Forum Selection Clauses

Rajasthan State Electricity Board v. M/s. Universal Petrol Chemicals Ltd. CIVIL APPEAL NOS. 5430-5431 OF 2002 decided by Dr. Mukundakam Sharma & Tarun Chatterjee, JJ. on January 12, 2009.

• The dispute resolution clauses in the first contract in this case were:
  
  "30.....The contract shall for all purposes be construed according to the laws of India and subject to jurisdiction of only at Jaipur in Rajasthan Courts only..........."

"31. ARBITRATION

(a) If at any time any question, dispute todifference whatsoever which may arise between the Purchaser and the Supplier upon or in relation to Contract, either party may forthwith to the order a notice in writing of the existence of such question(s)/dispute(s) differences and the sameshall be referred to the Chairman, RSEB, Jaipur or any person appointed by him for the purpose (herein referred to the `Arbitrator'). Such reference shall be deemed to be a submission to the arbitration within the meaning of the Indian Arbitration Act, 1940 and the statutory modifications made thereof.

(b) The award of the Arbitrator shall be final and binding on both the parties.

(c) Upon every or any such reference, the cost incidental to such reference and an award shall be in the discretion of the Arbitrator who may determine the amount thereof and direct the same to be borne and paid.

(d) Work under the Contract shall, if reasonably possible, continue during the arbitration proceedings and no payment due or payable by the Purchaser shall be withheld on account of such proceedings."

• The second contract provided for the following clauses:
  
  "DISPUTES
  
  All disputes, differences or questions whatever which may arise between the Purchaser and the Supplier upon or in relation with or in connection with the contract shall be deemed to have arisen at Jaipur (Rajasthan) and no Court other than the Court at Jaipur (Rajasthan) shall have jurisdiction to entertain or try the same."

• The clause in the bank guarantee to be furnished provided:
  "All disputes arising in the said Bank Guarantee between the Bank and the Board or between the supplier or the Board pertaining to this guarantee shall be subject to the courts only at Jaipur in Rajasthan."

• The case essentially involves the question as to territorial jurisdiction. The parties went through a round of litigation in the lower courts and also in the Calcutta High Court. The specific dispute between the parties was whether the forum was Jaipur or Calcutta. The court reiterated the well settled position of law on forum selection clauses:
  
  
• Where there may be two or more competent courts which can entertain a suit consequent upon a part of the cause of action having arisen therein, if the parties to the contract agree to vest jurisdiction in one such court to try the dispute which might arise as between themselves, such agreement would be valid and binding, and would not be contrary to public policy or Section 28 of the Indian Contract Act.
• When ouster clause is clear, unambiguous and specific, accepted notions of contract would bind parties and unless absence of ad idem can be shown courts should avoid exercising jurisdiction.
• There is thus an ouster clause used in the aforesaid stipulations stating that the courts at Jaipur alone would have jurisdiction to try and decide the said proceedings which could be initiated for adjudication and deciding the disputes arising between the parties with or in relation to the aforesaid agreements through the process of arbitration. In other words, even though otherwise the Courts at Calcutta would have territorial jurisdiction to try and decide such disputes, but in view of the ouster clause it is only the courts at Jaipur which would have jurisdiction to entertain such proceeding.
• Section 31 of the 1940 Arbitration Act provided:
  
  “(3) All applications regarding the conduct of arbitration proceedings or otherwise arising out of such proceedings shall be made to the Court where the award has been, or may be, filed, and to no other Court.
  
  (4) Notwithstanding anything contained elsewhere in this Act or in any other law for the time being in force, where in any reference any application under this Act has been made in a Court competent to entertain it, that Court alone shall have jurisdiction over the arbitration proceedings and all subsequent applications arising out of that reference, and the arbitration proceedings shall be made in that Court and in no other Court."
  
  The Calcutta High Court, from which the appeal arose, had held:
  
  “It is clear from the language used therein that where in any application has been made in a court, competent to entertain, in that case that court alone shall have jurisdiction. The requirement is not that the application should be allowed. Since in the instant case admittedly an application under Section 20 has been made, which is an application in a reference, Calcutta High Court will have jurisdiction."
• The Supreme Court disagreed with the view of the High Court. The SC held:
  
  Sub-section (3) precedes sub-Section (4) of Section 31 of the Act. The said sub-Section provides that all applications regarding the conduct of arbitration proceedings or otherwise arising out of such proceedings shall be made to the Court where the Award has been or may be filed and to no other court. Sub-Section (4) on the other hand states that where in any reference any application under the Arbitration Act has been made in a Court competent to entertain, then that Court alone would have jurisdiction over the arbitration proceedings and all subsequent applications arising from that matter and arbitration proceedings shall be made in that court and in no other court. An analytical look at the provisions of sub-Sections (3) and (4) will make it explicitly clear that any application in any reference, meaning thereby even an application under Section 20 of the Act could or should be filed in a court competent to entertain such proceeding and having jurisdiction to decide the subject of the reference.

• Section 20 of the 1940 Act read:
  20. Application to file in Court arbitration agreement. (1) Where any persons have entered into an arbitration agreement before the institution of any suit with respect to the subject matter of the agreement or any part of it, and where a difference has arisen to which the agreement applies, they or any of them, instead of proceeding under Chapter II, may apply to a Court having jurisdiction in the matter to which the agreement relates, that the agreement be filed in Court.
  (2) The application shall be in writing and shall be numbered and registered as a suit between one or more of the parties interested or claiming to be interested as plaintiff or plaintiffs and the remainder as defendant or defendants, if the application has been presented by all the parties, or, if otherwise, between the applicant as plaintiff and the other parties as defendants.
  (3) On such application being made, the Court shall direct notice thereof to be given to all parties to the agreement other than the applicants, requiring them to show cause within the time specified in the notice why the agreement should not be filed.
  (4) Where no sufficient cause is shown, the Court shall order the agreement to be filed, and shall make an order of reference to the arbitrator appointed by the parties, whether in the agreement or otherwise, or, where the parties cannot agree upon an arbitrator, to an arbitrator appointed by the Court.
  (5) Thereafter the arbitration shall proceed in accordance with, and shall be governed by, the other provisions of this Act so far as they can be made applicable.
  
  Such jurisdiction would or could be restricted by the agreements entered into by and between the parties. The parties have clearly stipulated and agreed that no other court, but only the court at Jaipur will have jurisdiction to try and decide the proceedings arising out of the said agreements, and therefore, it is the Civil Court at Jaipur which would alone have jurisdiction to try and decide such issue and that is the court which is competent to entertain such proceedings. The said court being competent to entertain such proceedings, the said Court at Jaipur alone would have jurisdiction over the arbitration proceedings and all subsequent applications arising out of the reference. The arbitration proceedings have to be made at Jaipur Court and in no other court.

• The above decision has reiterated the settled position of law on forum selection clauses, which is summarised herebelow:
• The fundamental principle is that no one can confer jurisdiction on a court by contract when there was none in the first place.
• However, where there are two courts having jurisdiction over the same subject matter, parties can agree by contract to have the dispute resolved exclusively in one jurisdiction.
  If there is an arbitration clause and a forum selection clause as below, the consequence would be that the forum selection clause would be subject to the arbitration clause provided it was the intent of the parties to resolve the dispute by arbitration.
  
  Dispute Resolution:
  Any dispute arising out of or in connection with the contract shall be referred to arbitration consisting of two arbitrators and the venue of the arbitration shall be in Mumbai.
  
  The courts in Delhi shall have the sole jurisdiction.
• It is not necessary that the ouster clause (forum selection clause) should have words like “only”, “alone” or “exclusively”. The fundamental test is that the intent of parties to go to courts in one jurisdiction and in no other must be reflected in the ouster clause.