“An ounce of mediation is worth a pound of arbitration and a ton of litigation!”
- Joseph Grynbaum
The Hon’ble Supreme Court of India (“Supreme Court”), in a recent decision has converged the divergent opinion, on the appropriate test to determine jurisdiction in a case of trans-border arbitration.
This divergence stems from the interaction between three distinct legal systems which come into play when a dispute occurs: (i) lex-contractus, the law governing the substantive contractual issues; (ii) lex arbitri, the law governing the arbitration agreement and the performance of this agreement; and (iii) lex-fori, the law governing the procedural aspects of arbitration.
Lex Arbitri, Lex Contractus and Lex Fori
The law governing the arbitration is not to be confused with (1) the proper law of the contract (lex contractus), (2) the proper law of the arbitration agreement (lex arbitri), or (3) the procedural rules which will apply in the arbitration (lex fori). These three regimes depend on the choice, express or presumed, of the parties.
The law governing the agreement to arbitrate determines the validity, scope, and interpretation of the agreement. In contrast, the law governing the arbitration itself is concerned with determining which Court has supervisory jurisdiction over the arbitration.
Pertinently, unless the parties have provided otherwise, it is prudent not to divide lex arbitri !
How to determine the law that governs the arbitration agreement?
The Supreme Court discussed the principles contained in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb, 2020 UK SC 3 and Sulamérica Cia Nacional De Seguros S.A. and Others v. Enesa Engenharia S.A., [2012] EWCA Civ 638 (“Sulamérica Cia”) to deduce that:
1) Lex contractus can be presumed to be lex arbitri - Although the arbitration agreement is separable from the main contract, it is not completely detached from it. When the arbitration agreement forms part of a contract, the express choice of a lex contractus strongly indicates the parties' intention. It would generally be inferred that the arbitration is governed by the same law as the substantive contract.
2) Lex fori can be determined to be lex arbitri - Conversely, there are cases to indicate that the law of the seat of arbitration should typically govern the arbitration agreement. selecting a country for the seat of arbitration does not automatically alter the presumption that lex contractus governs the arbitration agreement. The Supreme Court emphasised upon certain factors that may override this presumption :
(a) when the law of the seat mandates that the arbitration agreement must be governed by the law of that country;
(b) when there is a serious risk that the agreement will become ineffective, or the dispute will become non-arbitrable, if governed by the same law as that of the contract as was seen in the case of Anupam Mittal v. Westbridge Ventures II Investment Holdings, [2023] SGCA 1; and
(c) where the seat is deliberately chosen as a neutral forum.
These factors, which are not exhaustive will displace the presumption in favour of lex contractus governing the arbitration agreement.
3) In absence of choice of law - In absence of any choice of law governing the arbitration agreement, the arbitration agreement will be governed by law with which it is most closely connected. Relying upon its earlier decision of M/s. Arif Azim Co. Ltd. v. M/s. Micromax Informatics Fze., (2024) INSC 850, the Supreme Court has held that in such a case, the law applicable to the seat of arbitration will be the law having the closest connection to the arbitration even if it differs from the parties’ contractual obligations.
Three-step test developed by Sulamérica Cia:
First, neither Clause 16.5 (Governing law clause conferring jurisdiction to courts in Gujarat, India) nor Clause 18 (Direct settlement of disputes clause, committing the parties to Arbitration for final settlement in accordance with the Arbitration and Conciliation Centre of the Chamber of Bogota DC) of the agreement in question explicitly stipulates the governing law of the arbitration agreement. The next step of the test involves identifying the parties' implied choice of law for the arbitration agreement. At this stage, there is a strong presumption that the lex contractus, i.e., Indian law, governs the arbitration agreement.
In this case, it is important to note that no seat of arbitration has been explicitly chosen. In conclusion, at this second stage of the inquiry, the Supreme Court found that the parties had impliedly agreed that Indian law governs the arbitration agreement, and the controversy can be resolved accordingly.
The Supreme Court also held that the use of the premises at the Centre, or any other location designated by the director of the Centre in Bogota, does not imply that Colombian law governs the arbitration agreement. Although Clause 18 specifies that the award shall conform to Colombian law, this provision pertains solely to the arbitration proceedings or the award matters. It does not override or diminish the effect of Clause 16.5, which clearly stipulates that Indian law shall govern the agreement and the related disputes.
Conclusion:
The judgment underscores the importance of determining the seat of arbitration. Parties must be meticulous in selecting the seat as it governs the procedural aspects of arbitration and can have significant implications on the enforceability of the award. The judgment further highlights that parties engaging in international contracts should be conscious of the legal landscape surrounding arbitration and its relationship with the substantive contract. It can be seen from this case that clear and unambiguous choice of law clauses in both the arbitration agreement and the substantive contract are essential to prevent pre-arbitration litigation. One important factor is that the judgment allows contracting parties to select different laws to govern the arbitration agreement and the substantive contract. This flexibility is crucial in international arbitration where different legal systems may apply to the parties' rights and obligations under the contract versus how disputes are resolved.
Authors:
Palak Nenwani
Senior Associate,
Juris Corp
Email:
Rajnandini Singh
Junior Associate,
Juris Corp
Email: [email protected]
Disclaimer:
This article is intended for informational purposes only and does not constitute a legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial / quasi-judicial authorities may not take a position contrary to the views mentioned herein.