Supreme Court settles jurisdiction in arbitration: Inox Renewables Ltd. wins against Jayesh Electricals Ltd. (13 April 2021)

Introduction

Date of the Judgment: 13 April 2021

Citation: (2021) INSC 217

Judges: Justice Rohinton Fali Nariman and Justice Hrishikesh Roy

Can parties change the “seat” of arbitration by mutual agreement, even if it’s not in writing? The Supreme Court of India addressed this crucial question in a recent case involving Inox Renewables Ltd. and Jayesh Electricals Ltd. This judgment clarifies the importance of the “seat” of arbitration in determining which court has jurisdiction over arbitration matters. The Court held that the seat of arbitration can be changed by mutual agreement, even if not in writing, and that the courts at the new seat will have exclusive jurisdiction. The majority opinion was authored by Justice Rohinton Fali Nariman, with Justice Hrishikesh Roy concurring.

Case Background

On January 28, 2012, Gujarat Fluorochemicals Ltd. (GFL) and Jayesh Electricals Ltd. (Respondent) entered into a purchase order for the supply of power transformers. This purchase order included an arbitration clause, specifying Jaipur as the venue for arbitration.

Later, on March 30, 2012, Inox Renewables Ltd. (Appellant) acquired GFL’s business through a business transfer agreement. This agreement, however, designated Vadodara as the seat of arbitration for disputes arising from that agreement, a detail that was not related to the original purchase order between GFL and the Respondent. The Respondent was not a party to this business transfer agreement.

A dispute arose, and on September 5, 2014, the Respondent applied under Section 11 of the Arbitration and Conciliation Act, 1996, to appoint an arbitrator. The High Court of Gujarat at Ahmedabad appointed a sole arbitrator. The arbitrator passed an award on July 28, 2018, in favor of the Respondent.

The Appellant filed a Section 34 petition in Ahmedabad to challenge the award. The Respondent argued that the courts at Vadodara had exclusive jurisdiction based on the business transfer agreement. The Commercial Court at Ahmedabad agreed with the Respondent, stating that the courts at Vadodara had exclusive jurisdiction.

The Appellant then filed a Special Civil Application against the order of the Commercial Court. The High Court of Gujarat at Ahmedabad held that even if Ahmedabad had jurisdiction, the exclusive jurisdiction clause in the purchase order vested jurisdiction in the courts at Rajasthan, and therefore the appropriate court would be at Jaipur. However, the High Court did not find any error in the Ahmedabad Court’s decision and dismissed the Special Civil Application.

Timeline

Course of Proceedings

The Commercial Court at Ahmedabad accepted the Respondent’s argument that the courts at Vadodara had exclusive jurisdiction based on clauses 9.11 and 9.12 of the business transfer agreement. This decision was challenged in the High Court of Gujarat at Ahmedabad, which, while noting the arbitration clause in the purchase order specifying Rajasthan courts, ultimately dismissed the Appellant’s application. The High Court held that even if Ahmedabad had jurisdiction, the exclusive jurisdiction clause in the purchase order vested jurisdiction in the courts at Rajasthan, and therefore the appropriate court would be at Jaipur.

Legal Framework

The case primarily revolves around the interpretation of Section 20 of the Arbitration and Conciliation Act, 1996, which deals with the place of arbitration. Section 20(1) states that parties are free to agree on the place of arbitration. Section 20(3) allows the arbitral tribunal to determine the place of arbitration if the parties fail to agree.

The relevant portion of the arbitration clause (clause 8.5) in the purchase order states:
“The venue of the arbitration shall be Jaipur. In the event of arbitrators’ award being not acceptable to either party, the parties shall be free to seek lawful remedies under the law of India and the jurisdiction for the same shall be courts in the State of Rajasthan.”

The Supreme Court also considered the definition of “court” under Section 2(1)(e) of the Arbitration and Conciliation Act, 1996, which specifies the courts that have jurisdiction over arbitration matters.

Arguments

Appellant’s Arguments:

• The Appellant argued that the business transfer agreement was irrelevant because it was not between the Appellant and the Respondent.
• The Appellant contended that the arbitrator had recorded in the award that the venue/place of arbitration was shifted to Ahmedabad by mutual consent. Consequently, the seat of arbitration became Ahmedabad, giving exclusive jurisdiction to the courts at Ahmedabad.
• The Appellant relied on the Supreme Court’s judgment in BGS SGS SOMA JV vs. NHPC Limited, (2020) 4 SCC 234, which states that the designated seat of arbitration is akin to an exclusive jurisdiction clause.

Respondent’s Arguments:

• The Respondent argued that any shift in the seat of arbitration must be by a written agreement between the parties.
• The Respondent contended that the arbitrator’s finding regarding the shift in venue referred only to Section 20(3) of the Arbitration and Conciliation Act, 1996, indicating a convenient place for the arbitration, not the seat.
• The Respondent relied upon Videocon Industries Limited vs. Union of India & Anr., (2011) 6 SCC 161 and Indus Mobile Distribution Private Limited vs. Datawind Innovations Private Limited, (2017) 7 SCC 678, to argue that a change in the seat of arbitration requires a written agreement.
• The Respondent argued that the vesting of exclusive jurisdiction with the courts in Rajasthan was independent of the arbitration clause stating that the arbitration was to be held at Jaipur.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the parties had mutually agreed to shift the seat of arbitration from Jaipur to Ahmedabad, and if so, what would be its impact on the jurisdiction of the courts?

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the parties had mutually agreed to shift the seat of arbitration from Jaipur to Ahmedabad. This mutual agreement, recorded by the arbitrator, was sufficient to change the seat of arbitration, even without a formal written agreement.

The Court emphasized that the “seat” of arbitration is crucial for determining jurisdiction. Once the seat is chosen, it acts like an exclusive jurisdiction clause, giving the courts at that seat exclusive authority over arbitration matters.

The Court stated that the judgment in Videocon Industries Limited vs. Union of India & Anr., (2011) 6 SCC 161 was not applicable to the facts of the present case, as there was no amendment clause in the agreement between the parties which required a written agreement to change the seat of arbitration.

The Court also clarified that the reliance placed by the Respondent on Indus Mobile Distribution Private Limited vs. Datawind Innovations Private Limited, (2017) 7 SCC 678 supported the Appellant’s case, as it clarified that shifting the “venue” under Section 20(1) is a shift of the seat, not just a convenient place for meetings.

The Court held that the clauses in the Purchase Order must be read together. The jurisdiction of the courts in Rajasthan was linked to the seat of arbitration being at Jaipur. Once the seat was changed to Ahmedabad by mutual agreement, the courts in Ahmedabad had exclusive jurisdiction.

The Court quoted the arbitrator’s finding:
“…the parties have mutually agreed, irrespective of a specific clause as to the [venue, that the place] of the arbitration would be at Ahmedabad and not at Jaipur.”

The Court also quoted from BGS SGS (supra):
“…the moment a seat is designated by agreement between the parties, it is akin to an exclusive jurisdiction clause, which would then vest the courts at the “seat” with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties.”

The Court further stated:
“…the fact that the arbitral proceedings “shall be held” at a particular venue would also indicate that the parties intended to anchor arbitral proceedings to a particular place, signifying thereby, that that place is the seat of the arbitral proceedings.”

The Court set aside the impugned judgment and directed the parties to approach the courts at Ahmedabad for resolution of the Section 34 petition. The deposit made by the Appellant in the Supreme Court was ordered to be transferred to the appropriate forum at Ahmedabad.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of party autonomy in arbitration, as well as the need to give effect to the mutual agreement between parties. The Court’s reasoning also emphasized the importance of the “seat” of arbitration as the anchor for determining jurisdiction.

Key Takeaways

• The “seat” of arbitration is crucial for determining which court has jurisdiction over arbitration matters.
• Parties can mutually agree to change the seat of arbitration, even without a formal written agreement.
• Once the seat is changed, the courts at the new seat have exclusive jurisdiction over arbitration proceedings.
• The judgment in Videocon Industries Limited vs. Union of India & Anr., (2011) 6 SCC 161 is not applicable to cases where there is no amendment clause requiring written agreement.

Directions

The Supreme Court directed that:

• The parties are now referred to the courts at Ahmedabad for resolution of the Section 34 petition.
• The deposit of Rs. 40,00,000 made by the Appellant in the Supreme Court is to be transferred to the appropriate forum at Ahmedabad.
• The execution proceedings shall remain stayed till the disposal of the Section 34 petition, unless the appropriate forum at Ahmedabad varies this interim order.

Development of Law

The ratio decidendi of this case is that the seat of arbitration can be changed by mutual agreement, even if not in writing, and that the courts at the new seat will have exclusive jurisdiction. This clarifies the legal position regarding the importance of the “seat” in arbitration and the extent of party autonomy in determining the seat. This is a change from previous positions where a written agreement was required to change the seat of arbitration.

Conclusion

In conclusion, the Supreme Court’s judgment in M/s. Inox Renewables Ltd. vs. Jayesh Electricals Ltd. clarifies that the “seat” of arbitration is paramount in determining jurisdiction. The Court held that parties can mutually agree to change the seat, even without a written agreement, and that the courts at the new seat will have exclusive jurisdiction. This decision emphasizes party autonomy and provides clarity on the interpretation of Section 20 of the Arbitration and Conciliation Act, 1996.

Category

Parent Category: Arbitration Law

Child Categories:

• Seat of Arbitration
• Jurisdiction in Arbitration
• Section 20, Arbitration and Conciliation Act, 1996
• Mutual Agreement

Parent Category: Arbitration and Conciliation Act, 1996

Child Categories:

• Section 20, Arbitration and Conciliation Act, 1996

FAQ

Q: What is the “seat” of arbitration?

A: The “seat” of arbitration is the legal place of arbitration, which determines which court has jurisdiction over the arbitration proceedings. It’s not just the physical location where hearings take place.

Q: Can the “seat” of arbitration be changed?

A: Yes, the Supreme Court has clarified that parties can mutually agree to change the seat of arbitration, even if there is no written agreement to that effect.

Q: What happens if the “seat” of arbitration is changed?

A: If the seat of arbitration is changed, the courts at the new seat will have exclusive jurisdiction over the arbitration proceedings.

Q: What is the significance of this judgment?

A: This judgment clarifies the importance of the “seat” of arbitration and emphasizes party autonomy in determining the seat. It also clarifies that a written agreement is not always necessary to change the seat of arbitration.

Q: What is Section 20 of the Arbitration and Conciliation Act, 1996?

A: Section 20 of the Arbitration and Conciliation Act, 1996 deals with the place of arbitration. It states that parties are free to agree on the place of arbitration, and if they don’t, the arbitral tribunal can decide.