Proper Law of Arbitration Agreement: The Indian Position

In the previous post, I had discussed the three systems of law that govern an international arbitration and the English Court of Appeal’s landmark decision in Enka v. Chubb, which held that there is a “strong presumption” that parties have impliedly chosen the curial law as the AA law. In this post, I examine the position under Indian law for determining the law governing the arbitration agreement where parties have chosen a proper law of the contract different from curial law. I argue that while earlier decisions accorded primacy to the proper law of contract, recent judgments have veered towards the Enka principle, albeit in a different context. As in the previous post, I will refer to the proper law of contract as the ‘main contract law’ and the law governing the arbitration agreement as ‘AA law’.

The starting point for discussion is the Supreme Court’s decision in NTPC v. Singer, rendered prior to the enactment of the Arbitration and Conciliation Act, 1996 (‘1996 Act’). Here, the parties chose Indian law as the main contract law and the contract contained an ICC arbitration clause. Since the parties had not chosen the seat of arbitration, the ICC Court designated London as the seat. The Court was required to determine whether the AA law was Indian law. The Court held that in the absence of an “unmistakable intention to the contrary”, AA law is the same as the main contract law. Even though on facts, parties had not chosen the seat of arbitration, as a matter of law, the Court extended the primacy of the main contract law to cases where parties had expressly designated the seat of arbitration.

Subsequently, a similar issue arose before the Supreme Court in Sumitomo Heavy Industries Ltd. v. ONGC Ltd. The contract provided for Indian law as the main contract law and designated London as the seat of arbitration. The Court cited the terms of the contract to hold that the AA law was also Indian law. It did not explain the basis of this conclusion, which is explained by the fact that this was the agreed position between the parties. Hence, Sumitomo is not an authority for the proposition that the AA law is to be the same as the main contract law where parties fail to choose the former. Nonetheless, as discussed below, the Supreme Court has subsequently referred to Sumitomo for this proposition.

Although NTPC and (arguably) Sumitomo accorded primacy to the main contract law for determining the AA law, the weight of both these decisions has been significantly weakened for twin reasons: (a) they were rendered in the specific context of the Arbitration Act, 1940 and Foreign Awards Act, 1961, both of which have now been replaced by the 1996 Act; and (b) they reflect an archaic understanding of international arbitration where seat of arbitration did not constitute the “centre of gravity” of arbitration, as it does under the 1996 Act.

Let us analyse the judicial treatment of both these decisions. The Supreme Court in Indtel Technical Services v. W.S. Atkins Rail Ltd. reiterated the NTPC principle and held that a choice of English law as the main contract law would extend to the AA law as well. Subsequently, a Constitution Bench in BALCO held that NTPC has been rendered irrelevant under the 1996 Act. However, this observation was made in the context of the repeal of Section 9(b) of the Foreign Awards Act. The Court in BALCO was not concerned with the legal test for determination of AA law. After BALCO, the Court’s assessment of the NTPC principle has been inconsistent, as it has questioned its applicability on one occasion while applying it on the other. It is no different with Sumitomo. In a three-Judge Bench decision in BALCO, Sumitomo has been construed to hold that the AA law is the same as the main contract law in the absence of an express agreement to the contrary. Subsequently, the Court in Hardy Exploration held that Sumitomo was not relevant under the 1996 Act. But Hardy Oil was itself held to be bad law in BGS SGS SOMA JV.

This topsy-turvy treatment of NTPC and Sumitomo is a result of the Supreme Court’s unending tryst with the significance of seat of arbitration. Quite apart from this, however, the Court’s decisions post-BALCO, when called upon to apply the Bhatia International principle, suggest that Indian law has departed from the NTPC position and inched closer to the Enka principle of primacy of curial law while determining the AA law. I explain this below.

To recall, the Court in Bhatia International had held that Part I of the 1996 Act would apply even to foreign-seated arbitrations unless it was expressly or impliedly excluded by parties. Although the Court in BALCO overruled Bhatia International, it held that disputes arising out of arbitration agreements entered into prior to BALCO would continue to be governed by the Bhatia International principle. Post-BALCO, the Court was frequently called upon to assess the scenarios in which Part I was impliedly excluded according to the Bhatia International principle. One such decision, which is reflective of the Enka approach, is Reliance Industries v. Union of India (‘Reliance Industries (I)’).

In Reliance Industries (I), parties had chosen Indian law as the main contract law and English law as the AA law, and had consented to London as the seat of arbitration. The Union of India initiated setting aside proceedings under Section 34 of the 1996 Act to challenge a partial award before the Delhi High Court. The High Court held that Part I was applicable and the Section 34 proceedings were maintainable. On appeal, the Supreme Court reversed the Delhi High Court’s ruling and held that Part I of 1996 had been impliedly excluded by the parties. The Court reasoned, inter alia, that it is the AA law which governs setting aside proceedings and the AA law in this case had been chosen as English law. As a result, setting aside proceedings under Part I of the 1996 could not be initiated.

In another decision arising out of the same contract, the Supreme Court in Union of India v. Reliance Industries (‘Reliance Industries (II)’) followed its earlier decision in Reliance Industries (I) and held that in cases governed by the Bhatia International principle, Part I of the 1996 Act would necessarily be excluded where the AA law was not Indian law.

These decisions of the Supreme Court post-BALCO are depictive of an emphatic link between the AA law and Part I of the 1996 Act and an endorsement of the fact that Part I contains provisions governing substantive rights arising out of the arbitration agreement. The setting aside of an arbitral award has been held to be governed by AA law and resultantly, the choice of a foreign AA law implies that parties intended to exclude the applicability of Part I – which contains the setting aside provision under Indian law (Section 34). Similarly, as the Court has held in other decisions, AA law also governs the constitution of the arbitral tribunal (Section 11 of the 1996 Act) and the formal validity of the arbitration award (Section 31). Indubitably, therefore, Part I of the 1996 Act, which necessarily applies to arbitrations seated in India (See Section 2(2)) as curial law, also contains elements governed by AA law. This overlap between the AA law and curial law was one of the fundamental reasons which led Popplewell LJ in Enka to conclude that there is a strong presumption that parties have impliedly chosen the curial law as the AA law. In fact, Popplewell LJ opined that the overlap is not a feature unique to English law, as the [English] Arbitration Act, 1996 is based on the UNCITRAL Model Law. This, and other, reasons of Enka squarely apply in the Indian context. Indian courts, when called upon to rule on the test for determining the AA law, simply to need to extend the rationale of decisions such as Reliance Industries (I and II) and whole-heartedly adopt the Enka principle.

Published by Sharad Bansal

Advocate, Bombay High Court

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