Supreme Court on Seat v. Venue

The issue regarding law governing arbitration does not seem to be settling anytime soon in India due to constantly changing juridical idea of terms like “seat” and “venue” in dispute resolution clauses. The Hon’ble Supreme Court of India had another chance to re-visit this issue in its recent judgment of Mankatsu Impex Private Limited vs. Airvisual Limited (Arbitration Petition No. 32 of 2018), where it was held that mere usage of expression “place of arbitration” in a arbitral clause cannot be the basis to determine the intention of the parties that they have intended that place as the “seat” of arbitration. The intention of the parties as to the “seat” should be determined from other clauses in the agreement and the conduct of the parties. Brief Facts of the Case Mankatsu Impex Private Limited (hereinafter referred to as “Petitioner”) was a company incorporated in India and was operating its business under the brand name of “Atlanta Healthcare”. Petitioner was engaged in the business of air quality management and supply of air purifiers, car purifiers, anti-pollution masks and air quality monitors. Airvisual Limited (hereinafter referred to as “Respondent”) was a company incorporated under the laws of Hong Kong and was in the business of manufacture and sale of air quality monitors as well as air quality information. Petitioner and Respondent (together to be referred as “Parties”) entered into a Memorandum of Understanding (hereinafter referred to as “MoU”) on September 12, 2016, under which the Respondent agreed to sell the complete line of the Respondent’s air quality monitor products for onward sale to the Petitioner. As per the terms of the MoU, the Petitioner was appointed as an exclusive distributor for the products for sale within India. Additionally, non-exclusive rights were given to the Petitioner qua distribution for sales in Sri Lanka, Bangladesh and Nepal. This agreement under the MoU was to continue for a period of five years from the starting date, which date was to commence from the date of delivery of the first lot of Air Quality monitors in India, i.e. October 03, 2016 or November 01, 2016, whichever was later. On October 14, 2017, the Petitioner received an e-mail from one Mr. Charl Cater of IQAir AG (Proposed Respondent No.2) informing the petitioner that the Respondent is now a part of IQAir AG. Attached to the e-mail was a letter dated October 13, 2017 by the CEO of IQAir AG stating that IQAir AG has acquired all technology and the associated assets of the respondent. Further, the product of AirVisual Node has been discontinued and the IQAir AG is in the process of relaunching a new and improved version which will be rebranded as IQAir AirVisual Pro. The letter also stated that IQAir AG will not assume any contracts or legal obligations of the respondent and will work on a case to case basis with resellers to negotiate new contracts and that the IQAir AirVisual products will be made available under separate dealer agreements. The Petitioner sent its reply dated October 15, 2017, invoking the terms of MoU with the respondent as per which the Petitioner holds exclusive rights for sale of AirVisual Products for five years within the territory of India. Further the Petitioner stated as per the terms of the MoU, in the event of any take out/buy out or change in shareholding of the entity, it was obligatory on the part of the respondent to ensure that the party taking over the business/assets shall honour the contract on the same terms and conditions and it is a deemed presumption that the acquisition of business/assets of the respondent has been done keeping in view the existing liabilities and obligations. On October 31, 2017, the Petitioner sent an e-mail to the respondent and IQAir AG seeking Proforma Invoice to enable it to issue purchase orders. In reply, it was reiterated by IQAir AG that they have not assumed any legal obligations of the respondent. However, they offered to supply IQAir branded AirVisual Pro to the Petitioner under a new non-exclusive arrangement with a new wholesale price of USD 172 per unit as against the original price of USD 110 per unit agreed upon between the Petitioner and the Respondent. The Petitioner thereafter sent several e-mails but no response was received. On December 08, 2017, the Petitioner issued a notice invoking the arbitration clause provided in Clause 17 the MoU. The Dispute Resolution Clause under the MoU was as follows “17. Governing Law and Dispute Resolution 17.1 This MoU is governed by the laws of India, without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction. 17.2 Any dispute, controversy, difference or claim arising out of or relating to this MoU, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered in Hong Kong. The place of arbitration shall be Hong Kong. The number of arbitrators shall be one. The arbitration proceedings shall be conducted in English language. 17.3 It is agreed that a party may seek provisional, injunctive, or equitable remedies, including but not limited to preliminary injunctive relief, from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding.” The Petitioner approached Hon’ble Supreme Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”) for appointment of an Arbitrator to preside and adjudicate upon the arbitral dispute between the parties. Arguments on behalf of the Petitioner The arguments on behalf of the Petitioner were as follows Clause 17.1 of the MoU clearly stipulates that the MoU is governed by the laws of India and the courts at New Delhi have the jurisdiction. It was submitted that the Petitioner and the Respondent have only agreed Hong Kong as the “Venue” of arbitration and Hong Kong is not the juridical seat of the arbitration. In Union of India v. Hardy Exploration and Production (India) INC (2018) 7 SCC 374, ratio of the judgment clearly postulates that a “venue” can become a “seat” only if – (i) no other condition is postulated; (ii) if a condition precedent is attached to the term “place”, the said condition/indicia has to be satisfied first for “venue” to be equivalent to “seat”. In view of the same, it is clear that Clause 17.1 where the parties have clearly agreed that the MoU has to be governed by the laws of India and the courts at New Delhi would have the jurisdiction, Part-I of the Act is applicable and hence, prayed for appointment of sole arbitrator. Arguments on behalf of Respondent The arguments on behalf of the Respondent were as follows As per Clause 17.2 of the MoU entered into between the parties, the place of arbitration shall be Hong Kong. Since the place of arbitration is outside India, Section 11 of the Act has no application to the present dispute. The expression used in Clause 17.2 which provides “the place of arbitration shall be Hong Kong”, in addition to also providing that “all disputes arising out of the MoU shall be referred to and finally resolved and administered in Hong Kong” clearly shows that the parties have agreed that the arbitration between the parties would be seated in Hong Kong and therefore, Part-I is not applicable and Section 11 has no application to the present dispute. In BGS SGS SOMA JV v. NHPC Limited 2019 (17) SCALE 369, the Hon’ble Supreme Court held that the expression “arbitration proceedings” would make it clear that the “venue” is really the “seat of arbitration proceedings” as the aforesaid expression does not include just one or more single or part hearing but the arbitration proceedings as a whole including making of the award at that place. It was submitted that in the present case, the word “administered” used in Clause 17.2 of the MoU between the parties clearly shows that the parties have agreed that the arbitration between the parties would be seated in Hong Kong. Issue framed by the Court In view of Clause 17.2 of the MoU, whether the parties have agreed that the seat of arbitration is at Hong Kong and whether the Court lacked jurisdiction to entertain the petition filed under Section 11 of the Act, 1996? Decision of the Court The court held that since the Respondent Company is incorporated outside India, the present arbitration proceeding is an International Commercial Arbitration as per Section 2 (1)(f) of the Act. Further, as per Section 2 (2) of the Act, Part I of the Act will be applicable to International Commercial Arbitration when the situs of arbitration is situated in India. It is clear from Clause 17 that the proper law of Contract was Indian Law and the MoU was silent on the proper law and curial law governing arbitration. It was further held that determination of seat was vital for any arbitral proceeding, since the law governing the seat will govern the arbitration proceedings and arbitration procedure, including judicial review of the arbitration award. Situs of arbitration is not limited to the place of hearing but it determines the Court which would have supervisory jurisdiction over the arbitration proceeding. It was also held that it is well-settled that “seat of arbitration” and “venue of arbitration” cannot be used inter-changeably. Mere usage of the expression “place of arbitration” cannot be the basis to determine the intention of the parties that they have intended that place to be as the “seat” of arbitration. The intention of the parties as to the “seat” should be determined from other clauses in the agreement and the conduct of the parties. On a plain reading of the arbitration agreement, it was clear that the reference to Hong Kong as “place of arbitration” was not a simple reference as the “venue” for the arbitral proceedings; but a reference to Hong Kong was for the final resolution by arbitration administered in Hong Kong. The agreement between the parties that the dispute “shall be referred to and finally resolved by arbitration administered in Hong Kong” clearly suggests that the parties have agreed that the arbitration will be seated at Hong Kong and that laws of Hong Kong shall govern the arbitration proceedings as well as have power of judicial review over the arbitration award. Once the parties have chosen arbitration to be administered in “Hong Kong”, laws of Hong Kong would govern the arbitration. When the parties have chosen a place of arbitration in a particular country, that choice brings with it, submission to the laws of that country. Therefore, the Indian courts will have no jurisdiction for appointment of the arbitrator. Since the arbitration was seated at Hong Kong, the petition filed by the petitioner under Section 11(6) of the Act was not maintainable and the petition was dismissed. Conclusion The Hon’ble Supreme Court has once again reiterated and reaffirmed the settled law on supremacy of the law of the “Seat” while deciding the “law governing arbitral proceeding”. Further it would appear that if the “law governing arbitration” is not mentioned and the “law governing the contract” is explicitly mentioned, then the “law of the seat” will automatically triumph over the “law governing contract” while deciding the law governing arbitral proceedings. Finally, the Court has also held that mere usage of “place of arbitration” will not grant any place the legal status of “Seat”. However, if the place of arbitration is mentioned under the dispute resolution clause and the proceedings are conducted in that place including making of the final award, then the place of arbitration will attain the status of “seat of arbitration” and the courts and the law of the seat will have exclusive jurisdiction over the arbitral proceeding. Hence, a physical location of arbitration can achieve a legal status of seat by the conduct of the parties. This update has been contributed by R. Sudhinder (Senior Partner) and Nikhil Kumar Singh (Associate).