TO-MAY-TOES, TO-MAH-TOES BUT NOT WHEN IT COMES TO “SEAT” OF ARBITRATION

TO-MAY-TOES, TO-MAH-TOES BUT NOT WHEN IT COMES TO “SEAT” OF ARBITRATION

A commentary on Government of India v Petrocon India Limited [2016] 3 MLJ 435 by Shannon Rajan

The importance of the terminological distinction between “seat” and “venue” in an arbitration agreement cannot be overstated. In this case, the lack of clarity in the arbitration agreement on this issue resulted in the parties litigating the issue for more than 13 years in three jurisdictions, namely Malaysia, India and the United Kingdom, with pronouncements being issued by the apex courts of Malaysia and India.

THE ARBITRATION AGREEMENT

The Government of India (“Appellant”), Petrocon India Limited (“Respondent”) and three other entities were parties to a Production Sharing Contract (“PSC”). The arbitration agreement in question is found in Article 34.12 of the PSC, which reads as follows:

“34.12   Venue and Law of Arbitration Agreement

The venue of sole expert, conciliation or arbitration proceedings pursuant to this Article, unless the Parties otherwise agree, shall be Kuala Lumpur, Malaysia, and shall be conducted in the English language … Notwithstanding the provisions of Article 33.1, the arbitration agreement contained in this Article 34 shall be governed by the laws of England.”

BRIEF FACTS OF THE DISPUTE

A dispute arose between the Appellant and the Respondent in respect of the PSC around 2001. Due to the outbreak of the severe acute respiratory syndrome (SARs) epidemic in Kuala Lumpur, the venue of the arbitration was first moved from Kuala Lumpur to Amsterdam. Subsequently, the hearings were shifted to London, culminating in the consent order dated 15 November 2003 (“Consent Order”) which shifted the seat of the arbitration to London. Thereafter, arbitration proceedings commenced, resulting in a partial award being issued on 31 March 2005 (“Partial Award”).

The Appellant filed an Originating Motion in the High Court of Malaya to set aside the Partial Award on the premise that the seat of the arbitration was Kuala Lumpur. The Appellant obtained an order for leave to serve the said application out of jurisdiction. In response, the Respondent applied to set-aside the Originating Motion, the order for leave to serve out of jurisdiction and service of Originating Motion on the grounds that the High Court of Malaya had no jurisdiction to determine the dispute as the seat of arbitration had been shifted to London by the Consent Order.

THE LOWER COURTS’ DECISIONS

The High Court and the Court of Appeal allowed the Respondent’s application, essentially holding that the High Court of Malaya has no jurisdiction to entertain, adjudicate or decide on the Appellant’s Originating Motion.

The High Court treated the “venue of arbitration” as the “seat of arbitration” and held that the latter had shifted from Kuala Lumpur to London under the Consent Order. The Court of Appeal, while deciding in favour of the Respondent, disagreed with the High Court’s reasoning. It held that the “venue” is merely a matter of geographical convenience for the parties and that the seat of arbitration is determined by the law governing the arbitration agreement. As the PSC is governed by English law, the Court of Appeal concluded that London is the juridical seat. The Appellant appealed to the Federal Court.

THE PROCEEDINGS IN INDIA

While the appeal was being contested before the Court of Appeal in Malaysia, the Appellant filed a petition in the Delhi High Court in India, seeking a declaration that the seat of arbitration is Kuala Lumpur. The Delhi High Court dismissed the Respondent’s objection that the Indian courts did not have jurisdiction to consider the application.

On the Respondent’s appeal, the Supreme Court of India held that the Delhi High Court did not have the jurisdiction to entertain the Appellant’s petition as the arbitration agreement was not governed by the laws of India, but by English law.  

 

THE FEDERAL COURT’S DECISION

The Federal Court observed that the term used in the arbitration agreement in the present case is “venue” rather than “seat” and that in international arbitrations, the words often used are “place of arbitration”, “seat of arbitration” and “forum”. The Federal Court therefore had to address its mind to the following questions, namely: (1) whether there is a fixed terminology in reference to the seat of arbitration; (2) whether there was a “seat” of arbitration expressly selected by the parties; and (3) whether the terminology “venue” has the same meaning as “seat”.

The Federal Court in explaining the distinction between the seat and the geographical location of arbitration referred to another Federal Court case of Government of India v Cairn Energy India Pty Ltd & Another [2012] 3 CLJ 423. It held that the seat of arbitration will determine the curial law that will govern the arbitration proceeding. The seat refers to the legal seat rather than the geographical seat. It is a permanent or fixed seat which can only be changed by consent of the parties of the arbitration. The Court added that this must be distinguished from the physical or geographical place where the arbitration is to be held, which can be shifted from place to place without affecting the legal seat of arbitration.

In the present case, the arbitration agreement provides for the venue of arbitration being Kuala Lumpur while the law governing the arbitration agreement is English law. Although there is no provision for seat of arbitration in the arbitration agreement, the Federal Court found that there was a strong proposition for the venue of arbitration to be deemed the seat of arbitration for the following reasons:

(a)    if the word “venue” in Article 34.12 merely refers to the geographical or physical seat of arbitration, it would not have been necessary to insert it into the agreement as the geographical seat may be changed at any time at the parties’ convenience;

(b)    the word “venue” or “seat” is often used interchangeably in international arbitrations. In the present case, it was common ground that venue of the arbitration was first moved to Amsterdam from Kuala Lumpur due to the outbreak of the SARS epidemic in Kuala Lumpur. Subsequently, the hearings were shifted to London and culminated in the issue of the Consent Order, which shifted the seat of the arbitration to London. Therefore, at the start of the arbitration proceedings, Kuala Lumpur was commonly accepted as the seat of arbitration; and 

(c)     the Appellant also filed its application to set aside the Partial Award in the Kuala Lumpur High Court and this shows that the Appellant had accepted Kuala Lumpur as the seat of arbitration.  It is trite law that a challenge can only be made in the jurisdiction which is the seat of arbitration.

After the Federal Court found that the word “venue” in Article 34.12 should, on its proper interpretation, be construed to mean the seat of arbitration, the next question that follows is whether the seat of arbitration had been shifted to London. It found that the seat of arbitration had shifted to London by way of the Consent Order and that such a change in the seat of arbitration was within the parties’ contemplation as reflected in Article 34.12, which reads: “The venue of … arbitration proceedings pursuant to this Article, unless the Parties otherwise agree, shall be Kuala Lumpur, Malaysia …”. It was of the view that the Consent Order was made by the arbitral tribunal pursuant to this article.

The next issue was whether the change in the “venue” of arbitration requires the concurrence of all the parties to the PSC as stipulated under Article 35.2. The Federal Court held that Article 35.2 does not apply to the arbitration agreement contained in Article 34 as the latter is a distinct and separate agreement from the underlying contract and that “the parties” in Article 34.12 refers to the parties to the arbitration as distinct from the parties to the PSC.   

The final issue related to the effect of the Indian Supreme Court’s decision. The Federal Court found that there was no issue of estoppel and res judicata operating to prevent the Respondent from re-litigating the issue before the Malaysian Court. This was because the Indian Supreme Court after having ruled that the lower court lacked jurisdiction to entertain the Appellant’s petition, it was no longer necessary for the Supreme Court to delve into the issue of the seat of arbitration. The Federal Court held that whatever ruling or observation made by the Indian Supreme Court beyond the issue of jurisdiction must be taken as mere obiter dicta and had no binding effect on the parties.

COMMENTS

This case is a timely reminder on the importance of ensuring that an arbitration agreement must be drafted with infinite precision. It also highlights the problems that could arise from a failure to comply with this golden rule, as evident from the multitude of proceedings initiated across multiple jurisdictions, resulting in years of delay in the substantive proceedings as well as substantial legal costs being incurred in dealing with the ancillary issues.

The Federal Court’s decision suggests a continuation of a growing trend where the designation of a “venue” for arbitration in an arbitration agreement would be considered as strong evidence that the “seat” should be in the same jurisdiction. In the instant case, the Federal Court adopted a common sense approach to interpreting the word “venue” in the arbitration agreement in that it recognised that it would not have been necessary to expressly insert the word “venue” when parties were at liberty to shift the geographical location at any time.  

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SUBJECT MATTER: ARBITRATION

 

 
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