Seat of Arbitration: Supreme Court Defines the Scope in Cross-Border Disputes (2024) INSC 850 (7 November 2024)

Date of the Judgment: 7 November 2024
Citation: 2024 INSC 850
Judges: Dr. Dhananjaya Y. Chandrachud, CJI, J.B. Pardiwala, J., Manoj Misra, J.

When parties from different countries agree to resolve disputes through arbitration, where should that arbitration take place? The Supreme Court of India recently addressed this critical question in a case involving a distributorship agreement between companies in Afghanistan and the UAE. The court clarified the factors that determine the “seat” of arbitration, which dictates which country’s laws and courts will oversee the process. This ruling has significant implications for international commercial disputes involving Indian parties.

Case Background

M/s Arif Azim Co. Ltd., an Afghan company, entered into a distributorship agreement on 09 November 2010 with M/s Micromax Informatics FZE, a UAE-based company, for the distribution of mobile handsets in Afghanistan. The agreement stipulated that payments would be made via letters of credit before the delivery of the products. The agreement also included a dispute resolution clause stating that any disputes would be resolved through arbitration in Dubai, UAE, under UAE arbitration rules.

Over time, transactions occurred between the parties. A dispute arose when Micromax India, an Indian company and a subsidiary of Micromax FZE, issued invoices and received payments directly, leading to a credit balance for the Afghan company that was not being settled. After several attempts to resolve the matter, the Afghan company invoked arbitration, claiming a sum of $88,425 with interest.

The Afghan company sought to have the arbitration administered under the jurisdiction of Indian courts, arguing that the cause of action had arisen in both Afghanistan and India. The UAE company, however, contended that the arbitration should be seated in Dubai as per the agreement.

Timeline

Course of Proceedings

The Afghan company filed a petition in the Supreme Court of India under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator. The UAE company contested this, arguing that the arbitration should be seated in Dubai, UAE, as per the agreement.

Legal Framework

The Supreme Court examined the following key legal provisions:

• Section 2(2) of the Arbitration and Conciliation Act, 1996: This section states that Part I of the Act applies where the place of arbitration is in India.
• Section 20 of the Arbitration and Conciliation Act, 1996: This section allows parties to agree on the place of arbitration. If no agreement exists, the arbitral tribunal determines the place.

The Court also discussed the concept of “seat” versus “venue” in arbitration, emphasizing that the seat determines the jurisdiction of courts over the arbitration process.

Arguments

Petitioner’s Arguments

The petitioner, M/s Arif Azim Co. Ltd., argued that:

• The dispute resolution clause defined the venue as Dubai but did not confer exclusive jurisdiction to Dubai courts.
• The agreement suffered from vagueness regarding which Dubai courts would have jurisdiction.
• The concept of seat is more significant than venue in international arbitrations.
• The laws of the country most closely connected to the agreement, India and Afghanistan, should govern the arbitration.
• The conduct of the parties, including a non-signatory to the agreement (Micromax India) directing payments, altered the original terms.

Respondent’s Arguments

The respondent, M/s Micromax Informatics FZE, argued that:

• The petition was not maintainable in India as neither the arbitration seat nor the parties were in India.
• The agreement clearly intended Dubai to be the seat of arbitration.
• Part I of the Arbitration and Conciliation Act, 1996, does not apply to arbitrations seated outside India.
• The use of “non-exclusive jurisdiction of Dubai Courts” did not envisage jurisdiction of courts outside the UAE.
• Invoking Section 11 of the Act would amount to rewriting the terms of the agreement.

The petitioner submitted that the laws of the country with which the subject agreement was most closely connected are India and Afghanistan. The recitals in the Interpretation Clause of the Distribution agreement and the conduct of the parties revealed that the parties had attached very little importance to its local subsidiary FZE within the “Micromax Group” of companies that ultimately signed the Distributor agreement. It was formed to take advantage of concessional benefits in a free economic zone. The intention of the parties as to the “seat” should be determined from other clauses in the agreement and the conduct of the parties.

The petitioner submitted that Clause 27 preserved the party’s autonomy in allowing the concerned parties to choose their seat/jurisdiction. The second part of jurisdictional Cl. 27 discloses the intention – an agreement by itself – to opt out of Dubai court’s jurisdiction and this is what the parties had intended by their reference to “the non -exclusive jurisdiction of the Dubai Courts. Since the parties had agreed not to confer exclusive jurisdiction to courts in Dubai, neither of the parties to the agreement construed the arbitration clause as designating courts in Dubai as the seat of arbitration.

The respondent submitted that the use of “non -exclusive jurisdiction of Dubai Courts” in Distributor Agreement did not ever envisage jurisdiction of Courts outside UAE and in no manner whatsoever the “Courts of India”. The word “non -exclusive: has been used in the context that jurisdiction of other Courts in UAE may not be restricted.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. Whether the petition under Section 11 of the Arbitration and Conciliation Act, 1996, is maintainable?
2. Whether Part I of the Act is applicable to the arbitration clause in the distributorship agreement?
3. What is the seat of the arbitration in terms of the distributorship agreement?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon

Legal Provisions

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court relied on several key authorities to reach its decision. Here’s how some of them were viewed:

✓ Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. [CITATION]: The court affirmed that this case overruled the concurrent jurisdiction principle and held that Part I of the Arbitration Act, 1996 applies only to arbitrations within India.

✓ Roger Shashoua (1) v. Sharma [CITATION]: The court accepted the Shashoua principle, stating that the designation of a venue as London, combined with a supranational body of rules, implies that London is the juridical seat.

✓ BGS SGS SOMA JV v. NHPC LTD. [CITATION]: The court relied on this case to conclude that when a place is designated as the “venue” of arbitration proceedings, it is effectively the “seat” of arbitration.

✓ National Thermal Power Corporation v. Singer Company & Ors. [CITATION]: The court acknowledged this case but clarified that the “closest connection test” is no longer the primary method for determining the seat of arbitration.

✓ The Court distinguished Bhatia International v. Bulk Trading S.A. [CITATION] and Venture Global Engineering v. Satyam Computer Services Ltd. [CITATION], noting that these cases were overruled by BALCO.

✓ The Court also considered Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd [CITATION], stating that the moment the seat of arbitration is determined, it is akin to an exclusive jurisdiction clause.

✓ The Court also considered Swastik Gases (P) Ltd. v. Indian Oil Corpn. Ltd. [CITATION], stating that even without words like “exclusive,” a jurisdiction clause can imply exclusive jurisdiction.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following points:

• The express terms of the arbitration agreement designating Dubai as the venue and the UAE Arbitration and Conciliation Rules as the curial law.
• The principle that the seat of arbitration determines the jurisdiction of courts over the arbitration process.
• The rejection of the concurrent jurisdiction doctrine, which had been overruled by the decision in BALCO.
• The acceptance of the Shashoua principle, which holds that the designated venue is the juridical seat.
• The emphasis on party autonomy and the need to give deference to the choices made by the parties in the arbitration agreement.

The Court emphasized that the seat of arbitration is a crucial location as it determines the courts that will have exclusive jurisdiction to oversee the arbitration proceedings. The Court also emphasized that the parties’ choice of curial law is a positive indicium that the place designated is the “seat”.

The Court rejected the argument that the non-exclusive jurisdiction clause in the agreement conferred jurisdiction on other courts, stating that the clause relates to the substantive agreement and not the arbitration agreement.

The Court also considered the doctrine of forum non conveniens and concluded that Dubai, UAE, was the more appropriate forum for the arbitration, given the location of the respondent and the designated seat.

The Court’s reasoning emphasized that the express terms of the agreement and the principle of party autonomy are paramount in determining the seat of arbitration. The Court also made it clear that once the seat of arbitration is determined, the courts of that seat have exclusive jurisdiction over the arbitration process.

The court also emphasized that the closest connection test is not the primary method for determining the seat of arbitration and that the express terms of the agreement are paramount.

The court also emphasized that the non-exclusive jurisdiction clause does not override the designation of the seat of arbitration and that the seat of arbitration determines which court has jurisdiction.

The court also considered the doctrine of forum non conveniens and concluded that Dubai, UAE, was the more appropriate forum for the arbitration, given the location of the respondent and the designated seat.

The court also emphasized that the parties’ choice of curial law is a positive indicium that the place designated is the “seat”.

The court also emphasized that the parties’ choice of curial law is a positive indicium that the place designated is the “seat”.

The Court held that the present petition under Section 11 of the Act, 1996 is not maintainable as neither the seat of arbitration is India nor is the arbitration agreement governed by laws of India.

The Court stated that, “the mere fact that the venue chosen by the ICC Court for the conduct of arbitration is London does not support the case of the Singer on the point.”

The Court stated that, “the proper law of the contract in the present case being expressly stipulated to be the laws in force in India and the exclusive jurisdiction of the courts in Delhi in all matters arising under the contract having been specifically accepted”

The Court stated that, “In sum, it may be stated that the law expressly chosen by the parties in respect of all matters arising under their contract, which must necessarily include the agreement contained in the arbitration clause, being Indian law and the exclusive jurisdiction of the courts in Delhi having been expressly recognised by the parties to the contract in all matters arising under it, and the contract being most intimately associated with India, the proper law of arbitration and the competent courts are both exclusively Indian”

Key Takeaways

The Supreme Court’s judgment provides the following key takeaways:

• The “seat” of arbitration is crucial as it determines which country’s courts have jurisdiction over the arbitration process.
• When an arbitration agreement designates a specific place as the “venue” and there are no contrary indications, that place is considered the “seat” of arbitration.
• The curial law (the procedural law of arbitration) often coincides with the law of the seat, and the choice of curial law is a positive indicium that the place designated is the “seat”.
• The “closest connection test” is no longer the primary method for determining the seat of arbitration.
• Part I of the Arbitration and Conciliation Act, 1996, applies only to arbitrations seated in India, unless the parties expressly or impliedly exclude its application.
• The doctrine of concurrent jurisdiction is no longer applicable.

This ruling emphasizes the importance of carefully drafting arbitration clauses and clearly specifying the seat of arbitration to avoid disputes over jurisdiction. It also clarifies that the seat of arbitration is not merely a venue for hearings but the juridical seat that determines the applicable law and jurisdiction.

Directions

The Supreme Court dismissed the petition and directed that the parties shall bear their own costs.

Development of Law

The ratio decidendi of this case is that the seat of arbitration is determined by the express terms of the arbitration agreement, particularly the designation of the venue and the choice of curial law. The court emphasized that the Shashoua principle, which states that the designated venue is the juridical seat, is the correct approach, and that the closest connection test is no longer the primary method for determining the seat of arbitration.

This ruling also clarifies that the doctrine of concurrent jurisdiction is no longer applicable, and that Part I of the Arbitration and Conciliation Act, 1996 applies only to arbitrations seated in India, unless the parties expressly or impliedly exclude its application.

Conclusion

The Supreme Court’s judgment in this case clarifies the legal principles for determining the seat of arbitration in international commercial disputes. By emphasizing the express terms of the arbitration agreement, the Shashoua principle, and the rejection of concurrent jurisdiction, the courthas provided much-needed clarity and certainty for parties involved in cross-border arbitration. This ruling underscores the importance of careful drafting of arbitration clauses and the need for parties to clearly specify the seat of arbitration to avoid disputes over jurisdiction. The judgment will have a significant impact on international commercial arbitrations involving Indian parties, ensuring that the seat of arbitration is determined based on the parties’ agreement and not by a “closest connection” test.