Navigating Jurisdictional Issues in Arbitration: Delhi HC Underscores The Criticality of ‘Seat” In Arbitration Agreements

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Arbitration as a dispute resolution mechanism has gained a lot of traction due to its flexibility, convenience, cost efficiency and especially as a faster mode of resolution of disputes. Hence, most contracts or agreements, especially those involving international trade, stipulate that any dispute arising due to a breach of the contract or affecting parties rights, would be resolved through Arbitration. A reference to arbitration can be adopted in two ways: (i) by incorporating an Arbitration clause within the same contract/agreement, or (ii) by creating a separate agreement to enumerating the Arbitration process.

In this process, one of the most important factors to be considered by the parties is the ‘Seat of Arbitration’, which determines the jurisdiction of Courts and the substantive law which will govern the arbitration, when any dispute may arise. The Supreme Court in various cases have held that the “Seat” shall determine the exclusive jurisdiction of the Court to oversee the arbitration proceedings. In the same context, another case of Mankastu Impex Private Limited vs. Airvisual Limited, it was laid down by the Court that the “seat of arbitration” is the vital aspect in any arbitration proceedings. It determines the applicable law and also the arbitration procedure.

The Delhi High Court in the recent judgement of M/s Kings Chariot V. Mr. Tarun Wadhwa, ARB.P. 421/2024,  deliberated upon a matter involving a situation wherein, the Arbitration clause contained within an agreement between parties did not determine the Seat of arbitration. Thus, the court had to determine the maintainability of a Section 11 application brought in by the Petitioner before the High Court of Delhi, while considering and determining factors such as the cause of action, ordinary place of residence/business of the parties etc. Delhi High Court observed that in the instant case, there is neither any place nor any venue determined by the parties, in the arbitration clause. Therefore, the territorial jurisdiction has to be determined by Section 16 to Section 20 of Civil Procedure Code.

Facts Of The Case

The Respondent, constructing a hotel in Guna, Madhya Pradesh, engaged the Petitioner for internal works under an MEP Contract dated 11.10.2018. Disputes arose on 03.07.2021 when the Respondent allegedly manhandled the Petitioner’s workforce and compelled them to leave the premises. The Respondent invoked the Arbitration Clause in the contract on 18.01.2024. The Petitioner sought payment of outstanding amounts, but received no response. Subsequently, the Petitioner filed a Section 11 petition in the Delhi High Court. The Respondent objected, claiming the Petitioner had not disclosed a cause of action and the Court lacked territorial jurisdiction.

The Bench after considering submissions, held that if there is no such Agreement of seat of jurisdiction, then the Application under Section 11(6) of the Act, 1996 would be filed only in the jurisdiction of the High Court is to be determined in accordance with Section 16 to 20 Civil Procedure Code.

Observations Of The Court

Delhi High Court opined that Section 11(6) of the Act, 1996 should be harmoniously read with Section 2(1)(e) of the Act, 1996. Referencing the case of Union of India v. Hardy Exploration and Production (India) Inc, it noted that only the courts within the territorial limits of the designated seat of arbitration would have jurisdiction. Additionally, as the contract lacks a seat or the venue, the Court determined it lacked jurisdiction and dismissed the petition.

Analysing The Way Forward

The judgement by the Delhi High Court underscores the criticality of clearly defining the ‘Seat of Arbitration’ in the arbitration clause or agreement. The lack of clarity in this regard led to the dismissal of the petition, indicating that the courts may not have the jurisdiction to entertain a Section 11 application if the seat of arbitration is not specified.

This judgement serves as a stark reminder to contracting parties and legal practitioners about the importance of detailing the seat of arbitration in the agreement to avoid legal complications and jurisdictional issues.

In the context of this judgement, it is imperative for parties to an arbitration agreement to expressly state the ‘Seat’ or ‘Venue’ of Arbitration. This is not just a matter of procedural formality, but a substantive requirement that could potentially affect the enforceability of the arbitration agreement. The seat of arbitration determines the procedural law applicable to the arbitration proceedings, the court that would have supervisory jurisdiction over the arbitration, and the law governing the arbitration agreement.

In light of the judgement, it is advisable for parties to clearly delineate the seat of arbitration in their agreements. Where the seat is not specified, the courts may resort to the Code of Civil Procedure to determine jurisdiction as was done in this case. However, reliance on the Code of Civil Procedure could lead to unpredictable outcomes, as the jurisdiction will be determined based on factors such as the cause of action and the ordinary place of residence or business of the parties, which may not always align with the parties’ intentions.

Furthermore, the judgement reiterates the principle set out in the case of Union of India v. Hardy Exploration and Production (India) Inc. that the courts within the territorial limits of the designated seat of arbitration would have exclusive jurisdiction. This principle, if adhered to, can help avoid parallel proceedings in different jurisdictions and ensure the efficient resolution of disputes.

Conclusion

In conclusion, the way forward for parties entering into arbitration agreements is to explicitly specify the seat of arbitration in their agreement. This will minimise challenges jurisdictional boundaries, and also enhance the predictability and efficiency of the arbitration process. Legal practitioners and arbitrators must also be mindful of this requirement and ensure that it is adequately addressed in the arbitration agreement to avoid legal disputes and complications.

Authors: Vidhur Malhotra & Aryan Udani


Lawyers.

Interns and Paralegals.

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