Seat of Arbitration and its communion to lex – larger bench to decide: Part III

Payal Chawla

Read Part I of the Article here and Part II here.

Part III

Closest and most intimate connection test

In NTPC v. Singer, as stated above, the Court applied the closest and most intimate connection test but applied it to the dispute or to the entire contract. This was in contra-distinction to the manner in which the UK courts applied the test – they have consistently applied the test to the arbitration contract.

In C v. D [2007 EWCA Civ 1282 (CA)] the Court of Appeal states,

“that an agreement to arbitrate will normally have a closer and more real connection with the place where the parties have chosen to arbitrate, than with the place of the law of the underlying contract, in cases where the parties have deliberately chosen to arbitrate, in one place, disputes which have arisen under a contract governed by the law of another place”.

On February 14, 2014, the Supreme Court delivered the decision in Enercon (India) v. Enercon (supra)  and applied the closest and the intimate connection, but this time to the arbitration, placing reliance on the ratio of law laid down in Naviera Amazonica (supra).

The court held all the three laws: (i) the law governing the substantive contract; (ii) the law governing the agreement to arbitrate and the performance of that agreement (iii) the law governing the conduct of the arbitration, are Indian and hence India would be the ‘seat’, and London the ‘venue’.

More recently, in the matter of Centrotrade Minerals & Metal Inc. v. Hindustan Copper Limited[(2017) 2 SCC 228] a three-judge bench, dealing with the issue of two-tier arbitration, treated the second tier ICC London arbitral award to be a foreign award.

The relevant facts of Centrotrade are – a dispute arose between an Indian party and an American party. The contract contained a two-tier arbitration clause. The first arbitration was conducted by the Indian Council of Arbitration, to be held in India. The lex contractus was Indian. The second-tier arbitration was to be conducted by an Arbitrator appointed by ICC to be conducted in London. The London arbitrator applied Indian law. The three-judge bench does not get into an enquiry to determine whether the London seat award was a foreign award or not, but proceeds on the assumption it was.

The Court in Centrotrade appears to renounce the closest and intimate connection test to the dispute, in favour of the closest and most intimate connection test to the place, albeit, it does not say so.

On July 4, 2017, the Supreme Court decided Roger Shashoua v. Mukesh Sharma [(2017) SCC Online SC 697]. In the said case, the ‘venue’ of arbitration was London, lex fori was the Rules of International Chamber of Commerce, Paris and the lex contractus was Indian law. The Court in Roger Shashoua impliedly rejects the closest and most real connection to the dispute theory, laid down in NTPC v. Singer, and upholds UK High Court (Queen’s Bench) Commercial Court decision in Roger Shashoua v. Mukesh Sharma2009 EWHC 957 (Comm))– thereby fortifying the view of the closest and most real connection to the arbitration agreement.

Lex contractus and its relationship to lex arbitri

The Court in NTPC v. Singer also appears to suggest, albeit in obiter, that lex arbitri would be the same as lex contractus, unless there was a contrary indication. A decade earlier, the UK Courts in Black Clawson (supra), had similarly observed, in “the ordinary way, this [the proper law of the arbitration agreement] would be likely to follow the law of the substantive contract’.

However, by 1993, the UK Court of Appeal in Harbour Assurance Co (UK) Ltd v Kansa General International Insurance Co Ltd [1993] QB 701, was of the view that the arbitration agreement is a distinct and separable agreement from the underlying or principal contract.

But by 2012, the Court of Appeals in Sulamerica (supra), although in obiter, appears to reaffirm the decision of Black Clawson(supra) in this regard.

In India, however, Union of India v. Reliance Industries Limited[(2015) 10 SCC 213] disagreed with NTPC v. Singer and stated – “It can be seen that this Court in Singer case did not give effect to the difference between the substantive law of the contract and the law that governed the arbitration’, recognising that the two need not be the same. This principle was quoted with approval in Roger Shashoua v. Mukesh Sharma [(2017) SCC Online SC 697].

Therefore, the law since NTPC v. Singer has clearly, in this regard, transitioned. It is now settled law, in India, that the lex arbitri can be different from the lex contractus and need not follow lex contractus, where lex arbitri is not explicitly agreed to by the parties.

[It would be important to make a mention of Arsanovia v. Cruz City [2012] EWHC 3702(Comm). Although, this case does not deal with the supervisory jurisdiction of courts and may not be directly relevant to the issue at hand, but it in a sense implies that lex arbitri follows lex contractus.

In this case, the arbitration agreement provided for Indian law to be the lex contractus.  London was the seat, and the lex fori was the LCIA Rules. The arbitration agreement did not explicitly provide for a lex arbitri, but specifically excluded Part 1 of the Indian Arbitration and Conciliation Act, 1996. In an s.67 application of the (UK) Arbitration Act, 1996, the Court held that the arbitral tribunal had no substantive jurisdiction. The Court also held that the lex arbitri would follow the lex contractus and would hence be Indian law. The ratio of this judgment remains controversial.

Lex contractus versus lex fori

This brings me to my last segment– where both ‘seat’ and ‘lex arbitri’ are not explicitly chosen by the parties, which lex will have primacy –lex contractus or lex fori/curial law?

English Law

In Black Clawson (supra), Mustill J enunciated the principle whereby he held that if lex fori follows the ‘seat’, the converse must be true as well- i.e. in the absence of some express and clear provision to the contrary, it must follow that if the curial or procedural law of an arbitration is to be the law of X, then X is also to be the “seat” of the arbitration.

The Court in Naviera Amazonica(supra)attached no significance to lex contractus and observes in this regard,

“In the present case there was no investigation of (1) the substantive law, because nothing turns on it, but I am content to assume that this was the law of Peru on the ground that this was the system with which this policy was most closely connected.'”

The Court then went on to hold that London would have jurisdiction.

But in Sulamerica (supra), the Court, albeit in obiter, appears to allude to primacy of lex contractus over lex fori. The Court observes and in this regard observes, ‘Although there are powerful factors in favour of an implied choice of Brazilian law as the governing law of the arbitration agreement’, but rules in favour of English law since the seat of arbitration was London which according to the Court ‘inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings’.

(The Court also took into consideration that application of Brazilian law would invalidate the arbitration agreement).

This approach appears to be in contra-distinction to the position of the Court in Naviera Amazonica which found lex contractus of no importance.

Law in India

India’s journey has been somewhat inverse. The law started out leaning in favour of lex contractus in NTPC v. Singer (supra).

But by Dozco India (P) Ltd. (supra), lex fori begins to gain acceptance and the Court observes,

“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.”

On a similar vein, the closest and most intimate connection to the dispute (NTPC v. Singer) gave way to the closest and most intimate connection to the arbitration (Enercon v. Enercon).

As I was drawing my research to a close, I chanced upon some interesting paragraphs in the Balco v. Kaiser judgment, which although were enunciated in a slightly different (but related) context, if perused and applied to the present issue, clinch the argument in favour of lex fori over lex contractus.

The Court in Balco v. Kaiser interprets the expression “under the law” appearing in Article V(1)(e) of the New York Convention to mean “’the procedural law of the arbitration’ rather than ‘law governing the arbitration agreement’ or ‘underlying contract’” relying on the treatise of Gary B. Born and several judgments.

[It is important to clarify, however, that the context of such interpretation had come in relation to what was the meaning of the expressions appearing in Article V(1)(e) of the New York Convention i.e. “in which the award was made” and the courts “under the law of which the award was made”, and whether these phrases signified two different countries, having concurrent jurisdiction to annul the award. The Court in Balco v. Kaiser debunked the concurrent jurisdiction theory, relying on observations of Hans Smit, Professor of Law at Columbia University, according to whom providing for two fora for an annulment action was an ‘error’.Accordingly, the Court held that the award could only be annulled in the country “in which the award was made” as a general rule, and as an exception in the country “under the law of which the award was made”].

Redfern and Hunter in International Arbitration, while explaining the connection between the lex arbitri and lex fori says:-

“Parties may well choose a particular place of arbitration precisely because its lex arbitri is one which they find attractive. Nevertheless, once a place of arbitration has been chosen, it brings with it its own law. If that law contains provisions that are mandatory so far as arbitration are concerned, those provisions must be obeyed. It is not a matter of choice any more than the notional motorist is free to choose which local traffic laws to obey and which to disregard.”

The above principle was quoted with approval by the Supreme Court in Eitzen Bulk A/S v. Ashapura Minechem Ltd. [(2016) 11 SCC 508].

Since India now applies the ‘closest and most intimate connection’ test to the arbitration agreement, it is now only appropriate that lex fori would gain primacy over lex contractus. And in a ‘seat-centric’ environment, primacy of lex fori over lex contractus would apply a fortiori.

However, this would be a general rule and in certain exceptional circumstances, lex contractus would need to be given primacy over lex fori. Such situations would be where the Court would necessarily need to undertake an enquiry into the substantive law of the contract as a whole to decide the supervisory jurisdiction of the court.

Such instances, I imagine, would be far and few in between. One hypothetical example that comes to mind – imagine a contract between an Indian party and a Norwegian party. No seat or lex arbitri is provided. Governing law of the contract is English law and the lex fori is the Nani Palkhivala Arbitration Centre Rules. The venue is New Delhi, India. The Indian courts are called upon to make an enquiry if the arbitration clause is void, being vitiated by fraud.

I suspect, in such a circumstance, giving primacy to lex contractus over lex fori may be appropriate, since the court may be required to touch upon issues surrounding the main contract. I must re-emphasise, at the cost of repetition, that even in such a scenario lex arbitri would have primacy over lex contractus, should lex arbitri have been explicitly chosen by the parties. The Court of Appeal in Sulamérica (supra), observes,

“That principle, which reflects the presumption that the parties intended that even disputes about matters which, if established, would undermine the intrinsic validity of the substantive contract (such as fraudulent misrepresentation) should be determined by their chosen procedure, has been given statutory recognition by section 7 of the Arbitration Act 1996.”

The public policy question

The proposition that I have put forth i.e. that – as a general rule of thumb, lex fori would rank higher in the pecking order than lex contractus – would necessarily need to be tested from the stand-point of the public policy question.

It is settled law that procedural law is subservient to substantive law in India (Saiyad Mohammad Bakar El-Edroos (Dead) by LRS v. Abdulhabib Hasan Arab[(1998) 4 SCC 343]. The Court could well reconcile the two, on the ground that powers of the court in public law and arbitration law are quite different, but nonetheless the issue will need to be dealt with.

Should India follow UK law?

In one word – no!

India is ‘seat-centric’, while UK considers ‘seat’ merely as an important component in deciding supervisory jurisdiction. The UK it still grappling to settle its own law in this regard.

In my humble submission, with the decisive Balco v. Kaiser decision, India is already uniquely poised to spearhead the legislative uniformity in this space. The Supreme Court must not only lay down similar decisive guidelines on the supervisory jurisdiction of courts but also pioneer the way in this area of law for the rest of the world.

As Justice Sundaresh Menon says,

“….even in the absence of treaty-based reform, individual jurisdictions can play a part in promoting greater finality and certainty..” [The Role of the National Courts of the Seat in International Arbitration– Sundaresh Menon, CJ, Supreme Court of Singapore].

Conclusion

In my humble submission the correct exposition of the law in ‘seat-centric’ India ought to be as follows:

1. Once ‘seat’ has been given primacy, all laws connected with the ‘seat’ most also gain primacy.
2. Where ‘seat’ is explicitly chosen, courts of the ‘seat’ have exclusive jurisdiction. This is already a settled proposition of law.
3. Where no ‘seat’ is explicitly chosen,‘seat’ would need to be implicitly determined.
4. If lex arbitri is explicitly stated, ‘seat’ would follow the lex arbitri.
5. If no ‘seat’ or ‘lex arbitri’ are explicitly discernable, as a general rule,‘seat’ would follow lex fori and vice versa, following the principle of closest and most intimate connectionto the arbitration agreement.
6. However, in the rare and exceptional circumstance alone where the court is required to look to the main contract, lex contractus would gain primacy over lex fori. [Emphasis supplied by the author]
7. The last factor would be lex contractus in the determination of the locus arbitri.

Acceptance of lex fori over lex contractus, in a sense does favour institutional arbitration over ad-hoc arbitration, albeit not overtly. A more careful analysis will be redolent of that thought. If indeed India wishes to promote her institutional arbitration, as she must, and if India is to become an arbitral destination, lex fori must have primacy over lex contractus. 

The judgment in Union of India v. Hardy Exploration and Production (India) Inc. Civil Appeal  No(s). 4628/2018 reserved on 05-09-2018. Given the length of the article, the same was divided into parts.

The author is the founder of JusContractus a Delhi based full service law firm, with primary focus on arbitrations and is a director of the Nani Palkhivala Arbitration Centre. The author recognises the assistance of Ms. Aastha Bhardwaj, Advocate at JusContractus. The author also acknowledges the comments of Mr. Niranjan Venkatesan, Barrister at One Essex Court, which were critical in giving a final direction to the article.

For feedback, contact payalchawla@juscontractus.com.

This article is for informational purposes only, and is not intended to provide, and should not be relied on for legal advice. Readers are advised to seek independent legal advice in accordance with their peculiar facts and circumstances.