Address (Un)Known: Reconciling the Tests for an Arbitral Seat
- Administrator
- 2 days ago
- 6 min read
Arush Sarma* Arnav Singh^
INTRODUCTION
Every arbitration agreement mentions a seat; fewer have succeeded in finding one. The doctrinal distinction between the seat and venue has precipitated innumerable disputes between parties to an arbitral agreement. The Supreme Court of India ("SC") recently, in the J&K Economic Reconstruction Agency v. Rash Builders India Private Limited ("Rash Builders"), addressed a similar problem, while determining whether the seat of arbitration dictates the procedural laws applicable to it. The dispute in this case arose in an appeal filed by one of the parties challenging the jurisdiction of the Delhi High Court over the arbitral proceedings, even though the agreement mentioned the seat to be Srinagar.
The judgment of the SC lays down a two-part test to identify the seat of the tribunal. The first prong is the closest and intimate connection test (the Naviera Amazonica principle), while the second part being the Shashoua principle (per Shashoua v. Sharma). The SC carefully noted that these tests are to be only applied in cases wherein an explicit agreement for the seat and tribunal of arbitration is absent.
In this article, we critique the reasoning of the judgment on the seat of the tribunal on two levels: through an internal critique and a foundational critique. We begin by arguing that the importance ascribed to intention in the reasoning of the judgment is merely an illusion. We highlight that the Rash Builders case is flawed in terms of sequencing, wherein the SC essentially inverts the order of testing the parties' intent and considers it only after applying the closest connection test. We then contend that the SC erred in treating the two tests as irreconcilable, reasoning that the former is a balancing exercise whereas the latter is merely a presumption.
THE ILLUSION OF PRIMACY OF INTENTION
The SC relies on Naviera Amazonica in stating that the close and intimate connection test forms the first part of identification. However, the same test was refined and qualified in subsequent cases. In Sulamérica, the Court of Appeal held that the law of an arbitration agreement is worked out by asking questions in three steps:
(a) has an express choice been made?
(b) if not, can an implied choice be found? and
(c) if neither exists, the court falls back on the system of law the agreement is most closely connected to.
The court was explicit that these steps “[…] ought to be embarked on separately and in that order […]” [¶ 25]. As such, the closest connection is the last resort, rather than the starting point.
In Enka v Chubb, the United Kingdom's Supreme Court plainly stated that the close connection test may only be applied in the absence of a choice. Further, whether a choice exists is ascertained only by “construing the arbitration agreement and the contract containing it, as a whole” [¶ 170].
Relying on these principles, Shashoua stated that the choice of the parties is effective in conferring jurisdiction upon a court [¶ 32]. Furthermore, it held that such intention may be inferred from the conduct of the parties and the contract, as a whole [¶ 31].
In the Rash Builders case, the implied intention of the parties is effectively disregarded. In ¶ 18(v), the SC applies, first, the close and intimate connection test from Naviera Amazonica. It then examines surrounding circumstances (such as intention) to determine the curial law. In doing so, the implied intention of the parties is relegated to a secondary consideration. However, at the same time, ¶ 18(vi) of the judgment gives paramountcy to the intention of the parties, whether it be explicit or implied.
A close reading of ¶¶ 18(v) and 18(vi) suggests that a court may proceed to weigh factors such as nationality, currency, language, and place of performance under ¶ 18(v)(a), without first considering whether the arbitration clause itself, through its chosen words (including institutional rules, references to curial-law, or a tribunal's consent order fixing the seat and venue, as in Rash Builders), already supplies a determinate implied answer under ¶ 18(vi).
If intention in determining the seat, and by extension, the curial law, is accorded paramountcy, the close and intimate connection test can operate only as a measure of last resort. It cannot constitute the first step in administering a test to ascertain the seat of arbitration. Moreover, the reasoning in Rash Builders does not account for situations where the parties' intention and the agreement's closest connection point in different directions.
An analysis of ¶ 18(v) indicates that a determination of intention must occur after the identification of the location with the closest and most intimate connection to the proceedings. This is antithetical to the very principle it relies on since Shashoua authoritatively states that the choice of the parties is decisive with respect to the seat of proceedings.
THE IRRECONCILABILITY OF THE TESTS
The second aspect of our critique concerns the internal irreconcilability of these tests. Perhaps the only common thread joining the two principles is the lack of an express seat in the arbitral agreement. Our contention is not merely that the SC misapplied the tests by inverting their order of application (as established above), but that the principles are, by their very nature, internally and structurally inconsistent with each other.
The court in the Amazonica judgement opined that a multifactorial consideration, inclusive of but not limited to procedural law, place of hearings, nationality of the tribunal, relevant correspondence between the parties and the arbitrators, is material to locate the place which shares the most intimate connection with the arbitration in question. Accordingly, the venue of the arbitration is only one of the possibly many considerations which the court, in its reasonable prudence, opined to weigh while answering the question of the seat. While the former is a test which the SC intended to be a balancing act, the latter is merely an objective exercise in presuming the venue to be the seat in the absence of other determinations. The court in Shashoua, thus, can be best classified as a presumptive rule, which is that unless an indication to the contrary exists, the venue shall be construed to be the place.
By the Shashoua principle, it is the party challenging the seat which bears the onus to displace the presumption of the seat. Contra, Amazonica does not require a presumption to be made in the first place, and accordingly, the party which asserts a place to be the seat needs to prove so systematically, thereby displacing any material evidentiary reliance on the venue of proceedings.
An obvious rebuttal to the internal inconsistency of the two, perhaps, would be that the Shashoua principle is merely the peculiar case of Naviera being applied to a recurring factual matrix. However, for it to be true, it needs to pass the test of falsifiability. In this case, we argue that since Shashoua’s outcomes are not derivable from a balancing act performed on the same facts, their reconciliation (ordered or otherwise) is not possible. Accordingly, we argue that the outcomes of the two principles may only arrive at the same juncture by sheer coincidence, for the very nature of an inquiry, per Shashoua, is based on shifting the load of a multifactoral review on a presumption.
CONCLUSION
Taking the judgment in Rash Builders at face value, its primary focus appears to be preserving the intention of the arbitrating parties. However, ¶ 18(vi) claim on intention seems to be misapplied in the case since the SC conveniently abandons it only to first reach for the closest connection test. This causes the order of application, per settled jurisprudence, which the court in this case celebrates, to be inverted. This standalone would be a problem easy to address by a mere reordering of applicable tests. However, upon deeper investigation, it is revealed that the two tests are internally irreconcilable on a fundamental level. While Naivera is an act of balancing competing concerns, the Shashoua is a presumptive move which treats the venue as a rebuttable presumption for a seat.
The only available common ground between both is a plain absence of an express seat in the contract, and within it, the arbitral agreement. However, applying both to the same factual matrix reveals that they offend the principle of falsifiability and would not lead to a common determination, if not for mere coincidence.
The only workable solution available to the court is a larger determination to make. Unless the courts decide, once and for all, between subordinating the Shashoua principle to give way to Sulamérica (as an implied choice inference), or to halt the treatment of the same as a causal alternative to Naivera. Until that is done, Indian courts will continue asking two oracles the same question and act surprised when they do not agree.
* Arush Sarma is a third-year student at the National Law School of India University, Bengaluru. He is a passionate mooter and is interested in pursuing his interests in various areas of corporate law.
^ Arnav Singh is a third-year student at the National Law School of India University, Bengaluru. He frequently writes on questions of procedure and evidence. His area of interest is criminal law.
Comments