Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited: A Critique.

[Shaalini Agrawal]

is a third-year student of Gujarat National Law University.

The seat of arbitration has various internal and external implications for the arbitral proceedings. One such implication is that the administration and control over the arbitration is done by the courts of the country where the seat is located. Such courts have the power to regulate the conduct of arbitration and hear application challenging the arbitral award.[1] Where the seat of arbitration is designated, expressly or by implication, by the parties as India, the courts in India will have supervisory jurisdiction over the arbitral proceedings and Part 1 of the Arbitration and Conciliation Act, 1996 (“Act”) will apply.

In case of domestic arbitration where parties have chosen a neutral city as the seat of arbitration, the question that arises for consideration is which courts in India will have the jurisdiction- courts of seat of arbitration or court which has the subject matter jurisdiction under sections 16-20 of the Civil Procedure Code, 1908 (“Code”).

There have been conflicting judgements of various High Courts and the Supreme Court on this issue. Most recently, the Supreme Court in Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited[2] (“Indus Mobile”) has held that the designation of seat in the arbitration agreement is akin to an exclusive jurisdiction clause. It means that when the parties have chosen a particular place as the seat of arbitration, the courts of that place will have exclusive jurisdiction to regulate the arbitral proceedings. This is irrespective of where the cause of action arose or where the parties or the subject matter of dispute is located.

This case comment argues that the judgement in Indus Mobile was erroneous because firstly, it completely ignored the wording of section 2(1)(e) of the Act and secondly, it ignored the judicial precedents of over 70 years that interpreted section 2(1)(e) to confer jurisdiction only on the courts that have territorial jurisdiction over the subject matter of the arbitration according to sections 16-20 of the Code and misplaced reliance on Bharat Aluminium Co v. Kaiser Aluminium Technical Services[3] (“BALCO”).

Facts of the Case

In this case, Respondent no. 1 was engaged in the manufacture, marketing and distribution of mobile phones and tablets with its registered office at Amritsar. An agreement was entered into between the Appellant and the Respondent no. 1 where the latter would be the former’s retail chain partner. Respondent no. 1 was supplying goods to the Appellant from New Delhi to Chennai. Dispute arose between the two parties. Respondent no. 1 sent a notice to the Appellant stating the default of outstanding dues of Rs.5 crores with interest on the part of the latter and called upon it to pay the outstanding dues within 7 days. Appellant failed to pay and the arbitration clause in the agreement was invoked by the Respondent No. 1.

Clause 18 of the agreement provided that the “…dispute shall be finally settled by arbitration conducted under the provisions of the Arbitration & Conciliation Act 1996 by reference to a sole Arbitrator which shall be mutually agreed by the parties. Such arbitration shall be conducted at Mumbai, in English language.” Clause 19 of the agreement further provided that “all disputes & differences of any kind whatever arising out of or in connection with this Agreement shall be subject to the exclusive jurisdiction of courts of Mumbai only.”

Respondent no. 1 then filed two petitions under sections 9 and 11 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court. The Delhi High Court disposed of both the petitions holding that since no part of the cause of action arose in Mumbai, only the courts of Delhi and Chennai (from and to where goods were supplied), and Amritsar (which is the registered office of the appellant company)  could have jurisdiction over the matter. This is so irrespective of the exclusive jurisdiction clause as the courts in Mumbai would have no jurisdiction in the first place. Since the court in Delhi was the first court that was approached, it would have exclusive jurisdiction over the matter.

Appellants approached the Supreme Court where they argued that even if no part of the cause of action arose at Mumbai, yet courts in Mumbai would have exclusive jurisdiction over all the proceedings as the seat of the arbitration is at Mumbai. Respondents supported the Delhi High Court judgement by stating that one of the tests prescribed by section 16-20, Civil Procedure Code, 1908, to give a court jurisdiction over the matter must at least be fulfilled and merely the designation of seat as Mumbai would not give exclusive jurisdiction over the proceedings to the Mumbai courts.

Decision of the Supreme Court and its Analysis

The Supreme Court set aside the order of the Delhi High Court in the following words:

“..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.”

However, the Supreme Court in the above paragraph upheld two conflicting propositions. Firstly, it held that “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.” Secondly, it stated in the same paragraph that “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.” With the first proposition, it merely holds that the court of the seat of arbitration will also be a court of proper jurisdiction and the parties would still have the choice to approach the court have subject matter jurisdiction. But with the second proposition, it rules out such choice of the parties.

Moreover, both these propositions of law are erroneous because they are founded on the premise that the court of the seat of arbitration, having no connection with subject matter/ cause of action of the dispute, has proper jurisdiction over the arbitral proceedings. The Court in Indus Mobile placed reliance on the Constitution Bench decision in BALCO in which the Court interpreted section 2(1) (e) of the Act as giving jurisdiction to two courts that is, the court where the cause of action is located and the courts where the arbitration takes place.[4] However, this observation in BALCO does not constitute the ratio of the decision. Moreover, the Court did not refer to and analyze the previous decisions which have interpreted section 2(1) (e) otherwise. Therefore, the relevance of the observation is quite questionable.

The Court ignored the language of section 2(1) (e) of the Act which defines court as:

“the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes.”[5]

In the provision, Parliament provides that this principal civil court must have jurisdiction to decide the questions forming the subject-matter of the arbitration if these had been the subject-matter of a suit.[6] The interpretation of the provisions is correctly laid down by the Delhi High Court in GE Countrywide Consumer Financial Services Ltd. v. Surjit Singh Bhatia[7] where it held that one has to firstly ascertain the subject of arbitration that is the dispute and then, presuming that there is no arbitration agreement, ascertain where the suit would have been filed. Only such courts where suit could be filed will be courts within the meaning of section 2(1) (e) and only such courts will have supervisory jurisdiction over the proceedings. The question as to whether seat of arbitration confers jurisdiction on the court was considered by Delhi High Court in Sushil Ansal v. Union of India[8] wherein it was clearly held that the seat of arbitration did not confer jurisdiction in the courts and it is important to consider the competence of the court for deciding the subject-matter of the dispute had a suit been filed. Therefore, courts of neutral seat of arbitration having no connection with subject matter/ cause of action have not been conferred jurisdiction under section 2(1) (e) of the Act.

Supervisory jurisdiction of the courts is statutory and not inherent. This position was upheld by the House of Lords in Bremer Vulkan Schiffbau v. South India Shipping Corp. Ltd.,[9] wherein it was rejected that courts have a general supervisory power over the conduct of arbitrations more extensive than those that are conferred upon it by the Arbitration Acts. Moreover, it is a well settled law that parties are not competent to confer jurisdiction on a court by agreement which it does not otherwise possess but if there are more than one forum where a suit can be filed, it is open to the parties to select a particular forum to the exclusion of all other forums.[10]

Conclusion

While the ratio laid down in this decision that the courts of the neutral seat will have exclusive jurisdiction over arbitral proceedings is definitely more arbitration friendly, it is not envisaged in the legislation. It is, therefore, upon the lawmakers to amend the Act and expressly confer jurisdiction to the court of the seat of arbitration. Failure to do so will result in inconvenience to the parties in approaching the courts when they have chosen a neutral seat of arbitration. Moreover, Indian courts will be devoid of jurisdiction in cases where two foreign parties agree toarbitrate in India where the dispute has no connection with India.

[1] Enercon v. Enercon, (2014) 5 SCC 1.

[2] Indus Mobile Distribution v. Datawind innovations, AIR 2017 SC 2105.

[3] Bharat Aluminium Co v. Kaiser Aluminium Technical Services, (2012) 9 SCC 552.

[4] Ibid.

[5] The Arbitration and Conciliation Act, 1996, § 2(1) (e), No. 26, Acts of Parliament, 1996 (India).

[6] V. Niranjan & Shantanu Naravane,  Bhatia International Rightly Overruled: The Consequences of Three Errors in BALCO, (2012) 9 SCC J-26.

[7] GE Countrywide Consumer Financial Services Ltd. v. Surjit Singh Bhatia, (2006) 129 DLT 393.

[8] Sushil Ansal v. Union of India, AIR 1980 Del 43.

[9] Bremer Vulkan Schiffbau  v. South India Shipping Corpn. Ltd , (1981) 1 All ER 289 (HL).

[10] Globe Transport Corporation v. Triveni Engineering Works, (1983) 4 SCC 707.