New Delhi (ABC Live): The Constitutional Bench of the Supreme Court of India on November 7, 2024, ruled that Part I of the Act, 1996, and the provisions thereunder only apply where the arbitration takes place in India, i.e., where either (I) the seat of arbitration is in India OR (II) the law governing the arbitration agreement is the law of India.

New Delhi (ABC Live): The Constitutional Bench of the Supreme Court of India on November 7, 2024, ruled that Part I of the Act, 1996, and the provisions thereunder only apply where the arbitration takes place in India, i.e., where either (I) the seat of arbitration is in India OR (II) the law governing the arbitration agreement is the law of India.

The fact of the case law:

The petitioner herein and the respondent no. 1 company entered into a Consumer Distributorship Agreement dated 09.11.2010 (for short, the “Distributorship Agreement”) inter-alia for the distribution of handsets which are manufactured by the respondent no. 1, UAE based company and the same was executed by the parties in Kabul, Afghanistan. As per the terms of the aforesaid agreement, the petitioner herein became the authorized distributor of the respondent’s products including mobile handsets and was granted a nonexclusive right to market and distribute the same under its own account in the territory of Afghanistan as allotted and delineated under the said agreement.

Furthermore, the aforesaid Distributorship Agreement inter-alia stipulates that the said agreement will be governed by the laws of UAE and subject to the non-exclusive jurisdiction of the Dubai Courts. The said Distributorship Agreement also contains an arbitration clause which states that any dispute or difference pertaining to the said agreement or arising therefrom shall be resolved through arbitration alone, the venue of the arbitration shall be Dubai, UAE and that the arbitration shall be subject to the UAE Arbitration & Conciliation rules.

Pursuant to the aforesaid Distributorship Agreement several transactions took place between the petitioner and the respondents for the purchase and distribution of mobile handsets. It is the case of the petitioner that the business practice mutually followed by the parties for undertaking these transactions involved the petitioner first placing a purchase order, after which the respondents would raise an invoice, and the requisite payment would then be made either to the respondent no. 1 or the respondent no. 2 as per the instructions of the respondents.

Around March, 2012 the petitioner herein placed an order for purchase of 8000 (approx..) mobile handsets from the respondent no. 1. Against this purchase the respondent no. 1 raised a proforma invoice to the tune of $109,500/- (USD One hundred nine thousand five hundred) and as per the invoice the said amount was payable by the petitioner to the respondent no.1 company.

According to the petitioner, although the terms of the Distributorship Agreement mandated that both the delivery of handsets and the payments thereof be processed through the respondent no. 1 yet, interestingly, this time the handsets and the corresponding invoices for the same were issued by the respondent no. 2 instead. The respondent no. 2 supplied only 7300 handsets to the petitioner and issued a new invoice for the same amount i.e., $109,500/- (USD One hundred nine thousand five hundred), which was now payable directly to the respondent no. 2 instead.

It is the case of the petitioner herein that as on 12.05.2012, the petitioner company had a credit balance of $190,625/- (USD One hundred ninety six hundred twenty-five) with the respondent no. 1 company i.e., the running account of the respondent no. 1 reflected a sum of $190,625/- (USD One hundred ninety six hundred twenty-five) in favour of the petitioner company as outstanding credit. However, the respondent no. 2 whilst raising the invoice for supply of the aforesaid 7300 handsets, ignored the abovementioned credit balance of the petitioner and demanded payment, to be made directly to the respondent no. 2 in India.

Thereafter some email correspondences were exchanged between the petitioner company and one Shri Vikas Jain, the executive director of the respondent no. 1 and the business director of the respondent no. 2 company for the adjustment of the abovementioned credit balance lying in favour of the petitioner against the outstanding invoices. On 23.10.2012, the respondents vide an email informed the petitioner company that since the accounts of Micromax Informatics FZE & M/s Micromax India are separate, the credit balance lying in its favour in the respondent no. 1’s account cannot be directly adjusted for the invoices raised by the respondent no. 2. It further stated that, the petitioner company should first make payment to the respondent no. 2 towards the invoices that have been raised, and thereafter, the respondent no. 1 company would remit the outstanding credit balance to the petitioner.

On 15.01.2013, the petitioner made the requisite payment of $109,500/- (USD One hundred nine thousand five hundred), which was now payable directly to the respondent no. 2 towards the aforesaid invoices raised by it. Thereafter, it appears from the materials on record, that over a period of time many more transactions took place between the petitioner company and respondent no. 1 inter-alia for purchase and supply of various products whereby the credit balance lying in the respondent no.1’s account in favour of the petitioner company now came out to be $88,425/- (USD Eighty-Eight Thousand Four Hundred Twenty-Five).

On 09.09.2019, the petitioner vide an email again requested Shri Vikas Jain to confirm the credit balance lying in its favour with the respondent no. 1and to undertake steps to transfer the same to the petitioner’s account. In response, Shri Vikas Jain directed the finance department of respondent no 1 to confirm the credit balance lying with it in favour of the petitioner and further requested the petitioner to furnish its statement of account so that the two books of account may be reconciled for making the requisite payment.

Thereafter, several more correspondences took place between the petitioner and Shri Vikas Jain on behalf of the respondents through emails and texts inter-alia requesting for various documents and statements for the purpose of ascertaining the outstanding credit balance in favour of the petitioner. On 06.05.2022, the petitioner furnished the necessary statement of accounts to the respondents and requested for an update on the payment.

It appears from the material on record, that over the next 2-months several requests were made by the petitioner to the respondents for furnishing the outstanding credit balance in its favour and to make the requisite payment; however, the same were to no avail. Shri Vikas Jain, on behalf of the respondents’ time to time expressed his difficulty in ascertaining the exact figure for the outstanding credit balance, inter-alia citing that it was a very old running account and that the accountants responsible for maintaining the records had left the company, and thus requested for more time to do the needful.

On 14.09.2022, the petitioner sent a notice for invocation of arbitration under Section 21 of the Act, 1996, in terms of Clause 26 of the Distributorship Agreement to the respondent nos. 1 & 2. Vide the notice, the petitioner raised a claim of $88,425/- (USD Eighty-Eight Thousand Four Hundred Twenty- Five) with interest @24% p.a. as per the terms agreed in the Distributorship Agreement and nominated Shri. V. Giri and Shri. R. Basant, Senior Advocate as its nominee arbitrators and called upon the respondents to accordingly appoint an arbitrator either from the above suggested panel or any other suitable name within 28-days from receipt of the said notice.

It is material to note that in the aforesaid notice of invocation dated 14.09.2022, the petitioner further alluded that in the Distributorship Agreement more particularly Clause 27 the parties had not designated a specific court to the exclusion of all other courts to adjudicate the dispute, thus no exclusive jurisdiction had been conferred by the parties upon any particular court. It further stated that, as the cause of action had concurrently both in Afghanistan and India, the petitioner expressed its preference to resolve the dispute through arbitration administered under the jurisdiction of the courts in India.

Since no reply to the aforesaid notice of invocation of arbitration was elicited from either of the respondents, the present petition came to be filed by the petitioner on 19.04.2023 before this Court for seeking appointment of an arbitrator under Section 11(6) of the Act, 1996 in other words due to the failure on part of the respondents in nominating an arbitrator as per the mutually agreed upon terms and procedure under the aforesaid Distributorship Agreement.

ISSUES FOR DETERMINATION

I. Whether, the present petition under Section 11 of the Act, 1996 is maintainable?

II. Whether, Part I of the Act, 1996 is applicable to the arbitration clause contained in the Distributorship Agreement dated 09.11.2010?

III. What is the seat of the arbitration in terms of the Distributorship Agreement dated 09.11.2010?

CONCLUSION

 From the above exposition of law, the following position of law emerges: -

(i) Part I of the Act, 1996 and the provisions thereunder only applies where the arbitration takes place in India i.e., where either (I) the seat of arbitration is in India OR (II) the law governing the arbitration agreement are the laws of India.

(ii) Arbitration agreements executed after 06.09.2012 where the seat of arbitration is outside India, Part I of the Act, 1996 and the provisions thereunder will not be applicable and would fall beyond the jurisdiction of Indian courts.

(iii) Even those arbitration agreements that have been executed prior to 06.09.2012 Part I of the Act, 1996 will not be applicable, if its application has been excluded by the parties in the arbitration agreement either explicitly by designating the seat of arbitration outside India or implicitly by choosing the law governing the agreement to be any other law other than Indian law.

(iv) The moment ‘seat’ is determined, it would be akin to an exclusive jurisdiction clause whereby only the jurisdictional courts of that seat alone will have the jurisdiction to regulate the arbitral proceedings. The notional doctrine of concurrent jurisdiction has been expressly rejected and overruled by this Court in its subsequent decisions.

(v) The ‘Closest Connection Test’ for determining the seat of arbitration by identifying the law with which the agreement to arbitrate has its closest and most real connection is no longer a viable criterion for determination of the seat or situs of arbitration in view of the Shashoua Principle. The seat of arbitration cannot be determined by formulaic and unpredictable application of choice of law rules based on abstract connecting factors to the underlying contract. Even if the law governing the contract has been expressly stipulated, it does not meanthat the law governing the arbitration agreement and by extension the seat of arbitration will be the same as the lex contractus.

(vi) The more appropriate criterion for determining the seat of arbitration in view of the subsequent decisions of this Court is that where in an arbitration agreement there is an express designation of a place of arbitration anchoring the arbitral proceedings to such place, and there being no other significant contrary indicia to show otherwise, such place would be the ‘seat’ of arbitration even if it is designated in the nomenclature of ‘venue’ in the arbitration agreement.

(vii) Where the curial law of a particular place or supranational body of rules has been stipulated in an arbitration agreement or clause, such stipulation is a positive indicium that the place so designated is actually the ‘seat’, as more often than not the law governing the arbitration agreement and by extension the seat of the arbitration tends to coincide with the curial law.

(viii) Merely because the parties have stipulated a venue without any express choice of a seat, the courts cannot sideline the specific choices made by the parties in the arbitration agreement by imputing these stipulations as inadvertence at the behest of the parties as regards the seat of arbitration. Deference has to be shown to each and every choice and stipulations made by the parties, afterall the courts are only a conduit or means to arbitration, and the sum and substance of the arbitration is derived from the choices of the parties and their intentions contained in the arbitration agreement. It is the duty of the court to give weight and due consideration to each choice made by the parties and to construe the arbitration agreement in a manner that aligns the most with such stipulations and intentions.

(ix) We do not for a moment say that, the Closest Connection Test has no application whatsoever, where there is no express or implied designation of a place of arbitration in the agreement either in the form of ‘venue’ or ‘curial law’, there the closest connection test may be more suitable for determining the seat of arbitration.

(x) Where two or more possible places that have been designated in the arbitration agreement either expressly or impliedly, equally appear to be the seat of arbitration, then in such cases the conflict may be resolved through recourse to the Doctrine of Forum Non Conveniens, and the seat be then determined based on which one of the possible places may be the most appropriate forum keeping in mind the nature of the agreement, the dispute at hand, the parties themselves and their intentions. The place most suited for the interests of all the parties and the ends of justice may be determined as the ‘seat’ of arbitration.

Thus, for all the foregoing reasons, the Apex Court reached the conclusion that the present petition under Section 11 of the Act, 1996 is not maintainable as neither the seat of arbitration is India nor is the arbitration agreement governed by laws of India.

Toread The Supreme Court of India Judgment click here