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Seat Vs Venue of Arbitration

Rapid globalisation and an increase in multinational activities have led to an increase in commercial disputes. As a result, there is a pressing need for a fast and effective system for resolving conflicts. This would help to understand why international commercial arbitration has become so popular. Arbitration is a private process for resolving a contract dispute between the parties without the involvement of a court. The arbitrator is the person who assists in the resolution of the dispute. Arbitration is a flexible and mutually agreed-upon method of resolving disputes between contracting parties by referring the disagreement to a third party. It is a form of alternative dispute resolution that helps to relieve the strain on the courts. Arbitration is intended to provide a faster alternative to the courts when it comes to resolving disputes.

Concept of seat and venue

Both the terms 'Seat' and 'Venue' are significant in any arbitration case since they not only identify where the arbitration will take place, but they also determine the supervisory jurisdiction of courts and the curial law (lex arbitri) that will govern it. These terms are interlinked but cannot used interchangeably and poorly drafted arbitration agreements often fail to demonstrate the actual seat and venue of arbitration.

This inevitably leads to conflict and confusion while determining the actual seat of arbitration.  The 'seat' of arbitration is the 'situs' of arbitration, that is, the location of the arbitration. The seat of arbitration determines the arbitration's curial law or procedural law, as well as which court(s) will have supervisory authority over the arbitration. For example, unless otherwise agreed, an arbitration hearing held in Mumbai shall be governed by the Arbitration and Conciliation Act, 1996, and any application challenging an arbitrator's award or decision (Sections 34 and 37) will be heard by the Bombay High Court. The idea of a seat is more important in international arbitrations since it serves as a marker for both curial and supervisory jurisdiction.

The 'Venue' of arbitration, on the other hand, only specifies the geographical location where the arbitration is held and has nothing to do with curial law or judicial jurisdiction. Parties are permitted to agree on the location of arbitration under Section 20 of the Arbitration and Conciliation Act, 1996. The term venue has no bearing on the dispute's curial law or substantive law.

Bharat Aluminium Co v. Kaiser Aluminium Technical (2012) established a distinction between the seat of arbitration and the location of arbitration. The Supreme Court declared unequivocally that when parties choose a country as the site of arbitration, they are knowingly accepting the laws of that country. The procedures shall be governed by the laws of that county governing the conduct and monitoring of arbitration. The Supreme Court also stated in Enercon (India) Limited and Ors. v. Enercon GMBH and Anr 2014 that the location of the seat of Arbitration would determine the courts having exclusive jurisdiction to monitor the arbitration procedures.

Neither the Arbitration Act of 1940 nor the Arbitration and Conciliation Act of 1996 ("Act") defines the terms "seat" and "venue." The term 'Place of Arbitration' is defined in Section 20 of the Act and is used interchangeably with the terms 'Seat of Arbitration' and 'Venue of Arbitration.' Despite the Law Commission's recommendation in the 2015 Amendment Act to assign distinct definitions for seat and venue, such ideas did not result in actual modifications. In the absence of a clear statutory framework, the law has been decided through a series of judicial decisions, some of which are contradictory.

"Seat" and "Venue" are two separate and distinct notions. Arbitration agreements that are poorly written fail to specify the real seat and venue of arbitration, and these phrases are frequently used interchangeably. When defining the actual seat of arbitration, this invariably leads to controversy and ambiguity.

Role of Judiciary

Courts have developed numerous criteria overtime to unravel the web and determine the real seat of arbitration in such ill-drafted contracts. However, these ideas have frequently been conflicting, adding to the uncertainty. Discussed below are some of the important judgments of the SC to enunciate the principles for determining the seat of arbitration.

  • On April 19, 2017, a bench compiling of Justice Pinaki Chandra Ghosh and Justice Rohington Fali Nariman held that an exclusive jurisdiction clause in an arbitration agreement that states that the courts at a specific location alone will have jurisdiction in respect of disputes arising under the agreement will oust all other courts' jurisdiction in the matter, even if no part of the cause of action arises there. The Court cited its previous decisions in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc (2012) 9 SCC 552, Enercon (India) Ltd. v. Enercon Gmbh, (2014) 5 SCC 1, and Reliance Industries Ltd. v. Union of India, (2014) 7 SCC 603 and stated that once a seat of Arbitration has been decided and fixed, it is akin to a clause of exclusive jurisdiction. Following that, the court of the seat (which has territorial jurisdiction) would have supervisory powers over the arbitration. The Supreme Court's decision clarifies an issue that frequently arises when an arbitration clause designates one state/city as the seat of arbitration, and parties then approach the courts of other states/cities solely for their own convenience, rather than in accordance with the terms of the contract. In light of the Act's recent modifications, this judgement, and the preceding judgments, parties will henceforth pick the seat of arbitration after careful consideration and discussion, and will be banned from engaging in forum shopping in violation of contractually agreed obligations.
  • It is important to note the ratio laid down by the England and Wales High Court in Roger Shashoua v. Mukesh Sharma, commonly referred to as the Shashoua Principle by Indian courts, to begin understanding the principle adopted by Indian courts to divide the concepts of seat and venue in the context of international arbitration. The parties had chosen London as the destination of arbitration but not as the seat in this dispute. Cooke, J. used a rule that stated that when parties choose a location for arbitration but do not designate a seat for arbitration If the parties have chosen a supranational body of rules to regulate the arbitration and there is no other evidence to the contrary, it is safe to assume that the venue is the seat of arbitration. It's worth noting that the Shashoua Principle was approved by the Constitutional Bench in the BALCO case. In Enercon (India) Ltd. v. Enercon GmbH, the Shashoua Principle has applied again. It was concluded that wherein substance the parties agreed that the laws of one country would govern and control the given arbitration, the place where the arbitration has to be heard will not dictate what the governing law will be. Thus, it appeared that India's position would have been secure.

However, there appeared to be grounds for the dispute in 2018, when it was discovered that the Supreme Court had diverged from the Shashoua Principle, which had been accepted by the same court in BALCO. In Union of India v. Hardy Exploration and Production (India) Inc., a three-judge panel was asked to decide whether the decision in Sumitomo Heavy Industries Ltd. v. ONGC Ltd. & Ors. will affect the juridical seat theory. The Court returned a negative response to the inquiry. Following its response to such a query, the Court proceeded to examine and select the arbitration seat. The arbitration provision in the Agreement specified Kuala Lumpur as the arbitration venue and the UNCITRAL Model Law on International Commercial Arbitration as the curial law. Kuala Lumpur is not the seat of arbitration, according to the Supreme Court. The Court ruled that the term "place" cannot be used to describe a seat. A venue does not become a seat by default. It necessitates a good action and something associated with it.

Similarly, when one of the above conditions is met, a location becomes a seat. It does not automatically gain the status of a seat. The Court came to the conclusion that a venue could only become an arbitration seat if something else was added to it concurrently. The Court's decision is clearly at odds with the Shashoua Principle, which was upheld by the same court in BALCO.

  • In the case of BGS-SGS Soma, a similar question was presented to a three-judge panel in 2019 for decision. Following a review of numerous decisions, the Supreme Court established specific criteria for choosing the arbitration seat. The Supreme Court determined that when a provision specifies an arbitration site and proclaims that the arbitration will take place there, it means that the venue is the seat. This, together with the lack of strong counter-evidence indicating the "Venue" is only a venue and not a seat, further establishes that such location is, in fact, the seat. The Court, therefore, confirmed the Shashoua concept. The Supreme Court further deemed Hardy Exploration's (above) decision to be inconsistent with the concept established in BALCO (supra) and so "not good law."
  • In March 2020, another conundrum had arisen before the Supreme Court in Mankastu Impex (P) Ltd. v. Airvisual Ltd. Here, the Court was deciding on a dispute originating from a Memorandum of Understanding, which indicated that Indian laws would regulate the MoU and that New Delhi courts would have jurisdiction. The disagreements will be submitted to Hong Kong, where they will be eventually settled. The Court was asked to decide whether the arbitration seat should be in New Delhi or Hong Kong. While deciding the case, the Court stated that the mere statement of the site of arbitration does not imply that the parties intended it to be the seat. Other sections of the Agreement and the parties' actions must be used to ascertain the parties' intent to the seat. Instead of using the Hardy Exploration or Soma JV ratios, the Court used a new technique of investigation. Despite the fact that the Court did not explicitly follow Hardy Exploration, it appears that it reached a similar decision based on a different line of reasoning. Based on the foregoing analysis, it appears that the Indian Supreme Court has been hesitant to uphold Hardy Exploration or Soma JV, despite the fact that the Court has reached the same decision that it would have reached if the Hardy Exploration ratio had been used. The precedential value of Soma JV and the Shashoua Principle established by the Constitutional Bench in BALCO has undoubtedly been questioned.

Conclusion

The notions of Seat and Venue have sparked a lot of debate in the courts and led to substantial judicial discourse. The issue relating to the exclusive jurisdiction of courts at the seat has finally been put to rest by BGS-SGS Soma (supra). This was a positive step taken by the Supreme Court to correct the confusion created by BALCO (supra) and such similar judgements. As pointed out in BGS-SGS Soma (supra), the interpretation of BALCO (supra) followed in Antrix Corporation can lead to absurd consequences, e.g. where a contract is performed across various states, a party can file proceeding in some remote district in Uttarakhand even though the Agreement states the seat to be New Delhi or Mumbai. Thus, it is undeniable that the seat of arbitration is far more important than the arbitration's location or venue, and it is also true that the uncertainty in this regard could be used by obstinate parties to sabotage the arbitral process by employing dilatory tactics in an attempt to avoid the jurisdiction of the seat's courts.

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Standard from of Contract - Legal or Illegal?

Generally speaking, standard contracts are imbibed with the common 'take it or leave it' clauses. In such situations, the other party has almost no power to negotiate the terms laid down in the contract; they can either accept the terms as it is or reject the entire contract. Therefore, the basic right of negotiation is largely curtailed by a standard form of contract. Such contracts are generally entered into between a service provider and its customers, including insurance companies and other sale and purchase agreements.

Is a standard form of contract legal?

There is no distinction between general contracts and standard form of contracts under the Indian Contract Act, 1872. All provisions of the Act equally apply to all contracts. The reason for the popularity of a standard form of contract is the ever-expanding business activities of an organisation. Many issues have arisen as regards the negotiation power of the party. Such a party is in a disadvantaged position where it has to either accept the contractual terms or be deprived of the particular service. The party generally does not read the clauses fully and believe that they have no choice but to sign the contract. In light of such circumstances, the courts in India have, on multiple occasions, devised tests to protect the aggrieved party and ensure justice.

Tests to protect the party in a disadvantaged position

A standard form of contract is legal and valid. However, in the interest of justice, the courts have devised measures to test the cogency of such contracts and prevent exploitation. In Life Insurance Corporation of India v. Consumer Education and Research Centre and ors., the Court held that in a standard form of contract, there is no opportunity given to the weaker party to bargain, and thus there is an imbalance of bargaining power between parties.

Firstly, a reasonable notice has to be served upon the party in a weaker position by the party framing the contract, which highlights the various terms and conditions of the contract, whether before or at the time of signing of the contract.  In the case of M/s Prakash Road Lines (P) Ltd. v. HMT Bearing Ltd., a lorry receipt for the carriage of goods was issued. The receipt contained a clause that the goods will be delivered at the responsibility and risk of the owner and not the transporter/ carrier. The Court held that merely including such a condition will not be enough to release the carrier of his liability and obligations as it is unfair. Printing of lorry receipt is not enough to satisfy the requirement of the notice unless it can be shown that the plaintiff had the knowledge and gave his consent to such stipulations.

It is required that the terms of the agreement should not be unreasonable and intended to injure the other party. In Lilly White v. Mannuswami, it was observed that the terms of the contract would be declared to be unreasonable if it is contradictory to the purpose of entering into the contract or violates the public policy. Over time and again, courts have refused to enforce unfair and unreasonable contracts or clauses in contracts that are arbitrary and an abuse of position due to the inequality in bargaining power. In case it can be shown that the party was not in a disadvantaged position and was not prevented from bargaining the terms, the contract will be upheld.

SC precedent

This issue was discussed at length in the case of Central Inland Water Transport Corporation limited vs Brojo Nath Ganguly.

In this case, the corporation was formed by the union government, and it was completely controlled by the government because it held all of the shares. Brojo worked for a corporation that was dissolved by court order, and he was thereafter enrolled into the plaintiff's Corporation under the terms and conditions of the latter. He was elevated to Deputy Financial Adviser and Chief Accounts Officer after being selected as the corporation's Deputy Chief Accounts Officer. Brojo's employment was terminated without notice under the corporation's rule 9(i), which states that the company has the authority to terminate a permanent employee's employment by giving him three months' written notice or paying him three months' basic salary and dearness allowance.

Brojo raised an issue that Rule 9(i) is arbitrary and unconscionable and filed a complaint in the Calcutta High Court. The Corporation filed an appeal against the order by the HC.

Issue: Whether Rule 9(i) is unconscionable under Section 23 of the Indian Contract Act, 187?

Judgment: The apex court held that the Central Inland Water Transport Corporation Ltd's rule 9(i), the Service, Discipline, and Appeal Rules of 1979, gave the company the authority to terminate a permanent employee's employment by giving him three months' written notice and a  rule like Rule 9(1) in a contract of employment that agitates significant segments of the public is damaging to the public interest because it tends to produce a sense of self-doubt in the minds of those who are affected, and so it is against the public good. The SC judge dismissed the appeal and gave judgment against the Corporation stating that rule 9(i) is invalid, arbitrary, and unconscionable and opposes public policy under Section 23 of the Indian Contract Act, 1872.

Analysis: Subclause (i) of Rule 9 is against public policy and is unlawful under section 23 of the Indian Contract Act because it gives the company full and arbitrary authority. It is unclear who will exercise such power on behalf of the Corporation. There are no rules in place to determine when the Corporation may use the power granted by rule 9(i). There are no guidelines laid down to indicate in what circumstances the power given by rule 9(i) is to be exercised by the Corporation. If there is no bean of public policy to protect a case, then the Court must find the practice to be against public policy in accordance with public morality, welfare, and interest.

Conclusion

In a standard form of contract, the terms and conditions are printed in fine print, which may be overlooked by the other party. These contracts are also known as dotted line contracts, and it is assumed that a weaker party may be exploited and injured as no specific laws govern the standard form of contracts. The party getting it signed is in a dominant position and can easily suppress the other party by compelling them to enter into the contract. Such contracts are being increasingly entered into, and higher standards of scrutiny are required. This practice also impinges upon the principles of natural justice that require both the parties to be heard.

 

A standard form contract is a reality of modern business setup. However, the Indian courts have failed to employ a uniform rule to unravel this difficulty, and hence, although the courts seem to be in favour of the less favourable, there is ambiguity in referring to the guidelines or the lack of it.

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