the Supreme Court in Sumitomo Heavy Industries v. ONGC (supra), would hold,

the law which would apply to the filing of the award, to its enforcement and to its setting aside would be the law governing the agreement to arbitrate and the performance of that agreement”.

[Emphasis supplied by the author]

In March 2002, the Indian Supreme Court delivered the decision of Bhatia International(supra). This changed the nature of debate, in India, and in the decisions that followed, the debate on lex was confined to finding whether parties had ‘impliedly’ excluded India’s lex arbitri.

Meanwhile in England, Fiona Trust & Holding Corp v Privalov [2008] 1 Lloyd’s Rep. 254(HL)considered the location of the ‘seat’ of arbitration as an important factor in determining the proper law of the arbitration agreement.

And the tide in India would soon begin to turn as well. The Supreme Court, despite Bhatia International, in Dozco India Pvt. Ltd. v. Doosan Infracore Co. Ltd [(2011) 6 SCC 179] drawing a distinction between ‘venue’ and ‘seat’, would rely on Naviera Amazonica. Distinguishing its facts from Bhatia International, the Court held that since the law governing the arbitration was Korean law, the seat of arbitration was Seoul in Korea.

In May 2012, the Court of Appeal delivered the decision in the matter of Sulamerica (supra)Sulamerica is recognised as the locus classicus in regard to the determination of supervisory jurisdiction of courts. In Sulamerica, the contract in question was an insurance policy. The governing law of the contract was exclusively Brazilian law. The clause also provided for the exclusive jurisdiction of Brazilian courts. The lex fori was ARIAS (UK) Arbitration Rules. The clause also provided for London as the ‘seat’.

Where the lex arbitri is not apparent, the Court in Sulamerica suggests a three-stage enquiry’ i.e. (i) express choice, (ii) implied choice and (iii) closest and most real connection’. The Court goes on to observe that the ‘three stages ought to be embarked on separately and in that order’.

A few months later in 2012, the Constitution Bench in India would deliver the landmark judgment of Balco v. Kaiser which defined the ‘seat’ as the sole test for determining the supervisory jurisdiction of Indian courts. And so the debate would turn to determination of such ‘seat’ when the same was not explicitly discernable. The Court observed,

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.”

The judgment in Union of India v. Hardy Exploration and Production (India) Inc. Civil Appeal  No(s). 4628/2018 reserved on 05-09-2018. Given the length of the article, the same has been divided into three parts, to be released over the course of four days. 

Read Part I of the Article here.

The author is the founder of JusContractus a Delhi based full service law firm, with primary focus on arbitrations and is a director of the Nani Palkhivala Arbitration Centre. The author recognises the assistance of Ms. Aastha Bhardwaj, Advocate at JusContractus. The author also acknowledges the comments of Mr. Niranjan Venkatesan, Barrister at One Essex Court, which were critical in giving a final direction to the article.

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This article is for informational purposes only, and is not intended to provide, and should not be relied on for legal advice. Readers are advised to seek independent legal advice in accordance with their peculiar facts and circumstances.

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