[This article is authored by Madhur Arora, an Associate at AZB & Partners, Mumbai.]
Keywords: Seat, Long-Term Contract, Applicable Law, Conflict.
Arbitration in India started with the old Arbitration Act of 1996, which has subsequently been amended in 2015. Despite creating subsequent amendments of the legislation itself, arbitration in India seems to have undergone a drastic stage of confusion with regards to the international aspect of commercial arbitration. One of the key contentions in this regard exist between the applicable law and the arbitration agreement in the circumstance that the law of the seat is different than the law that governs the underlying contract. Other leading international jurists have also commented on how the complications between the interpretation of the Indian act has caused havoc in the group of parties that indeed wished to have trade relations with India but are reluctant to enter into long term contracts due to the uncertainty of how their dispute resolution processes might turn out. This paper attempts to trace the controversy in India and its conclusion’s compatibility with internationally accepted standards and practices.
The Current Practice of Determining Applicable Law
The method of determining the law applicable to an arbitration agreement is quite erratic in the Indian Arbitration Community. This is a topic of contention across the globe in international commercial arbitrations, but the nature of the Indian legal system causes mass confusion for the parties seeking to arbitrate in India or under Indian law[i]. This contention arose again in 2014 when the Supreme Court was faced with the question of how to determine the choice of law in Enercon (India) Ltd And Ors v. Enercon Gmbh And Anr.
The earlier approach under Indian jurisprudence is visible in 1992 decision of Supreme Court in the case of NTPC v. Singer wherein the bench held that the law that governs the underlying contract should indeed be the law that would govern the arbitration agreement as well. This is in the event that a seat for the arbitration has been chosen and there has not been an express selection of a choice of law for the arbitration agreement.
An international approach of a similar kind has been observed in various jurisdictions such as Austria, the United Kingdom, The United States of America and various ICC tribunals. Under such a choice, the law of the underlying contract is taken to be the law of the arbitration agreement, and the relevance of the seat is with regards to the supervisory jurisdiction of the courts of the seat.
The controversy began with the 2002 judgement of the Supreme Court of India in the case of Bhatia International v. Bulk Trading S.A. In this case, two parties to an international contract had decided to arbitrate under the ICC rules in Paris. The foreign party, in the anticipation of an award in their favor, moved the Indian Courts for securing the recovery of such an anticipated award by restricting the Indian party from alienating their property. The Indian party filed an objection to the effect that no other court except the one in the seat of the arbitration should have jurisdiction over the matter at hand. This objection was based on the basic principles followed by various nations on this exact question. The Supreme Court ratified the judgement of the High Court wherein it was held that Part 1 of the Arbitration and Conciliation Act, 1996, which essentially gives effect to the Model law shall also apply to arbitration that are held outside India.
The issue here was that the courts in India subsequently adopted a very overreaching approach by virtue of this judgement. The value of the seat of the arbitration was reduced to almost nothing by this very approach. The issue in the court was not that of what law is applicable to the arbitration agreement, however, the judgement was heavily criticized for its interpretation of the value that the seat of the arbitration will have in a choice of law conflict.
It is in this regard that the judgement in the Venture Global Engineering Case v. Satyam Computer Services Ltd. caused the trend to take a turn for the worse. This case broadened the ambit of the court, which allowed for intervention by the court in India in order to give effect to foreign arbitral awards. This further undermined the value that the seat of an arbitration has, and because of the same, the choice of law analysis methodology also came into question as it too functioned on the principle of the importance of the seat in terms of supervisory jurisdiction. By this rationale, the seat of the arbitration and the Lex Arbitri were reduced to only being the venue and procedure of the arbitration.
It is only when the 2012 judgement in the Bharat Aluminium Co v. Kaiser Aluminium Technical Services Inc. came that certain clarifications were made to the value ascribed to each aspect in determining the applicable law. The Supreme Court overruled the decisions in both Bhatia International and Venture Global prospectively and redefined the importance ascribed to the seat of arbitration and, within that, satisfied the connotations that the express selection of a seat of arbitration brings with itself.
In this case, the operative clause in contention was the following:
“Article 22 – Governing Law: This agreement will be governed by the prevailing law of India and in case of Arbitration, the English Law shall apply.”
It was held by the court that Article 22 is sufficiently clear in dictating that the law governing the underlying contract is indeed the law of India. However, Article 17.1 of the very same contract stated that the law of England would indeed be the law applicable to the arbitration agreement. It would subsequently not be prudent to infer from Article 22 that Indian law should be the law that would govern the contract. However, in the event of arbitral proceedings being commenced, English law would be the law that would govern the very same. It is in this light that clarity and sufficient weightage was paced upon the seat of arbitration.
Various jurists interpreted the outcome of this case in a similar manner. An example of the same would be: “The court read the arbitration clause in light of “party autonomy” being the “grundnorm” of international commercial arbitration and stated that when interpreting such an agreement, it must be kept in mind that parties would have intended to avoid impracticable and inconvenient processes and procedures. The court therefore found that the proper law of contract was clearly Indian law while English law was only the law governing the arbitration agreement”[ii].
The final standard that currently dictates the Indian approach is the one established in the Enercon Case. The approach, in this case, is based on the very widely followed Choice of Law analysis laid down in the English decision of Sulamérica [iii]. This case laid down a three-step test to determine what choice of law should be applicable to an arbitration agreement in case of a conflict to that effect. The first step is to see whether a law has been expressly designated by the parties. In the event no such law is discernible from the contract or the arbitration agreement itself, the next step is to look at the implied choice of law by looking at various factors such as communication between the parties, their intention at the time of entering the contract etc. The third prong is the test of the closest and the most real connection. In that regard, heed must be paid to which law holds the closest and the realest connection with the contract at hand and this must be determined subjectively on a case to case basis [iv].
The Enercon case applied this test inversely. They saw what approach would lead to the most “commonsensical” conclusion. The test has been applied in the manner so as to ascertain which law does not have a close connection with the contract, and by excluding such a law, can the true choice of law be determined. Therefore, the current procedure is to apply the Sulamérica Choice of law test but with a modified most real and closest connection test as laid down in the Enercon case.
Although, there exists certain ambiguity in the area of which presumption is more favorable, the seat or the underlying contract; one thing is clear [v]. Indian jurisprudence currently is taking a pro- arbitration approach to the problem at hand and the future trajectory of the choice of law analysis can be said to be heading in a positive direction.
[i]Nigel Blackaby, ‘Redfern And Hunter on International Arbitration’ (2009 OUP). [ii] Niyati Gandhi & Vyapak Desai, ‘What Finally Happened In Bharat Aluminium Co. [“BALCO”] v. Kaiser Technical Services?’ Nishith Desai Associates, 12, February 2016. [iii] Sulamérica Cia Nacional De Seguros S.A. And Ors. v. Enesa Engenharia S.A. And Ors. [EWCA Civ. 638]. [iv] Nigel Blackaby, ‘Redfern And Hunter on International Arbitration’ (2009 OUP). [v]Shashoua v. Sharma Queen’s Bench Division (Commercial Court)  2 Lloyd’s Rep 376.