With an Arbitration Clause, Do you Still Need to Designate Jurisdiction?

Normally, parties to an agreement negotiate on an arbitration clause wherein they agree upon a place of arbitration. For instance, two Indian parties may agree:

"13. Any dispute arising out of or in connection with this Agreement shall be referred to arbitration by a sole arbitrator to be jointly appointed by the Parties. The place of arbitration shall be New Delhi.."

The question is whether parties should also agree on the courts that would have jurisdiction over matters in relation to this Agreement. The law as it stands today is that in addition to the courts that would ordinarily have had jurisdiction had there been no arbitration clause (typically the court from which a part or the whole cause of action arose or the court within whose jurisdiction the respondent resides or carries on business, etc.), the courts of the seat of arbitration would also have jurisdiction. In this regard, see, BALCO:

"96... 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."

That the SC in BALCO sought to introduce concepts of international arbitration into domestic arbitration when there was no need to and contrary to the definition of "court" in Section 2(1)(e) of the Arbitration and Conciliation Act, 1996 ("1996 Act") is fairly well-established. See, for instance, V. Niranjan & Shantanu Narvane, ‘Bhatia International Rightly Overruled: The Consequences of Three Errors in BALCO’ (2012) 9 SCC J-26, where the authors argue, rightly, that one of the important consequence of this "error" in BALCO is that BALCO created an exception to the fairly established principle that jurisdiction on a court cannot be conferred by consent, unless the law otherwise confers jurisdiction.

What is more problematic is the problem of reconciliation of two opposing principles. One of the justifications of the court in BALCO was the purportedly well-established principle in international arbitration that designation of a seat operated as an exclusive jurisdiction clause. Based on this, the court held that if a party to an Indian arbitration with no foreign element ("Purely Domestic Arbitration"). At the same time, it was fairly well-established that where two or more courts had concurrent jurisdiction over the matter, parties to a contract could agree to confer exclusive jurisdiction only on one of those courts but not on another. 

Now the problem with the above formulation was that both these two principles could not be conceptually reconciled where the choice of seat was different from the choice of jurisdiction. For instance, in the above quoted example, if choice of seat was Delhi and if the parties had agreed on the exclusive jurisdiction of the courts at Mumbai, would the choice of seat and the consequent "choice" of Delhi courts as courts of exclusive jurisdiction  override parties' agreement to have Mumbai as the choice of court?

This crucial hole in this doctrine is stark if one peruses the observations of the Supreme Court in Indus Mobile:

"Under the Law of Arbitration, unlike the Code of Civil Procedure which applies to suits filed in courts, a reference to "seat" is a concept by which a neutral venue can be chosen by the parties to an arbitration clause. The neutral venue may not in the classical sense have jurisdiction -- that is, no part of the cause of action may have arisen at the neutral venue and neither would any of the provisions of Sections 16 to 21 of Code of Civil Procedure be attracted. In arbitration law however, as has been held above, the moment "seat" is determined, the fact that the seat is at Mumbai would vest Mumbai courts with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties."

Two problems arise owing to this observation: (1) if the seat is designated, will parties' choice of a court other than the seat's court be invalid? If the emphasised observation is taken to its logical end, this is what will entail. (2) the observation really renders S. 2(1)(e) otiose, which could definitely not have been the legislative intent. 

There is another dimension to the issue. In Brahmani River (25.07.2019: SC), the Division Bench of the Supreme Court observed: "Where the contract specifies the jurisdiction of the court at a particular place, only such court will have the jurisdiction to deal with the matter and parties intended to exclude all other courts." If that is so, then whenever the parties agree on the place/ seat  of arbitration, say Delhi, and agree that courts at another place, say, Mumbai, will have exclusive jurisdiction, then parties should be deemed to have excluded the courts at the place of arbitration and should be deemed to have chosen Mumbai as the relevant court. In such a case, the principle that choice of seat is an exclusive jurisdiction clause will not survive.

The statement in C v D [2007] EWCA Civ 1282 and Shashoua v. Sharma that the choice of seat is akin or analogous to an exclusive jurisdiction clause has been taken to mean that choice of seat is equivalent to an exclusive jurisdiction clause in BALCO and Indus Mobile. More on Indus Mobile, criticisms of Indus Mobile and other aspects in another post. The judicial creation of jurisdiction to courts at seat in domestic arbitration is a reality which we have to accept. That it may be wrong is for a future court to decide. This question needs to be answered from the perspective of party autonomy. 

However, the judicial creation of jurisdiction leads to doctrinal inconsistency. Consequently, courts in future will have to answer this properly and provide its reasoning by filling the logical gap. The only way in which the opposing principles can be reconciled would be to re-write these principles in terms of default rules (or as presumptions, if one were to see these in terms of evidence), which is quite a standard formulations in many jurisdictions as regards choice of law issues:

1. The choice of seat will operate as a exclusive choice of the courts at seat.
2. Parties could contract around this default rule by agreeing on one of the courts which would have had concurrent jurisdiction had there been no arbitration clause. 
3. Where there is a choice of seat and a designation of exclusive jurisdiction of a court different from the seat, such a designation would be a clear indicator of parties' intent to contract around the default rule at Sl. No. 1.
4. Contracting around the default rule is constricted by the principle that no one can confer jurisdiction on a court by agreement when such court would not otherwise have jurisdiction. In other words, if a party wants to contract around the presumption in Sl. No. 1, such a contracting around would be valid only if the court chosen is one which will come within the purview of Section 2(1)(e). For instance, if Party A (from Lucknow) and Party B (from Mumbai) enter into agreement at Mumbai for execution of contract at Mumbai and payment at Mumbai and agreement provides for seat of arbitration at Chennai and exclusive jurisdiction of courts at New Delhi, the party choice of exclusive jurisdiction of courts at New Delhi cannot be deemed to have contracted around the default rule (that choice of seat at Chennai operates as the exclusive choice of courts at Chennai) since under the Code of Civil Procedure, 1908, courts at New Delhi would not have any jurisdiction.

Now, to answer the question posed in the title of this post: why should parties waste precious negotiation time on jurisdiction clause when it is sufficient if they agree on the choice of seat? They should, if they wish to contract around the aforesaid default rule and make an exclusive choice of courts other than those of the seat. If the parties do not wish to do so, they need not waste time on the jurisdiction clause because choice of seat also means the exclusive choice of courts at the seat.