 Difference between venue and seat of arbitration

Globalisation has made the world a small place. With drastic increase in transnational
transactions, there has also arisen an urgent need for a mechanism for quick and efficient
method of adjudicating disputes, and that explains the rise of the era of international
commercial arbitrations. Transactions involving entities belonging to different nationalities
invite the supervisory jurisdictions of their respective nations. It is in this context that it
becomes necessary to explain the concept of seat and venue under the Arbitration and
Conciliation Act, 1996 (the 1996 Act), judicial precedent that has comprehensively
interpreted the 1996 Act, and the subsequent amendment to the 1996 Act in 2015.
International commercial arbitrations
The 1996 Act defines the term “international commercial arbitration” under Section
2(1)(f)[1]. Due to the involvement of parties of different nationalities, there is always an
issue of conflict of laws between two or more jurisdictions. The doctrine of party autonomy
plays a vital role in avoiding such conflicts between jurisdictions. It permits the parties to
choose the seat of arbitration, the venue of the arbitration and the law that is applicable to
the contract itself.
Although the dominant issue pertains to conflict of laws and law of arbitration, as much as it
is concerned with choice of law and arbitral proceedings, it is essential to also briefly discuss
the law of contract for addressing the issue of legality of clauses in a contract which exclude
jurisdiction of courts.
Contract law
It is a well-settled position of law in India[2] that parties by contract cannot oust the
jurisdiction of courts absolutely, as such clauses are contrary to public policy and are void.
However, referring disputes to an Arbitral Tribunal for adjudication instead of courts is not
barred. Such reference is permitted as it does not entirely oust the jurisdiction of courts.
Reference of potential disputes to arbitration only creates a mechanism for dispute
resolution whereby questions of fact and law may be decided by an Arbitral Tribunal. This
adjudication is finally subject to a court’s approval. Lord Denning’s observation
in Lee v. Showmen’s Guild of Great Britain[3] summarises the aforesaid position:
… parties cannot by contract oust the ordinary courts from their jurisdiction. They can, of
course, agree to leave questions of law, as well as questions of fact, to the decision of the
domestic tribunal. They can, indeed, make the tribunal the final arbiter on questions of fact,
but they cannot make it the final arbiter on questions of law. They cannot prevent its
decisions being examined by the courts. If parties should seek, by agreement, to take the law
out of the hands of the courts and put it into the hands of a private tribunal, without any
recourse at all to courts in case of error of law, then the agreement to that extent is contrary
to public policy and void.
The Contract Act, 1872 protects contracts which refer disputes to arbitration from being
declared void[4]. The parties being permitted to exclude jurisdiction of courts for
adjudication of disputes, the next question that arises is regarding the permissibility to
choose the law applicable to the contract and arbitral proceedings.
As mentioned earlier, party autonomy is the cornerstone of the law of arbitration. The
signatories to the contract are free to decide not only the law that is applicable to the
contract, but also the law applicable to the arbitration agreement (lex arbitri), and the
procedural law governing the arbitration (curial law)[5].
The Court of Appeal in England in Naviera Amazonica Peruana SA v. Compania
International de Seguros del Peru[6] has summarised the relevant laws that are
applicable to a contract involving an arbitration agreement, which are as follows:
(i) law governing the substantive contract (applicable law);
(ii) law governing the agreement to arbitrate, and the performance of that agreement
(juridical seat or lex arbitri); and
(iii) law governing the procedure of the arbitration (curial law).
In international commercial arbitrations, incorporating clauses that choose the aforesaid
laws clearly and distinctly is of vital importance. Not every dispute which arises pursuant to
an agreement is covered by arbitration. The arbitration clause may specify the kind of
disputes which may be referred to arbitration. Therefore, the courts exercising jurisdiction
over the disputes which can be referred to arbitration and courts exercising jurisdiction over
any other disputes not covered by the arbitration agreement can be different. Specifying the
law applicable to the contract, lex arbitri and the curial law helps ascertain the courts which
have supervisory jurisdiction. It is possible that courts in the aforementioned situations may
be different; therefore, not stating the same in express terms can prove to be perilous for
parties.
The aforesaid laws are discussed hereinafter.
Applicable law — Contract
A contract creating obligations between parties requires a legal system in accordance with
which the obligations may be fulfilled. The law governing the performance of the obligations
under the contract may be distinct from the law that is applicable to the arbitration clause.
The term “applicable law” or “proper law of the contract” is the law that governs the
discharge of the contract itself. In case of disputes arising, the Arbitral Tribunal applies the
applicable law to determine the substantive dispute[7]. Applicable law or the proper law of
the contract are terms which refer to a legal system in which a contract may be executed.
Applicable law — Arbitration agreement
A clause referring parties to arbitration in case of a dispute arising between them is treated
as a separate agreement. Although the clause is part of the main contract, the clause stands
on a different pedestal and is therefore treated as a separate agreement. Therefore, any
dispute pertaining to the validity of the contract itself, does not render the arbitration
agreement inoperative, except in cases involving egregious fraud that perpetrates the main
agreement itself[8]. The law applicable to the arbitration clause can be classified in two
categories, namely, the juridical seat (lex arbitri), and the curial law.
Juridical seat or lex arbitri
The law that is applicable to the arbitration proceeding is the law of the juridical seat of the
arbitration or more commonly referred to as lex arbitri. The lex arbitri would determine the
courts which can exercise supervisory jurisdiction over the arbitration proceedings. Parties
may choose as the seat of arbitration proceeding, a legal system which has no nexus with the
parties simply to obviate the possibilities of bias or unfamiliarity, that may exist in a system
which naturally exercises jurisdiction over a party.
“Lex arbitri” may be best explained by referring to the judgment in XL Insurance
Ltd. v. Owens Corning[9]. An American party A entered into a contract with a British
party B. The substantive law of the contract was New York State law and the agreement to
arbitrate was subject to the English Arbitration Act, 1996. Insured party A brought
proceedings before the Delaware Court for indemnification of certain losses which were
insured. Insurer Binitiated proceedings in London seeking to restrain A from pursuing
proceedings in Delaware. The English Court held that the choice of law (proper law) being
different from the lex arbitri would not invalidate the arbitration clause. Since the parties
have chosen to seek refuge under the English Law for arbitration, the provisions of the
English Arbitration Act would be applicable and English Law shall solely govern the matters
falling within the scope of the arbitration agreement/clause, including formal validity of
arbitration agreement and the jurisdiction of the arbitrators.
Curial law
The procedural law applicable to the conduct of arbitration is known as the curial law. It is
synonymous with the procedural law in litigation. Curial law will almost always be the same
as lex arbitri. It governs the internal arbitration procedures like commencement of
proceedings, appointment of arbitrators, pleadings, manner of conducting evidence, etc.
Arbitration and Conciliation Act, 1996 (the 1996 Act)
The 1996 Act is fraught with vague and ambiguous sections. The provisions of the 1996 Act
themselves did not incorporate the concepts of seat and venue and the same have largely
been developed by judicial precedent. Although, a constant intervention by the judiciary is
an anathema to the process of arbitration, it has almost proved to be beneficial for the
development of the law in India. Due to lacunae in the Act, the Law Commission submitted
its 246th Report suggesting a plethora of amendments radically reforming the entire 1996
Act. Despite having recommended comprehensive changes, very few suggested amendments
were actually enacted by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of
2016) (the 2015 Amendment).
Before adverting to the case law that has supplied interpretations to the 1996 Act and the
2015 Amendment, a brief analysis of the provisions of the 1996 Act are necessary to
understand the lacunae in the legislation, the judicial precedent remedying the lacunae, and
the new position of law under the 2015 Amendment.
The 1996 Act is divided in four parts. Parts I, II and IV of the 1996 Act govern arbitrations,
and Part III governs conciliation. For the sake of the present article, Part I is relevant. Part I
of the 1996 Act, espouses all the provisions governing the conduct of arbitration proceedings
taking place in India, and the extent of judicial intervention which may be sought to assist
the process.
A conflict between two jurisdictions would necessarily arise only in international
commercial arbitrations. The term “international commercial arbitration” is defined under
Section 2(1)(f) of the 1996 Act and is self?explanatory. The provisions relevant for
understanding conspectus of seat and venue under the 1996 Act are Sections 2(2) and 20.
Section 2(2) in an ominously cryptic manner reads as follows:
2(2). This Part shall apply where place of arbitration is in India.
On a bare perusal of the said section, it seems that the 1996 Act was applicable only to
arbitrations which were taking place in India. Whether “place” meant seat (conferring
jurisdiction to Indian courts) or merely venue was clearly ambiguous begging judicial
interpretation. Further, Section 20 also in a similarly ambiguous manner while granting
parties the autonomy to decide the “place” of arbitration, failed to distinguish between seat
and venue. The section reads as follows:
20. Place of arbitration.—(1) The parties are free to agree on the place of arbitration.
(2) Failing any agreement referred to in sub-section (1), 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.
(3) Notwithstanding sub-section (1) or sub-section (2), the Arbitral Tribunal may, unless
otherwise agreed by the parties, meet at any place it considers appropriate for
consultation among its members, for hearing witnesses, experts or the parties, or for
inspection of documents, goods or other
property. (emphasis
supplied)
The word “place” necessarily should connote different meanings in the sub-sections. A bare
perusal of the section would imply that the parties are at liberty to choose only the “place”
(meaning venue) of arbitration and nothing further. This thoroughly undermines and
restricts the autonomy of parties to choose the convenient legal systems and the manner in
which arbitrations can be conducted. The concept of party autonomy under Section 20 was
ultimately consolidated by the Supreme Court by furnishing it with proper interpretations.
An analysis of the judgments is vital to understand the evolution of the 1996 Act.
Bhatia International v. Bulk Trading SA[10]
Briefly stating facts, the parties had entered into a contract wherein the arbitration clause
provided that the arbitration was to be as per rules of International Chamber of Commerce
(ICC). Disputes having arisen between the parties, the respondent initiated the arbitration
proceedings at ICC. In addition to such initiation, the respondent also filed an application
under Section 9 of the 1996 Act seeking an injunction against the appellants restraining them
from alienating in any manner their business assets and properties. The District and High
Court both held that the courts in India have jurisdiction to adjudicate the application despite
the “place of arbitration” being outside India. These orders were challenged before the
Supreme Court. The simple contention raised by the appellant before the Supreme Court
based on a plain reading of Section 2(2) was that, unless the international commercial
arbitration is taking place in India, Part I will not apply.
What should have been contended for the sake of conceptual clarity was that the expression
“place” used in Section 2(2) of the 1996 Act connotes “seat” and not merely the “venue” of
the arbitration. The implication of such submission would have been that the 1996 Act is a
seat-centric legislation, and therefore Part I would apply to international commercial
arbitration, only when the seat of arbitration was in India. Conferring such interpretation on
Section 2(2) would have obviated any inconsistency with the rest of the Act that the court
apprehended. Instead, the court under the garb of “judicial art imbued with creativity and
realism” interpreted Section 2(2) in a manner because of which the distinction between
“seat” and “venue” (in this case the word “place” means venue) was obliterated. According
to the interpretation cast by the Supreme Court, an international commercial arbitration
where an Indian party is involved, being proceeded with in any part of the world, would
confer jurisdiction on Indian courts to exercise powers under Part 1 of the 1996 Act.
Although the intention of the Court seemed to be noble so far as it wanted to grant parties a
remedy to secure or freeze assets which would in the future help realising their claims, the
consequences were far reaching. Rightly, a Constitutional Bench of the Supreme Court
in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.[11] held as
follows.
Bharat Aluminium Company v. Kaiser Aluminium Technical Services
Inc.[12](BALCO)
The Supreme Court, while dealing with a poorly drafted legislation, vide this judgment
provided conceptual clarity to the legislation. The Supreme Court interpreted the word
“place” to mean “seat” or “venue” depending on the section in which the word was used. The
Court while dealing with Sections 2(2) and 20, extensively laid out the concept of seat and
venue, which have already been discussed hereinabove.
Expressly overruling the interpretations cast on Section 2(2) in Bhatia International[13],
the Court observed that the section has to be interpreted to mean that only when the
seat/place of arbitration is in India, will Part I apply, restoring the distinction between seat
and venue. Further consolidating the doctrine of seat and venue under the 1996 Act, the
court clarified that the term “place” used in Sections 20(1) and (2) would connote “seat” and
the term “place” used in Section 20(3) would connote “venue”. Reading Section 2(2) with
Section 20, the Court inevitably concluded that the Act has no extraterritorial application.
The Court was conscious of the fact that the legislation being seat-centric, parties will be
rendered remediless in case they want to secure the assets of the party against which a claim
lies, by filing an application under Section 9. However, making available the remedy of
Section 9 to parties who have chosen the seat to be outside would involve interpreting
Section 9 in a manner that it was never intended to be. Any other interpretation being
conferred on Section 9 would only amount to judicial overreach and therefore the court
rightly stated that such errors, if any, are matters to be redressed by the legislature.
Subsequently the Supreme Court in its judgment in Enercon (India) Ltd. v. Enercon
GmbH[14], and another judgment in Bharat Aluminium Co. v. Kaiser Aluminium
Technical Services Inc.[15], reiterated and further established the law laid down by
BALCO. Enercon[16] clarified the position of law in case the parties have failed to or
improperly mentioned the law applicable to the arbitration agreement. The court, placing
reliance on the judgment in Naviera Amazonica[17] adopted the “closest and most
intimate connection test”. This test states that when it is unclear as to which law is applicable
to the arbitration agreement, the intention of the parties is essential in determining the seat.
Further, the legal system in which the arbitration is taking place or the system which has the
closest and most intimate connection with the arbitration proceedings is relevant. The
Supreme Court while placing reliance on Naviera Amazonica[18] reproduced the
following paragraph which makes the situation amply clear.
100. … 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.
Report 246 — Law Commission of India
The Law Commission of India in 2014 suggested sweeping amendments to the 1996 Act, that
would radically change the arbitration jurisprudence developed in India. The Report
discussed in great detail the need to amend Sections 2(2) and 20. The changes suggested
replacing the word “place” with the words “seat” and “venue”, in accordance with the
explanation provided by BALCO[19].
The amendment further proposed addition of a proviso to Section 2(2) permitting parties to
choose to remain under the supervisory jurisdiction of Indian courts. The proviso was
suggested to make Section 2(2) a derogable provision in order to extend the doctrine of party
autonomy. The recommended proviso read as follows:
Provided that subject to an express agreement to the contrary, provisions of Sections 9, 27,
37(1)(a) and (3) shall also apply to international commercial arbitration, even if the seat of
arbitration is outside India, if an award made, or that which might be made in such place
would be enforceable and recognised under Part II of this Act.
The Report further suggested replacing the word “place” in Section 20(1) with the words
“seat” and “venue”, replacing the word place with “seat” in Section 20(2) and with “venue”
in Section 20(3). However, these amendments were not enacted. Nonetheless, the same does
not prove to be perilous since the section has been extensively interpreted by the Supreme
Court in BALCO[20].
2015 Amendment
Although not entirely relevant for the present subject, it is essential to state that the 2015
Amendment is not at all conducive for the philosophy of arbitration. The Assembly Debates
contain absolutely no discussions on any questions of law, and is mostly confined to policy.
The 1996 Act has been subject to constant judicial scrutiny and various interpretations of
the provisions of the 1996 Act find their rationale in judgments. Despite such history of
constant judicial intervention for supplying interpretation, none of the problems concerning
the legal ramifications of the amendment were discussed in Parliament.
Not having discussed any legal ramifications that the amendment might have, and, passing
the legislation with only policy in mind, it is not surprising that several cases concerning
interpretation of the amended provisions are pending before the Supreme Court of India.
The Law Commission Report had suggested certain changes which would have rendered the
arbitration process easier. Not having incorporated the substantial changes suggested by the
Report, the legislation once again remains to be in flux, necessitating constant judicial
interpretation.
Not all the amendments discussed hereinabove have been incorporated in the 1996 Act.
Inclusion of the words “seat” and “venue” would have further established the proposition
laid down in BALCO[21], safeguarding the interpretation from further scrutiny and adverse
interpretations. The Amendment Act has, however, incorporated the proviso to Section 2(2)
suggested by the amendment. Inclusion of the proviso does not fundamentally alter the
nature of the 1996 Act, which, as per BALCO[22] is a seat-centric legislation. Having
granted the parties the autonomy to choose to retain the jurisdiction of Indian courts, the
amendment has redressed the lacuna that existed in the 1996 Act. The parties involved in
foreign seated international commercial arbitrations can file proceedings under Section 9 in
order to secure the assets which may be necessary to realise their claims.
Conclusion
In view of the aforesaid, a summary of the position under Indian law is as follows:
(a) The seat of arbitration determines the courts which would exercise jurisdiction over the
arbitration proceeding.
(b) The parties may by consent make Section 9 applicable even when the arbitration is not
held in India. But, in absence of such an agreement, the 1996 Act solely operates within the
territory of India.
(c) The substantive law applicable to the contract is distinguishable from the law applicable
to the arbitration agreement. The parties may choose the law applicable to the arbitration
agreement, which may be different from the substantive law applicable to the contract itself.
(d) In case the parties have not mentioned the law applicable to the arbitration agreement,
the test of “the closest and most intimate connection” adopted in the judgment of Enercon
India[23] is to be applied. The jurisdiction in which the arbitration is conducted and the
intention of parties are the determining factors while applying the closest connection test.

* Advocate, Chambers of Senior Counsel Mr Chander Uday Singh, Supreme Court of India.
[1] S. 2(1)(f) “international commercial arbitration” means an arbitration relating to
disputes arising out of legal relationships, whether contractual or not, considered as
commercial under the law in force in India and where at least one of the parties is—
(i) an individual who is a national of, or habitually resident in, any country other than India;
or
(ii) a body corporate which is incorporated in any country other than India; or
(iii) an association or a body of individuals whose central management and control is
exercised in any country other than India; or
(iv) the Government of a foreign country;
[2] ABC Laminart (P) Ltd. v. A.P. Agencies, (1989) 2 SCC 163.
[3] (1952) 2 QB 329, 342 (CA).
[4] S. 28 Agreements in restraint of legal proceedings void:
Exception 1.—Saving of contract to refer to arbitration dispute that may arise. —
This section shall not render illegal a contract, by which two or more persons agree that any
dispute which may arise between them in respect of any subject or class of subjects shall be
referred to arbitration, and that only the amount awarded in such arbitration shall be
recoverable in respect of the dispute so referred.
[5] NTPC v. Singer Co., (1992) 3 SCC 551.
[6] (1988) 1 Lloyd’s Rep 116 (CA).
[7] Arbitration of Commercial Disputes: International and English Law and
Practice, Andrew Tweeddale, Keren Tweeddale, pp. 180-181.
[8] A. Ayyasamy v. A. Paramasivam, (2016) 2 SCC 386.
[9] (2000) 2 Lloyd’s Rep 500 : (2001) 1 All ER (Comm) 530.
[10] (2002) 4 SCC 105.
[11] (2012) 9 SCC 552.
[12] Ibid.
[13] (2002) 4 SCC 105.
[14] (2014) 5 SCC 1.
[15] (2016) 4 SCC 126.
[16] (2014) 5 SCC 1.
[17] (1988) 1 Lloyd’s Rep 116 (CA).
[18] Ibid.
[19] Page 52 — Law Commission Report.
[20] (2012) 9 SCC 552.
[21] Ibid.
[22] Ibid.
[23] (2014) 5 SCC 1