UNCITRAL Digest on the Model Law on International Commercial Arbitration

UNCITRAL usually comes up with extremely good work on International Commercial Arbitration. Its contribution to the subject has been astounding, to say the least. It has added another feather to its cap by publishing the Digest of Cases on the Model Law on International Commercial Arbitration. The 242 page Digest lists out almost all the major cases of prominent Model Law jurisdictions and also includes several Indian cases such as Bhatia International, Venture Global, Patel Engineering, Bohgara Polyfab, SAW Pipes, Phulchand Exports, Centrotrade Minerals, etc. The digest is a must-have for all enthusiasts of international commercial arbitration and can be accessed from here.

It has been our constant complaint in this blog that advocates in India do not cite relevant foreign decisions. We hope this Digest will aid advocates cite relevant decisions in the courts and explain the rationale for a particular legal position prevailing in another Model Law jurisdiction.

Choice of Law: The Law of the Arbitration Agreement

We had previously noted a recent judgement of the English Court of Appeal in Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (16 May 2012). The said judgement is expected to be cited all over for comprehensively dealing with the issue of the applicable law of arbitration agreement in the absence of express choice by the parties. In this post, we list the salient points in the judgement. This post would form a part of the series in this blog on Choice of Law and the posts contained under the said topic can be accessed from here.

Choice of Law of Arbitration Agreement: The Sulamerica Approach

In Sulamerica, the relevant clause in the insurance policy quoted below 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 relevant clauses:

"7. Law and Jurisdiction

It is agreed that this Policy will be governed exclusively by the laws of Brazil.

Any disputes arising under, out of or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil. 

11. Mediation

If any dispute or difference of whatsoever nature arises out of or in connection with this Policy including any question regarding its existence, validity or termination, hereafter termed as Dispute, the parties undertake that, prior to a reference to arbitration, they will seek to have the Dispute resolved amicably by mediation.

All rights of the parties in respect of the Dispute are and shall remain fully reserved and the entire mediation including all documents produced or to which reference is made, discussion and oral presentation shall be strictly confidential to the parties and shall be conducted on the same basis as without prejudice negotiations, privileged, inadmissible, not subject to disclosure in any other proceedings whatsoever and shall not constitute any waiver of privilege whether between the parties or between either of them and a third party.

The mediation may be terminated should any party so wish by written notice to the appointed mediator and to the other party to that effect. Notice to terminate may be served at any time after the first meeting or discussion has taken place in mediation.

If the Dispute has not been resolved to the satisfaction of either party within 90 days of service of the notice initiating mediation, or if either party fails or refuses to participate in the mediation, of if either party serves written notice terminating the mediation under this clause, then either party may refer to the Dispute to arbitration.

Unless the parties otherwise agree, the fees and expenses of the mediator and all other costs of the mediation shall be borne equally by the parties and each party shall bear their own respective costs incurred in the mediation regardless of the outcome of the mediation.

12. Arbitration

In case the Insured and the Insurer(s) shall fail to agree as to the amount to be paid under this Policy through mediation as above, such dispute shall then be referred to arbitration under ARIAS Arbitration Rules. The Arbitration Tribunal shall consist of three arbitrators, one to be appointed by the Insured, one to be appointed by the Insurer(s) and the third to be appointed by the two appointed arbitrators. The Tribunal shall be constituted upon the appointment of the third arbitrator.

The arbitrators shall be persons (including those who have retired) with not less than ten years' experience of insurance or reinsurance within the industry or as lawyers or other professional advisers serving the industry.

Where a party fails to appoint an arbitrator within 14 days of being called upon to do so where the two party-appointed arbitrators fail to appoint a third within 28 days of their appointment, then upon application ARIAS (UK) will appoint an arbitrator to fill the vacancy. At any time prior to the appointment by ARIAS (UK) the party or arbitrators in default may make such appointment.

The Tribunal may at its sole discretion make such orders and directions as it considers to be necessary for the final determination of the matters in dispute. The tribunal shall have the widest discretion permitted under the law governing the arbitral procedure when making such orders or directions.

The seat of the arbitration shall be London, England."

The issue before the court was whether the law of arbitration agreement was Brazilian Law. It was argued by the insurers that they had validly commenced the arbitration. The insureds resisted this contention by arguing that the law of arbitration agreement was Brazilian law under which the consent of insured were required to commence arbitration. Therefore, the court had to determine if the law of arbitration agreement was Brazilian or English Law.

The decision of the English Court of Appeal is summarized here below. It may be noted that we have not dealt with the English precedents/ previous decisions):

1. In the absence of any indication to the contrary, the proper law governing the arbitration agreement contained in the contract is the proper law of the contract. Where parties have chosen the proper law of the contract, it is "natural" to infer that the law of the arbitration agreement would also be the same as that of the proper law of the contract containing it.
2. The proper law of the arbitration agreement also may differ from the proper law of the contract due to the operation of the doctrine of separability of the arbitration agreement from the rest of the contract.
3. The proper law of the arbitration agreement can be determined by a three-stage enquiry: "(i) express choice, (ii) implied choice and (iii) closest and most real connection. As a matter of principle, those three stages ought to be embarked on separately and in that order, since any choice made by the parties ought to be respected, but it has been said on many occasions that in practice stage (ii) often merges into stage (iii), because identification of the system of law with which the agreement has its closest and most real connection is likely to be an important factor in deciding whether the parties have made an implied choice of proper law..."
4. Where there is a separate arbitration agreement to arbitrate in London, the implication, in the absence of express choice of proper law, would be that English law would be the proper law of the arbitration agreement since it would have the closest and most real connection.
5. However, where the arbitration agreement forms a part of the contract with an express choice of proper law of contract, the position is different.
6. "A search for implied search for an implied choice of proper law to govern the arbitration agreement is therefore likely... to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract, unless there are other factors present which point to a different conclusion." 
7. In this case, two factors lead to the conclusion that the parties had impliedly chosen English law as the law of the arbitration agreement: (1) the choice of London as the seat of arbitration: when the parties had expressly chosen London as the arbitral seat, they must have "foreseen and intended" that the provisions of the Arbitration Act, 1996 relating to arbitration agreement including substantive Sections 5 (Agreements to be in writing), 7 (Separability of arbitration agreement.), 8 (Whether agreement discharged by death of a party.), 12 (Power of court to extend time for beginning arbitral proceedings) and 13 (Application of Limitation Acts.) would apply; (2) According to the insureds, as per Brazilian law, despite the arbitration agreement, the arbitration would be commenced only after consent of the insured. This is a "powerful factor" and must be considered in the enquiry on whether Brazilian law is the proper law of arbitration agreement. Unilateral arbitration agreements wherein reference is possible at the option of a party are in vogue. However, no such indication exists in the arbitration clause, which provides for reference of disputes to mediation and arbitration in case of disputes. "The possible existence of a rule of Brazilian law which would undermine that position tends to suggest that the parties did not intend the arbitration agreement to be governed by that system of law."

The court held:

"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."

As per this judgement, where parties have provided for a proper law of contract, an arbitration clause, and a seat that is outside the operation of the proper law of the contract, parties are deemed to have impliedly chosen the law of the seat as the law of arbitration agreement.

Prima facie, the rationale of this judgement does not appear to be convincing. We will do a critique of this judgement in a future post.

Arbitration Clause Survives Death of the Named Arbitrator: SCI Rules

In ACC Limited v. Global Cements (MANU/SC/0489/2012), the Supreme Court considered the issue as to whether the arbitration clause would remain valid if the arbitrator named in the arbitration clause was no more. 

 

The arbitration clause in question stated:

"21. If any question or difference or dispute shall arise between the parties hereto or their representatives at any time in relation to or with respect to the meaning or effect of these presents or with respect to the rights and liabilities of the parties hereto then such question or dispute shall be referred either to Mr. N.A. Palkhivala or Mr. D.S. Seth, whose decision in the matter shall be final and binding on both the parties."

The agreement containing the arbitration clause was entered into in 1989. Arbitration was invoked in 2011. By that time, the arbitrators named in the arbitration clause had died. One of the parties had approached the High Court under Section 11. The High Court had held that since there was no indication that parties intended that arbitration clause would cease to be in existence. The court held that it was the policy of law to promote the efficacy of arbitration and therefore the efficacy of commercial arbitration must be preserved when dealings are based on agreement providing for recourse to arbitration when disputes arise. Consequently, the court appointed a retired Supreme Court judge as arbitrator.

A petition for Special Leave was filed in the Supreme Court challenging the order of the High Court. In the said petition, the petitioner argued that the arbitration clause specifically named two persons as arbitrators considering their connection with ACC Limited. Therefore, the argument was, on the death of the arbitrators, the arbitration clause ceased to exist.

Not convinced with the argument, the court held that an application would lie under Section 11 unless there is an agreement in the contract where parties specifically debar appointment of any other arbitrator in case it is not possible for the named arbitrator to so act. The court’s view was that the objective behind Sections 14 and 15 of the Act was to facilitate arbitration and therefore unless a specific agreement by parties, Sections 14 and 15 had to be interpreted “to promote efficacy of arbitration”.

The court opined that the phrase “at any time” expressed the intent of the parties that so long as any dispute arose between the parties, the same would be referred to arbitration. The court clarified:

“Objection can be raised by the parties only if there is a clear prohibition or debarment in resolving the question or dispute or difference between the parties in case of death of the named arbitrator or their non-availability, by a substitute arbitrator.”

Since the arbitration clause does not prohibit the parties from appointing a substitute arbitrator, the court refused to grant leave to appeal and dismiss the same. 

The position under the Old Act also appears to be similar [See, for instance, Prabhat General Agencies v. Union of India (1971) 1 SCC 79; Bijoy Kumar Swaika v. Shyamsundar Swaika AIR 1976 Cal 448; Amrik Singh Bhandari v. Uttam Singh Duggal AIR 1979 Del 81]. 

The judgement can be accessed from here. 

Arbitration Updates

In the past month or two there have been a few significant arbitration related developments, which are noted in this short post.

The Law of Arbitration Agreement in the absence of express choice of law

The English Court of Appeal has clarified the law on the determination of the law of the arbitration agreement in the absence of express choice by the parties. Comments on the judgement in Sulamérica Cia Nacional De Seguros S.A. v Enesa Engenharia S.A. [2012] EWCA Civ 638 can be accessed from Indian Corporate Law Blog (Part I & II), and Herbert Smith Arbitration News. We will do a detailed post on the case as a part of our Choice of Law series.

Supreme Court finds a Way to Circumvent IOC v. Raja Transport

Indian Oil Corporation v. Raja Transport is one of those decisions where the Supreme Court upheld the practice of Government agencies and Public Sector Enterprises of appointing its own senior personnel as arbitrators in dispute with their Contractors. The Supreme Court held that senior officers, usually heads of department or equivalent, of a government/statutory corporation/ public sector undertaking, not associated with the contract, are considered to be independent and impartial and are not barred from functioning as arbitrators merely because their employer is a party to the contract. The court also recommended discontinuance of the said practice considering the need for independence and impartiality of the arbitral process. In the recent case of Bipromasz Bipron Trading SA v. Bharat Electronics Limited MANU/SC/0478/2012, the Supreme Court held that “where there is material to create a reasonable apprehension that the person mentioned in the arbitration agreement as the arbitrator is not likely to act independently or impartially... then the Chief Justice or his designate may, after recording reasons for not following the agreed procedure of referring the dispute to the named arbitrator, appoint an independent arbitrator in accordance with Section 11(8) of the Act.” The arbitration clause provided for reference of disputes to the Chairman & Managing Director (CMD) of BEL or his nominee. The CMD appointed a General Manager as the arbitrator. Even so the court appointed a retired judge of the Madras High Court as arbitrator considering that (1) the CMD had directly dealt with the entire contract (2) the appointed arbitrator was a direct subordinate to the CMD (3) there was a reasonable apprehension of partiality as the CMD had dealt with the entire contract. Check out MJ Antony's article in the Business Standard on the case. The article also discusses a few past decisions on the topic.

The New Swiss Rules:

The Swiss Chambers of Commerce Association of Arbitration and Mediation and the Chambers of Basel, Bern, Geneva, Neuchâtel, Ticino, Vaud and Zurich have revised their Swiss Rules of International Arbitration in June 2012. The revised Rules can be downloaded from here (pdf). Comments on the revisions in the 2012 Rules can be found in Kluwer Arbitration Blog (here and here), Kluwer Mediation Blog and Transactional Notes blog.