Seat Of Arbitration Not Determined By Formulaic & Unpredictable Application Of Choice Of Law Based On Abstract Connecting Factors To Underlying Contract: SC
The Supreme Court held that the seat of arbitration cannot be determined by formulaic and unpredictable application of choice of law based on abstract connecting factors to the underlying contract.
The Court held thus in an arbitration petition filed under Section 11(6)(a) read with Section 11(12)(a) of the Arbitration and Conciliation Act, 1996 (A&C Act), seeking a referral of the disputes between the parties and consequent appointment of an Arbitrator.
The three-Judge Bench comprising CJI D.Y. Chandrachud, Justice J.B. Pardiwala, and Justice Manoj Misra observed, “The ‘Closest Connection Test’ for determining the seat of arbitration by identifying the law with which the agreement to arbitrate has its closest and most real connection is no longer a viable criterion for determination of the seat or situs of arbitration in view of the Shashoua Principle. The seat of arbitration cannot be determined by formulaic and unpredictable application of choice of law rules based on abstract connecting factors to the underlying contract. Even if the law governing the contract has been expressly stipulated, it does not mean that the law governing the arbitration agreement and by extension the seat of arbitration will be the same as the lex contractus.”
The Bench added that the more appropriate criterion for determining the seat of arbitration is that where in an arbitration agreement there is an express designation of a place of arbitration anchoring the arbitral proceedings to such place, and there being no other significant contrary indicia to show otherwise, such place would be the ‘seat’ of arbitration even if it is designated in the nomenclature of ‘venue’ in the arbitration agreement.
AOR R. Sathish appeared on behalf of the petitioner while AOR Mudit Sharma appeared on behalf of the respondent.
Brief Facts -
The petitioner company (M/s Arif Azim Co. Ltd.) and respondent company (M/s Micromax Informatics FZE) entered into a Consumer Distributorship Agreement (CDA) for the distribution of handsets manufactured by the respondent and the same was executed by the parties in Kabul, Afghanistan. As per the agreement terms, the petitioner became the authorized distributor of the respondent’s products including the mobile handsets and was granted a non-exclusive right to market and distribute the same under its own account in Afghanistan. Pursuantly, several transactions took place between the parties. In 2012, the petitioner placed an order for purchase of around 8,000 mobile handsets from the respondent. As per the petitioner, this time, the handsets and the corresponding invoices were issued by another party (M/s Micromax India) instead and it supplied only 7,300 handsets.
The aforesaid party while raising the invoice, ignored the credit balance of the petitioner and demanded payment to be made directly to it in India. Thereafter, several more correspondences took place between the petitioner and the respondent’s Executive Director and over the next 2 months, several requests were made by the petitioner to the respondents for furnishing the outstanding credit balance in its favour and to make the requisite payment, however, the same were to no avail. Resultantly, the petitioner sent a notice for invocation of arbitration. As the cause of action had concurrently both in Afghanistan and India, the petitioner expressed its preference to resolve the dispute through arbitration administered under the jurisdiction of the Courts in India. Since no reply to the said invocation notice was received, the petition was filed before the Apex Court.
The Supreme Court in view of the above facts, noted, “… where more than one forum is available, it is the discretion of the court to entertain the matter by examining as to which is the appropriate forum more suited for the interests of all the parties and the ends of justice. Ordinarily, the burden to prove that the court or forum in seisin of the matter is an inconvenient forum or the proceeding therein are oppressive or vexatious lies on the party contending the same, yet the choice of forum by the other party is not decisive, and that it is for the court to determine whether the proceedings before it might be an inconvenience to the interests of the parties or less appropriate for the subject-matter in question.”
The Court said that even if it is assumed that Clause 27 of the Distributorship Agreement conferred concurrent jurisdiction to both the courts in UAE and the other courts and thus, the petitioner was well-within its right to approach the Supreme Court in terms of the non-exclusive jurisdiction clause for the purpose of appointment of arbitrator, the Court can decline to exercise its jurisdiction if there exists a more appropriate forum.
“… the seat of arbitration in terms of the aforesaid Distributorship Agreement is Dubai, UAE, both the law governing the contract and the curial law are the laws of UAE, the respondent no. 1 herein with whom the petitioner’s credit account lies is also situated in Dubai, even the venue of arbitration is Dubai, thus by all reasons of logic the more appropriate forum suitable for appointment of arbitrator is Dubai, UAE and not the courts of India”, it held.
The Court, therefore, came to the conclusion in the following manner –
• Part I of the Act, 1996 and the provisions thereunder only applies where the arbitration takes place in India i.e., where either (I) the seat of arbitration is in India OR (II) the law governing the arbitration agreement are the laws of India.
• Arbitration agreements executed after 06.09.2012 where the seat of arbitration is outside India, Part I of the Act, 1996 and the provisions thereunder will not be applicable and would fall beyond the jurisdiction of Indian courts.
• Even those arbitration agreements that have been executed prior to 06.09.2012 Part I of the Act, 1996 will not be applicable, if its application has been excluded by the parties in the arbitration agreement either explicitly by designating the seat of arbitration outside India or implicitly by choosing the law governing the agreement to be any other law other than Indian law.
• The moment ‘seat’ is determined, it would be akin to an exclusive jurisdiction clause whereby only the jurisdictional courts of that seat alone will have the jurisdiction to regulate the arbitral proceedings.
• The ‘Closest Connection Test’ for determining the seat of arbitration by identifying the law with which the agreement to arbitrate has its closest and most real connection is no longer a viable criterion for determination of the seat or situs of arbitration in view of the Shashoua Principle.
• Where the curial law of a particular place or supranational body of rules has been stipulated in an arbitration agreement or clause, such stipulation is a positive indicium that the place so designated is actually the ‘seat’, as more often than not the law governing the arbitration agreement and by extension the seat of the arbitration tends to coincide with the curial law.
• Merely because the parties have stipulated a venue without any express choice of a seat, the courts cannot sideline the specific choices made by the parties in the arbitration agreement by imputing these stipulations as inadvertence at the behest of the parties as regards the seat of arbitration.
• Where two or more possible places that have been designated in the arbitration agreement either expressly or impliedly, equally appear to be the seat of arbitration, then in such cases the conflict may be resolved through recourse to the Doctrine of Forum Non Conveniens, and the seat be then determined based on which one of the possible places may be the most appropriate forum keeping in mind the nature of the agreement, the dispute at hand, the parties themselves and their intentions. The place most suited for the interests of all the parties and the ends of justice may be determined as the ‘seat’ of arbitration.
The Court said that the petition is not maintainable as neither the seat of arbitration is India nor is the arbitration agreement governed by laws of India.
Accordingly, the Apex Court dismissed the petition.
Cause Title- M/s Arif Azim Co. Ltd. v. M/s Micromax Informatics FZE (Neutral Citation: 2024 INSC 850)
Appearance:
Petitioner: AOR R. Sathish, Advocates Rajesh Kumar, Mohan Das KK, Mathan Joseph, and S. Geetha.
Respondent: AOR Mudit Sharma and Advocate Nandini Sharma (Gidwaney).
