In a welcome recent decision of Indus Mobile Distribution Pvt. Ltd. v. Datawind Innovations Pvt. Ltd. [(2017) 7 SCC 678], the Hon’ble Supreme Court provided the much-needed clarity on the juridical seat in relation to domestic arbitration.
Brief facts of Indus Mobile:
The appellant (Indus Mobile) and respondent No. 1 (Datawind Innovations) entered into a contract whereby the respondent was to supply goods to the appellant. The contract contained an arbitration provision. Respondent No. 1 had its registered office at Amritsar, and was supplying goods from New Delhi to the appellant at Chennai. The arbitration clause provided that the arbitration shall be conducted at Mumbai, and that exclusive jurisdiction would be with courts at Mumbai only. It is important to mention that no cause of action arose in Mumbai, nor was any party resident there.
Disputes arose between the parties, and the respondent appointed a sole arbitrator. This appointment was objected to by the appellant, who consequently filed a petition under s.11 of the Arbitration and Conciliation Act, 1996 (“ACA”) for appointment of an arbitrator.
Decision by the Delhi High Court
In arriving at its decision, the Delhi High Court relied on Para 16 of A.B.C. Laminart (P) Ltd. v. A.P. Agencies [(1989) 2 SCC 163] (“A.B.C Laminart”) and Para 96 of Bharat Aluminium v. Kaiser Aluminium [(2012) 9 SCC 552] (“Balco”).
At Para 96 of Balco, the constitution bench of the Supreme Court had stated, “… the legislature has intentionally given jurisdiction to two courts i.e. the court which would have jurisdiction where the cause of action is located and the courts where the arbitration takes place”. Though, the Delhi High Court recognised that the Supreme Court in Balco had held that ‘both the courts would have jurisdiction i.e. the court within whose jurisdiction the subject matter of the suit is situate, and the courts within the jurisdiction of which the dispute resolution i.e. arbitration is located’, it went on to hold that 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 Delhi High Court derived this proposition from para 16 of A.B.C. Laminart, which had held that ‘so long as the parties to a contract do not oust the jurisdiction of all courts which would otherwise have jurisdiction to decide the cause of action under law, it cannot be said that the parties have by their contract ousted the jurisdiction of the court’. [Emphasis supplied]
As an aside, it would be apropos to mention that in para 16 of A.B.C Laminart which the Delhi High Court quoted with approval, it had also been stated – ‘In other words, where the parties to a contract agreed to submit the disputes arising from it to a particular jurisdiction, which would otherwise also be a proper jurisdiction under the law, their agreement to the extent they agreed not to submit to other jurisdictions cannot be said to be void as against public policy.’ [Emphasis supplied]. Therefore, the Delhi High Court’s restrictive interpretation of the doctrine of ouster, being limited to ‘cause of action’ as opposed to ‘jurisdiction’, was contrary to A.B.C. Laminart itself.
Be that as it may, the Delhi High Court went on to hold that Mumbai, whilst it would have jurisdiction, such jurisdiction would not be exclusive, and since Delhi was the first Court that was approached, Delhi alone would have supervisory jurisdiction in the matter, and that the arbitration would be conducted in Mumbai. This judgement of the Delhi High Court was assailed before the Supreme Court.
Ratio laid down by the Supreme Court
Disagreeing with the Delhi High Court, the Supreme Court held, ‘Under the Law of Arbitration, unlike the Code of Civil Procedure which applies to suits filed in courts, a reference to “seat” is a concept by which a neutral venue can be chosen by the parties to an arbitration clause. The neutral venue may not in the classical sense have jurisdiction – that is, no part of the cause of action may have arisen at the neutral venue and neither would any of the provisions of Section 16 to 21 of the CPC be attracted. In arbitration law, however, as has been held above, the moment “seat” is determined, it would vest such court with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties’.
The court held that Mumbai was the seat of arbitration, and therefore Mumbai courts were vested with exclusive jurisdiction. As a sequitur, therefore, the court held that “the moment the seat is designated, it is akin to an exclusive jurisdiction clause”, even if no cause of action has arisen thereat.
There is a school of thought that presents a critique of this judgement to the effect that it overreached legislative intent, and is contrary to the plain language of s.2(1)(e) of the Arbitration and Conciliation Act (ACA). The constitutional bench in Balco had observed that “subject matter of the arbitration” cannot be confused with “subject matter of the suit”. In order to ensure that s.20 of the ACA was not rendered nugatory, the Supreme Court observed that the expression ‘place’ would mean ‘seat’ in s.20(1) and s.20(2), and would mean ‘venue’ in s.20(3). However, despite these observations in Balco, and the recommendations of the Law Commission in its 246th Report, s.20 remained un-amended. Importantly, Justice Nariman was acutely aware of the aforegoing, and deals with it eloquently in his judgement.
In para 18, he states, “The amended Act, does not, however, contain the aforesaid amendments, presumably because the BALCO judgment in no uncertain terms has referred to “place” as “juridical seat” for the purpose of Section 2(2) of the Act. It further made it clear that Section 20(1) and 20(2) where the word “place” is used, refers to “juridical seat”, whereas in Section 20(3), the word “place” is equivalent to “venue”. This being the settled law, 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.”
Whether that is a correct exposition of the law is debatable, particularly since the observations in Balco were obiter in the context of domestic arbitration. That said, the overruling of the Delhi High Court judgment was correct, particularly in view of the Supreme Court’s observations in para 16 of A.B.C Laminart. Further, the ratio that Indus Mobile expounds, from a pragmatic standpoint, is certainly a step in the right direction.
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 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.
Some would argue that this would lead to forum shopping – but then, isn’t that one of the strongest arguments in favour of choosing arbitration over litigation? This decision, in my view, will have the effect of not only reducing litigation relating to jurisdiction in arbitration matters, but will also add a fillip towards India’s arbitral destination goal.
Payal Chawla is the founder of JusContractus, a Delhi based full service law firm, with primary focus on arbitrations. The author recognises the able assistance of Ms. Hina Shaheen and Ms. Aastha Bhardwaj, who are both advocates at JusContractus. For feedback, contact firstname.lastname@example.org.
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 with their peculiar facts and circumstances.
This article was first published in Bar and Bench onn 15.09.2017. The original article can be viewed by following the link: