Arbitration Case Comment: Venue is Seat in the absence of contrary indicia ��� Implied Overruling of The Verdict in the Hardy Exploration case

A recent decision of the Supreme Court of India has far reaching ramifications for arbitration law in the country. While the decision in the BGS Soma[1] case has seemingly set out the “correct law” concerning the venue and seat dichotomy which has been the subject matter of a high volume of contested litigation over the years, its clarity and efficacy may come undone due to issues touching on the law of precedent.

Venue and Seat in Arbitration  

The issue of venue and seat dichotomy relates to the issues of where the arbitration proceedings are to be held and the jurisdiction of the supervisory courts, especially of the courts under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) which are empowered to set aside arbitral awards. The place or location where the arbitration proceedings are conducted is the venue of arbitration. The venue of arbitration can be agreed upon by the parties and incorporated in an arbitration agreement. This will, however, not prevent the parties from holding the arbitration proceedings at any other place of their choosing, in the interest of convenience. On the other hand, the seat of arbitration is a legal concept that speaks to the applicability of the law of a place to the procedural aspects of arbitration proceedings and the exclusive supervisory jurisdiction of courts of a place over the arbitration proceedings.

The Hardy Exploration case

In September 2018, a three-judge bench of the Supreme Court of India held in Hardy Exploration[2] that the venue of arbitration stipulated in an arbitration agreement cannot by itself be considered as seat of the arbitration. It was stated that the determination of seat of arbitration must include an “express” or “positive” opinion of the arbitral tribunal. The bench also held that mere stipulation of venue in the arbitration agreement cannot lead to the conclusion that the stipulated venue is also the seat of the arbitration. For the purpose of ascertaining the seat of arbitration, it was held that it is necessary to consider the venue of arbitration along with “concomitant” factors in the context of the facts of the case.

The judgement in the Hardy Exploration case was considered to be at variance with the earlier rulings of the apex court, such as in the case of Enercon Gmbh[3] where it was held that in the absence of specific indicia pointing to the seat of arbitration, designation of venue of arbitration is akin to designation of the seat of arbitration. Further, the judgement in the Hardy Exploration case has been perceived as a possible trigger for increased litigation over venue and seat in appeals under Section 34 of the Act, where the issue of concomitant factors would be brought into play. Notwithstanding these critical aspects, the judgement in the Hardy Exploration case was considered to have ushered in a semblance of finality to the venue and seat dichotomy.

Background to the BGS Soma case

The dispute in the BGS Soma case arose from a contract between NHPC Limited (“NHPC”) and BGS SGS Soma JV (“BGS”) in respect of works to be undertaken for India’s largest hydropower project located in Assam and Arunachal Pradesh with an installed capacity of 2000 MW. The dispute resolution clause in the contract provided for the arbitration proceedings to take place at New Delhi / Faridabad.  The arbitration proceedings were conducted at New Delhi and the arbitration award was signed and delivered at New Delhi. NHPC preferred to challenge the arbitral award under Section 34 of the Act before the District Court at Faridabad. BGS, which was the award holder, filed an application under Order VII Rule 10 of the Civil Procedure Code, 1908, seeking return of the application to NHPC, so it could be filed at an appropriate jurisdictional court. BGS contended that as the cause of action arose at Assam and the arbitration proceedings were held at New Delhi, no factum of jurisdiction was vested in the courts at Faridabad. The District Court at Faridabad agreed with BGS and transferred the appeal proceedings to New Delhi. Being aggrieved by the order of transfer of proceedings, NHPC filed an appeal against this order at the Punjab and Haryana High Court, which set aside the order of transfer by holding that New Delhi was merely the venue of the arbitration and that the courts at Faridabad would have jurisdiction to entertain the appeal against the arbitration award as a part of the cause of action had arisen at Faridabad.

BGS filed a Special Leave Petition at the Supreme Court of India against the order of the Punjab and Haryana High Court. The three-judge bench hearing the Special Leave Petition was required to inter-alia address the questions of whether the District Court at Faridabad had jurisdiction in the instant case as a part of the cause of action had arisen at that place and if New Delhi was merely the venue and not seat of arbitration.

The Ruling

In ultimately holding that New Delhi was the seat of arbitration and not merely the venue, the bench extensively analysed the issue of the venue and seat dichotomy and traced the applicable law with reference to a host of leading judgements of the Supreme Court of India and of English Courts on the issue. The bench placed considerable reliance on the decision of the English Court in the Roger Shashoua[4] case where the Shashoua rule was carved out. The Shashoua principle speaks about the contrary indicia test, which has to be applied to determine whether a stipulated venue in an arbitration agreement can be considered as the seat of arbitration, based on the existence of any contrary indicia. Applying the Shashoua principle, if no contrary indicia is found, the stipulated venue in the arbitration agreement must be considered as the seat of arbitration.

The bench was faced with the question of whether the three-judge bench in the Hardy Exploration case was correct in holding that the Shashoua principle was not upheld in the decision of the constitution bench of the apex court in the BALCO[5] case. The bench concluded that the Shashoua principle was indeed recognized in the BALCO case and for this reason, the decision in the Hardy Exploration case cannot be considered as being good law.

The bench pointed out that the contrary indicia test was upheld in all relevant judgements of the Supreme Court following the judgement of the constitution bench in the BALCO case. The bench also referred to the more recent decision of a division bench of the Supreme Court in the Brahmani Pellets[6] case, which was perceived as exacerbating the confusion on the issue of venue and seat, as this decision followed the decision in the Hardy Exploration case. In this decision, the Supreme Court did not examine the issue of determination of seat of arbitration with reference to concomitant factors and held that once a venue of arbitration is designated by the parties, it is akin to seat of arbitration in the absence of contrary indicia.

Possibility of the decision in the BGS Soma case being considered as Per Incuriam

A catena of judgements of the Supreme Court, including the decision of the constitution bench in the Dawoodi Bohra[7] case have held that decisions rendered by a bench of co-equal strength are binding on subsequent bench of co-equal strength. The appropriate procedure for examining the correctness of law espoused in a decision of the Supreme Court would be to refer the matter to a larger bench based on a reference made by a bench of co-equal strength. In light of this law of precedent, it is likely that in subsequent cases before the High Courts involving the issue of venue and seat of arbitration, the High Courts will treat the decision in the BGS Soma case as being per incuriam.

Conclusion

Notwithstanding the issue highlighted above, it appears that the decision in the BGS Soma case states the correct law on the issue of venue and seat by interpreting the BALCO case judgement as having upheld the Shashoua principle, which is certainly more practical for determining the seat of arbitration as opposed to ascertaining concomitant factors which can often be vague and may lead to increased litigation. It is by now accepted that when parties designate a venue for the arbitration, it is intended that the venue can be equated to the seat of arbitration unless a contrary intention is specifically expressed by the parties. However, it is advisable for parties and practitioners to ensure that the seat and venue of arbitration are clearly defined in an arbitration agreement so as to avoid any future litigation on this issue.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal Hyderabad.

[1] BGS SGS Soma JV v.  NHPC Ltd. [2019 (6) ARBLR 393 (SC)]

[2] Union of India v. Hardy Exploration and Production India Inc. [2018 SCC Online SC 1640]

[3] Enercon (India) Limited and others v. Enercon Gmbh and another [(2014) 5 SCC 1]

[4] Roger Shashoua and others v. Mukesh Sharma [[2009] EWHC 957 (Comm.)]

[5] Bharat Aluminium Co. (BALCO) v. Kaiser Aluminium Technical Service Inc. [(2012) 9 SCC 552] [

6] Brahmani River Pellets Ltd. v. Kamachi Industries Limited [AIR 2019 SC 3658]

[7] Central Board of Dawoodi Bohra Community and another vs. State of Maharashtra and another [(2005) 2 SCC 673]