Rules of Law applicable to Domestic and International Commercial Arbitration

Rules of Law applicable to Domestic and International Commercial Arbitration

Krusch P Antony

“In practice arbitrators may allow themselves a greater freedom as to rules of substantive law than the courts are inclined to do. The arbitrators will above all be guided by the terms of the international contract and the customs of the international trade. At least this is what parties, as a rule, expect them to do.”               Pieter Sanders

1.0             Introduction

Arbitration is all about Party Autonomy and freedom to choose the law that govern one’s dispute. Party Autonomy is recognized in Indian Arbitration as well as in International Arbitration. Article 7 of the European Convention on International Commercial Arbitration 1961 provides: - “…the parties shall be free to determine by agreement, the law to be applied by the arbitrators to the substance of the dispute”.

Party autonomy and freedom to choose the law that govern arbitral dispute is truer in International Arbitration, comparing to the domestic arbitration. Domestic Arbitration in many countries still follows outdated parochial rules of practice.

Applicable rules of law to Domestic and International Commercial Arbitration is a serious concern, since the same is very much involved with choice of law by parties, and the applicability of conflict of laws rules. Arbitration agreement need not be same as the law of contract. Arbitration agreement can be governed by different law than the governing law of the substantive contract.

The law applicable are: - 1) The law governing the substantive contract; 2) the law governing the arbitration procedure or legal seat; 3) the law governing the arbitration agreement; 4) the law of the state (s), where the award will be enforced. 

2.0             Why Choice – of – Law Clauses in Arbitration is important?

Institutions as well as Courts are recognizing and giving due importance and relevance to choice - of - law clauses in arbitration agreements. This is because a contractual choice –of- law clause is more certain, predictable and sure to avoid a hostile forum. Arbitral Institutions and Arbitrators are duty bound to respect the wishes of the parties as expressed in their written agreement as to the parties’ choice of law in a commercial transaction.

The party autonomy is, however, with a Caveat.  The concerns of party autonomy as to choice of law is that, it may operate to undermine important public policy. This is because parties may opt out of state laws that might otherwise be applicable, thereby making that State’s public policy inapplicable.

3.0             Choice of Law in Indian Arbitration

In Indian Arbitration, part-1 of the Arbitration and Conciliation Act, 1996, shall be applicable to domestic and International Commercial Arbitration seated in India. Part -2 of the Arbitration and Conciliation Act, 1996, deals with foreign awards in International Commercial Arbitration.

In International Commercial Arbitration, parties can chose their seat of Arbitration. If parties select India as seat of Arbitration, Part-1 is applicable.  Part- 1 of the Arbitration and Conciliation Act, 1996, will not be applicable to any foreign seated arbitration, with exception to sec 2 ( as amended –w.e.f 23-10-2015), of the Arbitration and Conciliation Act, 1996. The amended position has clarified from the Supreme Court decision in BALCO (2012) (9) SCC 552. As amended, Part-1 will not apply to any foreign seated Arbitration except Sec 9, 27 and clause (a) of sub-section (1) and sub- section (3) of sec 37 unless an agreement exists to the contrary.

So, as to Indian parties’ choice of seat, when governing law of Arbitration is non- Indian and proceedings take place outside India, part-2 is applicable. Where the governing law of Arbitration is Indian and arbitration is concluded outside India, Part-1 will apply.

The rules applicable to substance of dispute is defined in sec 28 of the Arbitration and Conciliation Act, 1996. The Arbitral Tribunal, other than the International Commercial Arbitration, shall decide the dispute submitted in accordance with the substantive law for the time being in force in India.

Often, it happen that the agreement does not expressly provided clarity as to choice –of-law as to the seat or law governing the Arbitration Agreement. In Dozco vs Doosan {(2011) 6 SCC 179}, SC relies on the principle stated by Mustill and Boyd

“In the absence of express agreement, there is a strong prima facie presumption that the parties intend the curial law to be the law of the ‘seat’ of the arbitration, i.e. the place at which the arbitration is to be conducted, on the ground that that is the country most closely connected with the proceedings. So in order to determine the curial law in the absence of an express choice by the parties it is first necessary to determine the seat of the arbitration, by construing the agreement to arbitrate.”

4.0              Governing Law V/s Curial Law

The SC in Dozco vs Doosan {(2011) 6 SCC 179}, distinguishes between the Governing Law of Arbitration and the Curial law or proceeding rules of Arbitration.

The proper law of the Arbitration agreement governs the validity of the arbitration agreement, the question whether a dispute lies within the scope of arbitration agreement; the validity of the notice of arbitration; the constitution of the Tribunal; the question whether an award lies within the jurisdiction of the arbitrator; the formal validity of the award; the question whether the parties have been discharged from any obligation to arbitrate future disputes.

The curial law governs; the manner in which the reference is to be conducted; the procedural powers and duties of the arbitrator, question of evidence, the determination of the proper law of the contract.

5.0             Approaches as to choice- of- law in Arbitration

A single Arbitration may give rise to a number of choice of law issues, and, occasionally, resolution of these issues may be as complex as deciding the substance of the dispute. The law governing the substance of the dispute is the law or rules of law governing the contract out of which the dispute arises. The applicable substantive law (law governing the contract) determines the legal rights and obligations of the parties, in particular, may also affect the causes of action that may be advanced, the substantive remedies, the types of damages reasonable, limitation defenses, the calculation of the quantum of damages and even burden of proof (Doug Jones 2014).

6.0              Applicable Law – Amiable Compositor.

Article 35 of the UNCITRAL Model Law states that the Arbitral Tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the Arbitral Tribunal shall apply the law which it determines to be appropriate.

Arbitral Tribunal shall decide as “Amiable Compositor” or “ ex aequo et bono” only if the parties have expressly authorized the Arbitral Tribunal to do so. Similar provision in clause (2) of Sec 28 of The Arbitration and Conciliation Act, 1996. This means, Arbitrator acting in fairness, equity and good conscience, if authorized by parties.

Indian Law gives importance to the principle of territoriality and the center of gravity for determining law governing arbitration is the juridical seat of arbitration. Indian Law recognizes the difference between the juridical seat of Arbitration and Venue. The law governing the arbitration agreement shall be the juridical seat of Arbitration and not the venue.

The parties may also choose a different procedural or curial law to govern the arbitration proceedings inasmuch as the same is not in conflict or inconsistent with any express choice of law governing the arbitration agreement, i.e., the law of juridical seat of arbitration.

7.0             Voie directe- “ direct application” .

This method involves the Arbitral Tribunal determine choice of law issues by directly applying a particular law or rules of law. So,”….that  where no choice of law has been made, the arbitral tribunal should render its award “ in accordance with the rules of law it considers appropriate”.(Article 1511 of the French Code of Civil Procedure). This method is followed in general, and is adopted by many international arbitration institutions such as ICC 2012 Arbitration Rules ( Art 21); UNCITRAL Arbitraion Rules 2010; AAA 209 Rules; WIPO 2002 Arbitration Rules; SIAC 2013 Rules; LCIA 1998 Rules; Australian Centre for International Commercial Arbitration ( ACICA) 2011 Rules and Stockholm Chamber of Commerce 2010 Arbitration Rules and the Vienna International Arbitration Centre 2013 Rules of Arbitration. Delocalized Approach – This theory refers to a universal Lex Arbitri. This means an International arbitration will not be subject to any peculiarities of law just because of the seat of arbitration. The ratio of this theory is to assist in the creation a truly international law of arbitration procedure without domestic law interference.

8.0              Voie Indirecte.  

In case of no agreement of the parties on the applicable law to the merits of the dispute, “ the tribunal shall apply the law determined by the conflict of laws rules which it consider applicable”( Sec 46(3) of the English Arbitration Act 1996). Similarly, Article 32 (2) of the Singapore Arbitration Act goes by Voie Indirecte. Also, voie Indirecte is followed by European Arbitration Convention, 1961, the UNCITRAL Model Law. Lex Fori – Traditionally, the arbitrators would apply the conflict of law rules of the “ Lex Arbitri’ , the law of the place , ‘Seat’ of arbitration. Every country has each own national law and usually the parties and the arbitrators will choose the Lex Fori, instead of a more delocalized approach. English Courts consider really essential for arbitration to have a ‘Seat’ and have been against the idea of delocalization theory.

9.0              Closest Connection Test.

The Swiss Arbitration Law 2012 provides that in the absence of a choice of law by the parties, the Arbitral Tribunal should apply “the rules of law with which the dispute has the closest connection” (Article 33). Similarly, Sec 1051(2) of the Tenth Book of German Code of Civil Procedure.  In Eneron India Ltd., Vs Eneron Gmbh ( 2014), the Supreme Court of India, applying the same closest and intimate connection to arbitration, held that the curial law provisions of Indian Arbitration and Conciliation Act, 1996 shall be applicable.

10.0         Conclusion

Arbitral Tribunals are authorized to apply international law to a contract where the parties have made a choice of law to agreement. However, where the parties choose a national law to govern their contract, courts and tribunals will apply that law to contract, except for special circumstances such as where the choice is illegal or not bona fide {Vita Food Products Inc . v. Unus Shipping Co. Ltd ( n.30)}. Finally, the arbitrator ‘must consider the fate of his award so as to prevent annulment, thus taking into consideration the mandatory rules of the country or countries where enforcement of his award could conceivably be sought’.

References:-

1.     Nigel Blackaby et al, Redfren and Hunter on International Arbitration, Oxford University Press, 16^th Edition, 2015.

2.     Pieter Sanders, Trends in the field of International Commercial Arbitration Recuveil des Cours, Vol 145, 1975, 216.

3.     Serge Lazereff, Mandatory extraterritorial application of national law, (1995) Arb.Int’12 , 137, 140.

4.     Cindy G. Buys, The Arbitrators’ duty to respect the parties’ choice of law in commercial arbitration, St. John’s Law Review, Issue 1 , Vol 79, 2005.

5.     Dong Jones, Choosing the law or rules of law to govern the substantive rights of the parties, Singapore Academy of Law Journal, (2014), 26.

6.     Enercon ( India) v. Enercon GMBH ( C A 2086 & 2087) judgement dt.Feb14, 2014).