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

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Payal Chawla

This article first appeared as three-part series on Bar and Bench on 09.09.2018, 10.09.2018 and 13.09.2018.

On May 1, 2018, the Supreme Court referred the issue of manner of determination of a ‘seat’, when the ‘seat’ is not expressly agreed to by the parties, to a larger bench, in the matter of Union of India v. Hardy Exploration and Production (India) Inc. [(2018) 7 SCC 374].

In cases where the arbitration agreement specifies the “venue” for holding the arbitration sittings by the arbitrators, but does not specify the “seat”, the question then arises, ‘on what basis and by which principle’, the “seat” should be determined, because the ‘seat’ ‘has a material bearing for determining the applicability of laws of a particular country for deciding the post-award  arbitration proceedings’.

The Court was of the view that the matter needs to be referred to a larger bench, given the conflicting decisions and law laid down by the Supreme Court ‘in several decisions by the Benches of variable strength’.

Facts of Hardy Exploration:

In 1997, Hardy Exploration and Production (India), Inc. (“Hardy Inc.”) entered into a contract with the Union of India, to allow Hardy Inc. to search for and potentially extract hydrocarbons from certain areas off of India’s south-eastern coast. The contract contained a detailed arbitration provision.

The arbitration clause inter alia provided for a three-member arbitral tribunal. The ‘venue’ of arbitration was Kuala Lumpur. No ‘seat’ was provided in the contract. The clause stated that the ‘contract shall be governed and interpreted in accordance with the laws of India’.

Therefore, the contract explicitly provided that the lex contractus was Indian. It also provided for a lex fori i.e. the UNCITRAL Model Law on International Commercial Arbitration of 1985. The contract was, however, silent on the lex arbitri.

When disputes arose between the parties, Hardy Inc. initiated arbitration proceedings. The Tribunal passed an Award in favour of Hardy Inc.and passed an order of specific relief and interest on its original investment, as well as certain costs.

The Award was challenged in an s.34 before the Delhi High Court in July 2013. Hardy Inc., on the other hand, sought enforcement of the Award in November 2013 before the Delhi High Court, which proceedings are pending.

As regards the s.34 proceedings, those have had an interesting life. The Union of India filed a petition before the Delhi High Court. After two years, the Union of India, when faced with objections of jurisdiction, withdrew the petition on the grounds that Delhi was not the appropriate jurisdiction on 09.07.2015 [It was felt that Madras High Court in Chennai, would be the correct jurisdiction, being geographically closest to the Block (or the cause of action)].

Post the withdrawal, the Union of India filed a Review before the Hon’ble Delhi High Court. Since the s.34 was ‘withdrawn by the petitioner on its own volition’, the Court found no infirmity with the order and dismissed the Review, vide order dated 20.01.2016.

Both orders dated 09.07.2015 and 20.01.2016 were challenged by the Union of India before the Division Bench under s.37(2) of the Arbitration & Conciliation Act, 1996. Even though the Division Bench was prima facie of the view that ‘strictly speaking’, the order dated 09.07.2015 was correct and that there was no ‘error apparent on the record’, the Court still went on to decide the issue.

The Division Bench held that Kuala Lumpur was not merely the ‘venue’, but also the ‘seat’, and therefore the principle laid down in Bhatia International v. Bulk Trading S.A.[(2002) 4 SCC 105] had no application to the issue at hand, and Part 1 would not apply.

In essence, the Court held that since the Award was made at Kuala Lumpur, that was the ‘seat’. The Court also impliedly treated the lex fori or the curial law, to be determinative, in the absence of clear determination of ‘seat’. The lex contractus seemed to have had no bearing on the Court in its determination.

In October 2016, the Union of India filed for leave to appeal before the Supreme Court, which issue has now been referred to a larger bench for consideration.

[As an aside, in the meantime, Hardy Inc. filed a petition seeking confirmation of the arbitral award before the District Court, District of Columbia, the United States under the Federal Arbitration Act. India opposed the confirmation, claiming that the enforcement of the award’s specific performance order would be violative of the U.S. public policy, as would confirmation of the interest portion of the award, which India claimed is punitive and coercive, rather than compensatory. Agreeing with the submissions of the Union of India, the Court declined to confirm the grant of specific performance and grant of interest, as being violative of U.S. public policy].

On the facts of the case, particularly the withdrawal of the s. 34 by the Union of India, it is unclear how the appeal is maintainable, but that said, the issue of ‘seat’ determination, as a principle of law, is long overdue and ripe for consideration.

Meaning of lex-contractuslex-arbitri and lex-fori:

An ‘arbitration case with a foreign element, three systems of law are potentially relevant. Namely: (i) The law governing the substantive contract. (ii) The law governing the agreement to arbitrate, and the performance of that agreement. (iii) The law of the place where the reference is conducted: the lex fori’ – Black Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1982] 2 Lloyd’s Rep. 446. Quoted more recently with approval in Court of Appeal in Sulamérica Cia Nacional De Seguros S.A.v. Enesa Engenharia S.A.[2013] 1 WLR 102

Lex contractus is the law governing the main contract or in other words the law governing the performance of the main contract.

Lex arbitri literally translated from Latin means ‘law of the arbitration’- for example, the Arbitration and Conciliation Act, 1996 or the UK Arbitration Act, 1996.  – This is the ‘proper law of the arbitration agreement, i.e. the law governing the obligation of the parties to submit the disputes to arbitration, and to honour an award’.

‘The proper law of the arbitration agreement governs the validity of the arbitration agreement, the question whether a dispute lies within the scope of the arbitration agreement; the validity of the notice of arbitration; the constitution of the tribunal; the question whether an award lies within the jurisdiction of the arbitrator; the formal validity of the award; the question whether the parties have been discharged from any obligation to arbitrate future disputes’ [Mustill and Boyd titled Law and Practice of Commercial Arbitration in England, 2nd Edition].

Although, generally, the lex contractus and lex arbitri would be the same, but because an arbitration agreement is a separate contract, it is possible for the lex arbitri to be different from the lex contractus. Hypothetically, it is possible for the parties to state in their contract that the governing law (i.e. the lex contractus) would be Indian Law (eg. The Indian Contract Act, 1872), but that the arbitration would be governed by the (UK) Arbitration Act, 1996 (lex arbitri).

Lex Fori, also known as curial law, on the other hand, governs the procedural aspect of the conduct of the arbitration proceedings’ [Yograj Infrastructure Ltd. v. Ssangyong Engineering & Construction Co. Ltd[(2012) 12 SCC 359]. It is the ‘law governing the conduct of the arbitration.

This is usually referred to as the curial or procedural law, or the lex fori’ [Balco v. KaiserAluminium Technical Services Inc. [(2012) 9 SCC 552]In Sumitomo Heavy Industries Ltd. v. ONGC Ltd. [(1998) 1 SCC 305], a three-judge bench of the Supreme Court explained that curial law ‘governs the procedural powers and duties of the arbitratorquestions of evidence and the determination of the proper law of the contract’.

The meaning of Lex fori or curial law can often be confusing. The expressions lex arbitrilex fori and curial law have been used interchangeably in several judgments, both English and Indian. In reality, however, there is a difference between the two, albeit there are overlaps.

Lex arbitri is the substantive law of the arbitration agreement, and lex fori is the procedural law of the arbitration. By way of example, the Arbitration and Conciliation Act, 1996, can be both the lex arbitri and lex fori. In so far as the Act deals with the substantive law of the arbitration it would be the lex arbitri, and portion of the said Act that deals with procedural aspects, would be lex fori.

In a scenario where parties have provided for both the Arbitration and Conciliation Act, 1996 and say the Nani Palkhivala Arbitration Centre Rules, the former would be the lex arbitri and the latter would be the lex fori. Where the lex fori is in conflict with the lex arbitri, the lex arbitri will prevail and such portion of the lex arbitri would be treated as the lex fori.

NTPC v. Singer

I begin with National Thermal Power Corporation v. Singer Company [(1992) 3 SCC 551] decided on 7th May, 1992. The decision of NTPC v. Singer was delivered in the context of the Arbitration Act, 1940, and was part of the pre-Bhatia International (supra) regime.

The salient features of the contract in relation to the dispute between NTPC and Singer were – New Delhi was the venue, the lex contractus and lex arbitri were both Indian law and the lex fori /curial law was the Rules of International Chamber of Commerce (‘ICC’).

The twist in the tale arose because of Article 12 of the (then) ICC Rules which read:

The place of arbitration shall be fixed by the International Court of Arbitration, unless agreed upon by the parties.”

Although, the parties had never expressed their intention to choose London as the ‘seat’, but, in the absence of any agreement on the question, London was chosen by the ICC Court as the place of arbitration. Except to be the place of arbitration, London had no significant connection with the contract or the parties.

The judgment in NTPC v. Singer in essence held:

  1. The Court observed – “It was in Delhi that the agreement was executed. The form of the agreement is closely related to the system of law in India. Various Indian enactments are specifically mentioned in the agreement as applicable to it in many respects. The contract is to be performed in India with the aid of Indian workmen whose conditions of service are regulated by Indian laws. One of the parties to the contract is a public sector undertaking. The contract has in every respect the closest and most real connection with the Indian system of law and it is by that law that the parties have expressly evinced their intention to be bound in all respects.”
  2. The court applied the ‘closest and most intimate connection’ test to the entire contract or in other words to the dispute, in determining the supervisory jurisdiction of the courts. [Emphasis supplied by the author].
  3. The Court held that parties have expressly chosen Indian law and the exclusive jurisdiction of the courts in Delhi, therefore the substantive law was Indian and the arbitral award could not be a foreign award.
  4. The Court also held that where lex arbitri was not expressly chosen by parties, the same would follow lex contractus, particularly if the arbitration agreement was embodied in the main contract.
  5. The Court impliedly gave primacy to lex contractus over lex fori.

Despite the lucid exposition of the law by the Court in NTPC v. Singer, the law has since traversed on all the above counts.

Supremacy of Seat in India

Until 2012, Bhatia International held the fort. According to the ratio of Bhatia International, a party, in the context of international commercial arbitration, had to necessarily, explicitly or implicitly, exclude Part 1 of the Arbitration and Conciliation Act, 1996 i.e. the lex arbitri of India.

Therefore, in order to decide whether the courts in India had supervisory jurisdiction over an arbitration, the lex arbitri of India necessarily needed to be excluded by the parties. Else, Indian courts would retain jurisdiction. Therefore, under the Bhatia regime lex arbitri was the determinative lex for Indian courts.

However, on September 6, 2012, the Constitution Bench delivered the judgment of Balco v. Kaiser (supra). Post Balco v. Kaiser, ‘seat’ or the ‘locus arbitri’ became determinative for deciding whether India had supervisory jurisdiction over an arbitration or not, in the context of international commercial arbitration.

More recently, the Balco v. Kaiser principle was extended to domestic arbitration by the decision of Indus Mobile Distribution Pvt. Ltd v. Datawind Innovations Pvt. Ltd. [(2017) 7 SCC 678]

With Balco v. Kaiser, the supervisory jurisdiction of courts in India became ‘seat-centric’, giving primacy to ‘seat’.

A word about England in this context – while India, post Balco v. Kaiser, is decisively ‘seat-centric’, England only treats ‘seat’ as an important component in deciding supervisory jurisdiction of courts.

Lex arbitri – the most important lex in determining ‘seat’

In the post Balco or ‘seat-centric’ era, where no ‘seat’ has been explicitly selected by the parties, it becomes imperative to discern the ‘seat’. But the question is – what is the manner of determining the ‘seat’, when ‘seat’ is not expressly designated?

This has been a vexing question worldwide, and there are a plethora of decisions on the subject. [For the interested reader, the majority of the conspectus of decisions have been detailed in Enercon (India) Ltd. v. Enercon GmbH [(2014) 3 SCC 551], Roger Shashoua v. Mukesh Sharma [(2017) 14 SCC 722] and more recently in Hardy Exploration(supra)]. In this article, I have discussed only those decisions I considered most relevant to the issue at hand.

In 1988, the Court of Appeal in the UK would deliver the decision in Naviera Amazonica (supra)which would go on to become perhaps the most quoted and relied-upon decision in regard to the determination of supervisory jurisdiction of courts, at least in India.

In Naviera Amazonica, the question arose whether the insurance policy contained a London or Lima seated arbitration clause. The Court held the arbitration clause to be governed by English law. The governing law of the insurance policy was English law and the arbitration was also to be governed by English Law. The Court held that Lima, where the arbitration was required to be held, was merely the venue of arbitration.

The Court observes,

Where the parties have failed to choose the law governing the arbitrationthose proceedings must be considered, at any rate prima facie, as being governed by the law of the country in which the arbitration is held, on the ground that it is the country most closely connected with the proceedings’.

Prima facie, i.e. in the absence of some express and clear provision to the contrary, it must follow that an agreement that the curial or procedural law of an arbitration is to be the law of X has the consequence that X is also to be the ‘seat’ of the arbitration. The lex fori is then the law of X, and accordingly, X is the agreed forum of the arbitration. A further consequence is then that the courts which are competent to control or assist the arbitration are the courts exercising jurisdiction at X’.

[Emphasis supplied by the author]

Accordingly, the Court in Naviera Amazonica observes that the most important aspect in determination of supervisory jurisdiction of the court is the ‘substantive law of the agreement to arbitrate’ i.e. the lex arbitri.

Since in the facts of Naviera Amazonica, in the wording of the arbitration clause ‘the parties had agreed expressly that their agreement to arbitrate should be subject to English law’, the Court holds that court in England will have jurisdiction.

The Court also appears to suggest that where the lex arbitri is not readily discernable, lex fori becomes the next most relevant lex in the determination of ‘seat’.

Some years later, in India, the Supreme Court in Sumitomo Heavy Industries v. ONGC (supra), would hold,

the law which would apply to the filing of the award, to its enforcement and to its setting aside would be the law governing the agreement to arbitrate and the performance of that agreement”.

[Emphasis supplied by the author]

In March 2002, the Indian Supreme Court delivered the decision of Bhatia International(supra). This changed the nature of debate, in India, and in the decisions that followed, the debate on lex was confined to finding whether parties had ‘impliedly’ excluded India’s lex arbitri.

Meanwhile in England, Fiona Trust & Holding Corp v Privalov [2008] 1 Lloyd’s Rep. 254(HL)considered the location of the ‘seat’ of arbitration as an important factor in determining the proper law of the arbitration agreement.

And the tide in India would soon begin to turn as well. The Supreme Court, despite Bhatia International, in Dozco India Pvt. Ltd. v. Doosan Infracore Co. Ltd [(2011) 6 SCC 179] drawing a distinction between ‘venue’ and ‘seat’, would rely on Naviera Amazonica. Distinguishing its facts from Bhatia International, the Court held that since the law governing the arbitration was Korean law, the seat of arbitration was Seoul in Korea.

In May 2012, the Court of Appeal delivered the decision in the matter of Sulamerica (supra)Sulamerica is recognised as the locus classicus in regard to the determination of supervisory jurisdiction of courts. In Sulamerica, the contract in question was an insurance policy. The governing law of the contract was exclusively Brazilian law. The clause also provided for the exclusive jurisdiction of Brazilian courts. The lex fori was ARIAS (UK) Arbitration Rules. The clause also provided for London as the ‘seat’.

Where the lex arbitri is not apparent, the Court in Sulamerica suggests a three-stage enquiry’ i.e. (i) express choice, (ii) implied choice and (iii) closest and most real connection’. The Court goes on to observe that the ‘three stages ought to be embarked on separately and in that order’.

A few months later in 2012, the Constitution Bench in India would deliver the landmark judgment of Balco v. Kaiser which defined the ‘seat’ as the sole test for determining the supervisory jurisdiction of Indian courts. And so the debate would turn to determination of such ‘seat’ when the same was not explicitly discernable. The Court observed,

the seat of arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings.”

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.

[Note: The judgment in Union of India v. Hardy Exploration and Production (India) Inc. Civil Appeal  No(s). 4628/2018 reserved on 05-09-2018]

Payal Chawla 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.

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