"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.

Wednesday, September 14, 2011

The Mechanics of Choice of Seat and Curial Law in International Arbitration: An Indian Perspective

In our last post under the label “Arbitration: Choice of Law”, we did a descriptive comment on the decision of the Supreme Court in Yograj Infrastructure v Ssang Yong Engineering & Construction Co. Ltd. We identified certain flaws with the judgement and concluded that the “court’s reasoning/ analysis on curial law, consequence of choice of the law of seat etc is erroneous.” In this post and the subsequent ones, we provide reasons for our claim. Before that, the relevant terms of the agreement in the case are reproduced for the convenience of the reader:
27. Arbitration

27.1 All disputes, differences arising out of or in connection with the Agreement shall be referred to arbitration. The arbitration proceedings shall be conducted in English in Singapore in accordance with the Singapore International Arbitration Centre (SIAC) Rules as in force at the time of signing of this Agreement. The arbitration shall be final and binding.

27.2 The arbitration shall take place in Singapore and be conducted in English language.

27.3 None of the Party shall be entitled to suspend the performance of the Agreement merely by reason of a dispute and/or a dispute referred to arbitration.

28. This agreement shall be subject to the laws of India. During the period of arbitration, the performance of this agreement shall be carried on without interruption and in accordance with its terms and provisions.”
In Yograj, the Supreme Court held that as per the choice of the parties in Clause 27.1, the curial law or the procedural law (see, para 33 of the judgement, for the synonymous treatment of curial law and procedural law), that is, the “law which regulates the procedure to be adopted in conducting the arbitration”, was the Arbitration Rules of the Singapore International Arbitration Centre. (Para 35). Subsequently, at Para 39, the Supreme Court held that the SIAC Rules- the curial law- becomes applicable only after the arbitral proceedings were commenced. Following conclusions can be deduced from these findings of Supreme Court:

1.   In an international commercial arbitration, where parties choose the Rules of a particular arbitration institution for the conduct of arbitration, such Rules is the curial law or the procedural law of arbitration.
2.     Curial law or the procedural law begins to operate when the arbitration commences.

At a basic level these two propositions are erroneous. The judgement is against well settled principles of international arbitration recognized by prominent authorities.

Choice of a Foreign Seat:
As per settled principles of international arbitration, what does a choice of foreign seat indicate? As it happened in this case, the Indian party and the South Korean party chose to conduct their arbitration in a country which was connected to neither of them. It is normal for parties to choose a forum which is unconnected to either parties. They chose Singapore as the seat of arbitration. Now, what does the choice of Singapore as the seat of arbitration imply? We’ll look at the relevant provisions of the New York Convention:

Article V provides the grounds on which the recognition and enforcement of foreign awards may be refused. India is the signatory of the New York Convention. Article V.1 provides:
1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:

(a) The parties to the agreement referred to in article II 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; or
(d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

(e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.”
Thus, three kinds of broad roles have been accorded to the seat of arbitration. [It may be noted that we are considering the law of the country where the award was made and the law of the country where arbitration took place to be the law of the seat of arbitration itself. While both are treated distinctly by the New York Convention, in practice and in most cases, both are the same. See, GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 1258-1262 (VOLUME II), (2009)]. The three broad roles are as follows:

a)   Where the parties have not indicated the law applicable to their arbitration agreement, an arbitral award under that agreement could be refused enforcement if the parties were under some incapacity under the laws of country where the award was made, which in most cases is the law of the seat of arbitration.
b)    Where the parties had agreed to a procedure or the composition of tribunal and such agreement had failed, and such composition or the arbitral procedure was to be in accordance with the law of the seat of arbitration.
c)    The award is not binding or has been set aside or suspended by the country in which the award has been made or under the law under which the award is made, which, in most cases, but not always, is the law of the seat of arbitration.

By virtue of point (c) and to an extent point (b) above, the law of the seat of arbitration is endowed with the power to virtually ensure that the award by the tribunal is not an award that could be recognized even under the NYC. Born (supra, at p. 1264), reluctantly concedes:
[T]he New York Convention is often interpreted as affording the law of the arbitral seat essentially plenary power over the procedures used in international arbitration.”
While Born argues for “structural limits” (p. 1265) on the power of the law of the seat, Redfern et al seems to content with the state of affairs. According to the latter scholarly work, affording primacy to the law of the seat of arbitration “gives an established legal framework to an international commercial arbitration.” [REDFERN ET AL, LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION 109 (2004)] The debate over which of the two approaches is better is a topic for another day; for now, the point is that it is been recognized in almost prominent jurisdictions and by popular commentators that the choice of a particular jurisdiction as the place of arbitration results in the automatic applicability of the law pertaining to provisional measures pending, prior to, or after arbitration, procedures pertaining to arbitration, setting aside arbitral awards and so on. This law of arbitration, known in international arbitration lingo as the lex arbitri, is the arbitration law of the seat of arbitration.

There is considerable confusion on what lex arbitri is. The short answer is- it depends. We’ll do another post on lex arbitri and its contents but, for now, the thing is when two parties resolve their disputes through arbitration in a particular jurisdiction, the rules of that jurisdiction will govern the arbitration because, ultimately, it is that jurisdiction which will give the “legal touch” (not always, though) to the arbitration. The fundamental error in Yograj (and judgements prior to Yograj right from Bhatia International) was the complete disregard to this consequence: when parties chose Singapore as the seat, the Singaporean arbitration law applied including in respect of provisions pertaining to interim relief prior to the commencement of arbitration [see, Section 12A(4) of the Singaporean International Arbitration Act]. Thus, the Singaporean International Arbitration Act applied even before the commencement of arbitration. Therefore, the applicability of the said Act is not consequent to Rule 32 of the SIAC Rules but because the said Act is a part of the Singaporean Arbitration Law and the Act provided that it applied to international arbitration.

2 comments:

Anonymous said...

"The judgement is against well settled principles of international arbitration recognized by prominent authorities."

I would be interested in knowing very precisely where you derive this proposition. In my experience, outside your country, the court's proposition is well founded. Most countries which adopted the NY Convention did so only after having drafted enabling rules and laws enabling the confirmation (or annulment) procedures. This was done to assure the smooth integration of the enforcement enabling law.

Badrinath Srinivasan said...

Anon.. thanks for commenting. The proposition that you quote from the blog post is directed at the two inferences drawn from the Yograj judgement which were listed prior to the sentence quoted by you. Those propositions as you might see are wrong. In fact, the Supreme Court of India in another judgement (http://practicalacademic.blogspot.in/2011/12/errores-emendantur-yograj.html)accepted the error and corrected the position. The second inference (that the curial law begins to operate only after the commencement of arbitration is clearly erroneous. The lex arbitri might provide for pre-arbitration proceedings such as interim measures.