More Clarity of Implied Exclusion of Part I? Videocon v. Union of India

[Due to some problems with Blogger, our yesterday's post on Videocon v Union of India got deleted. Apart from critiquing the decision of the Delhi High Court, we also reproduce yesterday's post with some modifications.]

 

The Indian Corporate Law Blog has a brief post on the latest decision of the Supreme Court (decided on 11.05.2011) in Videocon Industries Limited v. Union of India & Others (Videocon). The decision is significant for obvious reasons: it clarifies the law pertaining to implied exclusion of Part I of the Arbitration and Conciliation Act, 1996 (although there are decisions that have held otherwise). 

Provisions of the Production Sharing Contract:
The dispute arose out of provisions of a Production Sharing Contract (PSC) signed between the Government of India (UoI) on the one hand and a consortium consisting of four companies on the other. The relevant provisions of the PSC dated 28.10.1994 are as follows: 

“33.1 Indian Law to Govern
Subject to the provisions of Article 34.12, this Contract shall be governed and interpreted in accordance with the laws of India.
33.2 Laws of India Not to be Contravened
Subject to Article 17.1 nothing in this Contract shall entitle the Contractor to exercise the rights, privileges and powers conferred upon it by this Contract in a manner which will contravene the laws of India.
34.3 Unresolved Disputes
Subject to the provisions of this Contract, the Parties agree that any matter, unresolved dispute, difference or claim which cannot be agreed or settled amicably within twenty one (21) days may be submitted to a sole expert (where Article 34.2 applies) or otherwise to an arbitral tribunal for final decision as hereinafter provided.
34.12. Venue and Law of Arbitration Agreement
The venue of sole expert, conciliation or arbitration proceedings pursuant to this Article, unless the Parties otherwise agree, shall be Kuala Lumpur, Malaysia, and shall be conducted in the English language. Insofar as practicable, the Parties shall continue to implement the terms of this Contract notwithstanding the initiation of arbitral proceedings and any pending claim or dispute. Notwithstanding the provisions of Article 33.1, the arbitration agreement contained in this Article 34 shall be governed by the laws of England.
35.2 Amendment
This Contract shall not be amended, modified, varied or supplemented in any respect except by an instrument in writing signed by all the Parties, which shall state the date upon which the amendment or modification shall become effective.”

This PSC, it may be noted, is a Pre-NELP PSC. For those uninitiated in Indian Petroleum Law, NELP refers to National Exploration Licence Policy. In the late 1990s the Government of India felt that there was a need to accelerate the pace of hydrocarbon exploration and production and sought to liberalize the petroleum sector. After holding consultations with the State Governments on the terms of the Exploration Licence, the Ministry of Petroleum and Natural Gas held the first NELP bidding round in 1999. So far contracts under eight rounds of NELP have been awarded.

As regards dispute resolutions provisions, NELP PSCs are not as liberal as some of the Pre-NELP PSCs are. Non-Indian seats have not been permitted under the NELP PSCs. For instance, the latest Model PSC for the NELP IX round does not contemplate a foreign seat. Relevant clauses read as under:

“32.1 This Contract shall be governed and interpreted in accordance with the laws of India.
32.2 Nothing in this Contract shall entitle the Contractor to exercise the rights, privileges and powers conferred upon it by this Contract in a manner which will contravene the laws of India.
33.9 The arbitration agreement contained in this Article 33 shall be governed by the Arbitration and Conciliation Act, 1996 (Arbitration Act). Arbitration proceedings shall be conducted in accordance with the rules for arbitration provided in Arbitration Act.
33.12 The venue of the sole expert, conciliation or arbitration proceedings pursuant to this Article, unless the Parties agree otherwise, shall be New Delhi, India and shall be conducted in the English language. Insofar as practicable, the Parties shall continue to implement the terms of this Contract notwithstanding the initiation of proceedings before a sole expert, conciliator or arbitral tribunal and any pending claim or dispute .”

Most of the PSCs in other countries do not allow foreign arbitration seats.

The Dispute:
Provisions pertaining to cost recovery is one of the most controversial provisions in Production Sharing Contracts and disputes have arisen even in India pertaining to the same (see, for example, Niko Resources Ltd. v Union of India). Even in this case, disputes arose between the Government and the Contractor (consisting of a consortium of four companies) on cost recovery. [We’ll do a detailed post on the concepts in the Indian Production Sharing Contract in the near future]. In furtherance of the dispute resolution provisions, the arbitral tribunal was constituted and the first hearing was to take place in Kuala Lumpur (the Malaysian capital) in March 2003.

However, the March hearing did no take place because of the SARS epidemic that became the news in early 2003. The tribunal shifted the venue of the proceedings to Amsterdam (the Netherlands) and London (UK). In October 2003, the Tribunal passed a consent order which read: "By consent of parties, seat of the arbitration is shifted to London.”

Subsequently, all the proceedings pertaining to the dispute were held in London. A partial award was passed by the tribunal in March 2005. Union of India challenged the petition in the High Court of Malaysia. At the same time, Union of India also sought directions under Section 9 of the Arbitration and Conciliation Act, 1996 from the Delhi High Court to stay the arbitral proceedings. Videocon objected to the maintainability of the petition. 

Arguments on Non-maintainability of the Petition:
Before the Delhi High Court, Videocon argued that by choosing English Law as the Law of the Arbitration Agreement, the parties have excluded the applicability of Part I of the Indian Act. Therefore, the argument was that the Delhi High Court did not have jurisdiction over the matter. Apart from the argument that Part I was applicable, UoI’s argument was that English Law governed the substantive aspects of the arbitration agreement while the procedural aspects of the arbitration agreement were governed by the curial law, which is the law of the seat of arbitration. In the dispute, UoI contended that since the seat of arbitration was Kuala Lumpur, the Malaysian Laws on arbitration governed the conduct of the arbitral proceedings. Against this, Videocon contended that English Law was the curial law and not Malaysian Law in view of the agreement of the parties to shift the seat of arbitration to London.

Decision of the Delhi High Court:
The Delhi High Court held that the petition was special case and that since “the governing procedural law is yet to be determined”, the question as to the seat of arbitration is to be determined by a court which has the closest connection to the parties or the dispute. Accordingly, the court held that since Indian courts were most closely connected to the dispute, which arose out of an Indian PSC, the Delhi High Court would have jurisdiction. The court stated:

“In the absence of any indication to the contrary, the governing law of the contract or the “proper law” (in the words of Dicey) of the contract being Indian Law, it is that system of law which must necessarily govern matters concerning arbitration, although in-certain respects the law of the place of arbitration may have its relevance in regard to procedural matters.”

The High Court also reasoned that the dispute between the parties pertaining to the seat of arbitration had resulted in a stalemate as the annulment proceedings in Kuala Lumpur were in a standstill due to issues of jurisdiction. Further, UoI stated that for the English courts to assume jurisdiction, the place of arbitration was a relevant factor. The High Court apprehended that in such a situation, the arbitration would become a stalemate and such a situation would be an affront to the spirit of Section 9.

Comment:
The Arbitration Agreement: Article 33.1 of the PSC provided that the Contract was to be governed by the laws of India. Now, when there is such a clause in the contract, it implies that the choice of the Substantive Law of Contract was Indian Law. Therefore, the issues pertaining to formation, validity, performance, interpretation etc were to be governed by the Indian Contract Law. Article 33.1 also uses the expression “subject to Article 34.12”. Relevant portion of Article 34.12 provides: “Notwithstanding the provisions of Article 33.1, the arbitration agreement contained in this Article 34 shall be governed by the laws of England.” Thus, according to the PSC, the arbitration agreement would be governed by English Law.

But what is the precise difference between these two? A single agreement (the arbitration clause is a part of the PSC) is governed by laws of two different jurisdictions. This situation arises due to an important theoretical construct in international arbitration known as the severability of the arbitration agreement. The severability doctrine states that an arbitration clause in the agreement is severable from the main contract. This independence leads (among many others) to two crucial consequences relevant to us: (1) the validity of the arbitration clause does not depend merely on the validity of the main agreement; (2) parties could choose a law for the arbitration clause that is different from that of the main contract.

In general, however, authorities agree that there is a presumption that the substantive law of the arbitration clause would be the same as that of the main agreement which contains the arbitration clause, unless there is an agreement to the contrary. This blawgger is apprehensive in calling this as a presumption. It would be more precise to call this a default rule.

Under the PSC in Videocon, issues pertaining to formation, validity, interpretation, performance etc of the arbitration agreement were to be governed by English Law. Hypothetically, if English Law provides for a mandatory rule that the arbitral tribunal should consist of odd number of arbitrators and an arbitration agreement whose governing law is English law provides for two arbitrators, such an agreement would be void as per the (hypothetical) English rule even if the main contract containing the said arbitration clause is governed by a jurisdiction which does not invalidate such a clause.

This option for the parties to choose a law for the arbitration agreement distinct from the main contract exists possibly because parties could enter into submission agreements, i.e., an independent agreement to arbitrate, and choose a separate governing law for it. For instance, parties could enter into a contract with Indian laws as the substantive law but could agree upon an independent agreement to arbitrate disputes arising out of the Indian contract with English Law as the governing law. hence, it would be superfluous to deny a choice to the parties to have their arbitration clause contained governed by a law different from the substantive law of the main contract.

Article 34.12 provides that the venue of the arbitral proceedings shall be Kuala Lumpur. In short, the implication of this choice, as far as international arbitration is concerned, is that the parties have agreed that the legal validity of the arbitration proceedings and the outcome of the arbitration proceedings would be recognized by the Malaysian Laws. One of the consequences of this is that if a party to such proceedings wants to challenge the legal validity of the arbitration or its outcome, the challenge is to be in Malaysia.

Therefore, the arbitral tribunal is to apply three different laws to the proceedings (1) the substantive law of contract- Indian Laws, (2) substantive law of arbitration agreement- English Laws, and (3) Lex arbitri or the governing law of arbitration-Malaysian laws. Redfern & Hunter differentiate between the law governing the parties’ capacity to enter into an arbitration agreement and the law governing the arbitration agreement and the performance of that agreement. We do not go into that distinction for the simple reason that the distinction is more theoretical than practical.

Consequences of the Agreement of the Parties to Shift the Seat of Arbitration: 

We had previously noted that the chain of events as described in the Delhi High Court judgement is significant. Here we describe why. The original seat of arbitration was Kuala Lumpur. However, the arbitral tribunal decided to hold the arbitral proceedings in Amsterdam and London. What is the consequence of holding the proceedings in Amsterdam or in London as far as the seat of arbitration is concerned? The answer is it depends on the law of the seat. For instance, if the parties to an agreement have agreed on an Indian seat but hold the arbitration proceedings in, say, London, there is no implied agreement to have the seat in London. Section 20(3) of the Indian Act provides: “Notwithstanding [the choice of the place of arbitration or the determination by the tribunal of the place of arbitration], the arbitral tribunal may, unless otherwise agreed by the parties, meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for inspection of documents, goods, or other property”. If the Malaysian laws do not prohibit conducting hearings outside Malaysia, the seat of arbitration would be Malaysia even if the hearings are held elsewhere for convenience. In fact, Section 22(3) of the Malaysian Arbitration Act, 2005 (which came into force after the arbitration in this case commenced) contains a provision similar to Section 20(3) of the Indian Act. [Since the Malaysian Arbitration Act, 1952 was based on the English Arbitration Act,1950, and since the latter allowed hearings to be conducted outside the seat of arbitration, we assume here that the Malaysian Laws permitted it]

In Videocon, due to SARS, the tribunal conducted its proceedings in Amsterdam and London. Even then, the seat of arbitration was Kuala Lumpur and the Malaysian Law was the lex arbitri. Subsequently, the parties expressly agreed to shift the arbitration to London. This agreement cannot be construed as an agreement merely to hold arbitration proceedings outside the seat of arbitration (Malaysia) for convenience for two reasons: (1) there was no necessity for such an agreement because the tribunal had been doing the same by holding proceedings in Amsterdam and London even before the agreement was reached, (2) the agreement uses the term “seat of arbitration”. The seat of arbitration specifically connotes the jurisdiction which would grant the “legal touch” to the arbitration proceedings. These were parties that had sophisticated legal counsel (for obvious reasons- the agreement was reached during the arbitration proceedings and was recorded by the tribunal). Therefore, the usage of the term “seat of arbitration” could not have been in reference to any thing other than the jurisdiction which grants the legal touch to the arbitration. The consequence of this agreement (in the absence of more information on the agreement between the parties) was a transfer of the seat of arbitration from Kuala Lumpur to London and not merely an agreement to hold proceedings outside the seat for convenience reasons.

Rarely does a transfer of seat take place. But if it happens, the question is what happens to the proceedings that were held prior to the shifting of the seat. Another issue is what if a party against whom an award is passed after the transfer goes to the original seat and challenges the award (as it happened in Videocon. [see, Gary Born, International Commercial Arbitration 1695-1696 (Volume II)(2009); Pierre Lalive, On the Transfer of Seat in International Arbitration].

The Dispute as to the Seat: It is surprising why the Delhi High Court had to deal with the issue as to the seat of arbitration in the proceedings under Section 9 in the first place and hold that the “governing procedural law is yet to be determined”. Videocon’s argument was that in view of London choice of seat of the parties, Part I was impliedly excluded. UoI contended that Malaysia was the seat of arbitration. The question as to whether London or Malaysia was the seat of arbitration was immaterial in deciding whether Part I was excluded impliedly because the argument was that the choice of a foreign seat had impliedly excluded applicability of Part I. So the court had to simply decide whether the choice of a foreign seat, of English Law as the law of arbitration agreement and of Indian law as the substantive law of contract excluded the applicability of Part I.

Existence of a Stalemate: The Delhi High Court’s reasoning for holding the Section 9 petition to be valid was the peculiar circumstances in the case that arose out of the dispute between the parties pertaining to the seat of arbitration. In the absence of access to entire records, and based on the facts as stated in the Supreme Court’s decision, this reasoning sounds unconvincing. If there was a dispute as to the seat of arbitration, the parties could have approached the arbitral tribunal first. In international arbitration, in the absence of any agreement by the parties, seat of arbitration is often determined by the arbitral tribunal itself.

Even if the parties could not have gone to the tribunal, they could have approached to the English courts to decide the question. The Delhi High Court’s reasoning on why the petitioner was right in not approaching the English courts is not convincing: 

“The petitioner has already expressed its dissidence about the English Court deciding the question of seat of arbitration for the reason that for the English Court to assume jurisdiction, it is the place of arbitration which is the relevant factor. In such a situation, of the Indian Court does not adjudicate upon the present petition, the arbitral proceedings between the parties will invariably end in a stalemate.”

 In simple, the court held that the petitioner did not go to the English Courts because the petitioner did not consider London to be the seat of arbitration. The court did simply stated the argument of UoI in different words but did not decided on the correctness of the argument. The existence of a “stalemate” was dependent on whether UoI was right in arguing that London was not the seat of arbitration. This decision was never made by the High Court. Therefore, the reason for granting the prayer asked by UoI was not in accordance with the well-established principles of international arbitration. 

We'll analyse the reasoning and the decision of the Supreme Court in the next post.