Supreme Court Clarifies “Seat” of Arbitration Under the Arbitration Act, 1996: BGS SGS SOMA JV vs. NHPC LTD. (2019) INSC 1052 (10 December 2019)

Case Background

On January 16, 2004, BGS SGS SOMA JV (the Petitioner) was awarded a contract for the construction of the Subansri Lower Hydroelectric Project. The project site was located in the states of Assam and Arunachal Pradesh. A dispute arose between the Petitioner and NHPC LTD. (the Respondent) regarding payment of compensation for losses suffered due to delays and hindrances caused by the Respondent. The contract included a dispute resolution clause (67.3) that stipulated arbitration as the method for resolving disputes.

The arbitration clause (67.3) specified that disputes with an Indian Contractor would be settled under the Indian Arbitration and Conciliation Act, 1996. It also stated that the arbitration proceedings would be held at New Delhi/Faridabad, India. A three-member Arbitral Tribunal was constituted, and seventy-one sittings took place in New Delhi between August 2011 and August 2016. The Tribunal delivered its award in New Delhi on August 26, 2016, in favor of the Petitioner.

The Respondent, being aggrieved by the arbitral award, filed an application under Section 34 of the Arbitration Act, 1996, in the Court of the District and Sessions Judge, Faridabad, Haryana, on January 3, 2017. The Petitioner then filed an application seeking the return of the Section 34 petition for presentation before the appropriate court in New Delhi or Dhemaji, Assam. The case was later transferred to the Special Commercial Court at Gurugram.

Timeline

Course of Proceedings

The Special Commercial Court at Gurugram allowed the Petitioner’s application and returned the Section 34 petition, stating it lacked jurisdiction to proceed. The Respondent then appealed to the High Court of Punjab and Haryana at Chandigarh under Section 37 of the Arbitration Act, 1996, read with Section 13(1) of the Commercial Courts Act, 2015.

The High Court of Punjab and Haryana held that the appeal under Section 37 of the Arbitration Act, 1996, was maintainable. It also concluded that New Delhi was only a convenient venue for the arbitration proceedings, and not the seat. The High Court further held that Faridabad had jurisdiction because part of the cause of action arose there. The High Court set aside the judgment of the Special Commercial Court, Gurugram.

Legal Framework

The case primarily revolves around the interpretation of the Arbitration and Conciliation Act, 1996, specifically Sections 2(1)(e), 20, 31(4), 34, 37, and 42.

• Section 2(1)(e) of the Arbitration Act, 1996: Defines “Court” as the principal Civil Court of original jurisdiction in a district or the High Court having jurisdiction to decide the questions forming the subject-matter of the arbitration.
• Section 20 of the Arbitration Act, 1996: Deals with the place of arbitration, allowing parties to agree on the place. If no agreement exists, the arbitral tribunal determines the place. It also allows the tribunal to meet at any place for consultations, hearings, etc.
• Section 31(4) of the Arbitration Act, 1996: Requires the arbitral award to state its date and the place of arbitration as determined under Section 20.
• Section 34 of the Arbitration Act, 1996: Allows for an application to set aside an arbitral award on specific grounds.
• Section 37 of the Arbitration Act, 1996: Specifies the orders against which an appeal can be made, including orders refusing to set aside an arbitral award under Section 34.
• Section 42 of the Arbitration Act, 1996: Stipulates that when an application under Part I of the Act has been made in a court, that court alone has jurisdiction over the arbitral proceedings.

The Commercial Courts Act, 2015, particularly Section 13, was also considered, which deals with appeals from decrees of Commercial Courts. The proviso to Section 13(1) of the Commercial Courts Act, 2015, states that appeals shall lie from such orders passed by the Commercial Division or a Commercial Court that are specifically enumerated in Order XLIII of the Code of Civil Procedure, 1908 and Section 37 of the Arbitration and Conciliation Act, 1996.

Arguments

Petitioner’s Arguments:

• The Petitioner argued that the High Court’s decision that an appeal under Section 37 of the Arbitration Act, 1996, was maintainable was incorrect. According to the Petitioner, an order returning a Section 34 petition does not amount to an order refusing to set aside an arbitral award under Section 34.

• The Petitioner contended that New Delhi was the “seat” of arbitration, not merely a “venue”. The Petitioner stated that the parties chose to have sittings at New Delhi, and the Arbitral Tribunal considered that the award made at New Delhi would be made at the seat of the arbitral proceedings.

• The Petitioner argued that even if both New Delhi and Faridabad had jurisdiction, New Delhi being the choice of the parties, the principle contained in Hakam Singh v. M/s. Gammon (India) Ltd., (1971) 1 SCC 286, would govern.

• The Petitioner relied on several judgments of the Supreme Court, including Bharat Aluminium Co. (BALCO) v. Kaiser Aluminium Technical Service, Inc., (2012) 9 SCC 552, and Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited & Ors., (2017) 7 SCC 678, to support their claim that the “seat” of arbitration is akin to an exclusive jurisdiction clause.

• The Petitioner argued that the recent judgment in Union of India v. Hardy Exploration and Production (India) Inc. 2018 SCC Online SC 1640, was incorrectly decided and contrary to the Five Judge Bench decision in BALCO (supra).

Respondent’s Arguments:

• The Respondent argued that the High Court was correct in holding that an order passed under Section 151 read with Order VII Rule 10 of the Code of Civil Procedure, 1908, would amount to a refusal to set aside an arbitral award.

• The Respondent contended that the arbitration clause did not expressly state that either New Delhi or Faridabad was to be the seat of the Arbitral Tribunal. Therefore, the arbitration clause only referred to a convenient venue.

• The Respondent argued that since the agreements were signed in Faridabad and notices were sent to the Respondent’s Faridabad office, part of the cause of action arose in Faridabad, giving the Faridabad courts jurisdiction.

• The Respondent stressed that in BALCO (supra), even if New Delhi was the seat of arbitration, both New Delhi and Faridabad would have concurrent jurisdiction. Since the Court at Faridabad was first approached, that Court alone would have jurisdiction under Section 42 of the Arbitration Act, 1996.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the appeals filed under Section 37 of the Arbitration Act, 1996, were maintainable.
2. Whether the “seat” of the arbitration proceedings is New Delhi or Faridabad.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Court considered the following authorities:

The Court also referred to the following legal provisions:

• Section 2(1)(e) of the Arbitration Act, 1996: Definition of “Court”.
• Section 20 of the Arbitration Act, 1996: Place of arbitration.
• Section 31(4) of the Arbitration Act, 1996: Contents of arbitral award, including stating the place of arbitration.
• Section 34 of the Arbitration Act, 1996: Application to set aside an arbitral award.
• Section 37 of the Arbitration Act, 1996: Appealable orders.
• Section 42 of the Arbitration Act, 1996: Jurisdiction of courts.
• Section 13 of the Commercial Courts Act, 2015: Appeals from decrees of Commercial Courts.
• Order XLIII Rule 1(a) of the Code of Civil Procedure, 1908: Appeal from orders.
• Articles 20 and 31 of the UNCITRAL Model Law: Place of arbitration and form and contents of award.

Judgment

The Court analyzed the arguments and authorities, concluding that the appeals filed under Section 37 of the Arbitration Act, 1996, were not maintainable. The Court also determined that New Delhi was the “seat” of the arbitration proceedings, not just a “venue.”

The Court emphasized that the “seat” of arbitration is akin to an exclusive jurisdiction clause. Once the parties have chosen a seat, the courts of that seat alone have jurisdiction over the arbitral proceedings.

The Court overruled the judgment in Union of India v. Hardy Exploration and Production (India) Inc. 2018 SCC Online SC 1640, stating that it was contrary to the Five Judge Bench decision in Bharat Aluminium Co. (BALCO) v. Kaiser Aluminium Technical Service, Inc., (2012) 9 SCC 552. The Court held that the Hardy Exploration judgment failed to apply the Shashoua principle and would lead to conflicting decisions and undermine the policy underlying the New York Convention and the UNCITRAL Model Law.

The Court referred to the following authorities to support its reasoning:

• Roger Shashoua & Ors. v. Mukesh Sharma [2009] EWHC 957 (Comm): The Court cited this case to emphasize that the “venue” of arbitration can be the “seat” if there are no other contrary indicators.
• Bharat Aluminium Co. (BALCO) v. Kaiser Aluminium Technical Service, Inc. (2012) 9 SCC 552: The Court relied heavily on this case to establish the principle that the “seat” of arbitration is akin to an exclusive jurisdiction clause.
• Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited & Ors. (2017) 7 SCC 678: The Court followed this case to clarify that the seat of arbitration 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 need to maintain the integrity of the arbitration process and the principle of party autonomy. The Court emphasized that once parties have chosen a “seat” for arbitration, they have also chosen the courts that will have jurisdiction over the arbitral proceedings. This is crucial for ensuring certainty and avoiding conflicting decisions. The Court also sought to align Indian arbitration law with international best practices and the UNCITRAL Model Law.

The Court’s reasoning can be summarized as follows:

• The Court emphasized the distinction between “venue” and “seat” in arbitration agreements. While “venue” may refer to a place for hearings, the “seat” is the juridical seat of the arbitration, which determines the supervisory jurisdiction of courts.

• The Court relied on the principle of party autonomy, stating that parties are free to choose the “seat” of arbitration. This choice is akin to an exclusive jurisdiction clause, giving the courts at the seat exclusive jurisdiction over the arbitral proceedings.

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  The Court held that the “seat” of arbitration should be determined by looking at the overall context of the arbitration agreement, the conduct of the parties, and the place where the award was made.

• The Court reiterated that Section 37 of the Arbitration Act, 1996, is exhaustive, and appeals can only be made against orders specifically mentioned therein.

• The Court overruled the judgment in Union of India v. Hardy Exploration and Production (India) Inc. 2018 SCC Online SC 1640, stating that it was contrary to the Five Judge Bench decision in Bharat Aluminium Co. (BALCO) v. Kaiser Aluminium Technical Service, Inc., (2012) 9 SCC 552. The Court held that the Hardy Exploration judgment failed to apply the Shashoua principle and would lead to conflicting decisions and undermine the policy underlying the New York Convention and the UNCITRAL Model Law.

Implications

This judgment has significant implications for arbitration in India:

• Clarification on “Seat” vs. “Venue”: The judgment clarifies the distinction between “seat” and “venue” in arbitration agreements, emphasizing that the “seat” is the juridical seat of arbitration, which determines the jurisdiction of courts.

• Party Autonomy: The judgment reinforces the principle of party autonomy, allowing parties to choose the “seat” of arbitration and, by extension, the courts that will have jurisdiction over the arbitral proceedings.

• Exclusive Jurisdiction: The judgment establishes that the choice of “seat” is akin to an exclusive jurisdiction clause, giving the courts at the seat exclusive jurisdiction over the arbitral proceedings.

• Consistency with International Best Practices: The judgment aligns Indian arbitration law with international best practices and the UNCITRAL Model Law, promoting India as a favorable jurisdiction for arbitration.

• Overruling of Hardy Exploration: The overruling of the judgment in Union of India v. Hardy Exploration and Production (India) Inc. 2018 SCC Online SC 1640 ensures that the law is consistent with the Five Judge Bench decision in Bharat Aluminium Co. (BALCO) v. Kaiser Aluminium Technical Service, Inc., (2012) 9 SCC 552, avoiding conflicting decisions.

• Importance of Clear Drafting: The judgment highlights the importance of clear and unambiguous drafting of arbitration clauses, particularly regarding the choice of “seat.”

• Reduced Litigation: By clarifying the jurisdictional aspects of arbitration, this judgment aims to reduce litigation and streamline the arbitration process.

Conclusion

The Supreme Court’s judgment in BGS SGS SOMA JV vs. NHPC LTD. (2019) INSC 1052 is a landmark decision that provides much-needed clarity on the concept of “seat” in arbitration agreements under the Arbitration and Conciliation Act, 1996. The Court’s emphasis on party autonomy, the distinction between “seat” and “venue,” and the principle of exclusive jurisdiction will have a lasting impact on arbitration in India. By aligning Indian arbitration law with international best practices, this judgment promotes a more efficient and predictable arbitration landscape in the country.

The overruling of the judgment in Union of India v. Hardy Exploration and Production (India) Inc. 2018 SCC Online SC 1640 ensures consistency in the application of the law and prevents conflicting interpretations. This decision will be a guiding light for courts and parties involved in arbitration proceedings, promoting greater certainty and reducing unnecessary litigation.

In conclusion, this judgment serves as a significant step forward in the development of arbitration law in India, reinforcing the country’s commitment to a robust and effective dispute resolution mechanism.