Indian Supreme Court rules that Indian courts have jurisdiction to hear an application to set aside an award issued in Malaysia

In its recent decision in Union of India v Hardy Exploration and Production (available here), the Supreme Court of India found that a contractual clause stipulating Kuala Lumpur as the 'venue' of arbitration did not amount to a choice of juridical seat. While the Indian courts' jurisdiction to hear set-aside applications will be excluded if the seat of the arbitration is outside India, the Supreme Court found that in this case there was no chosen seat (and the tribunal had not determined a seat), notwithstanding the choice of Kuala Lumpur as the venue for the arbitral proceedings, and the fact that the award was signed in Kuala Lumpur. Since this was a case where the arbitration agreement pre-dated 6 September 2012 (the date of the key Supreme Court ruling in BALCO), it appears that the Court did not find it necessary to positively determine that the seat was in India; the fact that an overseas seat had not been established appears to have been sufficient for the Indian courts to have jurisdiction to hear the application.

Background

On 2 February 2013, Hardy Exploration and Production (India) Inc ("Hardy") obtained an arbitration award (the "Award") in excess of £70 million against the Union of India ("UoI").[1] The dispute arose from a production sharing contract dated 19 November 1996 (the "PSC"), and related to oil and gas exploration rights in Indian territorial waters.

UoI challenged the Award by filing a set-aside application under Section 34 of the (Indian) Arbitration and Conciliation Act 1996 (the "Act") before the Delhi High Court. Hardy resisted this application on the basis that the Indian courts did not have jurisdiction to decide the set-aside application as the seat of the arbitration was Kuala Lumpur, Malaysia. Article 33 of the PSC contained the arbitration agreement, and Article 33.12 provided that:

"The venue of conciliation or arbitration proceedings pursuant to this Article unless the parties otherwise agree, shall be Kuala Lumpur…"

UoI argued that Kuala Lumpur was merely the physical venue where the arbitration was conducted and the award was signed, and the application of Part I of the Act (which includes Section 34) was not excluded by the parties.

The Delhi High Court found that since the Award was made and signed at Kuala Lumpur, and there was no indication of any dispute between the parties regarding the seat of the arbitration, it could be inferred that Kuala Lumpur was the seat. As a result, the Indian courts were found to have no jurisdiction under the Act. UoI appealed the decision before the Supreme Court.

Hardy's enforcement action in US courts

Separately, in 2016, Hardy also filed a petition for enforcement of the Award before the United States District Court for the District of Columbia ("US District Court"). In response, UoI argued that the US District Court should decline to enforce the Award as doing so would violate US public policy, and in any event, the court should stay the enforcement proceedings while its set-aside application in the Indian courts remained pending.

In its decision on 7 June 2018,[2] the US District Court denied India's application for a stay primarily on the basis that the set-aside proceedings in the Indian courts had remained pending for more than five years, and that there was no clear end in sight. Granting a stay in such a case would cause further delays and be in conflict with the general objectives of arbitration – expeditious resolution of disputes and the avoidance of protracted and expensive litigation. Since the court exercised its discretion and refused to grant a stay on the enforcement of the Award, it did not find it necessary to determine the seat of the arbitration, and whether Indian courts were the competent authority under Article V(1)(e) of the New York Convention to hear a set-aside application.

However, the US District Court's eventual decision was to refuse enforcement of the Award as it agreed with UoI's argument that confirming certain aspects of the Award would violate US public policy. One of the orders in the Award required UoI to allow Hardy to exercise its oil and gas exploration rights in accordance with the PSC i.e. an order of specific performance. While a US court may confirm an award providing for compensatory damages against a state or a state entity, the US District Court found that enforcement of an order of specific performance against a state, especially one which requires UoI to allow Hardy to undertake oil and gas exploration, would be forced interference with UoI's sovereignty over its territory (and natural resources), and therefore, against US public policy. For the same reason, the US District Court also refused to confirm the tribunal's award of interest pending India's compliance with the order of specific performance.

In rejecting Hardy's petition for enforcement, the US District Court did note that recourse was available to Hardy – litigation in the Indian courts, and this brings us back to the decision of the Indian Supreme Court.

Principles governing the ability of Indian courts to intervene in foreign-seated arbitrations

As readers may recall, historically, Indian courts were willing to intervene in arbitrations seated outside India pursuant to the Supreme Court's decision in Bhatia International.[3] In summary, the Act sets out India's arbitration law in two parts – Part I of the Act, which is based on the UNCITRAL Model Law, deals with commencement and conduct of arbitration, and enforcement and set-aside of any award; and Part II of the Act deals with enforcement of awards delivered in foreign-seated arbitrations. In Bhatia International, the Supreme Court had held that Part I of the Act applied even to arbitrations seated outside India, unless the parties had expressly or impliedly agreed to exclude Part I of the Act. This decision had significant consequences as even in the context of foreign-seated arbitrations, Indian courts could, among other things, set aside arbitral awards. This led disputing parties to seek to involve the Indian courts in foreign arbitrations on various matters ranging from appointment of arbitrators to enforcement of awards.

In Bharat Aluminium (or BALCO),[4] the Supreme Court overruled this controversial decision and held that Part I of the Act only applied to arbitrations seated in India. However, the Court held that this decision would only apply prospectively, to arbitration agreements entered into after 6 September 2012. (For further background on the Indian Supreme Court's decisions in Bhatia International and BALCO, please see our previous coverage here.)

However, in subsequent decisions, the Court has incrementally reduced the impact of Bhatia International even on pre-BALCO arbitration agreements by extending the situations where parties could be deemed to have excluded Part I of the Act. Significantly, in its 2015 decision in Union of India v Reliance Industries,[5] the Court held that Part I of the Act would be taken to have been excluded if: (i) the juridical seat is outside India; or (ii) the law governing the arbitration agreement is a law other than Indian law.

Since the PSC was entered into before 6 September 2012, the pre-BALCO rules were applicable here and the Supreme Court's decision must be read in that context. At the same time, the Supreme Court's observations on the difference between seat and venue, and the principles governing the determination of a seat in the absence of an express agreement, potentially have wider implications.

Decision

The question before the Supreme Court was whether the juridical seat of the arbitration was outside India, which would mean that the Indian courts did not have jurisdiction to consider the set-aside application.

In analysing this question, the Court held that the starting point was the arbitration agreement and laid down the following principles:

1. If the 'place' or the 'seat' of the arbitration was expressly indicated in the arbitration agreement, that would be considered a reference to the juridical seat of the arbitration. In line with the UNCITRAL Model Law, the Court also noted that 'place' and 'seat' are used interchangeably.
2. In the absence of an express choice of seat, if the arbitration agreement provided for a procedure to determine the seat of the arbitration, the Court would accept the seat determined in accordance with such procedure.[6]
3. In the absence of an express choice of seat and where the seat had not been determined in accordance with the procedure in the arbitration agreement, and a venue has been specified, there needed to be some additional factor for that venue to be considered the juridical seat of the arbitration. For instance, in Harmony Innovation Shipping Limited,[7] the parties had provided for "arbitration in London" without indicating whether London was also the seat of the arbitration. The Court considered additional factors – the arbitrators were to be members of the "London Arbitrators Association" (sic), the contract was governed by English law, and there was reference to the small claims procedure of the "London Maritime Arbitration Association" (sic) – all of which supported the conclusion that London was also intended to be the seat of the arbitration, and Part I of the Act was excluded.

The Court noted that Article 33.12 of the PSC expressly provided for the 'venue' of the arbitration proceedings to be Kuala Lumpur. In line with the analysis above, and relying on the well-established distinction between the juridical seat of the arbitration and the physical venue where the arbitration is conducted, the Court held that Article 33.12 on its own was not sufficient to indicate that Kuala Lumpur was the seat of the arbitration.

The Court also considered the parties' (unusual) choice that the arbitration proceedings were to be conducted in accordance with the UNCITRAL Model Law (as opposed to the UNCITRAL Rules). It noted that Article 20(1) of the UNCITRAL Model Law provided that absent the parties' agreement, the place of arbitration shall be determined by the arbitral tribunal. The Court held that the fact the hearings were held in Kuala Lumpur and that the Award was signed there was also not sufficient to indicate that Kuala Lumpur was the seat of the arbitration. According to the Court, Article 20(1) of the UNCITRAL Model Law requires a positive determination – adjudication by the arbitral tribunal as to the seat of the arbitration, and indicating the result of that adjudication in an award.

In the absence of any additional factor which pointed to Kuala Lumpur being the seat of the arbitration, the Court held that Kuala Lumpur could not be considered the seat of the arbitration. In its judgment, the Court did not go so far as to say that the seat of the arbitration was in India, but in the absence of a positive finding that the seat was outside India, Part I of the Act was not excluded, and Indian courts had jurisdiction to decide the set-aside application filed by UoI.

Comment

The decision is a reminder that the legacy of the controversial decision in Bhatia International continues to be felt six years after it was overruled. Nevertheless, the Supreme Court has confirmed the reduced impact of Bhatia International on arbitration agreements entered into before 6 September 2012 – Part I of the Act will be taken to have been excluded and Indian courts will not have any supervisory jurisdiction in those cases where either the juridical seat is outside India, or the law governing the arbitration agreement is not Indian law.

More generally, and in respect of arbitration agreements entered into before and after 6 September 2012, this decision could have achieved more and provided clarity on a still-murky area of arbitration jurisprudence in India. Indeed, while the Court found that Kuala Lumpur was not the seat of the arbitration, it did not determine what the seat of the arbitration was (presumably, because it was not required to do so under the principles laid down in Bhatia International ­– a contrast with the post-BALCO regime, in which Part I only applies where there is a positive finding that the seat is / was located in India).

However, this decision illustrates the importance of clear drafting of arbitration agreements to avoid uncertainty and resulting delays. A clear contractual choice of 'seat' rather than 'venue' would, it seems, have made the position clear, as would a choice of institutional rules which provide for the appointing authority to prescribe a seat where one is not chosen. It also appears that where there is no express choice of seat and no institutional power to designate a seat, such as in ad-hoc arbitrations, it is important for the parties to apply to the tribunal to determine a juridical seat so that such issues are not raised at the stage of enforcement.

[1]       Hardy Exploration & Production (India) Inc v Government of India v India Infrastructure Finance Company (UK) Limited, [2018] EWHC 1916 (Comm).

[2]       Hardy Exploration & Production (India), Inc v Government of India, Ministry of Petroleum & Natural Gas, 2018 WL 2758220 (United States District Court, District of Columbia, 7 June 2018).

[3]       Bhatia International v Bulk Trading SA, (2002) 4 SCC 105.

[4]       Bharat Aluminium v Kaiser Aluminium, (2012) 9 SCC 552.

[5]       Union of India v Reliance Industries Limited & Others, (2015) 10 SCC 213.

[6]       For instance, in IMAX Corporation v E-City Entertainment (India) Pvt. Ltd., (2017) 5 SCC 331, the parties did not choose a seat but provided for arbitration under the ICC Rules. In accordance with the ICC Rules, the International Court of Arbitration of the ICC decided that London would be the seat of the arbitration. On this basis, the Court held that the seat was London, and Part I of the Act was excluded.

[7]       Harmony Innovation Shipping Limited v Gupta Coal India Limited and another, (2016) 11 SCC 508.

For further information, please contact Nicholas Peacock, Partner, Donny Surtani, Partner, Kritika Venugopal, Senior Associate, Divyanshu Agrawal, Associate (India) or your usual Herbert Smith Freehills contact.