"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, May 17, 2011

Further Discussion on Videocon Industries v UoI (Exclusion of Part I of the ACA 96)

In the last post on this issue, we had analysed the decision of the Delhi High Court in the case of Videocon Industries v. Union of India. We summarize our conclusions reached in the previous post below:
  • The seat of arbitration as per the provisions of the Production Sharing Contract (PSC) was Malaysia. However, parties agreed to transfer the seat itself (and not merely to have the hearings outside Malaysia) to London.
  • Interference by the Delhi High Court under Section 9 for the reason that there was a dispute between the parties as to the seat of arbitration was unwarranted.
The next portion of this post deals with the case before the Supreme Court.

Arguments of the Parties before the Supreme Court:
For Videocon:
Summary of Videocon's arguments are:
  • Delhi High Court did not have jurisdiction to pass an order under Section 9 to stay the arbitral proceedings because such relief was beyond the scope of Section 9, especially in view of Section 5.
  • Even if such relief could be granted under Section 9, the Delhi High Court did not have jurisdiction as Part I was impliedly excluded by the parties as the lex arbitri was English Laws.
  • Having agreed for the shifting of seat, UoI is estopped from arguing that the seat of arbitration was Kuala Lumpur.
  • If UoI was aggrieved by the partial award, it could have applied to the English courts to annul the said award.
For UoI:
  • As per the arbitration agreement, Kuala Lumpur was the seat of arbitration. Once Kuala Lumpur was the seat of arbitration, the seat could not have been changed except by amending the PSC as per Article 35.2.
  • Arbitral tribunal was not entitled to determine the seat of arbitration and the record by the tribunal of proceedings to that effect.
  • The PSC was between ONGC Ltd., Videocon Petroleum, Command Petroleum and Ravva Oil and therefore the venue of arbitration cannot be treated to have been amended on the basis of the agreement between the two parties to the arbitration agreement. Any changes in the PSC required concurrence by all the parties. Every written agreement was to be in the name of the President of India and shifting the seat to London did not change the juridical seat of arbitration. Therefore, London was the seat of arbitration.
Decision of the Supreme Court:
According to the Supreme Court, two questions arose for its consideration
  1. Whether Kuala Lumpur was the designated seat of arbitration?
  2. Whether the Delhi High Court could entertain the petition filed by UoI under Section 9?
Decision on Kuala Lumpur as the Seat of Arbitration: The Supreme Court's reasoning and decision on this question is summarized below:
  • The PSC was entered into between five parties with Kuala Lumpur being the seat of arbitration. If the parties were to amend the PSC, they could do so only by amending the PSC as per Article 35.2 through a written instrument. Therefore, there was no transfer of seat but of shifting of venues to different places for convenience.
  • There is no provision in the Arbitration and Conciliation Act by which seat could be changed by the arbitral tribunal. 
  • The distinction between the seat and holding hearings in venues other than the seat has, however, been recognized in international arbitration. Even in Dozco India Ltd. V. Doosan Infracore, the Supreme Court recognized the difference between juridical seat of arbitration and hearings taking place in a jurisdiction outside the seat. [Section 53 English Arbitration Act, 1996]
  • Therefore, there was no agreement to transfer the seat of arbitration to London. The agreement was merely an agreement to hold proceedings outside the seat.
Decision on Implied Excludability of Part I: On the second question, the Court stated that the three judge Bench of the Supreme Court in Bhatia International held that in respect of arbitrations taking place outside India even non-derogable provisions of Part I could be excluded impliedly and that the ratio of Bhatia International was applied in Venture Global. Further, the court held that in Hardy Oil and Gas, the Gujarat High Court had held that Part I was since the Governing Law of arbitration was English Law, Indian courts had no jurisdiction. According to the court, the Gujarat High Court in Hardy Oil and Gas correctly applied the ratio of Bhatia International.

On the basis of the above reasoning the court held that the choice of substantive law of the arbitration agreement as English law implied that Parties had agreed to exclude provisions of Part I. Therefore, the court concluded that the petition under Section 9 was not maintainable.

Comment:
We had previously contended that it was not necessary for the Delhi High Court to rely on the uncertainty of the seat of arbitration for interfering in the arbitral proceedings under Section 9. We are unsure why the Supreme Court had to decide the issue of the seat of arbitration. Perhaps, the parties had raised arguments on this. In any case, we consider it unnecessary for the court to have done so as the fundamental issue before the Delhi High Court was whether Part I of the Arbitration and Conciliation Act, 1996 (Act) was excluded in view of the arbitral clause. Therefore, we’ll address the issue as to the seat subsequent to the analysis on implied exclusion of Part I.

Implied Exclusion of Part I: By merely choosing foreign laws, Part I could be impliedly excluded; but unless it is excluded, Part I would apply even to arbitrations held outside India. This principle, whose source is Bhatia International, is fairly well established. But what is not well-established is what are the choices to be made that would lead to exclusion of Part I. The contours of implied excludability is a matter of considerable confusion.

The Supreme Court was of the opinion that Hardy Oil and Gas was a case similar to Videocon. In Hardy Oil and Gas, the substantive law of the contract was Indian Law, the law governing arbitration was English Law, the arbitration was to be conducted as per Rules of the London Court of International Arbitration and the venue was London. The Gujarat High Court held that Part I was impliedly excluded because the parties had expressly chosen English Law to be the law governing arbitration. It may also be noted that the facts in Hardy Oil and Gas are virtually similar to the present case because as per the arbitration clause in the case, the law of the arbitration agreement was English Law. It would do well to quote the relevant clause in Hardy Oil and Gas:
"9.5 Governing Law and Arbitration
1. This Agreement (except for the provisions of Clause 9.5.4 relating to arbitration) shall be governed by and construed in accordance with the substantive laws of India.
2. Any dispute or difference of whatever nature arising under, out of, or in connection with this Agreement, including any question regarding its existence, validity or termination... shall at the instance of any Party be referred to and finally resolved by Arbitration under the rules of the London Court of International Arbitration (SLCIA), which Rules (Rules) are deemed to be incorporated by reference into this clause.

...
4. The place of arbitration shall be London and the language of arbitration shall be English. The law governing arbitration will be the English law.
5. Any decision or award of an arbitral tribunal shall be final and binding on the Parties
."
On the face of it, it could be argued that Indian Law was the substantive law of arbitration agreement. But on a close reading.of Article 9.5.1 we would argue that apart from the governing law of arbitration being English Law, the governing law of arbitration agreement was also English Law because of the bracketed portions of 9.5.1.

It must however be noted that in Hardy Oil and Gas, the Gujarat High Court did not go into the question of whether a choice of a foreign law as the substantive law of the arbitration agreement impliedly excluded Part I. At least the decision of the Gujarat High Court discloses no analysis to that effect. Therefore, according to this blawgger, the ratio of Hardy Oil and Gas is that a choice of a foreign arbitral seat acts as a an exclusive jurisdiction clause and Part I is deemed to be impliedly excluded for the same. This is confirmed by the Supreme Court’s decision in Videocon, relevant portion of which is quoted below:
In our opinion, the learned Single Judge of Gujarat High Court had rightly followed the conclusion recorded [in Bhatia International] and held that the District Court, Vadodara did not have jurisdiction to entertain the petition filed under Section 9 of the Act because the parties had agreed that the law governing arbitration will be English Law”. (emphasis supplied)
However, the reasoning of the Supreme Court in Videocon was that the choice of English Law as the law of arbitration agreement meant that Part I was excluded. The court held:
In the present case also, the parties had agreed that notwithstanding Article 33.1, the arbitration agreement contained in Article 34 shall be governed by laws of England. This necessarily implies that the parties had agreed to exclude the provisions of Part I of the Act. As a corollary to the above conclusion, we hold that the Delhi High Court did not have the jurisdiction to entertain the petition filed by the respondents under Section 9 of the Act and the mere fact that the appellant had earlier filed similar petitions was not sufficient to clothe that High Court with the jurisdiction to entertain the petition filed by the respondents.” (emphasis supplied)
As is apparent from the above two quotes, in Hardy Oil and Gas, the Gujarat High Court held that a mere choice of foreign arbitration law as the governing law meant that Part I was excluded.

In Videocon the arbitration agreement was an English Arbitration Agreement. The court held that because there the substantive law of arbitration agreement was English Law, it was implied that Part I was excluded. The court did not explain why. One plausible explanation would be that the validity and the interpretation of the arbitration agreement in Videocon was to be decided in accordance with English Law. As per English Law, an agreement to have a matter arbitrated in a seat operates similar to an exclusive jurisdiction clause and no court in another country would have jurisdiction over the arbitration proceedings [Shashoua v. Sharma], unless the parties have agreed otherwise. Therefore, the choice of English Law as the substantive law of arbitration agreement meant that no other country had jurisdiction over the matter. However, the question would be whether English Law prohibits a party from seeking interim relief in any other jurisdiction. Probably this should have been the methodology of analysis by the Supreme Court.

Even so, shouldn’t the question of whether the English Arbitration Agreement excluded the applicability of the Indian Act have been a question of fact (being a question as to foreign law)?

In any case, the law as it stands today post-Videocon is that if the arbitration agreement is governed by a foreign law, if the seat of arbitration is foreign, Part I would be impliedly excluded even if the substantive law of arbitration the main agreement was Indian Law. This decision does not deal with the law pertaining to implied exclusion of Part I if the substantive law of contract is Indian Law and the seat of arbitration is not India.

We'll look at the issue of transfer of the seat in another post.

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