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Non-Signatory Countries To New York Convention

Non-Signatory Countries To New York Convention: Background The Indian Arbitration law clearly distinguishes between the procedure that is to be followed regarding enforcement of domestic and foreign arbitral awards. A bare reading of the Arbitration and Conciliation Act, 1996 (“the Act”) would imply that Part I of the Act deals with domestic awards, while Part II of the Act is exclusive …

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 Domestic Arbitration in many countries still follows outdated parochial rules of practice.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).

Corporate Insolvency Resolution Process: A New Recovery Mechanism for Operational Creditors

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Supreme Court Provides Clarity on Exclusive Jurisdiction Clause in Arbitration Agreement

Supreme Court Provides Clarity on Exclusive Jurisdiction Clause in Arbitration Agreement-Vikrant Rana and Akshay Gupta

On April 19, 2017, a two-judge bench of the Supreme Court bench passed their judgment in Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited and Ors.[1] holding that in cases where the parties include an exclusive jurisdiction clause in an arbitration agreement designating a particular place as the seat of the arbitration, the Court in whose jurisdiction the seat of the arbitration falls would have sole jurisdiction to entertain petitions in respective of non-arbitrable issues arising out of the agreement, to the exclusion of any other Courts.

Use of Exclusive Jurisdiction Clauses in Agreements

Exclusive Jurisdiction Clauses are widely used by parties to an agreement as often it may not be convenient for the parties to sue at the place at which the cause of action for the dispute may have arisen. In such cases the exclusive jurisdiction clause offers a party the opportunity to establish a convenient pre-determined place where disputes arising in regard to the contract would be referred to, if and when they arise.

Factual Background

• Datawind Innovations Private Limited (hereinafter referred to as Respondent No.1) having its registered office at Amritsar in Punjab was engaged in the manufacture, marketing and distribution of mobile phones, tablets and other accessories.
• Indus Mobile Distribution Private Limited (hereinafter referred to as the Appellant) wished to conduct business with Respondent No.1, acting as their Retail Chain Partner.
• In furtherance of the above, an agreement dated October 25, 2014 was entered into between the Parties with Respondent No.1 supplying goods to the Appellant at Chennai from New Delhi.
• The Dispute Resolution Mechanism was provided under Clauses 18 and 19 of the agreement dated October 25, 2014.  Clause 18 provided that in case of disputes between the parties, if the dispute could not be resolved by discussion between senior officials of the parties, then the matter would finally be settled through arbitration, presided by a sole arbitrator, conducted under the provisions of the Arbitration and Conciliation Act, 1996 with the seat of the Arbitration being Mumbai.
• Further, Clause 19 provided that all disputes arising out of, or in connection with the Agreement would be subject to the exclusive jurisdiction of the Courts of Mumbai alone.
• Disputes arose between the parties and Respondent No.1 sent a notice dated September 25, 2015 to the Appellant. Further, the arbitration clause provided under Clause 18 of the Agreement was invoked. The Appellant denied the contents of the notice and asked Respondent No.1 to withdraw the same.
• In the meantime, Respondent No. 1 filed a petition before the Delhi High Court under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) seeking various interim reliefs.
• In October 2015 Respondent No.1 filed a second petition before the Delhi High Court under Section 11 of the Act to appoint the sole Arbitrator.

The Impugned Decision of the Delhi High Court

• The Delhi High Court while disposing off the two petitions held that as no part of the cause of action arose in Mumbai, the Courts of Mumbai would have no jurisdiction over the matter with only the Courts of Amritsar, Chennai and Delhi having jurisdiction.
• Since, the Delhi High Court had been approached first, it would continue to have jurisdiction in the matter. Further, the Court restrained the Appellant from transferring, alienating or creating any third-party interests in the Appellant’s property in Chennai and also appointed the sole Arbitrator.

Issue before the Supreme Court

In case no cause of action arises at the place where the seat of arbitration is situated, whether the Court within whose jurisdiction the seat of arbitration is located would have exclusive jurisdiction in all proceedings.  

Decision of the Supreme Court

• The Supreme Court referring to its earlier judgments in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc[2], Enercon (India) Ltd. v. Enercon Gmbh[3], and Reliance Industries Ltd. v. Union of India[4], the Court observed that in its previous judgments, it has time and again been reiterated that once the seat of arbitration has been fixed, it would be in the nature of an exclusive jurisdiction clause as to the courts which exercise supervisory powers over the arbitration.
• Further, in Union of India v. Reliance Industries Limited and Others[5], the Court referred had held that the supervisory jurisdiction of courts over the arbitration goes along with seat.
• Under the law of Arbitration, a reference to seat is a concept that has been developed to facilitate parties to choose a neutral venue for Arbitration. It is not necessary for any cause of action to have arisen at the neutral venue as the provisions of Section 16 to 21 of the Code of Civil Procedure, 1908 would not be attracted.
• Therefore, while setting aside the impugned order of the Delhi High Court with regard to its jurisdictional power, the Supreme Court held that since the parties had established the seat of the arbitration at Mumbai, exclusive jurisdiction would vest in Mumbai, the Courts of Mumbai would have exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties.

Observations

This decision of the Supreme Court is a welcome clarity on the issue that often arises with the parties to a contract approaching Courts whose jurisdiction has been ousted by the terms of the exclusive jurisdiction clause in the agreement. Parties should ensure that the seat of arbitration is selected by them after due consideration as this judgment prevents forum shopping, once the seat of arbitration is agreed to by the parties.

To view all formatting for this article (eg, tables, footnotes), please access the original here.

SS Rana & Co - Vikrant Rana and Akshay Gupta