"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Thursday, May 19, 2011

Choice of Law in International Commercial Arbitration: An Indian Perspective

According to a Redfern et al, it is possible that parties could choose five different laws applicable to their arbitration. They are:
  1. Governing law of Arbitration (lex arbitri)
  2. Substantive Law of Contract
  3. Law of Validity of Arbitration Agreement
  4. Law Applicable to Capacity of Parties to Enter into Arbitration Agreement
  5. Law governing recognition and enforcement of the arbitral award.
Even the Indian Courts have recognized that parties may choose to apply laws of different jurisdictions in an International Commercial Arbitration (see, NTPC v Singer, for instance). However, the consequences thereof have not been analysed in proper detail (barring certain exceptions). For instance, the Gujarat High Court in Hardy Oil and Gas and the Supreme Court in Videocon Industries seem to have not properly considered the legal consequences of having an agreement governed by law of a country and the arbitration clause contained in the agreement governed by a law of another country. A comprehensive analysis of consequences of choice-of-laws from an Indian perspective is lacking. The purpose of this series of blog posts (labeled "Arbitration: Choice of Law") is to provide a comprehensive introduction to this topic from an Indian perspective.

In Bhatia Internationalv. Bulk Trading SA, a three judge Bench of the Supreme Court held that Part I of the Arbitration and Conciliation Act, 1996 (Act) applied even to international commercial arbitration held outside India. Part I of the Act contains provisions pertaining to arbitration agreement, appointment of arbitrators, interim measures by the court and the arbitral tribunal, rules applicable to the substance of the dispute, annulment of awards etc. Bhatia International has altered the existing framework of international arbitration especially as regards the consequence of choice-of-laws. For instance, it has been held by the Indian courts that arbitral award of an arbitration whose seat is foreign could be annulled even in India. This implies the existence of two supervisory jurisdictions over a single arbitration. The Indian courts have also held that parties could exclude the applicability of Part I of the Act either expressly or impliedly, which is not in congruence with the international arbitration regime. Therefore, choice-of-laws are significant in international arbitration as far as India is concerned. This series additionally addresses the question of implied exclusion of Part I of the Act on the basis of choice-of-laws by the parties. The first few posts on the series address the implications of choice of a law of arbitration agreement distinct from the main contract. In this post, reference to arbitration agreement is a reference to arbitration clause contained in the main contract.

Choice of Law of Arbitration Agreement:
Before analyzing the implications of choice of a law of arbitration agreement distinct from the main contract, it would do good to analyse the consequence of not specially mentioning the law of arbitration agreement. Lets assume that the arbitration clause in a contract between an Indian party and American party provides:
Disputes shall be referred to arbitration. The seat of arbitration shall be New Delhi, India. The substantive law of the contract shall be English Law.
In this clause, there is no mention of the law of arbitration agreement. What is the consequence of the absence of the choice of the law of arbitration agreement? Logically, the choice of law of English Law as the substantive law of contract implies that the arbitration agreement should is also governed by the same substantive law. This is simply because the arbitration clause forms a part of the contract. [Portions added after posting are in dark blue fonts]. According to Redfern et al (p. 148), it is reasonable assumption that the substantive law of arbitration agreement, in the absence of a choice, would be same as that of the main agreement containing the arbitration clause. The authors state that this has been followed in several cases. The English Law seems to favour such an approach. In Sonatrach Petroleum v. Ferrell International, the Commercial Court held:
"[T]he proper law of the arbitration agreement is to be determined according to the general principles for ascertaining the proper law of a contract: there can be an express choice of law or the choice can be implied by reference to that body of law with which the arbitration agreement has its closest and most real connection. Where the substantive contract contains an express choice of law, but the agreement to arbitrate contains no separate express choice of law, the latter agreement will normally be governed by the body of law expressly chosen to govern the substantive contract. Where, however, there is no such express choice of law in either the substantive agreement or the arbitration agreement, but the venue of the arbitration is identified, it will normally, but not invariably, be concluded that the arbitration agreement and the substantive contract are both governed by the law of that place."
However, the authors themselves state subsequently that "the real choice-in the absence of any express or implied choice by the parties- appears to be between the law of the seat of the arbitration and the law which governs the contract as a whole". (p. 149) However, Gary Born argues that “where the parties have not selected a law to govern their arbitration clause, that provision will be governed by the ‘law of the country where the award was made’.” (formatting altered) (also note, Redfern et al quote the previous edition of Gary Born stating the same thing as Redfern et al do at p. 149).

In this case, the law of the arbitration agreement would be Indian Law as the law of the seat is Indian Law. The quote in the quote from Gary Born is actually a provision of the New York Convention on Recognition and Enforcement of International Arbitral Awards, 1958 (NYC) (India is also a signatory to the New York Convention). The relevant provision [Article V(1)(a)] of the NYC reads:
Recognition and enforcement of the award may be refused [where]…a) the parties to the [arbitration] agreement… were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it, or failing any indication thereon, under the law of the country where the award was made”.
This single provision of the Convention incorporates several ideas. One, the validity of the arbitration agreement is determined by the law which parties have chosen as the law of the arbitration agreement. Two, in case the parties have not indicated the law of the arbitration agreement, the validity of the said agreement would be judged as per the seat of the arbitration. Here the law of the country where the award is made does not refer to making of an award in a country for the sake of convenience. Commentators are in agreement that it refers to the seat of arbitration. This means that in the absence of a choice of the law of arbitration agreement, by default, the validity of the arbitration agreement would be judged as per the laws of the seat.

The arbitration clause quoted above does not mention the law of the arbitration agreement. Therefore, the law governing validity of the arbitration agreement would be the law of the seat, which is the Indian Law and the validity of the arbitration agreement would be tested in accordance with the Indian laws.

Analysis of the text of the Act also leads to the same results. See, Section 34(2)(a)(ii) provides for setting aside an arbitral award if the arbitration agreement was not valid under the law to which the parties had subjected it or, failing any indication thereon, under Indian Law (the expression under by the provision is “law for the time being in force”).

As per Article V(1)(a) quoted above, the law regarding capacity to enter into arbitration agreement is to be decided as per the law applicable to the parties. The provision does not state whether the applicable law refers to the law of the seat or the law chosen by the parties as arbitration agreement. In India, Section 34(1)(a)(i) is also silent on this aspect. According to Gary Born (p. 424), even questions pertaining to the capacity of the parties to enter into an arbitration agreement would be governed by the law of the arbitration agreement. If so, and if the parties have not specified the same, the law of the seat would govern issues pertaining to capacity of parties to enter into an arbitration agreement. This view is confirmed by the Travaux Preparatoires of the UNCITRAL Model Law as well.
More on the implications of an express choice of law of arbitration agreement in the next post.


Sumit Rai said...

I don't think there are 5 regimes that parties can chose, though there may be as many regimes that apply. Parites are not free to chose what law applies to incapacity or law governing enforcement.

It is true that there are essentially two school of thought on what law applies to arbitration agreement, if it is not specifically chosen. Englush authorities have shifted from proper law of contract to law of seat in recent times. Indian position however has until now remained that proper law of contract would apply. This position cannot now change until Bhatia position is corrected by amendment. One of the main consequence of Bhatia is that it renders choice of seat absolutely pointless. Internationally, choice of seat is presumed to be the choice of lex arbitri. Bhatia does not accept that. This is the reason why post-Bhatia decisions have shifted away from the specific principles of choice of law in arbitration to making such determination based on traditional conflict of law rules.

Arpan said...

The concept of proper law of the contract even in England is quite different. It means different things for capacity, status, corporations, etc. A close study of Dicey and Morris would make it clear that it is not a fixed formula. It cannot be said in certain that in case of no choice of law in an arbitration agreement,the English Courts look at the seat of arbitration. In case of no choice of parties to the procedural law, it is the arbitral tribunal which decides what would the procedural law. It could be the laws of the seat of arbitration, general arbitration rules or substantial rules... There cannot be said at certainity as to what is the most logical conclusion when there is no choice of law in an arbitration agreement. As a concept, international commercial arbitration is a global phenomenon and it cannot be put in a straight bracket..

Internationally, the law of the seat is presumed to lex arbitri.. because of the presence of the mandatory rules of the forum and also the New York Convention on Recognition of Awards, according to which the award would be recognised and enforced only if it complies with the law of the forum.

The problem with the Bhatia judgment is that the Court took the concept of public policy and mandatory rules to another level thereby making Part I applying to every arbitration agreement.

P.S- For more on this you can refer to our book -'International Commercial Arbitration and Its Indian perespective' by Harsh Sethi and Arpan Kr. Gupta. Its 2011 edition and published by Universal law Publishers.

Regards Arpan Kr. Gupta

Raghav Aggarwal Attorney & Solicitor at Law said...

I having specialized in the area of international business contracts and arbitration and having read the positions of various countries, especially the United States as case studies at Boston Univeristy School of Law, can safely say that Sumit Rai is right in saying that there cannot be different laws applying to an arbitration clause of a business contract.
Where a contracts mentions arbitration as its dispute resolution mechanism, it is obvious that the "procedural" law shall be of the seat's country in conjunction with the forum's rules if the arbitration is institutional, ehich would be different in case of an ad-hoc arbitration depending upon the arbitration clause's language.
Talking about the "substantive" provision, if a contract does specify the substantive law that will govern the dispute or the contract on the whole, it has to be that law. The parties just cannot contend that a separate law has to apply to the arbitraiton clause per se. Many people will argue that it is possible to apply separate substantive law to an arbitration clause because such provision is an independent agreement. But these people have to understand that an arbitration clause enjoys an "independent" agreement status only for a limited purpose i.e. to outlive the termination or non - enforceability of the whole contract. After all, if the whole contract is declared to be non - effective or terminated due to its breach and if the dispute resolution mechanism provision also terminates along with the main contract, then how will the parties resolve their conflicts and what will the use of agreeying to a dispute resolution mechanism in advance.

Badrinath Srinivasan said...

@ Arpan & Raghav, thanks for comments. Subsequent to sumit's comments, we did a post clarifying or correcting contentions made in this post

@ Arpan, hardly is there any good book on international commercial arbitration. Would like to know more about your book. Do let us know!!!

Arpan Kr. Gupta said...

@ Badrinath- Well I really dont know that whether it is a good book or not. We have attempted to take a comparative approach to the different legal concepts of international commercial arbitration and what is the indian perspective to it.
You would have to tell me how it is. Here is the link..