Determining the seat of arbitration

Gagan Anand
Legacy Law Offices, New Delhi
anand@legacylawoffices.com

The alternative dispute resolution mechanism of arbitration has been widely preferred by the parties owing to its accessibility and expedited procedures. In recent years, this preference has also extended to the sectors of commercial- and construction-related disputes, whether domestic or international. With an open option to mutually decide on the method, the dispute adjudicator, the applicable laws or even the place, arbitration has developed the reputation of actually serving its purpose of attaining an amicable settlement of disputes.

However, owing to such a high number of decisions which have to be undertaken mutually, arbitration has, unfortunately, not been absolved from litigation and has often been subjected to substantial judicial intervention, whether before or after the proceedings. Thus, while some of the aforementioned choices in relation to the setting up of an arbitration may seem to be prima facie trivial, their role in determining the case in itself is rather crucial.

One of the recently trending choices, which has been witness to a plethora of open lawsuits, is that of determining the seat of arbitration. Not to be confused with the physical place or venue, the ‘seat’ is predominantly referred to as the ‘situs’ of arbitration, owing to its consequence of governing the entire arbitral procedure or the lex arbitri.

While the lex arbitri has been a subject of a number of well-known landmark judicial precedents, its coverage in the legislative domain has been reasonably scarce. However, such lack of insertion in statutes, rules or regulations may also be due to the surrounding air of ambiguity with respect to the nexus of said relationship and the length to which it may exist.

A simplified explanation to the latter statement may be that while the seat of arbitration has been adequately held to be a determining factor of the laws which may govern the tribunal, there have also been a number of well-reasoned judgments, which have laid down detailed reasons for holding otherwise, with respect to the facts and circumstances of the cases at hand.

The debate over seat, place, and venue

There is a discernible difference between the terms ‘seat’ and ‘venue’, even though the same have been used and sometimes, even interpreted, interchangeably. In common parlance, while the venue or physical place of arbitration may only refer to the mere geographical location of the tribunal, the ‘seat’, on the other hand, is a legal concept that has a much larger impact of ascertaining the ‘curial’ role of the tribunal.

It is, however, needful to note that different statutes and guidelines prescribed by various countries and international institutions have used both the terms synonymously, whereas precedence to the rule of ‘party autonomy’ has been found to be a common factor within all such legislations.

For example, under Section 20 of the Arbitration and Conciliation Act 1996, (the ‘Indian Arbitration Act’), the parties have the right to decide the ‘place of arbitration’, while judicial intervention has only been warranted in cases where said parties fail to reach an agreement to the effect. In the latter case, the concerned judicial authority has been put under an obligation to consider the convenience of the parties while deciding upon the ‘place of arbitration’.

Under the UN Commission on International Trade Law Model Law on International Commercial Arbitration 1985, which forms the basis of a number of arbitration related legislations – including that of India – the parties are free to determine the ‘place of arbitration’ and in case of a failure to reach a mutual agreement, such decision shall be left for the arbitral tribunal.

While these provisions deal with the ‘place’ of arbitration, the context has been given to the ‘seat’. Needless to mention that such interchangeability in the definition has given rise to an ambiguity with respect to the term, thereby having the inadvertent effect of furthering the debate.

In its 176th Report published in 2001, the Law Commission of India undertook a detailed study on the conundrum surrounding the absence of specific provisions relating to the ‘seat of arbitration’, which has resulted in the inability of the parties to attain efficient execution of arbitration awards or attain interim orders in relation to the arbitration seats outside the Indian jurisdiction. In view of this, the Commission recommended inclusion of the term within the Indian Arbitration Act.[1]

Judicial precedents on the law of the seat

Considering that the seat of arbitration has been the subject of various interpretations, it is perhaps important to highlight recent judicial precedents which have endeavored to lay the seat/venue controversy to rest.

India: the judgment affirming the Shashoua Principle and other related decisions

In Bharat Aluminium Company v Kaiser Aluminium Technical Service Inc[2] (‘BALCO Judgment’), the Honourable Supreme Court of India (SCI) was faced with an issue where, even though the arbitration was held in London, the parties specified that the governing laws shall be those prevailing in India. Having delved deep into the meaning of the term ‘place of arbitration’, as mentioned under Section 20 of the Indian Arbitration Act, the SCI laid down certain factors to distinguish the terms ‘seat’ and ‘venue’. While holding that the ‘seat of the arbitration is intended to be its center of gravity’, the SCI further took note of the law laid down by the United Kingdom Supreme Court (UKSC), in the case of Roger Shashoua v Mukesh Sharma,[3] and held:

‘[...] That the choice of another country as the seat of arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings.’

In terms of the enforceability of the arbitration awards passed by foreign tribunals, the SCI further observed that Part II of the Indian Arbitration Act specifically deals with such an issue and thus, the awards so passed, shall be enforced in the manner as prescribed therein.

While the SCI followed the BALCO Judgment in the case of Enercon (India) Ltd & Ors v Enercon GmbH & Ors,[4] it took a different stance in Union of India vs. Hardy Exploration and Production Inc.[5] Specifically it held that, even though Kuala Lumpur was selected as the seat of the arbitration, it could not be held that the parties accepted the laws of Malaysia to govern the procedures.

Notably, while the SCI in the aforementioned cases settled on the fact that it was not necessary to specify the law which shall apply to the proceedings, if the juridical seat of arbitration was chosen, it was held that the seat would only be said to have been chosen, if there was a ‘positive act’ with respect to such acceptance. However, in the case at hand, the SCI found such an act to be missing.

Notwithstanding that a number of decisions have followed Hardy Exploration, it is important to note that the seat/venue controversy is yet to be put to rest in India.

UK: the recent case of Enka Insaat v OOO Insurance Company[6]

In terms of the UK, a purview of the accepted principles governing the law of the seat may be adopted from the aforementioned recent case pertaining to a dispute between the subcontractor and insurer, wherein, issues arose in relation to whether arbitration proceedings were to continue in England, where the subcontractor signed the contract, or in Russia, where the insurer and the subject of insurance were based.

The UKSC framed a set of three issues, two of which pertained to the determination of the proper law of an arbitration agreement and that of the role of a court of the seat of arbitration. By a three–two majority, the UKSC held that:

‘Where the parties have made no choice of law to govern the arbitration agreement, either specifically or by choosing the law which is to govern the contract as a whole, the court must determine the law with which the arbitration agreement is most closely connected. In general, the arbitration agreement will be most closely connected with the law of the seat of arbitration. This default rule is supported by the following considerations:

1. the seat is where the arbitration is to be performed (legally, if not physically);
2. this approach maintains consistency with international law and legislative policy;
3. this rule is likely to uphold the reasonable expectations of contracting parties who specify a location for the arbitration without choosing the law to govern the contract; and
4. this approach provides legal certainty, allowing parties to predict easily which law the court will apply in the absence of choice.’[7]

As a result, the UKSC held the seat of the arbitration to lie in London where the subcontracting agreement was signed and further provided a comprehensive set of guiding principles, with the objective of facilitating an efficient determination of the law of the seat in the future.

In his minority judgment, Lord Burrows held that the various factors apparent from a mere perusal of the facts and circumstances surrounding the contract in question gave a reasonable inference to the fact that the ‘proper law’ in the case at hand was that of Russia. These determining factors included the origin of the main parties to the contract, the place of performance, the primary language of the contract, as well as the mode of payment (Russian currency in a Russian bank). To further support such a decision, Lord Burrows enlisted a number of past precedents passed by the UKSC, which are good law to date.

In view of Lord Burrows’ opinion and the precedents he referenced, a future case may reignite the discussion undertaken within the judgments, if the facts and circumstances allow.

The way ahead

It is necessary to reiterate that the seat is the situs and, consequently, the fundamental determining factor of the arbitral procedure. Any ambiguity in relation to the seat will thus have inadvertent effects over the rights of the parties involved. Ambiguity in relation to the seat has been inculcated within the judicial precedents of various jurisdictions, which may be termed as largely inconsistent with the views expressed in the previous decisions.

Therefore, it may be appropriate to suggest that the way ahead, in relation to putting the seat/venue controversy to rest, may only be an inclusion of certain specific provisions within national legislation. Such inclusion may further facilitate a definite understanding over the basics of the juridical seat, even if the various intricate nuances in relation to the same are left open for interpretation by arbitral tribunals or courts, as per the facts and circumstances of each case.