Choice of Proper Law of
Arbitration Agreement: Sulamerica (Blog post)
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Sulamerica & NTPC: A
Comparative Interface (paper)
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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.
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The earliest case in India to
consider and decide upon the moot question at hand i.e. the determination of
the proper law of the arbitration agreement in the absence of express choice
was in the case of NTPC v. Singer, wherein the Apex Court held that “the
proper law of the arbitration agreement was ‘normally’ the proper law of the
contract expressly chosen by the parties”
and also went on to clarify 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.”
However it is pertinent to note
that the Court stated in “exceptional cases”, the expressly designated proper
law of the contract shall not prevail as to be the proper law of the
arbitration agreement, although the court refrained from elaborating on the
exceptional circumstances.
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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.
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The Apex Court held that, “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, the Court
should take up the stand to presume that the latter would be the seat of
arbitration.
This shall not affect a situation
wherein the proper law of contract is expressly chosen, the law of the seat
of arbitration would continue be in accordance with the proper law of
arbitration agreement.
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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.
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The Indian Position can be summed
up in three propositions:
1. When there is absence of
express choice of the law to govern the 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 or
doesn’t provide to the contrary.
3. Nonetheless in a commercial
arrangement when neither the proper law of contract nor the proper law to
govern the arbitration agreement is chosen, it would be presumed that the
latter would be seat of arbitration.
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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."
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The phrase “exceptional cases”
employed in NTPC v. Singer has not been explained in any of the decided
cases.
However, from the list of decided
cases, one can decipher as to ‘what shall not constitute an exceptional
case’. For instance, the proper law of contract was Indian law, the
courts at Delhi had exclusive jurisdiction, the seat of arbitration was
London and the lexarbitriwere the ICC Rules. Still, 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”.
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This judgement
has been cited with approval in several cases under the 1940 and the 1996
Acts.
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This very ratio has been cited
with approval in several cases under the 1940 and the 1996 Arbitration Act
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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).
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Even if the conclusions arrived at
by the Court of Appeal and the Supreme Court of India are dissimilar, there
still exists a high probability that SulAmérica would be perused as an
authority in Indian courts 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).
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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.
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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 governs 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 out of
commonsense and in
accordance with the business understanding.
3. The consequence of SulAméricais
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. However the judgements rendered
by the Indian courts reflect an approach which is not
in consonance with the approach
adopted by English courts in SulAmérica Case.
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5… 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…
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Nevertheless the drawback persists
of this approach. We can better understand this with the help of the
following hypothetical example i.e. let’s assume that before the Court in
SulAméricaa contract identical to the one at hand is entered into by the
parties. If SulAmérica approach is adhered to, English Law shall be the law
of arbitration agreement. Now assuming that prior to reference of a dispute
under the contract to arbitration, there was an amendment to the proper law
of contract. In such a situation, would English Law still remain the law
governing the arbitration agreement? The answer would take us at the same
spot from where we had started; hence this example highlights the
shortcomings that any judicial system shall face on applying the SulAmérica approach
blindly. The choice of the law of arbitration agreement would change during
the continuance of the contract not by an amendment to the contract but by
operation of proper law, which the parties at times might not even be aware
of. The choice of the law of arbitration agreement would change during the
continuance of the contract not by an amendment to the contract but by
operation of Brazilian law, which the parties at times might not be aware of.
Law on choice of law is very complex butSulAmérica can be interpreted as 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.
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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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At this juncture it is also
indispensable to note that the SulAmérica approach is not prejucial because
if the law of the seat is to be the law of arbitration agreement in the
non-existence of express designation, a foreign party entering into a
commercial arrangement with Indian law involved as the substantive law of
contract providing for seat of arbitration can do without the Arbitration and
Conciliation Act, 1996. While taking into account the current Indian
conditions and its increasing popularity of being seat of arbitration in most
of the international commercial arbitrations, it is necessary for Indian
judiciary to carry forward the foundation laid down in the NTPC v. Singer
Case with respect to choice of proper law governing the arbitration
agreement.
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