The “place”, “seat” and “venue” conundrum, in the interpretation of a contract as per the provisions of the Arbitration and Conciliation Act, 1996 (“A&C Act”), is not new to India. Recently, this problem has been further entangled in the case of Mankastu Impex Private Ltd. v. Airvisual Ltd. (“Mankatsu v. Airvisual”) wherein the Supreme Court of India (“SC”) has held –
“mere expression “place of arbitration” cannot be the basis to determine the intention of the parties that they have intended that place as the “seat” of arbitration. The intention of the parties as to the “seat” should be determined from other clauses in the agreement and the conduct of the parties.”(¶ 20 of Mankatsu v. Airvisual)
This blog analyses how this stance of the SC is contrary to the general principles of contract law and will be detrimental to the arbitration ecosystem in India.
The case concerned an International Commercial Arbitration (“ICA”) under the A&C Act wherein a Memorandum of Understanding (“MoU”) was entered between a company incorporated in India with another company incorporated in Hong Kong. Due to a breach of the fulfilment of the conditions of the MoU, the arbitration was invoked, and the aggrieved party moved to the court in India for appointment of an arbitrator. The terms of the MoU stipulated as follows –
“17.1 – This MoU is governed by the laws of India, without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction.
17.2 – Any dispute, controversy, difference or claim arising out of or relating to this MoU, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered in Hong Kong.
The place of arbitration shall be Hong Kong.” (¶ 17 of Mankatsu v. Airvisual)
It was in this specific context that the SC held – even the explicit mention of an exact “place” of arbitration in a contract will not be conclusive in determining the “seat” of arbitration.
“Place” Versus “Seat” under the Arbitration and Conciliation Act, 1996
The legal debate on “place”, “seat” and “venue” under the A&C Act is not a new one. However, a degree of recent inconsistency as well as consistency (on two different points of law) was brought by the SC through the case of Union of India v. Hardy Exploration and Production (India) INC (“Hardy Exploration Case”) wherein the court tried to explain the scope of the terms – “place”, “seat” and “venue”. While the inconsistency was caused in relation to “venue” and “seat” of arbitration because of the ruling of BGS SGS Soma JV v. NHPC Ltd. (“BGS Soma Case”), the consistency was brought in relation to the law on “place” and “seat” of arbitration.
In Hardy Exploration Case, the court was concerned with a product sharing contract which resulted in the invocation of an ICA. The court while dealing in detail with the concepts of “place”, “seat” and “venue” held that “an arbitration clause has to be read in a holistic manner so as to determine the jurisdiction of the court” (¶ 23 of Hardy Exploration Case). This argument was augmented by placing reliance upon the UNCITRAL Model Law, on the basis of which the court held that the terms “place” and “seat” can be used interchangeably, subject to the fact that there is no condition precedent attached to it (¶ 33 of Hardy Exploration Case).
Thus, the SC gave a similar legal status to a “place” and “seat” of arbitration and maintained consistency. However, the Hardy Exploration Case has recently been considered as a bad law by the SC in the BGS Soma Case. Therein, the court critiqued the test laid down in Hardy Exploration Case in so far as the “venue” and “seat” of arbitration were concerned (¶ 96 of BGS Soma Case). At the same time, it is imperative to note that in the BGS Soma Case the court did not dwell into the correctness of the test laid down in Hardy Exploration Case in so far as “place” and “seat” of arbitration are concerned. Thus, Hardy Exploration Case remains to be good law when a determination of “place” as “seat” of arbitration has to be made in case of an ICA under the A&C Act.
It is with this lens that we have to consider the Hardy Exploration Case. What the SC was dealing with in the Hardy Exploration Case was an ambiguous clause which did not mention the exact “place” of arbitration (¶ 26 of Hardy Exploration Case). This ambiguity was tried to be resolved by the court by considering a holistic angle of the entire contract.
However, this is completely different from the instant case of Mankatsu v. Airvisual, wherein the stipulated terms of the contract clearly and unequivocally consider Hong Kong to be the “place” of arbitration and has no condition precedent attached to “place” of arbitration. Thus, questions arise as to – when the courts can read implied terms into a contract? Further, while doing so, whether these implied terms can be contrary to the express terms of a contract?
Doctrine of Implied Terms of a Contract Under the Indian Law
In a contract, implied terms can be read into. However, these are subject to certain stringent conditions as the primary basis of a contract is the consent of the parties which is expressed in form of words. The SC in the case of Satya Jain v. Ahmed Rushdie relied upon the English case of The Moorcock ( 14 PD 64) wherein the Doctrine of Business Efficacy was propounded by the court. According to this doctrine, “a term can only be implied if it is necessary to give business efficacy to the contract to avoid a failure of consideration that the parties cannot, as reasonable businessmen have intended” (¶ 33 of Satya Jain v. Ahmed Rushdie).
This was augmented by the case of Shirlaw v. Southern Foundries ( 2 KB 206) which required the court to consider the terms of a contract from the point of view of a reasonable business man instead of a reasonable man. Nowhere, was it mentioned as to what would happen in case of an inconsistency between an express and an implied term of a contract (¶ 34 of Satya Jain v. Ahmed Rushdie).
However, the scenario changed with the case of Nabha Power Limited v. Punjab State Power Corporation Limited & Anr. (“NPL v. PSPCl”). In this case, the SC while dealing with the terms of a Power Purchase Agreement, not only followed the precedent established in Satya Jain v. Ahmed Rushdie, but also went on to follow a new test, as laid down in Australian case of B.P. Refinery (Westernport) Propriety Ltd. v. Shire of Hastings (1977 UKPC 13), for the reading of implied terms into a contract. This test now prohibited the reading of an implied term into a contract if it was contradictory to any of the express terms of the contract (¶ 49 of NPL v. PSPCl). It is because of this interpretation of contract law in India that the position of the SC in Mankatsu v. Airvisual becomes a curious position because even if the contract will now unequivocally mention the “place” of arbitration, the courts might not consider the same.
The reasoning of the SC in NPL v. PSPCL to read implied terms into a contract, subject to a stringent test, seems to be the correct position in law as – firstly, it is premised on the idea that a business involves risk to which the contracting parties freely consent via express terms in a contract; and secondly, it is in consonance with the law in common law countries of U.K. and Australia. However, based on the aforementioned analysis, it is also clear that the position of the SC in Mankatsu v. Airvisual is contradictory to the stance taken by the court in NPL v. PSPCl.
It is imperative to note that the arbitration ecosystem of India is already in a challenging position and is struggling to gain prominence. This is evidenced by the fact that arbitration awards are almost always challenged before the courts in India. Therefore, the reading of implied terms into a contract, in case of an arbitration agreement is dangerous to the entire arbitration ecosystem of India, as it has a potential of further increasing the number of challenges to arbitration awards. Now, the aggrieved party at arbitration will want the courts to read implied terms into a contract which will inevitably defeat the purpose of choosing arbitration instead of the traditional system of courts.
The article has been authored by Vatsal Patel, a fourth year law student at Institute of Law, Nirma University, Ahmedabad.