International Commercial Arbitration : Important Considerations For An Ever-evolving Landscape

Vikas Dutta and Rajesh Jha aim to analyse the recent developments in favour of party autonomy and answer the questions regarding the jurisdictional issues, the applicability of Part I of the Act on such Arbitrations, the interplay between ‘seat’, ‘venue’ and ‘place’ and other relevant aspects.

Introduction

International Commercial Arbitration (“ICA”) is a challenging, complex and exciting legal concept. It is challenging because India must provide a secure and constant arbitration-friendly environment for cross-border transnational dispute resolution mechanisms. It is complex because ICA involves simultaneous interplay between various kinds of laws. It is exciting because it is fascinating to see the development of an ever evolving new area of law.

The recent trends and the related pattern suggest that the Courts are in favour of respecting and preserving the autonomy of the arbitral process and that of the parties to the arbitration. Latest evidence of such approach can be observed from Apex Court’s decision in Inox Renewables Ltd case,¹ where Court gave preference to unequivocal intention of the parties as against literal interpretation of the arbitration clause and thereby upheld novation of choice of seat from Jaipur to Ahmedabad.

It is a fact of common knowledge that the concept of the arbitral seat is of central importance to the international arbitral process. This is because it is fundamental to defining the legal framework for international arbitration proceedings. This was our experience while contesting authority case of Mankastu² while seeking adjudication before three Judges Bench of Supreme Court which we will deal in the latter half of this Article.

In recent times there has been a creation of an extensive jurisprudence seeking to lay down clarity with regards to inter alia the importance of seat, the differentiation between seat and venue and the applicability of Part I and Part II of the Arbitration and Conciliation Act, 1996 (hereafter referred to as “Act”) in different sets of circumstances.

The essence of this article is that it aims to analyse the jurisprudence regarding the seat in International Commercial Arbitration as well as analyse the precise legal principles revolving around the ‘seat’ in ICA and try to reflect upon the lacunae requiring permanent judicial and legislative solution.

Fundamental concepts:

ICA and Scheme of the Act:

A cursory lookat the country’s arbitration legislation suggests that Part I of the Act deals with the arbitrations seated in India and Part II of the Act lays down provisions regarding foreign seated arbitrations.

Before deliberatingfurther into the details, it is very important to understand what exactly constitutes an ICA.The phrase has been defined in Section 2(1)(f) of the Act. In simplest terms, for the purposes of Part I of the Act,an arbitration which includes a foreign party or a foreign registered company as one of the parties is known as International Commercial Arbitration, and for the purposes of Part II of the Act, a commercial arbitration seated outside India is termed as International Commercial Arbitration.

Applicable Laws on ICA:

Any arbitration has majorly three kinds of laws involved:

• The substantive law of the contract (Lex contractus): The law which shall govern the contract between the parties. The relevant provision in this regard may be found in Section 28(1)(b) of the Act. It governs the discharge of the contract, subject and the merits of the dispute between the parties.
• The governing law of arbitration agreement (Lex arbitri): The law governing the agreement to arbitrate and the performance of that agreement. The proper law of the arbitration agreement governs the validity of the arbitration agreement, the question whether a dispute lies within the scope of the arbitration agreement; the validity of the notice of arbitration; the constitution of the tribunal; the question whether an award lies within the jurisdiction of the arbitrator; the formal validity of the award; the question whether the parties have been discharged from any obligation to arbitrate future disputes.
• The procedural/ curial law of arbitration agreement (Lex fori): The law which governs the procedure by way of which the arbitration shall proceed. It governs the internal arbitration procedures like commencement of proceedings, appointment of arbitrators, pleadings, manner of conducting evidence, etc.

Now that the fundamentals are in place, it is a perfect time to deep dive into the interplay between various practical aspects concerning ICA. In pursuance of the same, the above referred legal aspects concerning ICA have been dealt with in greater detail at relevant junctures later in this article.

INTERNATIONAL COMMERCIAL ARBITRATION VIS-À-VIS PART I OF THE ACT

The legal provisions regarding domestic arbitrations involving Indian parties and the International Commercial Arbitration as defined in Part I and Part II of the Act have been pretty clear since the initial days itself. However, the complexities started arising when the parties to the arbitration started going for more complex set-ups. For example, what would be the jurisdictional outcome when one of the parties (or both of them) to the arbitration is an Indian party and they have chosen a foreign seat? Will Part I of the Act still find application on such arbitrations? These are the few questions that have been answered below by way of the leading jurisprudence in this regard.

In BALCO³ which was a case of ICA with London as the chosen seat of arbitration, the Supreme Court held that Part I will not apply and courts in India will have no jurisdiction to entertain a petition under Section 9 of the Act. The court further held that with the choice of London as the seat of arbitration, the law governing the arbitration proceedings would be the English Law and the court in England would have supervisory jurisdiction over the arbitration proceedings as well as the arbitral award. It further held that only if the agreement between the parties is construed to provide for seat of arbitration to be outside India, Part-I would become inapplicable and Indian courts will have no jurisdiction.

In earlier referred judgment in the case of Mankastu⁴, the Supreme Court rejected a Section 11 application for appointment of an arbitrator in an International Commercial Arbitration. The clause in this case provided 'for disputes to be referred to and finally resolved by arbitration administered in Hong Kong'. It held that the said expression clearly suggests that the parties had agreed that the arbitration shall be seated at Hong Kong and that laws of Hong Kong shall govern the arbitration proceedings as well as the courts at Hong Kong shall have the power of judicial review over the arbitral award.

However, the Proviso to Section 2(2) of the Act, inserted by way of the 2015 amendment, is to the effect that, unless agreed to the contrary, Section 9, 27, 37(1)(a) and 37(3) shall also apply to international commercial arbitrations even if the place of arbitration is outside India. Therefore, to ensure that Indian courts do not have jurisdiction even in the matters covered under Section 9, 27, 37(1)(a) & 37(3) of the Act, it should be specifically stated to that effect in the agreement. Otherwise, despite the specific designation of the foreign seat, Indian courts will have jurisdiction to entertain cases relating to the aforementioned provisions of the Act.

HOT SPOTS: THE SEAT VS. VENUE CONUNDRUM

In recent times, the arbitration arena has seen a lot of tussle among the parties to arbitration with respect to the vesting of jurisdiction to the courts. InICA, a very careful consideration is required while choosing a Seat of arbitration. The arbitral seat is the legal or juridical home of the arbitration and therefore the choice of seat results in a number of significant legal consequences. The seat chosen by the parties determines the governing law of the arbitration and the manner in which it shall be conducted, unless the governing and the curial law have separately been chosen by the parties.

The above legal position can be better understood by way of a few examples. Let us assume that in a particular scenario the parties choose London as their seat of arbitration. In this case, their arbitration proceedings will be governed by the Arbitration Act, 1996 of England and the courts of England will have the jurisdiction if any dispute arises between the parties with respect to any aspect of this arbitration. Similarly, if the parties choose India as the seat of arbitration, the arbitral proceedings would be governed by the Arbitration and Conciliation Act, 1996 and the Indian courts shall have the jurisdiction to pass relevant orders or to settle the disputes arising in the course of the arbitration. In another relevant scenario, if the parties mention the substantive law as well in addition to specifying the seat of arbitration, then the contract between the parties shall be governed by the substantive law and the procedural law shall be that of the seat of arbitration. It is pertinent to note here that the chosen substantive law of the contract has no bearing on the arbitral proceedings or the questions related to the jurisdiction,if the parties have chosen the substantive and curial law of arbitration separately.

It is appropriate to state here and it is worth noting that in majority of the cases, ‘venue’ does not play any significant role in deciding the governing law or the jurisdictional aspects of the arbitration. This is primarily because venue is nothing but the geographical location at which the arbitration is scheduled to take place. In Hardy Exploration case,⁵ after considering the arbitration clause in the agreement, the Supreme Court held that Kuala Lumpur was only a venue of arbitration and not the chosen seat by the parties. On that basis, it was held that Part I of the Act was not excluded and the courts in India had the jurisdiction for entertaining the petition under Section 34 of the Act for challenge to the award.

One may ask as to why we used expression “in majority of the cases” in the first line of previous paragraph and not in absolute terms? This can be answered from the ratio ofHon’ble Supreme Court’s judgment in Roger Shashoua⁶ where the Court found that the designation of London as the “venue” of the arbitration in the absence of any express designation of a seat would suggest that the parties agreed that London would be the seat of the arbitration (in the absence of anything to the contrary). Similarly, in BGS-SGS SOMA-JV⁷ the Supreme Court while dealing with a case pertaining to domestic arbitration held that where there is an express designation of venue and no designation of any alternative place as ‘seat’ combined with a supranational body of rules governing arbitration and no other significant contrary indicia, the inexorable conclusion is that the stated venue is a juridical seat of arbitrational proceedings.

In furtherance of the same, in Mankastu⁸ which was a case of International Commercial Arbitration,the court held that seat of arbitration and venue of arbitration cannot be used interchangeably and that place of arbitration cannot be the basis to hold the same as the seat of arbitration. However, in the peculiar facts and circumstances of thatcase, the court interpreted ‘place’ to actually mean the ‘seat’ of arbitration.

Therefore, the venue of arbitration mentioned in a contract shall be equivalent to the seat of arbitration unless there is any indication to the contrary in the agreement.

Key Considerations/ Concepts:

Now post clarity on the seat and venue conundrum, the next obvious question is what should be the other considerations which, while drafting or agreeing on arbitration clauses in ICA, one should be cognizant of? In this context, following are the key considerations to arrive at with regards to the desired arbitration clause.

The closest connection test

An ideal arbitration clause should always specify the law of the arbitration agreement (governing law), the proper law of the contract (substantive law), and the curial law of the arbitration (procedural law).Arbitration clauses are further crystalized and strengthenedwhen the parties expressly indicate their choice of law. The dispute regarding the choice of the seat and the applicable law arises when the parties use the term “place”, “venue” and “seat” interchangeably in their contracts. More often, the decisions that lay the law are those which arise from clauses thatlack specificity and express indicators of the parties’ intent and choices. For instance, the Court in PASL Wind Solutions⁹ pointed out that the closest connection test would only apply if it was unclear that a seat has been designated either by the parties or by the tribunal.

The Indian courts in various cases have interpreted the agreement of the parties in order to determine the seat. For example, in Enercon¹⁰ the question before the Court was whether the phrase “venue shall be London” as used in the arbitration agreement imply that London was the purported seat of arbitration. The Supreme Court in this case, while recognising the test of the closest and most intimate connection, held that by expressly making Indian law as the governing law of the arbitration agreement, that of the underlying contract and the curial law of the arbitration as well, the parties have by necessary implication designated India to be the seat of arbitration and that London is merely the venue.

The party autonomy principle

In the recent landmark judgment of Amazon v. Future Retail¹¹., the Court underscored that party autonomy is one of the pillars of arbitration and that parties are free to agree upon the procedure which should govern them in the arbitration.Earlier, in Centrotrade¹² the Supreme Court taking a leap in ensuring and strengthening the party autonomy upheld the validity of a two-tier arbitration agreement under the Act. The court held that the Act does not prevent, either expressly or impliedly, the parties' autonomy to agree to a procedure for arbitration of the dispute between them. The party autonomy was upheld to the extent that they may agree to a procedure whereby the arbitral award might be reconsidered by another arbitrator or panel of arbitrators by way of an appeal.

Moreover,in PASL Wind Solutions¹³ also,the Supreme Court had emphasised uponparty autonomy being thebrooding and guiding spirit of arbitration. It had further held that Section 28(1)(a) of the Act makes no reference to arbitration being conducted between two Indian parties in a country other than India, and cannot be held to interdict two Indian parties from resolving their disputes at a neutral forum (seat) in a country other than India. The Court also held that the balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public in permitting two Indian nationals to avail of a challenge procedure of a foreign county. This stance can further be strengthened by the fact that when a foreign award passes muster under the challenge procedure of that country, its enforcement can still be resisted in India on the grounds contained in Section 48 of the Act. One of the grounds available under the said provisionis when a foreign award is contrary to the public policy of India.This in essence safeguards the public policy principle from getting violated even in cases where two Indian parties choose to arbitrate outside India and seek a foreign award.

CONCLUSION

ICA arena is said to be a meeting point for different legal cultures where we regularly see a convergence and interchange of practices. It is a feature of arbitration proceedings that questions seat and venue, and thus, the jurisdiction-related questions continue to come up for consideration before the courts. The law on this matter continues to be dynamic given the necessity to balance parties’ intention as gleaned from a plain reading of the written word on the one hand, with the often expressed principle of upholding the validity of the agreement on the other.

Therefore, it is imperative to draft arbitration clauses with absolute clarity to avoid uncertainty and delays. For instance, it is always advisable that the arbitration proceedings law is kept the same as the law of the country of the seat. Further, a clear contractual choice of “seat” rather than “venue” would always be better. Furthermore, in cases where there is no express choice of seat and no institutional power to designate the seat law, such as in ad hoc arbitrations, the parties need to apply to the Tribunal to determine a juridical seat so that such issues are not raised at the enforcement stage.

As India is constantly taking active steps for establishing itself as an arbitration-friendly jurisdiction and is trying to strengthen the party-autonomy principle, more and more possibilities of various permutations and combinations concerning the interplay between the three applicable laws and the seat of arbitration are arising. For instance, two foreign parties choosing India as the seat of their arbitration but the curial law of their own country. Or, the parties choosing governing law and the procedural law of two different jurisdictions without specifically mentioning the seat of arbitration. There can be many more such combinations that still remain unexplored by the parties to the arbitration. What would be the approach of Indian courts in such scenarios and what would be the extent of intervention that they would be willing to do is something that the arbitration enthusiasts will really look forward to.

To conclude, unlike Courts, Arbitration tribunals are the creation of a private contract, so the effectiveness of any Arbitration process, more so in ICA, is directly proportionate to the effectiveness and rationale of the Arbitration Clause. Furthermore, in a transnational contract, parties have specific objectives, such as a neutral forum, choice of jurisdiction to seek enforcement, party autonomy to agree on procedures, appeal, confidentiality, simplicity and flexibility of the process, time frame, scope etc. Therefore, correct and effective drafting is an essential precondition, as they say, “Well begun is half done.”