In case involving International Commercial Arbitration, it is often asked as to what is the law governing the matter of dispute between the parties, the lawgoverning the arbitration on the basis of which the dispute will be settled, which is essential for the construction and validity of the Arbitration agreement and the procedure of Arbitration? The rights and obligations arising out of the contract between the parties is governed by law of a particular country or some other considerationsagreed between the parties. Upon selecting a local law, it is referred to as the governing or properlaw of contract. The procedure to determined the proper law has to be in accordancewith the general principles of the conflict of laws, which is the law chosen by the parties, or in the absence of such choice, thelaw of the country with which the agreement is most closely connected as inferred from the intention of the parties to thecontract depending upon surrounding factors.The law governing the Arbitration is extremely essential since itdetermines the validity, effect and interpretation of the Arbitration agreement and it is this law which is relied upon by thearbitrator to determine the scope of his powers and theprocedure to be followed by the arbitral tribunal (unless the parties expressly agree to submit themselves to an institutional Arbitration like SIAC etc and then have to follow the procedure which is prescribed by the aforementioned institutionswhich is different from the law governing thearbitration and procedural law of arbitration).The Seat is the determining factor for what law is applicable,which would be governing the Arbitration including the procedural aspects. When the parties state an applicable law for theArbitration agreement, that law governs the Arbitration agreement including the procedural aspects of Arbitration. However, in the event that the parties have not specifically chosen the lawgoverning the conduct and procedure of Arbitration, expressly or by necessary implication, the law of the place of the Seat of Arbitration will determine the conduct of the Arbitration. The conduct of Arbitration will beregulated and the courts of the nation in which the Seat of Arbitration is located can then only do the challenge to an award. As such this Court would be the supervisory courtpossessed with the power to annul the award.The Supreme Court has held that the choice of anothercountry as the Seat of Arbitration undoubtedly implies anacceptance that the law of that country relating to theconduct and supervision of Arbitrations will apply to the proceedings.[i] The seat is so important thatif the Arbitration agreement is found or held to provide for aSeat / place of Arbitration in a foreign country, then even if theparties want that the Indian Arbitration Act shallgovern the arbitration proceedings, Indian courts cannotexercise supervisory jurisdiction over the Arbitration or theaward.However, recently to the new amendments proposed to the
Arbitration and Conciliation Act, 1996 (“Act”), the LawCommission Report (“Report”) recommends that PartI of the Act, such as interim relief[ii], court assistance for evidence[iii], appealable orders[iv], will remain available to parties in a foreignSeated Arbitration which now has been accepted by theUnion Cabinet. Additionally, in another amendmentssuggested in the Report, the Seat would be defined to mean the juridical Seat of the Arbitration.The Seat of Arbitration may well bequite independent of the place or thevenue where the hearings or otherparts of the arbitral process occur ortake place. The Seat of Arbitration it isof extreme importance, since the courts ofthe Seat that have the supervisoryjurisdiction over the arbitral process.
Difference between Seat and Venue of Arbitration
Identifying the Seat of Arbitration after Balco hasbecome one of the most important features of initiating the arbitration process. The seat selected decides thelaw governing the Arbitration procedure and often, moreimportantly, the process and rights relating to enforcementof the arbitration award. The seat and the venue of the arbitration is not always the same. Location and even the timings ofhearings take place during the course of the Arbitration inseveral different countries, the chosen Seat of Arbitrationwill remain unaffected independent of the geographicalplace where the hearings take place.In a case[v] the Supreme Court of India decided on adispute,which arose for non-delivery of supplies under an Intellectual Property License Agreement (“IPLA”)containing an arbitration clause. The relevant aspects of thearbitration clause in dispute were as under: The governing law of the IPLA was Indian law; the venueof the arbitration was London; and the provisions of the
Indian Arbitration and Conciliation Act, 1996 were toapply.Proceedings were initiated both in Indiaand in England that sought declarations on the validity of thearbitration clause and requesting for anti-suit injunctions.The Hon’ble Bombay High Court had earlier concluded that London despite not being the Seat ofArbitration, would have concurrentjurisdiction since, the venue of arbitration was London. The matter then went before the Hon’ble Supreme Court wherethe fundamental issue was the assumption that the Seat ofArbitration was India, whether after this determination the English Courts wouldhave concurrent jurisdiction as the venue of arbitration is in London? The Hon’ble Supreme Court of India held that “the expressmention in the arbitration clause that London was thevenue of the arbitration could not lead to the inference that London was to be the Seat because although London wastermed as the venue, the law governing the substantivecontract, the law governing the arbitration agreement andthe law governing the conduct of the arbitration werechosen to be Indian law and the closest and most realconnection was with India. Once the Seat was in India,Indian Courts would have exclusive supervisory jurisdictionand English Courts cannot have concurrent jurisdiction”.[vi]The Bombay High Court in another case[vii] in a section 11 Application under the Acthad also taken up this issue for consideration as to whether twoIndian parties can chose a Foreign Seat of Arbitration?Whether two Indian parties can choose a foreign Seated Arbitration? The Hon’ble Bombay High Court relied upon the decision made by the Supreme Court, which held that the intention of the legislature would be clear that Indian parties andCompanies incorporated in India cannot not be allowed to step away from Indian law which is a part of the publicpolicy of the country and hence cannot chose a foreign Seat of Arbitration and therefore relying upon the same wentahead to appoint an Arbitrator in the aforesaid case.[viii] However,another judgment[ix] is also about two Indianparties having a foreign Seated Arbitration. However, thesaid judgment finally does not answer the said issue.There is very clearly some uncertainty with respect to theaforesaid issue as on date. A conclusive finding on the same from the Hon’ble Supreme Court of India would be welcome.
Essentials to an Arbitration Agreement
While drafting an arbitration clause in a particular contract, especially in case ofInternational Commercial Arbitration; one should keep take care of the following things:
Arbitration clause shall clearly provide the composition of the arbitral tribunal, time forappointment and the language of the proceedings:
- Parties have to decide on the law governing the arbitration agreement;
- The procedural rules to be followed in the Arbitration like SIAC, LCIA etc have to be expressly stated;
The parties should also expressly agree upon the Seat of the Arbitration and not to use or confuse the terminology with any other words especially venue or place interchangeably.In case, the venue of the arbitral hearings is at a location other than the Seat ofArbitration, then it should be expressly mentioned in the contract that the Seat of Arbitration would bethe governing law of arbitration and the same will remain soirrespective of the hearings happening at various places/locations.
Frequently Asked Questions
1. How is the jurisdiction of courts determined in a domestic arbitration?
The Delhi High Court[x], recently had the opportunity to decide which Indian court would haveterritorial jurisdiction in a domestic arbitration. The court, distinguishing the venue of arbitration fromthe seat, held that an arbitration being conducted at a particular specified venue (where the seat wasnot specified), does not attach territorial jurisdiction of the courts of that venue in a domestic arbitration.The judgment alsostates that the jurisdiction of courts in a domestic arbitration would bedetermined according to the principles contained in the Code of Civil Procedure, 1908, i.e. (i)the place of execution of the contract; (ii) the place of performance ofthe contract; (iii) where the paymentunder the contract has to be made; or (iv) place of residence of the defendant/respondent.
2. What is seat theory?
Parties generally decide the seat of arbitration. It has a lot of consequences attached to it. For example, when both parties are Indian, The court in this country has the power to set aside the arbitral award. It is domestic award so no NY convention applies.
Or, when A and B are foreign parties and they choose India as seat of arbitration — courts in India will have jurisdiction. So Arbitration and Conciliation Act, 1996 will apply. And courts will have power to set aside and everything. The seat theory says that the seat of the place will govern the procedure of the court.
Edited by Shuvneek Hayer
Approved & Published – Sakshi Raje
[i]BharatAluminium Company Ltd v. Kaiser Aluminium Technical
Service Inc (“Balco”)Civ App 3678 of 2007 (6 September 2012)
[ii]Arbitration and Conciliation Act 1996, Section 9
[iii]Arbitration and Conciliation Act 1996, Section 27
[v]Enercon (India) Ltd and Ors v EnerconGmbhand Anr before the Hon’ble(2014) 5 SCC 1
[vi]Enercon (India) Ltd and Ors v EnerconGmbhand Anr before the Hon’ble(2014) 5 SCC 1
[vii]M/s AddharMercantile Private Limited vs Shree JagdambaAgricoExports Pvt Ltd2015 SCC OnLineBom 7752
[viii]TDM Infrastructure Private Limited v UE Development IndiaPrivate Limited(2008) 14 SCC 271
[ix]Reliance IndustriesLimited &Anr v Union of IndiaSpecial Leave petition (Civil) No 11396 of 2015
[x]PCP International Limited (“Petitioner”) v. LancoInfratech Limited(“Respondent”), OMP (I) No. 350/2015