Governing Laws Vis-À-Vis Arbitration

The Agreement stipulated that it shall be governed by laws of India and all matters pertaining to Agreement or arising as consequence thereof, shall be subject to jurisdiction of Courts in Gujarat, India. The Agreement also stipulated that in case of non-resolution of dispute through conciliation, it would be committed to arbitration by either party in accordance with Arbitration and Conciliation Center of the chamber of Bogota DC. It additionally stipulated that 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. It also states that award shall be in law and standard will be applicable Colombian law governing the matter, expenditure in the arbitration proceedings shall be borne equally.

The Supreme Court observed that though the issue appears to be simple on first blush, it is a complicated one since different opinions exists domestically and internationally qua appropriate test to determine jurisdiction in case of trans-border arbitrations. The difference arises in view of three distinct legal concepts viz.

1. lex-contractus – law governing the substantive contractual issue;
2. lex-arbitri
   – law governing the arbitration agreement; and
3. lex-fori – law governing procedural aspect.

In view of the foregoing and to arrive at a conclusion, the Court considered the following principles and tests:

Determination of parties choice of law

The Court referred to decision of English High Court in Melford Capital Partner (Holdings) LLP v. Frederick John Wingfield Digby, to identify four choices of law which ought to be distinguished i.e., (i) the law governing the arbitration, which determines the supervisory jurisdiction of a court and relates to the laws governing interim measures, appointment and removal of arbitrators etc.; (ii) the proper law of arbitration agreement, which determines the validity, scope and interpretation of agreement; (iii) the proper law of contract; and (iv) the procedural rules which apply in an arbitration. The Court observed that though parties may decide to have different proper law of arbitration agreement and law governing the arbitration as a whole, it is not advisable to do so since these two concepts are intrinsically connected.

The Court thereafter, in reference to the issue at hand viz. appointment or removal of arbitrators through exercise of supervisory jurisdiction, observed that in the absence of a procedure within the arbitration agreement, the same should be governed by the law governing arbitration agreement rather than by lex fori, since it is lex arbitri that governs the arbitration process.

Tests of determination

Appropriate test to determine the law governing arbitration agreement

The Court referred to decision of UK Supreme Court in Enka Insaat Ve Sanayi AS v. Insurance Company Chubb, wherein the Court after having discussed and analysed two lines of precedents i.e., one which suggests that lex contractus should govern the arbitration and the latter which suggest that law of seat of arbitration should typically govern the arbitration agreement, propounded the following principles for determination of governing laws of arbitration:

1. Where different set of laws govern the contract and the arbitration agreement, the law governing arbitration agreement should be determined through conflict of law rules;
2. Where the law governing arbitration agreement has been mutually decided by Parties, the same should apply. However, in absence of such decision, the law most closely related to arbitration agreement shall apply (“Close connection test
   ”). The determination of closely related law shall be on basis of interpretation of arbitration agreement, and if required, upon interpretation of entire contract;
3. Where the law governing arbitration agreement is not specified, the law governing contract 'usually applies'. In this respect, it was further observed that selection of a country as seat of arbitration may not automatically override the presumption in favour of law governing contract;
4. The aforesaid presumption in favour of law governing contract can be overridden in situations, (i) where the law of seat of arbitration mandates that arbitration shall be governed by law of said country or (ii) where the law governing contract may render the arbitration agreement ineffective or make the dispute inarbitrable. These instances, however, are not exhaustive;
5. Where a place is chosen as 'venue' as opposed to 'seat' of arbitration, there's a strong presumption that law of venue will not apply; and
6. In absence of law governing the arbitration agreement, Close connection test shall be applied, however, this exercise is to be done only when the law governing arbitration agreement cannot be determined despite exhausting above stated options. Further, the Close connection test and presumption in favour of seat will apply only when the law governing the contract is not specified.

Three-fold test

The Court thereafter referred to decision in Sulamérica Cia Nacional De Seguros S.A. v. Enesa Engenharia S.A., wherein it was observed that law governing contract may differ from law governing arbitration agreement and thus, a three-fold test should be applied for determining the law governing arbitration agreement i.e., (i) express consent, (ii) implied consent; and (iii) closes and most real connection. The (ii) and (iii) tests are often applied in conjunction since the determining the closes and most real connection can be inferred basis the implied choice of parties.

Shashoua Principle

The Shashoua principle though, developed by the English Courts, was affirmed by the Supreme Court in Bharat Aluminium Company v. Kaiser Aluminium Technical Services^[2], and was expounded upon in BGS SGS Soma JV v. NHPC^[3], to mean that whenever a place is decided as the 'venue' without identifying the 'seat', coupled with a supranational body of rules governing the arbitration and no contrary indication (contrary indicia), the only probable outcome is that the 'venue' itself is the 'juridical seat' of arbitral proceedings. The term 'contrary indicia' refers to factors which would indicate that a place for conducting is a mere 'venue' and not 'seat' of arbitration. The Court in BGS SGS Soma (supra) basis the Shashoua principle, laid down the following tests:

1. If a place has been identified as 'venue' of 'arbitration proceedings', the latter expression would infer that entire arbitration proceedings have to be conducted there as opposed to some of the hearings and in such a situation the 'venue' is the 'seat' of arbitration;
2. Where only some of the hearings have to be conducted at certain place as opposed to entire arbitration proceedings (which would include passing of award
   ), the said place is merely a 'venue' and not the seat;
3. Where the agreement provides that arbitration proceeding shall be held at particular place, it would indicate that such place is also the 'seat';
4. The aforesaid tests are all subject to there not being any significant contrary indicia; and
5. Lastly, in respect of international arbitrations, choice of supranational body of rules to govern arbitration (such as SIAC rules) are strong indication that the place decided as 'venue' is also the 'seat' of arbitration.

The Court subsequently in Mankatsu Impex Private Limited v. Airvisual Limited^[4], arrives at a similar opinion as BSG SGS Soma (supra) by holding that mere use of term 'place of arbitration' would not automatically make it the 'seat' and the same has to be determined from a wholistic reading of contract and conduct of parties. The Court in said decision, basis the stipulations under the Contract to the effect that all disputes arising thereunder shall be governed by laws of India and arbitration agreement stipulating resolution of dispute by arbitration administered in Hong Kong, declined to entertain a petition seeking appointment of arbitrator. The Court held that the law applicable to arbitration agreement was in terms of law of Hong Kong law and thus, there being a clear distinction between lex contractus and lex arbitri, the parties should approach the Courts at Hong Kong. The Court kept into consideration that there are no contrary indicia in the contract and the arbitration agreement, and therefore, it was the intent of parties that the arbitration will be administered in Hong Kong.

The Court also referred to Arif Azim Co. Ltd. v. Micromax Informatics Fze^[5], wherein it applied the 'Shashoua principle' and, inter alia, arrived at following conclusions:

1. When a 'seat' is determined, it would be akin to an exclusive jurisdiction clause wherein only the jurisdictional court of that seat would have jurisdiction to regulate the arbitral proceedings;
2. 'Closest Connection Test' is not viable for determining seat of arbitration in view of Shashoua Principle. Further, even if law governing contract is specifically provided for, it does not mean that law governing the arbitration agreement and by extension the seat of arbitration will be the same as
   lex contractus. It was however, clarified that 'Closest Connection Test' may be applied and is suitable when there is no express or implied designation of a place of arbitration in the form of either 'venue' or 'curial law'.
3. The most apposite method of determination of seat of arbitration is to identify that when there is an express designation of a place of arbitration, and no contrary indication is mentioned to prove otherwise, the said place would be the 'seat' of arbitration.
4. Mention of curial law or supranational rules in the agreement is a positive indication of the place so designated being the 'seat' of arbitration.
5. Merely because a venue has been stipulated without any express choice of seat, the said choice of seat cannot be ignored and due consideration ought to given to each choice made by the Parties.

Basis the aforesaid, the Court in Disortho (supra) concluded that the Agreement clearly and explicitly stipulates that it shall be governed by laws of India and thus, Indian Courts would have supervisory jurisdiction. The Court while arriving at aforesaid conclusion observed that upon a wholistic reading of the Agreement, it consistently only refers to Indian Courts. Whereas, Bogota has only been designated as 'venue' of arbitration and no 'seat' has been chosen; and the reference of laws of Colombia are only in respect of procedural matters. The Court in this respect also applied 'three step test'.

Upon going through various precedents, the Court has re-affirmed the key feature of arbitration i.e., to identify and enforce the true intention and choice of Parties in an arbitration. The Court has highlighted that even though the ambiguity in arbitration agreement may result in confusion as to laws of which country shall apply, the same can be deciphered by applying the tests and principles developed over the decade, which helps in culling out the true intention of Parties amongst all the ambiguity. In nutshell, the Court held that basis the 'Shashoua principle' and 'contrary indicia', there is strong indication of lex contractus being lex arbitri, unless explicitly stated otherwise or there being contrary indications.

Author: Aseem Chaturvedi, Partner; Shivank Diddi and Milind Jain, Principal Associates; and Arsh Alok, Associate at Khaitan & Co. Views are personal.

1. 2025 SCC OnLine SC 570 ↑

2. (2012) 9 SCC 552 ↑

3. (2020) 4 SCC 234 ↑

4. (2020) 5 SCC 399 ↑

5. 2024 SCC OnLine 3212 ↑