BGS SGS SOMA JV v. NHPC Ltd. — Error in BALCO Repeated

   

In international commercial arbitrations, it is a settled principle that if the parties choose to have a seat of arbitration in a particular country, then the laws of that country relating to regulation of arbitration proceedings will apply, and the courts of that country will have supervisory jurisdiction over the arbitration proceeding.

The question is whether this principle can or should be extended to a choice of a city in India as a seat, so as to confer exclusive supervisory jurisdiction on the courts of that city over the arbitration proceeding.

In a recent decision of the Supreme Court in BGS SGS SOMA JV v. NHPC Ltd.³, the Supreme Court has followed and explained the decision in BALCO v. Kaiser Aluminium Technical Services Inc.⁴, and held that a choice of a city in India as a seat confers exclusive supervisory jurisdiction on the courts of that city over the arbitration proceeding.

This article submits that the above view is erroneous.

PRINCIPLE IN INTERNATIONAL COMMERCIAL ARBITRATIONS

Parties to a contract or dispute have the freedom to choose the country in which the seat of arbitration between them will be located. Once the country where the seat of arbitration will be located is so decided, the arbitration statute of that country mandatorily applies to and governs the arbitration proceeding.

The arbitration statute which governs the arbitration proceedings will have provisions about the courts of that country in which any court proceedings arising out of the arbitration can be filed. These courts will necessarily be the courts of the country in which the arbitration proceedings are taking place.

Thus, the choice of the country where the seat of arbitration will be located, automatically and mandatorily leads to the choice of the law of that country as the law applicable to the arbitration proceedings, and the courts of that country as having exclusive jurisdiction over the matters arising from the arbitration proceedings. What is important to note is that this principle applies to a choice of a country and mandatory choice of law and courts of that country consequently.

PROVISIONS OF THE INDIAN ARBITRATION AND CONCILIATION ACT, 1996

The provisions of Sections 2(1)(e)⁵, 2(2)⁶, 20⁷ and 42⁸ of the Arbitration and Conciliation Act, 1996 (“the Act”) are relevant.

SUPREME COURT JUDGMENTS AND ANALYSIS

In a series of Supreme Court judgments, it has been held that the above principle applies to a choice of a city in India as a seat, so as to confer exclusive supervisory jurisdiction on the courts of that city over the arbitration proceeding.⁹

In BALCO v. Kaiser Aluminium Technical Services Inc.⁴ (hereinafter referred to as “BALCO”), for the first time, the application of the principle to a choice of a city was mentioned in para 96. It is reproduced below: (SCC pp. 605-06)

96. Section 2(1)(e) of the Arbitration Act, 1996 reads as under:

“2. Definitions.—(1) In this Part, unless the context otherwise requires—

(a)-(d)***

(e) “Court” means the principal civil court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court of a grade inferior to such principal civil court, or any Court of Small Causes;”

We are of the opinion, the term “subject-matter of the arbitration” cannot be confused with “subject-matter of the suit”. The term “subject-matter” in Section 2(1)(e) is confined to Part I. It has a reference and connection with the process of dispute resolution. Its purpose is to identify the courts having supervisory control over the arbitration proceedings. Hence, it refers to a court which would essentially be a court of the seat of the arbitration process. In our opinion, the provision in Section 2(1)(e) has to be construed keeping in view the provisions in Section 20 which give recognition to party autonomy. Accepting the narrow construction as projected by the learned counsel for the appellants would, in fact, render Section 20 nugatory. In our view, the legislature has intentionally given jurisdiction to two courts i.e. the court which would have jurisdiction where the cause of action is located and the courts where the arbitration takes place. This was necessary as on many occasions the agreement may provide for a seat of arbitration at a place which would be neutral to both the parties. Therefore, the courts where the arbitration takes place would be required to exercise supervisory control over the arbitral process. For example, if the arbitration is held in Delhi, where neither of the parties are from Delhi, (Delhi having been chosen as a neutral place as between a party from Mumbai and the other from Kolkata) and the tribunal sitting in Delhi passes an interim order under Section 17 of the Arbitration Act, 1996, the appeal against such an interim order under Section 37 must lie to the courts of Delhi being the courts having supervisory jurisdiction over the arbitration proceedings and the tribunal. This would be irrespective of the fact that the obligations to be performed under the contract were to be performed either at Mumbai or at Kolkata, and only arbitration is to take place in Delhi. In such circumstances, both the courts would have jurisdiction i.e. the court within whose jurisdiction the subject-matter of the suit is situated and the courts within the jurisdiction of which the dispute resolution i.e. arbitration is located.

(emphasis in original)

In Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd.¹⁰, the Supreme Court followed the ruling in para 96 of the BALCO² judgment (reproduced above). It held that since the parties in that matter had chosen Mumbai as the seat of arbitration, the courts at Mumbai alone had exclusive supervisory jurisdiction over the arbitration proceedings, notwithstanding the fact that no part of the cause of action had arisen at Mumbai and Mumbai courts did not fit within the definition of “Court” in Section 2(1)(e) of the Act.

This decision was followed in Brahmani River¹¹, BGS SGS SOMA¹ and HCC Ltd.¹², all listed in footnote 9 above.

The main reason given in BGS SGS SOMA¹ as to why a choice of Mumbai as seat of arbitration will result in conferring exclusive supervisory jurisdiction on Mumbai courts is the aforesaid principle, namely, choice of a place in which the seat of arbitration is located confers exclusive supervisory jurisdiction on the courts of that place.

The second reason is that the principle of party autonomy enshrined in Section 20 of the Act, read with the principle of territoriality contained in Section 2(2), requires that the parties should have the freedom to choose a neutral seat, and the neutral court of that place, which will exercise supervisory jurisdiction over the arbitration proceeding.

Thirdly, in BGS SGS SOMA¹, the Supreme Court referred to the fact that the definition of “court” in the Act is amended for international commercial arbitrations. The aforesaid amendment in the definition of “court” shows that in international commercial arbitrations held in India, the High Court alone is to exercise jurisdiction over such proceedings. In the light of this important change in the law, the Court held, Section 2(1)(e)(i) of the Act must be construed in the manner indicated in the judgment.

SUBMISSION — CHOICE OF A PARTICULAR CITY AS SEAT OF ARBITRATION DOES NOT CONFER SUPERVISORY JURISDICTION ON THE COURTS OF THAT CITY

The decision in BALCO⁴ was a subject-matter of comment and analysis in two articles written by V. Niranjan and Shantanu Naravane, namely, “Bhatia International rightly overruled: The consequences of three errors in BALCO”¹³ and “Three Errors in BALCO revisited”¹⁴.

The following is a summary of the points made by the learned authors on the above topic, in the two articles:

(a) BALCO² overlooks the fact that the expressions “subject-matter of arbitration” and “subject-matter of suit” in Section 2(1)(e) of the Act are used only to identify which court would have jurisdiction if a suit had been filed. This means that the court in which an application under the Act is filed must imagine that the arbitration clause does not exist, and then ask if it would have jurisdiction if a suit had been filed in that court on the same subject-matter.

(b) The error is to introduce the concept of “supervisory courts” into domestic arbitrations. The supervisory courts are the Indian courts, and not the Delhi/Mumbai courts.

(c) Section 2(1)(e) is not a consent-based provision. It defines jurisdiction independent of the intention of the parties, and since that jurisdiction is statutory, consent cannot confer it where otherwise it does not exist.

(d) The principle that choice of a seat confers exclusive jurisdiction on the courts of that place is in the context of international commercial arbitration, where the conflict is between the jurisdiction of the courts of the country of seat, and other countries.

(e) BALCO² introduces what appears to be a conceptual oddity into the law of jurisdiction in India. It has been settled law that parties cannot confer on an Indian court jurisdiction that it does not otherwise possess. Yes, the result of BALCO² is that this is possible in arbitration law.

(f) A number of judgments during the previous 70 years held that the seat of arbitration in a particular city did not confer supervisory jurisdiction on the courts of that city, if they otherwise did not have such jurisdiction.

(g) The jurisdiction of courts to supervise arbitration is statutory, not inherent. Therefore, court can exercise supervisory jurisdiction based on the seat of arbitration only if the statutory provision which confers jurisdiction pegs it to the seat of jurisdiction.

In this article, the points already put forward by the learned authors are not proposed to be repeated. Those points are, it is respectfully submitted, validly made and support the submission made in this article.

The judgment in BALCO² was considered and analysed in BGS SGS SOMA JV v. NHPC Ltd.³ The Supreme Court reiterated in BGS SGS SOMA¹ that the courts of the city where the seat of arbitration is located will have supervisory jurisdiction over the arbitration, and clarified that such jurisdiction will not be concurrent with the jurisdiction of the courts as defined in Section 2(1)(e) of the Act, but it will be exclusive.

It would appear that the points made in the above two articles were not placed before the Court for consideration. In any event, they are not considered in the judgment.

The reasons given in BGS SGS SOMA¹, are dealt with below.

First reason: The principle that choice of a place in which the seat of arbitration is located confers exclusive supervisory jurisdiction on the courts of that place

V. Niranjan and Shantanu Naravane^14a have dealt with this by submitting that the principle that choice of a seat confers exclusive jurisdiction on the courts of that place is in the context of international commercial arbitration, where the conflict is between the jurisdiction of the courts of the country of seat, and other countries.

What is to be noted is that the judgments which are referred to in BGS SGS SOMA¹, except BALCO², Indus Mobile¹⁵ and Brahmani River¹¹ (the last two followed BALCO²), refer to the principle in the context of international commercial arbitration and in the context of a choice of courts of a country, and not city. None of the judgments related to choosing between the jurisdictions of two cities (in one country), as opposed to countries.

In fact, BALCO² itself did not involve the question of choosing between the jurisdictions of two cities. In para 96 of the judgment, the cities of Delhi, Mumbai and Kolkata are mentioned only by way of an example. In BALCO² judgment, in paras 116 and 123, the Court, refers to laws and courts of country: (SCC pp. 618 & 621)

116. The legal position that emerges from a conspectus of all the decisions, seems to be, 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.

***

123. Thus, it is clear that the regulation of conduct of arbitration and challenge to an award would have to be done by the courts of the country in which the arbitration is being conducted. Such a court is then the supervisory court possessed of the power to annul the award. This is in keeping with the scheme of the international instruments, such as the Geneva Convention and the New York Convention as well as the Uncitral Model Law. It also recognises the territorial principle which gives effect to the sovereign right of a country to regulate, through its national courts, an adjudicatory duty being performed in its own country. By way of a comparative example, we may reiterate the observations made by the Court of Appeal, England in C v. D¹⁶ wherein it is observed that: (Bus LR p. 851, para 17)

“17. It follows from this that a choice of seat for the arbitration must be a choice of forum for remedies seeking to attack the award.”

In the aforesaid case, the Court of Appeal had approved the observations made in A v. B¹⁷ wherein it is observed that:

“…an agreement as to the seat of an arbitration is analogous to an exclusive jurisdiction clause. Any claim for a remedy … as to the validity of an existing interim or final award is agreed to be made only in the courts of the place designated as the seat of arbitration.”

(emphasis in original and supplied)

In Enercon (India) Ltd. v. Enercon GmbH¹⁸, in para 145, the Supreme Court stated as follows: (SCC p. 63)

145. … In the present case, Savant J, having fixed the seat in India erred in holding that the courts in India and England would exercise concurrent jurisdiction. The natural forum for all remedies, in the facts of the present case, is only India.

In Reliance Industries Ltd. v. Union of India¹⁹, the Supreme Court stated as follows: (SCC pp. 631-32, para 57)

57. In our opinion, these observations in Sulamérica case²⁰ are fully applicable to the facts and circumstances of this case. The conclusion reached by the High Court would lead to the chaotic situation where the parties would be left rushing between India and England for redressal of their grievances. The provisions of Part I of the Arbitration Act, 1996 (Indian) are necessarily excluded; being wholly inconsistent with the arbitration agreement which provides “that arbitration agreement shall be governed by English law”. Thus the remedy for the respondent to challenge any award rendered in the arbitration proceedings would lie under the relevant provisions contained in the Arbitration Act, 1996 of England and Wales. Whether or not such an application would now be entertained by the courts in England is not for us to examine, it would have to be examined by the court of competent jurisdiction in England.

(emphasis supplied)

The judgments in Videocon Industries Ltd. v. Union of India²¹, Roger Shashoua v. Mukesh Sharma²², C v. D¹⁶, Sulamérica Cia Nacional de Seguros SA v. Enesa Engelharia SA²⁰, which are quoted in the above judgments also do not relate to choosing between the jurisdictions of two cities (in one country), as opposed to countries.

Therefore, the principle of territoriality which the Court in BGS SGS SOMA¹ relied on, based on the above judgments, is a principle which applies in the context of international commercial arbitration, where the conflict is between the jurisdiction of the courts of the country of seat, and other countries. These judgments do not support applying the principle to a conflict of the courts of two cities within one country.

Second reason: The principle of party autonomy enshrined in Section 20 of the Act, read with Section 2(2), requires that the parties should have the freedom to choose a neutral seat, and the neutral court of that place

The parties to arbitration have complete autonomy to choose the place where the seat of arbitration will be located. The choice of the place will determine the country whose curial law will apply to the arbitration proceeding, and the country whose courts will have supervisory jurisdiction over the arbitration proceeding. Therefore, the parties have the autonomy to choose a country of seat of arbitration keeping in mind, inter alia, the curial laws and courts that they choose and the considerations of neutrality.

Section 20 of the Act provides for this autonomy. However, this autonomy is available to the extent of choosing the place of seat, the national laws and national courts. The judgments discussed above also provide for party autonomy only to this extent. Once the curial law of a country is chosen by the parties, by choosing to locate the seat of arbitration in that country, the curial law binds.

Accordingly, Section 2(2) provides that if the seat of arbitration is located in India, then the Act will mandatorily apply to the arbitration proceeding.

The curial law contains provisions about the specific court that can be approached and those provisions are binding on the parties.

Section 2(1)(e) read with Section 42 of the Act provides for the specific court that can be approached. These sections are binding on the parties. Parties do not have the liberty to depart from binding provisions of the statute.

The party autonomy does not extend to choosing the specific courts which will exercise jurisdiction. The specific courts are defined in the Act. Once the seat is within India, the Act will apply and bind. The courts that will have supervisory jurisdiction are specified in the Act.

Therefore, it is true that Section 20 allows parties to choose neutral place as a seat of arbitration and neutral courts. But the choice is at the level of choosing a neutral country whose courts will exercise jurisdiction. Neither Section 20 nor Section 2(2) require that the definition of “court” in Section 2(1)(e) is required to be expanded in any manner.

Third reason: In the light of the important change in the definition of “court” as it applies to international commercial arbitration, Section 2(1)(e)(i) of the Act must be construed in the manner indicated in the judgment

The change in the definition of “court” was pursuant to the Law Commission Report, 2014. The Report recommended that for international commercial arbitrations, the “court” should be the High Court, not a lower court.

The Law Commission Report contains the reasons for recommending the change. The reason is not that party autonomy requires this. The reason is not that once the parties chose the seat of arbitration, the courts in that place alone would have jurisdiction. The reason given was that “this would ensure that international commercial arbitrations, involving foreign parties, will be heard expeditiously and by commercial oriented Judges at the High Court level …”. Therefore, the departure was for a totally different reason and consideration. This change, therefore, has nothing to do with the conclusion arrived at by the Supreme Court, namely, that the courts of the city/place where the seat of arbitration is situated will have exclusive jurisdiction.

Further, even as per the amendment suggested by the Law Commission, the High Court which will have jurisdiction in international commercial arbitrations, is the High Court which has jurisdiction over the principal civil court which has jurisdiction over the subject-matter of arbitration, or the High Court which, in its original civil jurisdiction, has jurisdiction over the subject-matter of arbitration. According to the amended definition also, it is not the High Court where the seat of arbitration is situated, which will have jurisdiction.

The reasoning given in the Law Commission Report, and the content of the amended definition as proposed by it, make it clear that the exception to the definition of “court” in respect of international commercial arbitration was made, only with a view that the matters would be heard expeditiously and by commercial oriented Judges. It has nothing to do with the seat of arbitration.

Therefore, this amendment in the definition also does not furnish any reason for holding that the courts of the city where the seat of arbitration is situated, will have exclusive jurisdiction.

It is, therefore, submitted that the decision in BGS SGS SOMA¹ does not deal with the points raised in the two articles referred to above. The reasons contained in the decision for the view taken are erroneous.

The subsequent case of Hindustan Construction Co. Ltd. v. NHPC Ltd.¹² does not contain any new reasoning. It simply follows and applies BGS SGS SOMA¹.

CONCLUSION

The judgment in BGS SGS SOMA¹, as also other judgments referred to above, holding that a choice of seat of arbitration confers exclusive jurisdiction on the courts of the city where the seat is situated, are erroneous, and ought to be reviewed.

The legislature may consider an amendment to the 1996 Act to provide for the court which will have jurisdiction in matters where both parties are foreigners and no cause of action has arisen in India, but they choose India as a neutral or convenient seat for arbitration. This point has been discussed in detail in the article by V. Niranjan and Shantanu Naravane, namely, “Three Errors in BALCO² revisited” ¹⁴. Therefore, it is not repeated here.

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† Senior Advocate, Bombay High Court.