Union of India v Hardy Exploration & Production (2018: SCI): A Critique

We had a guest post in this blog providing a descriptive comment on the decision of the two judge Bench in Union of India v Hardy Exploration & Production (India) Inc (2018: SCI)("Hardy I") referring the matter to a larger Bench of the Supreme Court. Thereafter, a three judge Bench of the Supreme Court consisting of Dipak Misra, CJI, AM Khanwailkar & Dr DY Chandrachud, JJ. have decided the issue ("Hardy II") on 25.09.2018 (see here for the decision). This post discusses the decision.

Agreement Concerned:

The agreement between Union of India ("UOI") and Hardy Exploration & Production (India) Inc ("HEPI") provided, among other things:

"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.

33.2 Matters which, by the terms of this Contract, the Parties have agreed to refer to a sole expert and any other matters which the Parties may agree to so refer shall be submitted to an independent and impartial person of international standing with relevant qualifications and experience appointed by agreement between the Parties. Any sole expert appointed shall be acting as an expert and not as an arbitrator and the decision of the sole expert on matters referred to him shall be final and binding on the Parties and not subject to arbitration.

If the Parties fail to agree on the sole expert, then the sole expert shall be appointed, upon request by one of the Parties, by the Secretary General of the Permanent Court of Arbitration at the Hague, from amongst persons who are not nationals of the countries of any of the countries of any of the Parties.

33.3 Subject to the provisions herein, the Parties hereby agree that any unresolved dispute, difference or claim which cannot be settled amicably within a reasonable time may, except for those referred to in Article 33.2 be submitted to an arbitral tribunal for final decision as hereinafter provided.

33.5 Any Party(ies) may, after appointing an arbitrator request the other Party(ies) in writing to appoint the second arbitrator. If such other Party(ies) fails to appoint an arbitrator within forty five (45) days of receipt of the written request to do so, such arbitrator may, at the request of the first Party(ies), be appointed by the Secretary General of Permanent Court of Arbitration at Hague, within forty five (45) days of receipt of such request, from amongst persons who are not nationals of the country of any of the parties to the arbitration proceedings.

33.6 If the two arbitrators appointed by the Parties fail to agree on the appointment of the third arbitrator within thirty(30) days of the appointment of the second arbitrator and if the Parties do not otherwise agree the Secretary General of Permanent Court of Arbitration at Hague may at the request of either Party and in consultation with both, appoint the third arbitrator who shall not be a national of the country of any Party.

33.9 Arbitration proceedings shall be conducted in accordance with the UNCITRAL Model Law on International Commercial Arbitration of 1985 except that in the event of any conflict between the rules and the provisions of this Article 33, the provisions of this Article 33 shall govern.

33.10 Notwithstanding anything to the contrary contained in Article 30, the right to arbitrate disputes and claims under this Contract shall survive the termination of this Contract.

33.12 The venue of conciliation or arbitration proceedings pursuant to this Article unless the parties otherwise agree, shall be Kuala Lumpur and shall be conducted in English language. Insofar as practicable the parties shall continue to implement the terms of this contract notwithstanding the initiation of arbitration proceedings and any pending claim or dispute."

The agreement related to the Pre-BALCO period and therefore the law as stated in Bhatia International applied to it, that is, Part I of the Arbitration & Conciliation Act, 1996 (1996 Act) applied even to foreign arbitrations, unless excluded expressly or impliedly. 

Disputes arose between the parties and the same was referred to arbitration. The arbitral proceedings were held in Kuala Lumpur and the award was made and signed at Kuala Lumpur and was against the Union of India. The Union of India challenged the award u/s 34 of the Indian Arbitration & Conciliation Act, 1996 (1996 Act), which was dismissed as Part I, including S. 34, was not applicable since the place of arbitration was Kuala Lumpur. A review petition filed against the dismissal was also rejected. On appeal to a Division Bench of the Delhi High Court, the matter was dismissed. The Court's reasoning is quoted below:

"The said contract does not specifically mention the place or seat of arbitration. But, it is clear that the award was made at Kuala Lumpur. It is also clear that the UNCITRAL Model Law, 1985 is applicable. As already indicated above, Article 20(1) of the UNCITRAL Model Law, 1985 makes it clear that the parties are free to agree on the place of arbitration, failing which, the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties. There is no express determination of the place of arbitration by the arbitral tribunal. However, the arbitration proceedings were conducted at Kuala Lumpur and the award has been made and signed at Kuala Lumpur. Because of Article 31.3 of the UNCITRAL Model Law, 1985, the date of making the award and the place of arbitration as determined in accordance with Article 20(1) is required to be stated in the award. Since there is no mention of any dispute with regard to the place of arbitration in the award made by the Arbitral Tribunal, it can safely be presumed that the award having been made at Kuala Lumpur, the place of arbitration as distinct from the venue of the arbitration, would also be Kuala Lumpur."

On facts, the court found that Part I of the 1996 Act was impliedly excluded, and therefore dismissed the appeal. Union of India appealed to the Supreme Court, whose decision is summarised below:

• The decision in Sumitomo Heavy Industries was applicable in the context of the Arbitration Act, 1940 and would have no application in respect of the 1996 Act (Para 8).
• The arbitration clause has to be properly construed to find out if the arbitration clause determines the seat or not (para 17). 
• As a matter of principle, Part I could be excluded if, on facts, the juridical seat is outside India or the law governing the arbitration agreement is a law other than Indian law , as was held in Union of India v. Reliance Industries Ltd. (2015) 10 SCC 213 (Reliance II)(Para 18).
• In IMAX Corporation (2017) 5 SCC 331, the Supreme Court held that the parties chose ICC arbitration and left the choice of seat to the ICC, which consulted the parties and chose ICC as the seat. The relevant awards were made in London. Therefore, the court concluded that Part I was excluded (Para 20).
• In Roger Shashoua (2017) 14 SCC 722,  the Supreme Court held that where the parties had chosen a venue and there was something else the court has to determine whether these can be interpreted to mean a choice of juridical seat. In that case, since London was also the choice of the parties of the courts, London was decided to be the jurisdiction (Para 21).
• The arbitration clause has to be read in a holistic manner to determine the jurisdiction of the court (Para 23).
• If there is a mention of venue and something else is appended thereto, depending on the nature of the prescription the court can come to a conclusion as to the implied exclusion of Part I (Para 23).
• UNCITRAL Model Law on International Commercial Arbitration 1985 which is applicable as per the agreement provides that the place of arbitration is to be determined by the arbitral tribunal (Para 27). Further Article 31(3) requires the tribunal to state in the award the date and place of the arbitration as determined under Article 20(1)(Para 29)
• The parties had not chosen the seat and the arbitral tribunal was therefore required to determine the arbitral tribunal considering the convenience of the parties and the tribunal is clearly obligated to state the same in the award (Para 31).
• Determination requires a positive act but the arbitrator held the meeting at Kuala Lumpur and passed the award. This does not amount to determination. The sittings held at various places are relatable to the venue and cannot be equated with the seat. (Para 32).
• When the place is stated it is equivalent to seat "[b]ut if a condition precedent is attached to 'place', the condition precedent has to be satisfied so that the place can become equivalent to seat. In the instant case, as there are two distinct and disjunct riders, either of them have to be satisfied to become a place." (Para 33).
• There is no determination here as determination signifies expressive opinion, as per Law Lexicon and Black's Law Dictionary.  (Para 33).
• A venue can become a seat if one of the conditions precedent is satisfied and does not assume the status of seat. In the present case therefore Kuala Lumpur is not the seat of or place of arbitration and the interchangeable use cannot apply (Para 33). 

On the basis of the aforesaid reasoning, the Supreme Court held that Part I applied and Indian courts had jurisdiction. Consequently, the Supreme Court set aside the Delhi High Court's decision and remanded back the matter to the Delhi High Court to decide the Section 34 petition.

Comments

It is submitted that the reasoning and the eventual conclusion of the three Judge Bench of the Supreme Court consisting of Dipak Mistra, CJI, AM Khanwilkar & Dr. DY Chandrachud, JJ. are not correct. At the outset, this decision cannot be and should not be read as a general proposition regarding the rules of choice of seat in the absence of an expression determination thereof  in the BALCO regime. This should have a restricted application only regarding pre-BALCO regime: the ratio is only regarding an arbitration clause to which BALCO did not apply. Why? BALCO (2012) applied only prospectively.

Before we go into the detailed reasoning, we wish to draw the attention of the readers to these observations in the judgement:  

"When a 'place' is agreed upon, it gets the status of seat which means the juridical seat. We have already noted that the terms 'place' and 'seat' are used interchangeably. When only the term 'place' is stated or mentioned and no other condition is postulated, it is equivalent to 'seat' and that finalises the facet of jurisdiction. But if a condition precedent is attached to the term 'place', the said condition has to be satisfied so that the place can become equivalent to seat. In the instant case, as there are two distinct and disjunct riders, either of them have to be satisfied to become a place... The said test clearly means that the expression of determination signifies an expressive opinion. In the instant case, there has been no adjudication and expression of an opinion. Thus, the word 'place' cannot be used as seat. To elaborate, a venue can become a seat if something else is added to it as a concomitant. But a place unlike seat, at least as is seen in the contract, can become a seat if one of the conditions precedent is satisfied. It does not ipso facto assume the status of seat."

The above observation treats the term 'seat' and 'place' as two different concepts. Seat is place. Period. [see, Gary Born, International Commercial Arbitration 20152 (2014)- "it is important to distinguish between the “seat” of the arbitration (sometimes referred to as the “place” of the arbitration)".] UNCITRAL has a tradition of using the term 'place' to signify seat. Nothing more nothing less. Therefore, the observations in the first few sentences quoted above regarding conditions precedents and place are completely wrong and have been rendered without considering the evolution of international commercial arbitration and the UNCITRAL instruments, including the UNCITRAL Model Law based on which Section 21 of the 1996 Act is based. See, this link and the links provided under the head "Seat of Arbitration for a discussion regarding the use of the term "place" in UNCITRAL instruments.

At the cost of making this post lengthier, we quote some of the discussions held in the UNCITRAL during the revision of its Arbitration Rules. The then prevailing UNCITRAL Arbitration Rules, 1976, like our 1996 Act, employed the term 'place' to signify the arbitral seat. In its 45th Session, the Working Group discussed whether the  term should be substituted with "seat':

"88. A proposal was made to replace the words “place of arbitration” in article 16, paragraphs (1) and (4) with words such as “the seat of arbitration” or “the juridical seat of arbitration”. Reservations were expressed as to whether the proposed words would in fact improve the understanding of the provision. It was observed that users were often unaware of the legal consequences attached to the term “place of arbitration”. It was suggested that a reference to the “seat of arbitration” could signal the legal implications of that notion and could differ from the physical place where certain elements of the arbitral procedure were carried out or where an arbitrator might sign the award." Report of the Working Group on Arbitration and Conciliation on the work of its forty-fifth session A/CN.9/614. 

Ultimately the proposal to change the terminology was not retained as the usage of 'seat' was inconsistent with other UNCITRAL instruments such as the Model Law. Report of the Working Group on Arbitration and Conciliation on the work of its forty-fifth session A/CN.9/614. That being the history of the use of the term 'place', the observations quoted in Para 33 of the judgement relating to 'place' are wholly wrong. 

Another error that the judgement suffers from is importing the requirement into the Model Law that place of arbitration has to be expressly determined. It need not be expressly stated or expressly determined. To support its conclusion that 'determination' signified 'expressive opinion', the Supreme Court cited Ramanatha Aiyer's Law Lexicon and Black's Law Dictionary. Both these works cited court decisions in totally different contexts. 

Aiyer's Law Lexicon cited the decision of the Supreme Court in Jaswant Sugar Mills Ltd. v. Lakshmi Chand AIR 1963 SC 677, which dealt with the meaning of the term "determination" in the context of Article 136 of the Constitution of India and had nothing to do with arbitration, let alone the interpretation of the term in the context of UNCITRAL instruments. Black's Law Dictionary cited the decision Dyken Joint Venture v. Van Dyken 279 N.W.2d 459. Nowhere in the decision does the Wisconsin Supreme Court define "determination". Even the use of the term in the judgement was in the context of interpreting a statute and this had nothing to do with "determination" in the context of international commercial arbitration, much less the UNCITRAL instruments. 

For the time being let us assume that the arbitration tribunal did not decide on the seat. What happens if neither the parties chose the seat nor the tribunal determined it? UNCITRAL's Digest on the Model Law states the following:

"Article 20 does not provide for the situation where an arbitral tribunal fails to make such a determination. If the place of arbitration is neither agreed upon by the parties, nor determined by the arbitral tribunal, the courts might have to determine the place of arbitration. In such a case, it was found that the effective place of arbitration, i.e. the place where all relevant actions in the arbitration have taken place or, if this cannot be determined, the place of the last oral hearing, should be the place of arbitration."

One would notice that not a single prominent work  on international commercial arbitration was cited in the Supreme Court's judgement, which is surprising considering Supreme Court's previous practice of citing from many major commentaries on the subject. Had it looked for such authorities, it would have found the the Model Law Digest cited the decision of the German Court (CLOUT case No. 374-also reproduced under CLOUT case No. 408) [Oberlandesgericht Düsseldorf, Germany, 6 Sch 02/99, 23 March 2000-link]. The decision partially supports the decision of the Supreme Court in the instant case but goes on to reach the opposite result based on another reasoning. The relevant portion of the decision is quoted here: 

"If the parties have not agreed on a place of arbitration, such place is determined by the arbitral tribunal.The mere mentioning of a geographical place in the arbitral award can not be understood as a determination. If neither the party nor the arbitral tribunal has determined the place of arbitration, search place is fixed by reference to the "effective place of arbitration" or, by reference to the place of arbitration the last oral hearing."

Note that in this decision the court holds that the "mere mentioning of a geographical place in the arbitral award" cannot be understood as a determination but then goes on to hold that if  neither the party nor the tribunal has determined the place of arbitration, the place is fixed by reference to the effective place of arbitration or by reference to the place of the last oral hearing. It appears on facts that the hearings were held in Kuala Lumpur and therefore even by this judgement, the effective place of arbitration and the place of the last oral hearing were in Kuala Lumpur, the seat should have been Kuala Lumpur. 

It is submitted that the German judgement is erroneous in its decision that mentioning of the geographical place cannot be a determination. So is the Supreme Court in reaching the same conclusion. Let us see why. 

Section 20(1) states: "The parties are free to agree on the place of arbitration. Failing such agreement, the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties." Section 20(1) provides that in case parties do not agree on the place, the tribunal shall determine the place having regard to the circumstances of the case, including the convenience of the parties. In the instant case, there was no express choice by the parties. It appears that the hearings were held in Kuala Lumpur. It also appears that the tribunal did not expressly determine the place. But is this necessary? In other words, does Section 20(1) or any other provision in the Model Law require the tribunal to decide the place expressly? Ideally, it should. But what if not? 

Nowhere does the Model Law require the tribunal to decide expressly the place. It cannot be presumed that the absence of such express determination could mean that the tribunal did not determine the place. Even assuming that the tribunal committed a procedural error by not determining the place, would it not amount to a waiver of the right to object later as provided in Article 4 of the Model Law? (Article 4 reads: "A party who knows that any provision of this Law from which the parties may derogate or any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time-limit is provided therefor, within such period of time, shall be deemed to have waived his right to object."). It appears that the parties did not object to the purported non-express designation of the seat.

Article 31(3) of the Model Law provides: "The award shall state its date and the place of arbitration as determined in accordance with article 20 (1). The award shall be deemed to have been made at that place." Note that Article 31(3) talks of "determination in accordance with article 20 (1)" and 20(1) does not talk about express determination. Given Article 4 and the lack of any objection and the fact that the parties are deemed to have known about the mandatory requirement regarding place in Article 31(3), would it not be reasonable to suggest that the parties were completely agreeable to the tribunal expressly stating (and perhaps determining) the seat in the arbitral award? Interestingly, in Para 19 of the decision of the Delhi High Court in the instant case, the Division Bench makes a similar point: "Since there is no mention of any dispute with regard to the place of  arbitration in the award made by the Arbitral Tribunal, it can safely be presumed that the award having been made at Kuala Lumpur, the place of arbitration as distinct from the venue of the arbitration, would also be Kuala Lumpur."

The purpose of Article 31(3) can be culled out from the Travaux Preparatoires of the Model Law, especially, A/40/17 - Report of the United Nations Commission on International Trade Law on the work of its eighteenth session: "254... there was a basic difference between the place stated on the award being deemed to be the place of the award and the date stated on the award being deemed to be the date of the award. The former is an irrebuttable presumption to assure the territorial link between the award and the place of arbitration. The latter must be rebuttable, since the arbitrators, as well as the parties, might have reasons for stating the date of the award to be earlier or later than the date it was actually rendered." 

Thus the effect of the insertion of the place as Kuala Lumpur in the award assured a territorial link between the award and Kuala Lumpur. Therefore, coming back to the German case, in view of the above Report, the decision of the German court is wrong and so is the decision of the Supreme Court.

Let us now look at the ex post implications of the Supreme Court's decision. For one, in the instant case, the Supreme Court has concluded that the designation by the tribunal of Kuala Lumpur was not a determination regarding the place of arbitration. This means that the Supreme Court has already concluded that the arbitral award is defective in that it has not complied with the mandatory requirement in Article 21(1) read with Article 31(3) relating to expressly declaring the place of arbitration. Would this alone be a ground to set the award aside would have to be decided by the Delhi High Court.

The Supreme Court concluded that the mere choice of foreign venue is not sufficient for presuming a foreign seat/ place. Three comments are worth noting here: 

(1) The present case was not simply a case of mere choice of foreign venue. There were many more things to the arbitration clause: Parties had agreed to choose a set of non-national arbitration rules in the form of the UNCITRAL Model Law. The appointing authority was to be the Secretary General of the Permanent Court of Arbitration. Weren't these choices sufficient to reach a conclusion of implied exclusion (Mere choice of a foreign appointing authority as opposed to Indian meant that Indian courts as the appointing authority under Section 11 of the 1996 Act was impliedly excluded.).

(2) In the context of post-BALCO decisions, the conclusion reached on the same facts would be different because Part I would not apply in foreign arbitrations. Considering the factors mentioned in point (1) above along with the choice of foreign venue, the arbitration in the BALCO regime would be foreign. 

(3) Many times, parties to the contract are either ignorant of cutting edge distinctions between seat and venue. Often they do not obtain legal advice and even if they do, some are not conversant with the implications of the usage of venue instead of seat especially if the native language of the parties is not English. Sometimes, the parties postpone the agreement on particular clauses such as the seat to after disputes have arisen because they are not able to agree on the place. Contract negotiations take place in a dynamic environment and courts should be conscious of these aspects while construing arbitration clauses and should not adopt an overly technical approach.

Lastly, the first para of the Supreme Court's decision states that the Single Judge who heard the Section 34 petition dismissed the same vide judgement dt. 09.07.2015 for the reason that "in view of the terms of the agreement and the precedents holding the field, the Indian courts have no jurisdiction to entertain the application." This is factually untrue. OMP No. 693/2013 was filed by Union of India challenging the arbitral award. The matter was heard and the court vide its judgement dt. 09.07.2015 did not accept any preliminary objection nor did it hold that Indian courts did not have any jurisdiction. The petition was in fact withdrawn. Thereafter a Review Petition was filed by the Union of India and the review petition was dismissed since the petition under Section 34 was withdrawn. Even at this stage, the Single Judge did not pass any order on merits. It was only the Division Bench that decided that Indian courts could not exercise jurisdiction since Part I was impliedly excluded. Consequently, Para 2 of the decision of the Supreme Court is also factually erroneous in that the Division Bench did not concur with the Single Judge's view on jurisdiction and applicability of Part I because no view was expressed by the Single Judge!

All said and done, the case is an apt example as to why arbitration agreements should be drafted precisely and should include the choice of seat or place of the arbitration.