The process and outcome of arbitration is largely governed by the following laws: (a) law governing the contract referring to the substantive law that parties choose to govern the main contract and any disputes arising thereunder; (b) law governing the arbitration agreement referring to the law that parties choose to govern arbitration agreement (it governs issues like validity, arbitrability, etc.); (c) law governing conduct of arbitral proceedings and forum for related court proceedings (i.e. law of the seat) and (d) Institutional rules (if chosen), governing the form and procedure of arbitration.
Contracts generally expressly provide for the law governing the contract but are often silent on the law governing the arbitration agreement. However, it is crucial to determine and expressly set out the law governing an arbitration agreement since it determines issues of validity of the arbitration agreement, its scope, arbitrability, etc. The question is – when the law governing the arbitration agreement is not specifically mentioned or expressly provided for, then how is it determined.
The position in this regard in England and Singapore is fairly well settled. The England and Wales Court of Appeal in Sulamérica Cia Nacional de Seguros SA v. Enesa Engelharia SA, (2013) 1 WLR 102 held that the law of arbitration agreement is to be determined by undertaking the following three-stage enquiry: (i) whether the parties expressly chose the law of the arbitration agreement; (ii) whether the parties made an implied choice with regard to law of the arbitration agreement; and (iii) in the absence of express or implied choice, the system of law with which the arbitration agreement has the “closest and most real connection” will be the law governing the arbitration agreement. It further held that in the absence of other factors, the implied law of the arbitration agreement will likely be the same as the law of the substantive contract.
The aforesaid three-stage test has been followed by the UK Supreme Court in Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors [2020] UKSC 38. In summary, the UK Supreme Court has ruled that if the law governing the arbitration agreement is not specified, then the governing law of the contract (if specified) would apply, unless additional factors displace such presumption. However, if the governing law of the contract is also not specified, then the arbitration agreement will be governed by the law most closely connected with the arbitration agreement. In general, the law most closely connected with the arbitration agreement will be the seat of arbitration, if provided in the agreement.
In Singapore, the Singapore Court of Appeal in Anupam Mittal v Westbridge Ventures II Investment Holdings [2023] SGCA 1 has confirmed the three-stage test to determine the law governing an arbitration agreement, which was previously laid down in BCY v. BCZ [2016] SGHC 249. While considering the second stage of inquiry, it has clearly recognised the validation principle and observed that if the law of contract invalidates the agreement to arbitrate, then the third stage of inquiry will be looked into, which will determine with which system of law the arbitration agreement has its closest and most real connection. In this case, the disputes were arising out of a Shareholders Agreement relating to the management of the company. The governing law of the contract was Indian law. However, if Indian law would have been considered as the law governing the arbitration agreement, the same would have invalidated parties’ agreement to arbitrate, as oppression and mismanagement disputes are not arbitrable in India. Accordingly, the court moved to the third stage of inquiry and determined with which system of law the arbitration agreement had the closest connection with, and observed that because the seat was Singapore, the law of the arbitration agreement would be Singapore law.
Thus, there is near alignment between the approaches of courts in England and Singapore while determining the governing law of the arbitration agreement. It is to be borne in mind that the aforesaid three-stage test is to be followed in a chronological order, i.e.: the court will first see whether the law governing the arbitration agreement is expressly provided for. If not, the second stage of inquiry will follow, i.e.: what is the implied choice of law governing the arbitration agreement. In the absence of any contrary indicators/ factors, the implied choice of law of the arbitration agreement would be considered the same as the law of the substantive contract. It is only when the law of the substantive contract is also not expressly provided for or there are contrary indicators which negative parties’ intent to arbitrate, will the third stage of inquiry be looked into and the system of law the arbitration agreement has the “closest and most real connection” with, would be considered as the law governing the arbitration agreement. At the third stage of inquiry, if the seat of arbitration is designated by the parties, then the law of the seat would be considered to have the closest and most real connection and would be the law governing the arbitration agreement. In the absence of express designation of seat, a factual inquiry would be conducted to determine which is the system of law with which the contract has the closest and most real connection, i.e.: where the contract is to be performed, the location of parties, etc.
By contrast, the position in India on the law governing the arbitration agreement appears to be in a state of flux. In one of the early judgments in National Thermal Power Corporation v. Singer Company[(1992) 3 SCC 551],the Supreme Court had observed thatwhere the proper law of the contract is expressly chosen by parties, such law must, in the absence of an unmistakable intention to the contrary, govern the arbitration agreement. However, where the law of the contract is also not expressly chosen by the parties, then the place where arbitration is agreed to be held, i.e. law of the seat shall govern the arbitration agreement (paras 23 and 25). The said principle was subsequently followed in Sumitomo Heavy Industries Ltd v. ONGC (1998) 1 SCC 305 (para 5) and Indtel Technical Services Pvt Ltd v. W.S. Atkins Rail Ltd(2008) 10 SCC 308 (para 36), where the Supreme Court had observed that the law governing the arbitration agreement would be same as the law of the contract, i.e. Indian law. Subsequently, in UOI v. Hardy Exploration, (2019) 13 SCC 472, the Supreme Court referred to Indtel’s position – when the arbitration agreement is silent on the law and procedure of arbitration agreement, the governing law of the said agreement would ordinarily be the same as the law governing the contract. However, no findings were rendered by the Hon’ble Supreme Court on this aspect.
The High Courts in India have subsequently taken divergent views on what should be the law governing the arbitration agreement: (a) whether the law governing the main contract would govern the arbitration agreement; or (b) whether the law of the seat would govern the arbitration agreement. In Carzonrent India v. Hertz International, 2015 SCC OnLine Del 10085, the Delhi High Court held that the law governing the arbitration agreement would be the proper law of the contract (paras 24 and 25). Similarly, the Bombay High Court in Sakuma Exports Ltd v. Louis Dreyfus Commodities Suisse SA, 2013 SCC OnLine Bom 986[1] held that the law governing the arbitration agreement would be the proper law of the contract (paras 23 and 32).
Whereas, in Katra Holdings Ltd v. Corsair Investments Ltd, 2018 SCC OnLine Bom 4031, the Bombay High Court observed that arbitration agreement being a separate agreement is not governed by the law governing the contract (para 32). In HSBC PI Holdings (Mauritius) Ltd v. Avitel Post Studioz Ltd, 2014 SCC OnLine Bom 102, the Bombay High Court stated that the arbitration agreement would have the closest connection with seat and therefore the law of the seat will determine the law governing the arbitration agreement. Interestingly, this matter went to the Supreme Court.[2] Since it was a case of enforceability of a foreign award here, the Supreme Court considered whether the conditions for enforcement of a foreign award were met and examined the issue of arbitrability of fraud during the enforcement proceedings. The Supreme Court did not go into determining what would be the law governing the arbitration agreement, even though there was detailed discussion on it in the impugned Bombay High Court judgment.
Conclusion
While the UK Supreme Court and the Singapore Court of Appeal have largely adopted a consistent approach in determining the law governing the arbitration agreement in the absence of express choice by the parties, the position in India still appears to be uncertain. It is, therefore, time that the Indian courts lay down a clear dictum in this regard to avoid uncertainties surrounding the law governing the arbitration agreement. As mentioned at the beginning of the post, the law governing the arbitration agreement plays an important role as it determines issues regarding validity of arbitration agreement, its scope, arbitrability, etc. To avoid any misinterpretation or multiple rounds of litigation, it is suggested that parties clearly identify the law governing the arbitration agreement, while also clearly specifying the law governing the contract and the seat and venue of arbitration proceedings.
For further information, please contact:
Kapil Arora, Partner, Cyril Amarchand Mangaldas
kapil.arora@cyrilshroff.com
[1] Affirmed by SC in Sakuma Exports Ltd v. Louis Dreyfus Commodities Suisse SA, (2015) 5 SCC 656
[2] Avitel Post Studioz Limited v. HSBC PI holdings (2021) 4 SCC 713
