Arbitration and arbitration clause's independent contract status and Jurisdictional controversy over

Arbitration is the Alternate Dispute Resolution (ADR) mechanism, which gives the parties to settle their dispute, out of court, with the choice of designing their own forum, including selecting the law, that liberty is normally not available to any disputant, in anywhere in the world, except choosing their own advocates. But this act gives such unlimited freedom to the disputant to choose their own Judge (Arbitrator) and the number(s), their court (Tribunal), law to be governed, place of Tribunal and language of Tribunal.

In India, such freedom given through the Arbitration and Conciliation Act, 1996, the interested party include an arbitration clause in the contract or enter into a separate agreement at the time of entering into the contract or simply say if any dispute arise the same to be referred to arbitration.  Including all the details ie. name of the arbitrator, number, governing law, place and language, in the arbitration clause, at the time of entering into the contract, will fix responsibility on the parties from day one, otherwise they may exercise these options at the time of the dispute arises, which may lead to difference of opinion between the parties over arbitrator(s) and in numbers, governing law, place of arbitration and its language also, hence it is preferable to include at the time of entering into the contract.

Arbitration clause is an essential element (sine quo non) to refer the matter into arbitration, otherwise no party has the right to refer into arbitration, but can only be exercised the other options, i.e Adjudication before the court, negotiation, conciliation, mediation etc., The stipulation of arbitration clause is very from contract to contract and gives the absolute freedom to the parties to design their forum.

Even though the contract is invalid, the arbitration clause is valid and the contract and the arbitration clause are two independent contracts.

In apex court held vide its judgement Enercon (India) Ltd vs Enercon GMBH and anr (MANU/SC/0102/2014)  as follows:-

79. Section 16 provides that the Arbitration clause forming part of a contract shall be treated as an agreementindependent of such a contract.

80. The concept of separability of the arbitration clause/agreement from the underlying contract is a necessity to ensure that the intention of the parties to resolve the disputes by arbitration does not evaporate into thin air with every challenge to the legality, validity, finality or breach of the underlying contract. The Indian Arbitration Act, 1996, as noticed above, under Section 16 accepts the concept that the main contract and the arbitration agreement form two independent contracts.

The scope and ambit of provision contained in Section 16 of the Indian Contract Act has been clearly explained in Reva Electric Car Company Private Limited Vs. Green Mobil [(2012) 2 SCC 93],, wherein it wasinter alia observed as follows:

“54. Under Section 16(1), the legislature makes it clear that while considering any objection with respect to the existence or validity of the arbitration agreement, the arbitration clause which formed part of the contract, has to be treated as an agreement independent of the other terms of the contract. To ensure that there is no misunderstanding, Section 16(1)(b) further provides that even if the Arbitral Tribunal concludes that the contract is null and void, it should not result, as a matter of law, in an automatic invalidation of the arbitration clause. Section 16(1)(a) presumes the existence of a valid arbitration clause and mandates the same to be treated as an agreement independent of the other terms of the contract. By virtue of Section 16(1)(b), it continues to be enforceable notwithstanding a declaration of the contract being null and void. In view of the provisions contained in Section 16(1) of the Arbitration and Conciliation Act, 1996, it would not be possible to accept the submission of Mr. Ahmadi that with the termination of the MoU on 31- 12-2007, the arbitration clause would also cease to exist.”

The aforesaid reasoning has also been approved by a two Judge bench of this Court in   Today Homes and Infrastructure Pvt. Ltd. vs. Ludhiana Improvement Trust and Anr (2013 (7) SCALE 327)  wherein it was inter alia held as under:

“14. The same reasoning was adopted by a member of this Bench (S.S. Nijjar, J.), while deciding the case of Reva Electric Car Company Private Limited Vs. Green Mobil [(2012) 2 SCC 93], wherein the provisions of Section 16(1) in the backdrop of the doctrine of kompetenz kompetenz were considered and it was inter alia held that under Section 16(1), the legislature makes it clear that while considering any objection with regard to the existence or validity of the arbitration agreement, the arbitration clause, which formed part of the contract, had to be treated as an agreement independent of the other terms of the contract. Reference was made in the said judgment to the provisions of Section 16(1)(b) of the 1996 Act, which provides that even if the arbitral tribunal concludes that the contract is null and void, it should not result, as a matter of law, in an automatic invalidation of the arbitration clause. It was also held that Section 16(1)(a) of the 1996 Act presumes the existence of a valid arbitration clause and mandates the same to be treated as an agreement independent of the other terms of the contract. By virtue of Section 16(1)(b) of the 1996 Act, the arbitration clause continues to be enforceable, notwithstanding a declaration that the contract was null and void.”

Legally three kinds of laws are applicable to the contract with contains arbitration clause

1. Law governing the substantive contract  

2. Law governing the agreement to arbitration

3. Law governing the conduct of the arbitration

All the above three laws are refer to domestic laws i.e Indian laws and the place of the arbitration held in any place in India then there is no ambiguity over the applicable laws as well as on execution of the award.

If the parties are choosing the place of arbitration outside India, then which law governing the conduct of the arbitration proceeding, either the law of the land and the governing law of the arbitration or the law of the place where the arbitration proceeding held?

Ex.  Parties are in India and the appointment of arbitrator and the governing law also in India, but the place of arbitration in London then the question is which law governing the conduct of the arbitration proceeding either Indian law or English law?

Normally place of arbitration is fixed only for the convenient of the parties and arbitrator(s).  By fixing the place outside the country does not give the extended right to any of the parties to enlarge the jurisdiction of that country’s legal forum over the arbitration proceeding conduced in their jurisdiction, for the limited purpose of place, only. Suppose if the law permit to exercise the larger jurisdiction then both the countries ie contract executing country as well as the country of place of arbitration proceeding, having concurrent jurisdiction, which leads to multiplicity of proceedings and also destroy the object of arbitration, which was brought to our system to minimise the intervention of court as much as possible as well as to get the remedy quick and economically. 

In the arbitration scenario the recent confusion is between the seat and venue, whether both are one and the same or not? As a meaning of the common prudent the seat normally reflect the place and /or venue, which is normally used for conducting the arbitration proceeding but the terminology of law is little differ and observe the meaning of applicable law and jurisdiction over the arbitration proceedings.  If so automatically a question arise that if the seat and venue are not same, which law will govern the conduct of proceedings?

The seat and venue are fall within the country then no dispute about the governing law, but if it falls in different countries Ex. Seat is India but venue is London, then automatically the parties’ wants to extend their jurisdiction over the proceedings, in which they feel comfortable. Moreover over it leads to concurrent jurisdiction over the proceeding which leads to municipality of proceedings, conflicting judgment and ultimately take away the object of minimising the intervention of court.

Lord Brondon expressed about the difficulties of concurrent jurisdiction of two countries on the same matter in Abdin Vs. Daveu [1984] AC 398 as follows:- 

“In this connection it is right to point out that, if concurrent actions in respect of the same subject matter proceed together in two different countries, as seems likely if a stay is refused in the present case, one or other of the two undesirable consequences may follow: first, there may be two conflicting judgments of the two courts concerned; or secondly, there may be an ugly rush to get one action decided ahead of the other in order to create a situation of res judicata or issue estoppel in the latter.” The same is affirmed by apex court inEnercon vs Enercon (supra)

In Naviera Amozanica peruana S.A Vs Compania International De Seguros Del Peru (1988 (1) Lloyd’s Rep 116) it was observed that 

“the law governing the conduct of the arbitration”. This is usually referred to as the curial or procedural law, or the lex fori”. Thereafter, the Court approvingly quoted the following observation from Dicey & Morris on the Conflict of Laws (11th Edn.):

“English Law does not recognise the concept of a delocalised arbitration or of arbitral procedures floating in the transnational firmament, unconnected with any municipal system of law”. It is further held that “accordingly every arbitration must have a ‘seat’ or ‘locus arbitri’ or ‘forum’ which subjects its procedural rules to the municipal law which is there in force”.

The Court thereafter culls out the following principle:

“Where the parties have failed to choose the law governing the arbitration proceedings, those proceedings must be considered, at any rate prima facie, as being governed by the law of the country in which the arbitration is held, on the ground that it is the country most closely connected with the proceedings.”

The court further recognised that

“there is equally no reason in theory which precludes parties to agree that an arbitration shall be held at a place or in country X but subject to the procedural laws of Y”. But it points out that in reality parties would hardly make such a decision as it would create enormous unnecessary complexities. Finally it is pointed out that it is necessary not to confuse the legal seat of arbitration with the geographically convenient place or places for holding hearings.

In view of the above is it preferable to fix the seat and venue or place of the arbitration proceeding in same place or within a country?

In which our apex court observed in “Bharat Aluminium Company Vs. Kaiser Aluminium (“BALCO”)  (2012) 9 SCC 552, as follows

It is further noticed that this does not mean that all proceedings of the arbitration are to be held at the seat of arbitration. The Arbitrators are at liberty to hold meetings at a place which is of convenience to all concerned. This may become necessary as Arbitrators often come from different countries. Therefore, it may be convenient to hold all or some of the meetings of the arbitration in a location other than where the seat of arbitration is located.

In Balco, the relevant passage from Redfern and Hunter, has been quoted which is as under:

“The preceding discussion has been on the basis that there is only one ‘place’ of arbitration. This will be the place chosen by or on behalf of the parties; and it will be designated in the arbitration agreement or the terms of reference or the minutes of proceedings or in some other way as the place or ‘seat’ of the arbitration. This does not mean, however, that the Arbitral Tribunal must hold all its meetings or hearings at the place of arbitration. International commercial arbitration often involves people of many different nationalities, from many different countries. In these circumstances, it is by no means unusual for an Arbitral Tribunal to hold meetings—or even hearings—in a place other than the designated place of arbitration, either for its own convenience or for the convenience of the parties or their witnesses… It may be more convenient for an Arbitral Tribunal sitting in one country to conduct a hearing in another country — for instance, for the purpose of taking evidence…. In such circumstances each move of the Arbitral Tribunal does not of itself mean that the seat of arbitration changes. The seat of arbitration remains the place initially agreed by or on behalf of the parties.”

The apex court held in its recent Enercon case (supra) that

125. “In an International Commercial Arbitration, venue can often be different from the seat of arbitration. In such circumstances, the hearing of the arbitration will be conducted at the venue fixed by the parties, but this would not bring about a change in the seat of the arbitration. This is precisely the ratio in Braes of Doune Wind Farm (Scotland) Limited Vs. Alfred McAlpine Business Services Limited ([2008]EWHC 426 (TCC)”

In view of the above, the parties, for avoiding the confusion over the seat and venue or place of arbitration proceeding, while drafting the arbitration agreement or clause, instead of using the word “seat” it is preferable to use the word “Governing Law” or both by using the words such as Seat or Governing Law or Seat / Governing Law, which may minimise the conflict over the this. Most of the domestic contracts are not using the word seat since it is not practice here but often used in International Commercial Arbitration as the word derived from English Arbitration Act, 1996.