"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, July 25, 2012

Choice of Proper Law of Arbitration Agreement: Sulamerica

We did a descriptive comment on the recent decision of Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (16 May 2012) (Sulamerica) in which the English Court of Appeal dealt in detail with the concept of implied choice of the law of arbitration agreement was dealt with in detail. At the end ofthe post, we stated that we were not convinced by the reasoning in the judgement. As a prelude to a critique on the judgement, we briefly analyse the existing Indian position on the law on the choice of law of arbitration agreement.

Indian Position:
One of the earliest cases to decide on the determination of the law of the arbitration agreement in the absence of express choice is the well-known case of NTPC v. Singer AIR 1993 SC 998, where the Supreme Court held that the proper law of the arbitration agreement was “normally” the proper law of the contract expressly chosen by the parties. The court clarified that where the parties had expressly agreed on the proper law of the contract but had not designated the proper law of the arbitration agreement, “[i]t is Indian law which governs the contract, including the arbitration clause, although in certain respects regarding the conduct of the arbitration proceedings the foreign procedural law and the competent courts of that country may have a certain measure of control." It must be noted that the court stated that in “exceptional cases”, the expressly designated proper law of the contract may not be the proper law of the arbitration agreement, although the court did not elaborate on what the exceptional circumstances were.

This judgement has been cited with approval in several cases under the 1940 and the 1996 Acts. Examples are Sumitomo’s Case MANU/MH/0085/1996, Sumitomo v. ONGC AIR 1998 SC 825, Eitzen Bulk A/S v. Ashapura Minechem Limited AIR 2011 Guj 13 and Aastha Broadcasting Network Limited v. Thaicom Public Company Ltd. MANU/DE/4410/2011. In NTPC v. Singer, it was held:
Where, there is no express choice of the law governing the contract as a whole, or the arbitration agreement as such, a presumption may arise that the law of the country where the arbitration is agreed to be held is the proper law of the arbitration agreement. But that is only a rebuttable presumption..”
Thus, where neither the proper law of contract nor the proper law of arbitration agreement is chosen, it would be presumed that the latter would be the seat of arbitration. This does not mean that where the proper law of contract is expressly chosen, the law of the seat of arbitration would nevertheless be the proper law of arbitration agreement.

The Indian position can be summed up in three propositions:
1.      In the absence of express choice of the law of arbitration agreement, the choice of the proper law of the contract will also govern the arbitration clause.
2.      However, in exceptional circumstances, even if the proper law of the contract is chosen, such may not be the law of the arbitration agreement where the agreement is silent.
3.      Where neither the proper law of contract nor the proper law of arbitration agreement is chosen, it would be presumed that the latter would be the seat of arbitration.

The phrase “exceptional cases” employed in NTPC v. Singer has not been explained in any of the decided cases. However, from the decided cases, one can decipher what does not amount to an exceptional case. In NTPC v. Singer, for instance, the proper law of contract was Indian law, the courts at Delhi had exclusive jurisdiction, the seat was London and the arbitral rules were the ICC Rules. Even so, the Supreme Court held:
"It is Indian law which governs the contract, including the arbitration clause, although in certain respects regarding the conduct of the arbitration proceedings the foreign procedural law and the competent courts of that country may have a certain measure of control."
Note that in Sulamerica, the relevant clause in the insurance policy provided for the seat to be London, the Governing Law of Contract to be the laws of Brazil and the applicable rules to be ARIAS Arbitration Rules (ARIAS- A.I.D.A Reinsurance and Insurance Arbitration Society of the UK). The policy also provided that any dispute arising in respect of the policy would be subject to the exclusive jurisdiction of Brazilian courts. The facts in Sulamerica and NTPC v. Singer appear similar: 


Aspect
Sulamerica
NTPC v. Singer
Seat
London
London
Choice of Proper Law of Contract
Brazil
India
Applicable Arbitral Rules
ARIAS
ICC Rules
Exclusive Jurisdiction of Court
Brazil
Delhi, India

Even so, the conclusions arrived at by the Court of Appeal and the Supreme Court are different. In the future, Sulamerica would probably be cited in an Indian court to canvass the proposition that even if the proper law of the contract is expressly designated by the parties, the proper law of arbitration agreement would be the law of seat (which is different from that of the proper law of the contract). Following are the reasons why the proper law of arbitration agreement should be the expressly designated proper law of contract and not the seat of arbitration:
  1. At a basic level, it is only logical that the arbitration clause, which forms a part of the contract, would be governed by the same law that the rest of the contract is.
  2. In India, unlike in several other countries, often business managers solely negotiate contracts without any legal advice. In such cases, the law on choice of law should not be intricate or complicated and should proceed on the basis of logic and common sense. Considering that, the conclusion reached in NTPC v. Singer is commonsensical and in accord with business understanding and common sense.
  3. The consequence of Sulamerica is to make the parties agree on the proper law of arbitration agreement in addition to that of the contract so as to prevent ambiguities. From a transaction cost point of view, this would lead to additional cost to negotiate a proper law of arbitration agreement, in addition to the proper law of contract.
  4. Indian precedents, as discussed above, are not in favour of Sulamerica approach.
  5. To generalise Sulamerica, where there exists a rule similar to the Brazilian law (requiring further consent of insured for reference to arbitration) and where the seat is London, the law of arbitration agreement in the absence of express choice would not be Brazilian law although the law of contract is but would be English law. ("The possible existence of a rule of Brazilian law which would undermine [the reference of disputes to arbitration without further consent] tends to suggest that the parties did not intend the arbitration agreement to be governed by that system of law."). What Sulamerica does is to make the law on choice of law of arbitration agreement dependent on the law of another country. If the jurisdiction which parties agree as governing the contract provides for  further consent for reference of disputes to arbitration, in such case, the law of arbitration agreement (in the absence of express choice ) would not be that law but English law, which does not provide for such as clause. Assume for a moment that a contract identical to the one in Sulamerica is agreed to between two parties. If Sulamerica approach is adopted, English Law would be the law of arbitration agreement. Assume that prior to reference of a dispute under the contract to arbitration, the Brazilian legal requirement of further consent is removed by an amendment to the law. In such a case, would English Law still remain the law of arbitration agreement? This hypothetical example points out the defect of the Sulamerica approach. The choice of the law of arbitration agreement would change during the currency of the contract not by an amendment to the contract but by operation of Brazilian law, which the parties might not even be aware of. Law on choice of law is already complicated. Why make it murkier? [Note that Sulamerica can be read as holding that even if the contract provides for the proper law of contract but not the proper law of arbitration agreement, the latter would be the law of the foreign seat (“In my view an agreement to resolve disputes by arbitration in London, and therefore in accordance with English arbitral law, does not have a close juridical connection with the system of law governing the policy of insurance, whose purpose is unrelated to that of dispute resolution; rather, it has its closest and most real connection with the law of the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective. Its closest and most real connection is with English law.")]
It may be noted that the Sulamerica approach is not altogether disadvantageous. If the law of the seat is to be the law of arbitration agreement in the absence of express designation, a foreign party entering into a contractual relationship with Indian law as the substantive law of contract providing for arbitration in London need not worry about the Indian arbitration law (in a scenario where Bhatia International does not exist). The party needs to only look at the English arbitration law which it would in any case do considering that the lex arbitri would be English Law.  However, considering the above reasons, it makes sense for India to continue to apply NTPC v. Singer.

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