The Conundrum Between Seat and Venue of Arbitration
In Arif Azim Vs. Micromax Informatics FZE, an Arbitration Petition was filed under Section 11(6) of the Arbitration Act before the Hon’ble Supreme Court seeking appointment of an arbitrator. The Distributorship Agreement was executed by the parties in Kabul, Afghanistan for distribution of handsets manufactured by Respondent No. 1. The Distributorship Agreement stipulated that the said agreement will be governed by the laws of UAE and would be subject to non-exclusive jurisdiction of the courts of Dubai.
The said agreement also contained an arbitration clause which stated that the “Venue” of arbitration as Dubai, UAE. After a dispute regarding outstanding credit balance arose between the parties, Petitioner sent a notice for invocation of arbitration u/s 21 of the Arbitration Act, 1996.
It is the case of the Petitioner that the Distributorship Agreement did not grant exclusive jurisdiction to any particular court for resolving disputes. Furthermore, it was argued that the cause of action arose in both Afghanistan and India, expressing that the disputes arising out of the arbitration agreement are to be resolved by courts of India.
The Hon’ble three judge bench examined the state of affairs pre BALCO[1] judgment and post BALCO judgment wherein it rejected the contention that the Act, 1996 is ‘subject-matter centric’ and not exclusively ‘seat centric’. In the BALCO judgment, the Hon’ble Supreme Court had held that where parties have selected the seat of arbitration, it would amount to an exclusive jurisdiction clause.
In the Arif Azim judgment, Apex Court assessed the "closest connection test" which is a principle used to determine the governing law of an arbitration agreement when the parties have not expressly decided the governing law. Under this test, the Courts examine the place where the contract was made, the form and object of the contract, the place of performance, the place of residence or business of the parties, reference to the courts having jurisdiction, etc. to identify the system of law with which the transaction has the closest and most real connection.
It was held that the "closest connection test" is no longer a viable criterion for determination of seat of arbitration in light of the Shashoua principle which lays down that when arbitration venue is expressly stated and there is no place designated as the seat then the venue will be considered the seat of arbitration.
The Apex Court further relied on the landmark judgment of BGS SGS SOMA JV v. NHPC LTD[2]., wherein it was held that where in an arbitration agreement there is place designated for arbitration as the venue of the arbitral proceedings, then such place is also the seat of arbitration. Unless there is something that states that the venue is merely a venue, and not the seat of arbitration proceedings, the venue would also be construed to be the seat.
In the case of Arif Azim, as per the Distributorship Agreement, it is clear that the seat of arbitration is Dubai, UAE and the governing laws are also of Dubai, UAE. Indian laws are not in play here. It was observed that even if the agreement does state that there is a non-exclusive jurisdiction clause, the Hon’ble Supreme Court would not have the jurisdiction to appoint an arbitrator under Section 11 as the seat is not in India nor is the arbitration agreement governed by the laws of India. The language of the arbitration agreement established that Dubai was not merely a venue but also the seat of arbitration.
Author: Yashvi Aswani, Senior Associate
[1] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc reported as (2012) 9 SCC 552.
[2] (2020) 4 SCC 234