BGS SGS SOMA JV v. NHPC Ltd. and the Internationalization of Domestic Arbitration

The significance of ‘seat’ and ‘venue’ of arbitration has been a much-debated issue under Indian law and in the past decade, the Supreme Court has had multiple occasions to propound the significance of these two concepts. Much of the discussion has been in the context of international commercial arbitrations. The most recent in this line of decisions is the decision in BGS SGS SOMA JV v. NHPC Ltd., where the issue arose in the context of a domestic arbitration. A three-Judge Bench of the Supreme Court conducted an exhaustive analysis of the precedent and the legislative mandate on this issue and held, inter alia, that a choice of seat of arbitration confers exclusive jurisdiction on courts at the seat of arbitration in relation to arbitral proceedings under Part I of the Arbitration and Conciliation Act, 1996 (“1996 Act”).

There cannot be much quarrel about this proposition of law in the context of an international commercial arbitration where parties have a choice between multiple national legal regimes/supranational rules of arbitration. The fallacy of NHPC lies in the fact that it has borrowed this proposition from international commercial arbitrations and applied it to domestic (or non-international commercial) arbitrations governed by Part I of the 1996 Act.

Definition of ‘court’ under the 1996 Act the ruling in BALCO

The 1996 Act contains an express definition of ‘court’ in Section 2(1)(e), which would exercise jurisdiction in respect of an arbitral proceeding. According to Section 2(1)(e) (as it stood prior to the 2015 amendment), the court having jurisdiction in relation to arbitration proceedings is the principal civil court of original jurisdiction in a district (and includes a High Court in exercise of its ordinary original civil jurisdiction) which would have jurisdiction over the subject-matter of arbitration if the same had been the subject-matter of a suit. In other words, it relegates us to the bases of jurisdiction under the Code of Civil Procedure. The 2015 amendment to the 1996 Act prescribes that in international commercial arbitrations, it is only the High Court (hearing appeals from the pre-amendment S.2(1)(e) court) which will have jurisdiction in relation to arbitral proceedings.

Till the decision in Bharat Aluminium Co. v. Kaiser Technical Services (“BALCO”), the 1996 Act was interpreted not to have any link between the designation of seat and the competent court which would have jurisdiction in relation to arbitral proceedings. It was the Supreme Court in BALCO which laid down (in paragraph 96, which has been the subject of much discussion in NHPC) that two classes of courts will have jurisdiction: a) courts having jurisdiction as per the Code of Civil Procedure (“CPC courts”); b) the court at the seat of arbitration. The language of paragraph 96 leaves no doubt that it is both these categories of courts which will have jurisdiction.  

The decisions in Indus Mobile and NHPC

Despite the clear language of paragraph 96, a two-Judge Bench of the Supreme Court in Indus Mobile Distribution Pvt. Ltd. v. Datawind Innovations Pvt. Ltd. (2017) 7 SCC 678 held that choice of Mumbai as the seat of arbitration was equivalent to the choice of exclusive jurisdiction of courts in Mumbai and the jurisdiction of CPC courts in such instances is ousted. However, in Indus Mobile, the contract between the parties also contained a separate clause which conferred exclusive jurisdiction on Mumbai courts. Relying on this clause, the Delhi High Court in Antrix Corporation Ltd. v. Devas Multimedia Pvt. Ltd. 2018 SCC Online Del 9338 held that the ratio of Indus Mobile must be limited to cases where an exclusive jurisdiction clause existed in the contract, else the ruling in Indus Mobile would be contrary to paragraph 96 of BALCO.

NHPC (incidentally authored by the same Judge as Indus Mobile) has emphatically reinforced the ruling (and the error) in Indus Mobile and overruled Antrix Corporation. The Court in NHPC held that mere designation of seat of arbitration amounts to a choice of exclusive jurisdiction of the court at the seat of arbitration. This finding is plainly contrary to paragraph 96 of BALCO. Paragraph 96 of BALCO contains a clear stipulation and an illustration according to which the CPC Courts and the court at the seat of arbitration would have jurisdiction in a Part I arbitration. In such circumstances, how did NHPC overcome the hurdle of paragraph 96 of BALCO, which was rendered by a five-Judge Bench? NHPC found that paragraph 96 was contrary to the rest of the discussion in BALCO where choice of seat was held to constitute a choice of exclusive supervisory jurisdiction of courts at the seat of arbitration. NHPC also drew support from the decisions following BALCO where this principle – the equivalence of choice of seat with choice of exclusive supervisory jurisdiction – was upheld.

The fallacy of NHPC

It is submitted that NHPC’s reading of BALCO, specifically paragraph 96, is plainly incorrect. The fundamental flaw in NHPC, which leads the Court to incorrectly construe the ratio of BALCO, is its failure to recognize the distinction between an international commercial arbitration and a domestic arbitration. It is, therefore, necessary to examine this distinction.

In international commercial arbitration, there is no quarrel with the proposition that a choice of seat amounts to conferral of exclusive jurisdiction on courts at the seat of arbitration insofar as the supervisory role over arbitration proceedings is concerned. Thus, for matters such as constitution of the arbitral tribunal and setting aside an arbitral award, courts at the seat of arbitration have exclusive jurisdiction. It is important to note that the choice of a seat in the context of an international commercial arbitration is significant because the choice is between two or more distinct national legal regimes, with different arbitration laws and different municipal court systems. Since international commercial arbitration has to be rooted in a national legal regime and ought to derive its legitimacy from a municipal law (this is contested by French scholars, but that debate is outside the scope of this post), the choice of seat of arbitration by the parties is seen as a choice of the curial law of arbitration and the municipal court regime which would have supervisory jurisdiction over arbitration proceedings. Choice of seat also means that the award must comply with the public policy of the seat of arbitration, lest it run the risk of being set aside.

The seat of arbitration does not have the same level of significance in a domestic arbitration, where no party is from outside India. The legitimacy of the arbitral process is derived from the existing municipal law on the subject, i.e. the 1996 Act. It is only the Indian courts which will have supervisory jurisdiction over arbitral proceedings. The choice of substantive law also remains unaffected. Therefore, the choice of seat of arbitration has little bearing on the applicable laws or the municipal court regime which has the power to adjudicate upon challenges to an award. Indeed, the 1996 Act does not indicate any material consequence of seat of arbitration in the context of a domestic award. Indeed, till the decision in BALCO, Section 2(1)(e) was construed to mean that only the CPC courts have supervisory jurisdiction over arbitral proceedings. It is only after the Supreme Court’s interpretation of Section 2(1)(e) in BALCO that courts at the seat of arbitration were held to have jurisdiction over arbitral proceedings. Paragraph 96 of BALCO makes it unequivocally clear that the jurisdiction of courts at the seat of arbitration is concurrent, and not exclusive, in nature; parties have the choice to approach courts at the seat of arbitration or the CPC courts. In view of the distinction between an international commercial arbitration and a domestic arbitration discussed above, NHPC’s reliance on the significance of seat in international commercial arbitration to negate the rule of concurrent jurisdiction of CPC courts and courts at the seat of arbitration laid down in paragraph 96 of BALCO is incorrect.

Published by Sharad Bansal

Advocate, Bombay High Court

3 thoughts on “BGS SGS SOMA JV v. NHPC Ltd. and the Internationalization of Domestic Arbitration

  1. Hi Sharad, I have three points in response to your views:

    1) Paragraph 96 of BALCO is FAR from clear in stipulating concurrent jurisdiction for a) CPC courts and b) the court at the seat of arbitration.

    Justice Nariman notes paragraph 96’s lack of clarity in his judgment in BGS SGS Soma (paragraph 42). Justice Nariman points out how the illustration in paragraph 96 makes clear that courts at the seat (Delhi) would enjoy exclusive jurisdiction over a Section 37 appeal, even if the cause of action were to arise in Bombay or Calcutta. Thus, according to this illustration, CPC courts would not enjoy concurrent jurisdiction with courts at the seat.

    I find your interpretation of paragraph 96 plausible- but I take objection to your emphatic claim that paragraph 96 was ‘clear’ in providing for concurrent jurisdiction. In my view, paragraph 96 is anything but clear in stipulating either exclusive or concurrent jurisdiction.

    Justice Nariman’s interpretation of paragraph 96– read in light of the judgment as a whole– is equally plausible. In various places, BALCO states that choosing a seat amounts to exclusive jurisdiction on courts at the seat. I understand that you might suggest that BALCO’s findings on this point are applicable only to international commercial arbitrations, and cannot be applied to domestic arbitrations. I will deal with this in 3).

    2) It is true that in Indus Mobile, the Supreme Court was dealing with a contract containing a clause conferring exclusive jurisdiction on courts in Bombay. However, that was not the SOLE basis for the court’s conclusion that courts in Mumbai should enjoy exclusive jurisdiction over the arbitration. This is clear from paragraph 20 of Indus Mobile. I have added parentheses and capitalisation for emphasis:

    20. A conspectus of all the aforesaid provisions [of the A&C Act] shows that the moment the seat is designated, it is akin to an exclusive jurisdiction clause. On the facts of the present case, it is clear that the seat of arbitration is Mumbai and Clause 19 FURTHER [!!!] makes it clear that jurisdiction exclusively vests in the Mumbai courts. Under the Law of Arbitration, unlike the Code of Civil Procedure which applies to suits filed in courts, a reference to “seat” is a concept by which a neutral venue can be chosen by the parties to an arbitration clause. The neutral venue may not in the classical sense have jurisdiction – that is, no part of the cause of action may have arisen at the neutral venue and neither would any of the provisions of Section 16 to 21 of the CPC be attracted. In arbitration law however, as has been held above, the moment “seat” is determined, the fact that the seat is at Mumbai would vest Mumbai courts with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties [!!!].

    Thus, in BGS SGS Soma (para 60, 61), Justice Nariman overruled the Delhi HC decision (Antrix) that you have cited, and found that Indus Mobile held that courts in Mumbai enjoyed exclusive jurisdiction on the INDEPENDENT ground that choosing a seat amounted to the conferment of exclusive jurisdiction.

    3) At first blush, I am tempted to agree that the concept of seat carries very different consequences in domestic and international commercial arbitrations. However, for the following two reasons, I am not convinced that the difference between the two should mean that choosing a seat in domestic arbitration should not amount to exclusive jurisdiction on courts of that seat:
    a) One justification behind the idea that choosing a seat in an international commercial arbitration amounts to the conferment of exclusive jurisdiction is that it prevents parallel litigation in different fora and conflicting judgments resulting therefrom (C v. D, para 16; cited with approval in BALCO and Enercon). That same justification is equally applicable in domestic arbitration, where an arbitration might be seated in Delhi, but the cause of action might arise in 5 other states. In these circumstances, unless the choice of Delhi as seat amounts to the conferment of exclusive jurisdiction, a party might be forced to appear before courts in parallel litigation in courts of the 5 other states. Justice Nariman highlights this common rationale for viewing the choice of seat as the conferment of exclusive jurisdiction in both domestic and international commercial arbitrations in paragraph 51 of BGS SGS Soma.
    b) Following the Delhi High Court’s recent judgment in GMR v. Doosan, it is now possible for domestic arbitrations to be seated abroad. Therefore, conceptually speaking, the question of seat is relevant to domestic arbitrations just as that same question is relevant to international commercial arbitrations.

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  2. Hi Rishabh,

    Thank you for your detailed comments. My point-wise response is as follows:

    1. I would maintain that paragraph 96 of BALCO leaves no doubt that courts at the seat have only concurrent and not exclusive jurisdiction. I have quoted the example from paragraph 96 below. Please see the last line of this excerpt:

    “For example, if the arbitration is held in Delhi, where neither of the parties are from Delhi, (Delhi having been chosen as a neutral place as between a party from Mumbai and the other from Kolkata) and the tribunal sitting in Delhi passes an interim order under Section 17 of the Arbitration Act, 1996, the appeal against such an interim order under Section 37 must lie to the courts of Delhi being the courts having supervisory jurisdiction over the arbitration proceedings and the tribunal. This would be irrespective of the fact that the obligations to be performed under the contract were to be performed either at Mumbai or at Kolkata, and only arbitration is to take place in Delhi. In such circumstances, both the courts would have jurisdiction i.e. the court within whose jurisdiction the subject-matter of the suit is situated and the courts within the jurisdiction of which the dispute resolution i.e. arbitration is located.”

    The Court says that the Section 37 appeal ‘must lie to the courts of Delhi’, and not that it must lie ‘only’ to the courts of Delhi. Any doubt about this is alleviated by the very next sentence, where the Court says that ‘both the courts have jurisdiction’, and not only the courts of Delhi.

    2. I agree that the exclusive jurisdiction clause in Indus Mobile was not the only reason for the Court’s conclusion. I have therefore argued in my post that Indus was also wrong in holding that choice of seat confers exclusive jurisdiction. The Delhi High Court was at liberty to construe Indus in a way that would reconcile it with the larger Bench decision in BALCO, which is rightly did.

    3. a) There is no risk of parallel proceedings in domestic arbitration because Section 42 of the Act takes care of it. Nariman, J.’s reasoning in paragraph 51 of BGS SGS SOMA JV is slightly different – his concern is that parties may choose Delhi as the seat intending to have their s.34 challenge to be heard by Delhi courts, but they may suffer by having a 34 challenge being heard in a district court situated in a remote location where the cause of action arose if an application has already been filed in that court (which would kick in the application of s.42). This concern may be valid, but it does not justify Nariman, J.’s conclusion for two reasons: (i) there is no statutory backing for construing a choice of seat as a choice of exclusive jurisdiction; (ii) if parties really intended courts in Delhi to decide their s.34 challenge, they would (or should, in the absence of any statutory backing) incorporate an exclusive jurisdiction clause in their contract (as was the case in Indus Mobile).

    3. b) Yes, seat would become relevant in case of a domestic arbitration if two Indian parties are allowed to choose a foreign seat. But that would not justify the interpretation of BALCO in BGS SGS SOMA JV because s.2(1)(e) would be inapplicable in that situation.

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  3. Thanks for your taking out the time to respond, Sharad!

    Thanks in particular for clarifying why you think paragraph 96 of BALCO should be interpreted as saying that courts at the seat have only concurrent and not exclusive jurisdiction. I note your point that the Court held that the Section 37 appeal ‘must lie to the courts of Delhi’, and not that it must lie ‘only’ to the courts of Delhi. I wonder if that point was raised before Justice Nariman.

    As I stated in my previous comment, your interpretation of paragraph 96 is definitely plausible– more so after your explanation. However, I feel that by according so much significance the absence of the word ‘only’ from that portion of paragraph 96, we may be reading the judgment as if it were a statute– which is not the appropriate approach.

    I thoroughly enjoyed reading your piece, and I am keen to see what becomes of the law laid down in BGS SGS Soma– not only on the point of exclusive jurisdiction clauses which you discuss in your piece, but also on its view that Hardy Exploration is not good law. As you may have seen, the Supreme Court was recently faced with a case where one party argued that it was not open to the Three-Judge Bench in BGS SGS Soma to hold that the Three-Judge Bench decision in Hardy Exploration was incorrect (Mankastu Impex Pvt. Ltd. v. Airvisual Ltd. MANU/SC/0283/2020).

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