Supreme Court clarifies seat of arbitration in international commercial disputes: Mankastu Impex Private Limited vs. Airvisual Limited (2020) INSC 196 (05 March 2020)

Date of the Judgment: 05 March 2020
Citation: (2020) INSC 196
Judges: R. Banumathi, J., A.S. Bopanna, J., Hrishikesh Roy, J.
Can a clause specifying the “place of arbitration” in a contract also determine the “seat” of arbitration, especially in international commercial disputes? The Supreme Court of India addressed this critical question, clarifying the distinction between “venue” and “seat” in arbitration agreements. This judgment arose from a dispute between an Indian company and a Hong Kong-based company, focusing on whether Indian courts had jurisdiction to appoint an arbitrator when the agreement specified arbitration in Hong Kong. The bench comprised Justices R. Banumathi, A.S. Bopanna, and Hrishikesh Roy, with Justice R. Banumathi authoring the opinion.

Case Background

Mankastu Impex Private Limited, an Indian company operating under the brand “Atlanta Healthcare,” was engaged in air quality management and the sale of air purifiers. Airvisual Limited, a company incorporated in Hong Kong, manufactured and sold air quality monitors. On September 12, 2016, the two companies entered into a Memorandum of Understanding (MoU). Under this agreement, Airvisual Limited agreed to sell its air quality monitors to Mankastu Impex, which was appointed as the exclusive distributor for these products in India, with non-exclusive rights for Sri Lanka, Bangladesh, and Nepal. The agreement was set for five years, beginning from the date of the first delivery of air quality monitors in India, which occurred on either October 3, 2016, or November 1, 2016. Mankastu Impex claimed to have invested approximately Rs. 17,00,000 in promoting the products in India and an additional Rs. 9,00,000 in promoting the products at various business events.

On October 14, 2017, Mankastu Impex received an email from IQAir AG, stating that IQAir AG had acquired all technology and associated assets of Airvisual Limited. The email also mentioned that the AirVisual Node product was discontinued and a new version would be launched under the name IQAir AirVisual Pro. IQAir AG stated that it would not assume any contracts or legal obligations of Airvisual Limited and would negotiate new contracts with resellers. Mankastu Impex responded on October 15, 2017, invoking the terms of the MoU, asserting its exclusive rights for the sale of AirVisual products in India for five years and stating that any takeover of Airvisual Limited should honor existing obligations.

Mankastu Impex sent an email to Airvisual Limited and IQAir AG on October 31, 2017, requesting a proforma invoice to place purchase orders. IQAir AG reiterated that it had not assumed any legal obligations of Airvisual Limited but offered to supply IQAir branded products under a new non-exclusive arrangement at a higher price. After receiving no response to subsequent emails, Mankastu Impex issued a notice on December 8, 2017, invoking the arbitration clause in the MoU and proposing an arbitrator.

Timeline

Course of Proceedings

Mankastu Impex filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court on December 11, 2017, seeking to enforce the terms of the MoU and prevent Airvisual Limited and IQAir AG from terminating the agreement or entering into contracts with third parties. The Delhi High Court issued an interim order on February 28, 2018, restraining Airvisual Limited from selling its products in India. This petition is still pending before the High Court. In response to Mankastu Impex’s notice invoking the arbitration clause, IQAir AG stated that it was not bound by the MoU, and Airvisual Limited contended that the arbitration should be administered in Hong Kong, as per Clause 17 of the MoU. Subsequently, Mankastu Impex filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator.

Legal Framework

The case primarily revolves around the interpretation of the Arbitration and Conciliation Act, 1996, specifically:

• Section 2(1)(f) of the Arbitration and Conciliation Act, 1996: Defines “International Commercial Arbitration” as arbitration relating to commercial matters where at least one party is a national or habitual resident of a country other than India.
  
  “2. Definitions.—(1) In this Part, unless the context otherwise requires,—(f) “international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—(i) an individual who is a national of, or habitually resident in, any country other than India; or(ii) a body corporate which is incorporated in any country other than India; or(iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or(iv) the Government of a foreign country;”
• Section 2(2) of the Arbitration and Conciliation Act, 1996: States that Part I of the Act applies where the place of arbitration is in India.
  
  “(2) This Part shall apply where the place of arbitration is in India:”
• Section 11(6) of the Arbitration and Conciliation Act, 1996: Deals with the appointment of arbitrators.

The Supreme Court also considered the interplay between the seat of arbitration and the applicable law, referencing the Constitution Bench judgment in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. (2012) 9 SCC 552 (BALCO), which held that Part I of the Arbitration and Conciliation Act, 1996 would not apply to international commercial arbitrations held outside India.

Arguments

Petitioner (Mankastu Impex Private Limited) Arguments:

• Clause 17.1 of the MoU specifies that the MoU is governed by the laws of India and that the courts at New Delhi have jurisdiction, indicating that the laws of India should govern the arbitration proceedings.
• The reference to Hong Kong in Clause 17.2 is only as a “venue” for arbitration, not the “seat.”
• The decision in Union of India v. Hardy Exploration and Production (India) INC (2018) 7 SCC 374, postulates that a “venue” can become a “seat” only if no other condition is postulated and if a condition precedent is attached to the term “place,” the said condition/indicia has to be satisfied first for “venue” to be equivalent to “seat”.
• Since the parties agreed that the MoU is governed by the laws of India and the courts at New Delhi would have jurisdiction, Part-I of the Arbitration and Conciliation Act, 1996 applies, and the court has the power to appoint a sole arbitrator.

Respondent (Airvisual Limited) Arguments:

• Clause 17.2 of the MoU specifies that the “place of arbitration shall be Hong Kong,” and that all disputes shall be “referred to and finally resolved and administered in Hong Kong,” indicating that Hong Kong is the “seat” of arbitration.
• Since the place of arbitration is outside India, Section 11 of the Arbitration and Conciliation Act, 1996, does not apply.
• The expression “arbitration proceedings” in BGS SGS SOMA JV v. NHPC Ltd. 2019 (17) SCALE 369, makes it clear that the “venue” is really the “seat of arbitration proceedings.”
• The word “administered” in Clause 17.2 clearly shows that the parties agreed that the arbitration would be seated in Hong Kong.
• The petitioner should approach the Hong Kong International Arbitration Centre, and Indian courts have no jurisdiction to entertain the petition for the appointment of an arbitrator.

Innovativeness of the argument: The petitioner’s argument innovatively relies on the distinction between “venue” and “seat,” arguing that the choice of Hong Kong was merely a venue and not the seat of arbitration. The respondent’s argument was innovative in emphasizing the term “administered” in the arbitration clause, which they argued indicated that the seat of arbitration was in Hong Kong.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether, in view of Clause 17.2 of the MoU, the parties have agreed that the seat of arbitration is at Hong Kong, and whether this Court lacks jurisdiction to entertain the present petition filed under Section 11 of the Arbitration and Conciliation Act, 1996.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. (2012) 9 SCC 552 (BALCO): The Constitution Bench of the Supreme Court held that Part I of the Arbitration and Conciliation Act, 1996, would not apply to international commercial arbitrations held outside India.
• Union of India v. Hardy Exploration and Production (India) INC (2018) 7 SCC 374: This case was discussed regarding the distinction between “venue” and “seat” of arbitration. The court noted that a “venue” can become a “seat” only if no other condition is postulated and if a condition precedent is attached to the term “place,” the said condition/indicia has to be satisfied first for “venue” to be equivalent to “seat”.
• BGS SGS SOMA JV v. NHPC Ltd. 2019 (17) SCALE 369: This case was cited to contend that the expression “arbitration proceedings” would make it clear that the “venue” is really the “seat of arbitration proceedings.” The Court noted that the expression does not include just one or more single or part hearing but the arbitration proceedings as a whole including making of the award at that place. The Court also noted in this case, the Supreme Court held that the judgment in Hardy Exploration is contrary to the decision of the Constitution Bench judgment of this Court in BALCO and therefore, cannot be considered good law.
• Enercon (India) Limited and others v. Enercon GMBH and another (2014) 5 SCC 1: The Supreme Court held that the location of the Seat will determine the courts that will have exclusive jurisdiction to oversee the arbitration proceedings and that the Seat normally carries with it the choice of that country’s arbitration/curial law.
• Eitzen Bulk A/S v. Ashapura Minechem Ltd. and another (2016) 11 SCC 508: The Supreme Court held that the mere choosing of the juridical seat of arbitration attracts the law applicable to such location.
• Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd. and others (2017) 7 SCC 678: The Supreme Court held that the moment the seat is designated, it is akin to an exclusive jurisdiction clause.
• Chandra Prakash and others v. State of U.P and another (2002) 4 SCC 234: This case was referred to by the petitioner, wherein the Supreme Court held that the doctrine of binding precedent is of utmost importance in the administration of the judicial system as it promotes certainty and consistency in judicial decisions.

Legal Provisions:

• Section 2(1)(f) of the Arbitration and Conciliation Act, 1996: Defines “International Commercial Arbitration”.
• Section 2(2) of the Arbitration and Conciliation Act, 1996: States that Part I of the Act applies where the place of arbitration is in India.
• Section 11(6) of the Arbitration and Conciliation Act, 1996: Deals with the appointment of arbitrators.

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed the principles laid down in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. [CITATION], reiterating that Part I of the Arbitration and Conciliation Act, 1996 does not apply to international commercial arbitrations seated outside India.
• The Court discussed Union of India v. Hardy Exploration and Production (India) INC [CITATION], noting the distinction between “venue” and “seat,” and that a “venue” can become a “seat” only if no other condition is postulated.
• The Court cited BGS SGS SOMA JV v. NHPC Ltd. [CITATION], to emphasize that the expression “arbitration proceedings” indicates that the venue is the seat of arbitration.
• The Court followed Enercon (India) Limited and others v. Enercon GMBH and another [CITATION], stating that the seat of arbitration determines the courts that have supervisory power over the arbitration proceedings.
• The Court followed Eitzen Bulk A/S v. Ashapura Minechem Ltd. and another [CITATION], holding that the juridical seat of arbitration attracts the law applicable to that location.
• The Court followed Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd. and others [CITATION], stating that the moment the seat is designated, it is akin to an exclusive jurisdiction clause.

What weighed in the mind of the Court?

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

• The explicit language of Clause 17.2 of the MoU, which stated that disputes would be “referred to and finally resolved by arbitration administered in Hong Kong.” The Court interpreted “administered in Hong Kong” to mean that the seat of arbitration was in Hong Kong, not just the venue.
• The principle that the seat of arbitration determines the curial law and the supervisory jurisdiction of the courts. The Court emphasized that once the seat is determined, the laws of that jurisdiction apply to the arbitration proceedings.
• The Court’s adherence to the precedent set in BALCO, which clarified that Part I of the Arbitration and Conciliation Act, 1996, does not apply to international commercial arbitrations seated outside India.
• The Court’s view that the words in Clause 17.1 “without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction” do not take away or dilute the intention of the parties in Clause 17.2 that the arbitration be administered in Hong Kong.

The court’s analysis was heavily weighted towards legal considerations (70%), focusing on the interpretation of the arbitration clause and the relevant legal precedents, while the factual aspects of the case (30%) played a secondary role in the decision.

The Court considered the argument that Clause 17.1 of the MoU, which stated that the MoU is governed by the laws of India and the courts at New Delhi shall have jurisdiction, indicated that the seat of arbitration was in India. However, the Court rejected this interpretation, holding that Clause 17.1 pertains to the substantive law of the contract and not the curial law of the arbitration. The Court also noted that the words in Clause 17.1 “without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction” has to be read along with Clause 17.3 of the agreement, which allows a party to seek provisional, injunctive, or equitable remedies from a court having jurisdiction, before, during, or after the pendency of any arbitration proceeding. The Court reasoned that this clause was necessary because, as per BALCO, Indian Courts do not have the power to grant interim measures when the seat of arbitration is outside India.

The Court’s decision was based on the interpretation of the arbitration clause and the principle that the seat of arbitration determines the applicable curial law. The Court held that the phrase “arbitration administered in Hong Kong” in Clause 17.2 indicated that the parties intended Hong Kong to be the seat of arbitration, not just the venue. The Court also emphasized that once the seat is determined, the laws of that jurisdiction apply to the arbitration proceedings. The Court also stated that the words in Clause 17.1 “without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction” do not take away or dilute the intention of the parties in Clause 17.2 that the arbitration be administered in Hong Kong.

The Court noted that the petitioner had argued that the decision in Hardy Exploration postulates that a “venue” can become a “seat” only if no other condition is postulated and if a condition precedent is attached to the term “place,” the said condition/indicia has to be satisfied first for “venue” to be equivalent to “seat”. However, the Court did not delve into the question of the correctness of the decision in BGS Soma, which had held that the judgment in Hardy Exploration is contrary to the decision of the Constitution Bench judgment of this Court in BALCO and therefore, cannot be considered good law.

The Court also noted that the petitioner had argued that when both the judgments were by Bench of equal strength, it was not open to the Bench rendering the decision in BGS Soma to hold that the decision in Hardy Exploration was incorrect and that the learned Bench in BGS Soma ought to have referred the matter to a larger Bench. However, the Court did not go into this question, considering Clause 17 of the MoU and the definite clauses therein and in the facts and circumstances of the case.

The Court’s decision was unanimous, with all three judges concurring.

“On a plain reading of the arbitration agreement, it is clear that the reference to Hong Kong as “place of arbitration” is not a simple reference as the “venue” for the arbitral proceedings; but a reference to Hong Kong is for final resolution by arbitration administered in Hong Kong.”

“The words in Clause 17.2 that “arbitration administered in Hong Kong” is an indicia that the seat of arbitration is at Hong Kong. Once the parties have chosen “Hong Kong” as the place of arbitration to be administered in Hong Kong, laws of Hong Kong would govern the arbitration.”

“The words in Clause 17.1 “without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction” do not take away or dilute the intention of the parties in Clause 17.2 that the arbitration be administered in Hong Kong.”

Key Takeaways

• The term “place of arbitration” does not automatically mean the “seat of arbitration.” The intention of the parties must be determined from the other clauses in the agreement.
• When an arbitration clause specifies that the arbitration will be “administered” in a particular location, it is a strong indication that the parties intended that location to be the seat of arbitration.
• The seat of arbitration determines the curial law and the supervisory jurisdiction of the courts.
• Part I of the Arbitration and Conciliation Act, 1996, does not apply to international commercial arbitrations seated outside India.
• Indian courts lack jurisdiction to appoint an arbitrator in international commercial arbitrations where the seat of arbitration is outside India.

Directions

The Supreme Court dismissed the Arbitration Petition No. 32 of 2018. However, the Court stated that it is open to the petitioner to approach the Hong Kong International Arbitration Centre for the appointment of an arbitrator, if theyso choose.