This decision takes me back to the almost 20 years back when arbitration practitioners and students in India used to track all arbitration judgments of Indian courts and post in various law blogs such as India Corp Law Blog, etc. critiquing those judgments. All those students and practitioners were young at that time have now become experts. All those critique played an important role in leading to the BALCO judgment ([2012] 12 SCR 327) in September 2012, which is a watershed moment for Indian arbitration law and was viewed as correcting the divergence from international position.
After a long time, we see a decision of Supreme Court in Disortho, which requires such critique. The judgment in Disortho runs to 26 pages with only a five-line paragraph, that is, Para 2, devoted to summarising the arguments for both parties. What is missing in that decision is a counterpoints or arguments provided by each party.
The judgment virtually starts with the arbitration clause in question and goes on to analyze the the legal position. Anyway, this is a petition filed under Section 11 of the Arbitration and Conciliation Act, 1996 before the Supreme Court directly. Two points are noteworthy: One Courts have traditionally regarded decisions under Section 11 as fact specific and not as precedents. Secondly, this decision notes at Para 34 that parties came to a consensus to appointment as sole arbitrator.
“34. However, during the course of the hearing, the learned counsel for both parties, Meril and Disortho, unanimously stated that, should the present application under Section 11(6) of the Arbitration and Conciliation Act, 1996, be allowed, the parties are agreeable to the arbitration being held in India. Furthermore, the parties have consented to the appointment of a sole arbitrator to adjudicate and decide the disputes in question.”
All the same, there is a caveat: “… should the application… be allowed…” In any case, given the status of Section 11 applications as facts specific, this decision should not be taken as a precedent, although they generally are.
Let us look at the concerned arbitration clause in the agreement:
“16. Miscellaneous
16.5. This Agreement shall be governed by and construed in accordance with the laws of India and all matter pertaining to this agreement or the matters arising as a consequence of this agreement with be subject to the jurisdiction of courts in Gujarat, India.”
18. Direct Settlement of Disputes
The Parties mutually agree and pact that any dispute, controversy or claim arising during this Agreement related to subscription, execution, termination, breach, as well as noncontractual relationships, related to the clauses mentioned above; They may be submitted to conciliation in accordance with the Rules of Arbitration and Conciliation of the Chamber of Commerce of Bogota DC., or instead. of this city, where the Director of the Centre so determine.
Similarly, the Parties mutually agree and pact that if the dispute or difference has not been settled in conciliation, or to the extent that has not been resolved; it will be committed to Arbitration by either party for final settlement in accordance with the Arbitration and Conciliation Center of the Chamber of Bogota DC. The Arbitral Tribunal shall consist of one (1) arbitrator in cases of minor or no value E according to the Rules of Conciliation and Arbitration Center of the Chamber of Commerce of Bogota DC. Also, in the event of greater amount, the Court of conformity shall comply with the Regulations of the Center for Conciliation and Arbitration of the Chamber of Commerce of Bogota DC… The arbitration will take place in Bogota DC… On the premises of Center for Conciliation and Arbitration of the Chamber of Commerce of Bogota DC., or at the place where the Director of the Centre as determined in this city. The award shall be in law and standard will be applicable Colombian law governing the mailer, Expenditure in the conciliation and arbitration proceedings shall be borne equally.”
A bare perusal of this arbitration clause would lead to some of the following conclusion:
- Place/ Seat is Bogota. Law of the arbitration would generally be the law of the seat, that is, Columbian Law.
- Law Governing the Contract would be Indian law and Indian courts would have exclusive jurisdiction over the subject-matter, subject of course to the arbitration clause.
- Traditionally, where there is an exclusive jurisdiction clause and an arbitration clause, the exclusive jurisdiction clause has been regarded as subject to the arbitration clause.
- Drafters usually place the exclusive jurisdiction clause subsequent to the arbitration clause and use the phrase “subject to Clause ___” at the beginning of the exclusive jurisdiction clause for this purpose.Coming back to the agreement, Arbitration would have been as per the Regulations of the Centre for Conciliation and Arbitration of the Chamber of Commerce, Bogota.
This question is fairly straightforward but for the court, the issue was complicated for two reasons, in the court’s own words:
“3. What initially appeared to be a straightforward question has, in fact, become a vexed one, primarily for two salient reasons. First, there exists a divergence of opinion, both internationally and domestically, on the appropriate test to determine jurisdiction in a case of trans-border arbitration. This divergence stems from the interaction between three distinct legal systems which come into play when a dispute occurs: (i) lex-contractus, the law governing the substantive contractual issues; (ii) lex arbitri, the law governing the arbitration agreement and the performance of this agreement; and (iii) lex-fori, the law governing the procedural aspects of arbitration. These legal systems may either differ or align, depending on the parties’ choices. Furthermore, there may be internal splits within these legal systems, such as for lex arbitri. Secondly, when contractual clauses conflict, as is the case here, the resolution becomes legalistic and complicated.”
There are two problems with this observation by Court.
- One, Indian jurisprudence as settled by various Supreme Court judgments clearly provide that where the place of arbitration is foreign, then Indian courts do not have jurisdiction under Part I of the Arbitrtion and Conciliation Act. In Indian law, the term “place” has meant “seat”.
- Two, lex arbitri is not the law of the arbitration agreement. The court wrongly observed: “lex arbitri, the law governing the arbitration agreement and the performance of this agreement”.
Lex arbitri is not the law of the arbitration agreement. It is the law of arbitration. Redfern & Hunter, the popular commentary on international commercial arbitration, quote Paul Smith Ltd. v. H & S International Holding Co. Inc., [1991] 2 Lloyd‘s L.Rep. 127, the English Commercial Court, made certain observations. This has been dealt with by Redfern & Hunter in their commentary under the heading “What is the lex arbitri?”. Note that this portion of Paul Smith was quoted by Disortho:
“What then is the law governing the arbitration? It is, as Martin Hunter and Alan Redfern, International Commercial Arbitration, p. 53, trenchantly explain, a body of rules which sets a standard external to the arbitration agreement, and the wishes of the parties, for the conduct of the arbitration. The law governing the arbitration comprises the rules governing interim measures (e.g. Court orders for the preservation or storage of goods), the rules empowering the exercise by the Court of supportive measures to assist an arbitration which has run into difficulties (e.g. filling a vacancy in the composition of the arbitral tribunal if there is no other mechanism) and the rules providing for the exercise by the Court of its supervisory jurisdiction over arbitrations (e.g. removing an arbitrator for misconduct).”
In various portions of Disortho the SC is confused between lex arbitri and the law governing the arbitration agreement. Some of the places where this confusion is apparent are given here:
“This divergence stems from the interaction between three distinct legal systems which come into play when a dispute occurs: (i) lex-contractus, the law governing the substantive contractual issues; (ii) lex arbitri, the law governing the arbitration agreement and the performance of this agreement…” (emphasis added) (p.3)
“Lex arbitri might be split into two components if the parties so desire – (i) law governing the agreement to arbitrate or the proper law of arbitration and (ii) the law governing the arbitration…” (emphasis added) (p.3, foot note)
“8. While parties may elect to differentiate between the lex arbitri — the law governing the agreement to arbitrate and the law governing the arbitration itself — such a distinction warrants caution…” (emphasis supplied).
Despite the caution by Steyn, J. the SC got confused lex arbitri between the proper law of the arbitration agreement.
However, there are parts of the judgment which make important points on the convergence between the law of arbitration and the law of the arbitration agreement. For instance, the SC held:
“They are inherently intertwined as a part and parcel of the lex arbitri. This is particularly apparent in matters such as the filling of vacancies within the arbitral tribunal or the removal of an arbitrator for misconduct. In these situations, the law governing the arbitration agreement and the law governing the arbitration overlap, as both are essential to the functioning and integrity of the arbitral process. Consequently, unless the parties have provided otherwise, it is prudent not to divide lex arbitri.”
Often, by finding the law of the arbitration agreement, courts usurp jurisdiction when they might not even have one. The Sulamerica decision is an example of this. Pl. see a comment on the Sulamerica judgment written about 13 years back which is relevant to this. Disortho is no less.
While the SC may be correct in identifying the common aspects of lex arbitri and the law governing the arbitration agreement, lex arbitri is the law governing the arbitration and Lex loci arbitri refers to the law of the place of arbitration.
More on the judgment in the next post.
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