International Commercial Arbitration | How To Determine Law Governing Arbitration Agreement? Supreme Court Discusses Tests

In a significant judgment relating to International Commercial Arbitration, the Supreme Court today (March 18) ruled that in the absence of an express law governing the arbitration agreement, the applicable law should be determined based on the parties' intentions, with a strong presumption in favor of the law governing the main contract (lex contractus). The bench comprising Chief Justice Sanjiv Khanna, Justice Sanjay Kumar, and Justice KV Viswanathan heard the case where the plea was made for an appointment of an arbitrator in an International Commercial Arbitration where the Petitioner was a foreign-Columbia-based entity, whereas the Respondent was an Indian-Gujarat based entity. After a dispute arose between the parties, the Petitioner sought the appointment of the arbitral tribunal stating that in the absence of the law governing the arbitration agreement, the Indian Courts would have jurisdiction to appoint the arbitrator because the law governing the main contract was the Indian Law. Opposing the Petitioner's stand, the Respondent argued that the Court at Columbia would have jurisdiction to appoint the arbitrator because the entire arbitration proceedings were to be conducted in Columbia and the governing law for the arbitration proceedings i.e., lex fori was the Columbian law. Now, the question before the Court was whether the Indian Court would have jurisdiction to appoint an arbitrator even though the arbitration took place in a foreign country. Before answering the question, the Court found two conflicting clauses in the main agreement and discussed whether there was a possibility to harmonize conflicting clauses in a contract giving effect to both wherever possible. Clause 16.5: Stated that the agreement would be governed by Indian law, with courts in Gujarat having jurisdiction over all matters arising from the agreement. Clause 18: Provided for dispute resolution through arbitration under the rules of the Arbitration and Conciliation Centre of the Chamber of Commerce of Bogota, Colombia, with the arbitration to take place in Bogota and the award governed by Colombian law. Since there was no express stipulation made about what law would be governing the arbitration agreement, therefore, the judgment authored by CJI Khanna applied the three-step test established in Sulamérica Cia Nacional De Seguros S.A. v. Enesa Engenharia S.A. [2012] EWCA Civ 638, a leading international arbitration case, to determine the governing law of the arbitration agreement. The three-step enquiry test to determine the governing law of the arbitration agreement was: (i) express choice, (ii) implied choice, and (iii) closest and most real connection, i.e., in the absence of express choice for the law governing the arbitration agreement, the Court would identify the implied choice of law for the arbitration agreement, and even if the implied choice doesn't work, then the Court would apply the closest and most real connection test which considers several factors like parties intention, business operations, etc.The judgment also discussed various international judgments on this point.In this case, because there was no express choice for the law governing the arbitration agreement, the Court then applied the implied choice test and inferred that the parties intended Indian law to govern the arbitration agreement, given that Clause 16.5 designates Indian law as governing the contract. Further, the court found that Indian law had the closest connection to the arbitration agreement satisfying the third test. “First, neither Clause 16.5 nor Clause 18 explicitly stipulates the governing law of the arbitration agreement. Therefore, we proceed to the next step of the test, which involves identifying the parties' implied choice of law for the arbitration agreement. At this stage, there is a strong presumption that the lex contractus, i.e., Indian law, governs the arbitration agreement. As explained earlier, this presumption may be displaced if the arbitration agreement is rendered non-arbitrable under Indian law. But that is not the case here. Furthermore, the mere choice of 'place' is not sufficient, in the absence of other relevant factors, to override the presumption in favor of the lex contractus. In this case, it is important to note that no seat of arbitration has been explicitly chosen. In conclusion, at this second stage of the inquiry, we find that the parties have impliedly agreed that Indian law governs the arbitration agreement, and the controversy can be resolved accordingly.”, the Court observed. The Court rejected the Respondent's argument that because the venue of the arbitration was at Columbia therefore the Courts at Columbia would have jurisdiction to appoint an arbitrator. Instead, the Court said that the designation of Columbia as the venue for arbitration did not override the jurisdiction of Indian courts, as Clause 16.5 explicitly granted jurisdiction to courts in Gujarat. Further, the court...

International Commercial Arbitration | How To Determine Law Governing Arbitration Agreement? Supreme Court Discusses Tests

Yash Mittal

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