VEDANTA LIMITED V. SHREEJI SHIPPING – IS PARTY AUTONOMY THE ULTIMATE CONSIDERATION IN ARBITRATION?

The Arbitration and Conciliation Act 1996 (“1996 Act”) introduced Arbitration as an alternative form of dispute resolution as compared to the conventional method of litigation. It has increasingly become the preferred form of dispute resolution as it is based on consent, saves time and provides parties ample freedom to choose their arbitrator, seat of arbitration, venue, procedural law and more.  

With this amount of unfettered autonomy given to parties comes great responsibility to ensure that the proceedings are not riddled with misunderstanding/confusion regarding the practical application of terms and conditions agreed upon by the parties in its arbitration clause. One such practical difficulty that is often faced by parties is regarding the seat of the arbitration.

It is of utmost importance that the seat of an arbitration is given due consideration by the parties as the clause designating the seat is akin to the exclusive jurisdiction clause i.e., the courts present within the territorial limits of the seat of the arbitration have the supervisory jurisdiction in exclusion to all other courts. Resultantly the choice of seat can have significant consequences including but not limited to deciding the fate of the arbitral award.

Recently in Vedanta Limited v. Shreeji Shipping Arb.P. 342/2023, 08.02.2024 (“Vedanta Judgment”) the Delhi High Court of India was faced with the complex issue of deciding the voidability of an arbitration clause due to the multiplicity of ‘seats’ mentioned therein in light of Section 29 of the Indian Contract Act 1872 (“Contract Act”) which states that agreements which are vague or uncertain are void. The matter pertains to a Purchase Order that was entered into between Vedanta Limited and Shreeji Shipping for the transportation of coal. The dispute arose between the parties when there was a shortfall in transported amounts of coal as a result of which the arbitration clause was invoked by Vedanta Limited.

Pursuant to the invocation of arbitration, a Section 11 Petition was filed under the 1996 Act before the Delhi High Court wherein the validity of the arbitration agreement was contested by Shreeji Shipping. It was averred by Shreeji Shipping that since Clause 10.1 (ii) of the agreement specified multiple seats being Goa, Karnataka or Delhi which allegedly made the agreement void under Section 29 of the Contract Act due to ambiguity present in the seat of arbitration.

The Delhi High Court in contrast to the foregoing challenge was of the view that Section 29 of the Contract Act was not applicable in the present case. It was observed that Section 29 of the Contract Act declares only those agreements void which are uncertain in meaning or are incapable of being made certain. However, since the arbitration clause in the present case stipulated the seat, even though multiple seats, the same was clear and was merely offering a choice to the parties. Therefore, since there was no ambiguity in the clause it did not fall within the ambit of Section 29 of the Contract Act.

While rendering the present holding the Hon’ble High Court referred to the Hon’ble Supreme Court’s judgment in Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd. (2017) 7 SCC 678 (“Indus Judgment”) wherein it was held that the seat of arbitration provides exclusive jurisdiction to the courts and it is up to the parties to mutually grant exclusive jurisdiction from multiple courts to a specific court (or in this case vice versa).

The preamble of the 1996 Act has adopted the provisions of UNCITRAL Model Law[1] for the purpose of “establishment of a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations”. The 1996 Act gave significant importance to ‘juridical seat’ of arbitration with the underlying intent to ensure that the Courts have exclusive jurisdiction over arbitral proceedings where the ‘seat’ is located.[2] However, despite the novel intent, confusion arose as certain provisions of the UNCITRAL Model Law which were retained in the 1996 Act were not integrated properly.

One such anomaly surrounding the concept of ‘seat’ and ‘venue’ was first dealt with by the Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.[3] (“BALCO”) wherein it held that the words “seat” and “venue” of arbitration cannot be used interchangeably as they all hold distinct meaning. Thereafter, the Supreme Court in Union of India v. Hardy Exploration and Production (India) Inc.[4] (“Hardy Exploration”) held that the venue cannot assume the position of the seat automatically and additional factors such as the intent of the parties, language of the contract/agreement are essential in determining the fact ‘venue’ and ‘seat’ of arbitration.

To further remove the foregoing confusion, the Supreme Court in BGS SGS Soma JV v. NHPC Ltd.[5] (“BGS Soma”) and Mankatu Imprex Pvt. Ltd. c. Airvisual Ltd.[6] (“Mankatu Imprex”) held that the mere use of ‘place’ or ‘venue’ does not ipso facto make the place mentioned in the arbitration clause the seat of arbitration but instead the arbitration clause has to be read in light of additional evidence which includes intention of parties. Furthermore, a cursory glance at Section 20 of the 1996 Act, can be concluded that ‘place’ referenced in Section 20(1) & (2) of the 1996 Act refers to the ‘juridical seat’ of the arbitration whereas Section 20(3) of the 1996 Act references to ‘place’ as the venue of arbitration.

In light of the wide catena of judgments of the Supreme Court the law regarding the seat of arbitration is amply settled wherein the ‘seat’ of an arbitration provides for exclusive jurisdiction in contrast to the venue which is merely a place where the arbitral proceedings take place on account of mere convenience, the seat unlike the venue cannot be multiple places.

In the case of CVS Insurance and Investments v. Vipul IT Infrasoft Pvt. Ltd.[7] the parties entered into a partnership agreement which contained an arbitration clause wherein the place of arbitration was “Noida/New Delhi”. Owing to multiple places mentioned in the arbitration clause there was confusion as to whether the seat would be in Delhi or Noida. The said matter reached the Delhi High Court wherein it was held that since the arbitration clause failed to specify courts of which place, Noida or Delhi, would have exclusive jurisdiction, the jurisdiction would lie where the cause of action arose. Further, it also observed that even though under the 1996 Act the parties are free to choose their preferred seat there should only be one seat of arbitration though venues may be different.

Even the Indus Judgment (supra) relied upon by the Delhi High Court in rendering the Vedanta Judgment drew a clear distinction between seat and venue of arbitration and held that the choice of seat grants exclusive jurisdiction from multiple courts to a specific court.

The Vedanta Judgment robustly enforces the party autonomy which is one of the cornerstones of Arbitration, however, it cannot be absolute.

“It would be wrong or overly euphoric to believe that the parties’ autonomy to choose the law or rules of law applicable to the dispute is totally unlimited.” [8]

As of right now the boundaries and scope of party autonomy remain largely undefined. However, inspiration can be sought from the Hague Principles which were drafted by the Hague Conference in 2015 setting out soft norms which tried to find a balance between enforcing principles of party autonomy whilst setting out clearly defined limits which will govern such currently unfettered autonomy.[9] The main intent of the Hague Principles is to promote certainty and predictability with regard to the parties’ prior arrangement. Further, these principles put the onus on parties to know beforehand which law will apply for the parties' choice of law/seat to be valid, it is mandatory that there must be a real intention between the parties and the same must be evident from the provisions of the contract or circumstances.

In situations where there are multiple seats agreed upon by the parties, even though technically permissible in light of the principles of party autonomy, there still remains ambiguity with respect to where the exclusive jurisdiction would lie. In the absence of any principles limiting the principles of party autonomy, if the Hague Principles are applied to the current case of the Vedanta Judgment one can see that the arbitration clause in regards to the seat of the arbitration complicates the question of ascertaining the “real intention” between the parties as to which jurisdiction’s Courts the parties intended to approach in case of any conflict arose in the arbitral proceedings. This creates uncertainty as well as reduces predictability which furthers issues such as prolonging the adjudicatory process in case the parties choose to approach Courts of different jurisdictions concurrently. Additionally, it would add to issues of multiplicity of proceedings and further complicate the interpretation of arbitration clauses. The same would act as a detriment for parties to pursue Arbitration as it would complicate the process and make it cumbersome/time-consuming.

While Section 42 of the 1996 Act settles the controversy of having multiple seats by stating that once an application has been made to a court that has jurisdiction over an arbitration agreement then that court would have sole jurisdiction over the arbitration proceedings, however, the fact remains that allowance of an arbitration clause having multiple seats only leads to further complications.

Therefore, even though the Vedanta Judgment on the face of it is an arbitration-friendly judgment wherein party autonomy was upheld, fails to consider the practical difficulties and complications it will create in the implementation of the 1996 Act if parties start adding multiple seats in their arbitration clauses. The focus needs to be on ensuring that a balance is struck between ensuring that the substantial rights of the parties like party autonomy and practical difficulties in adjudicating arbitral disputes is upheld in harmony and not at the cost of either/or. Further, there is a need for having more clearer guidance on the yardstick to be used for ascertaining the scope of party autonomy.

[1] Art. 20, UNCITRAL Model Law on International Commercial Arbitration (1985).

[2] BGS SGS Soma JV v. NHPC Ltd. (2020) 4 SCC 234.

[3] (2012) 9 SCC 522.

[4] (2019) 13 SCC 472.

[5] 2019 SCC OnLine SC 1585.

[6] 2020 SCC OnLine SC 301.

[7]2017 SCC OnLine DEL 12149.

[8]Marc Blessing, Introduction to Arbitration – Swiss and International Perspectives, 10 SWISS COM, L. SERIES 1, 105, 402, (1999).

[9]Hague Conference On Private International Law, Principles On Choice Of Law In International Commercial Contracts (2015), https:// www.hcch.net/en/instruments/conventions/full-text/?cid=135 [hereinafter “Hague Principles”], at pmbl.