Friday, May 27, 2011

Guest Post: Supreme Court's View on Substantive and Curial Law in Arbitration

(In the following post, Mr Vijay Kumar, Advocate, Madras High Court and Associate, Iyer & Thomas, discusses the law on implied exclusion)

This post analyses few of the significant decisions of the Supreme Court (SC) with reference to the essential difference between the law governing the contract (substantive law) and the law governing the arbitration proceedings between the parties to the dispute (curial law).

S. 28 of the Arbitration and Conciliation Act, 1996 (A&C) provides for the rules applicable to the substance of the dispute. However, s. 28 is applicable only when the place of arbitration is in India as it starts with the words ‘[w]here the place of arbitration is situate in India…’. Therefore s. 28 does not apply where the place of arbitration is outside India.

In international commercial arbitrations, it has become a practice that parties agree upon a substantive law and on curial law. It is in these circumstances, question arises as to whether Part I of A&C is excluded either expressly or impliedly by choosing procedural law other than A&C for conducing arbitration proceedings.

With the scope being limited to the premises stated above, decisions of the SC in the matter of Bhatia International , Citation Infowares, Dozco v Doosan; Videocon v Union of India and Gujarat HC’s decision in Hardy Oil are analysed below.

The SC in Bhatia International’s case held that

“Part I of the A&C would apply to all arbitrations and to all proceedings relating thereto. Where such arbitration is held in India, the provisions of Part I of A&C would compulsorily apply and the parties are free to deviate to the extent permitted by the derogable provisions of Part I. In cases of International Commercial arbitration held out of India provisions of Part I would apply unless the parties by agreement express or implied exclude all or any of its provisions. In that case the laws or rules chosen by the parties would prevail. Any provision in Part I which is contrary to or excluded by that law or rules will not apply.” (para 32)

The conclusion in unequivocal terms is that, that in international commercial arbitration where place of arbitration is outside India, the parties are free to agree upon the law governing the contract and the procedural law applicable to arbitral proceedings. Such law as agreed between the parties shall prevail over Part I of A&C. Therefore parties are free to choose the substantive law applicable to contract, curial law applicable to the arbitration proceedings and the judicial seat of arbitration. Where curial chosen is different from A&C, that law would prevail over A&C.

It has been succinctly expressed in the decision of Hardy Oil and Gas Limited’s case decided by the Gujarat High Court. To appreciate the views expressed by the Gujarat HC, the relevant clauses of the contract are extracted below-:

“Governing Law and Arbitration

1. This Agreement (except for the provisions of Clause 9.5.4 relating to arbitration) shall be governed by and construed in accordance with the substantive laws of India.

2. Any dispute or difference of whatever nature arising under, out of, or in connection with this Agreement, including any question regarding its existence, validity or termination, which the parties are unable to resolve between themselves within sixty (60) days of notification by one or more Parties to the other(s) that a dispute exists for the purpose of this Clause 9 shall at the instance of any Party be referred to and finally resolved by Arbitration under the rules of the London Court of International Arbitration (SLCIA), which Rules (Rules) are deemed to be incorporated by reference into this clause.

3. The Tribunal shall consist of two arbitrators who shall be Queen's Counsel, practicing at the English Bar in the Commercial Division of the High Court, ……………………….

4. The place of arbitration shall be London and the language of arbitration shall be English. The law governing arbitration will be the English law……..

The Gujarat HC relied on Bhatia International and has stated certain principles drawing on National Thermal Power Corporation vs Singer with reference to choice and applicability of substantive and curial law with specific reference to conflict of laws. The principles are given below in brief –

Ø Parties have freedom to choose the law governing an international commercial arbitration agreement. They may choose the substantive law governing the arbitration agreement as well as the procedural law governing the conduct of arbitration. Such choice is exercised either expressly or by implication.

Ø Where there is no express choice of law governing contract as a whole, or the arbitration agreement in particular, there is, in the absence of any contrary indication, a presumption that the parties have intended that the proper law of the contract as well as the law governing the arbitration agreement are the same as the law of the country in which the arbitration is agreed to be held.

Ø On the other hand, where the proper law of the contract is expressly chosen by the parties (as in the present case), such law must, in the absence of an unmistakable intention to the contrary, govern the arbitration agreement which, though collateral or ancillary to the main contract, is nevertheless a part of such contract.

Ø In the absence of any indication to the contrary, the governing law of the contract being Indian law, it is that system of law which must necessarily govern matters concerning arbitration, although in certain respects the law of the place of arbitration may have its relevance in regard to procedural matters. The law governing such rights and liabilities is the proper law of the contract, and unless otherwise provided, such law governs the whole contract including the arbitration agreement, and particularly so when the latter is contained not in a separate agreement. This would be the situation where there is absence of a specific agreement to the contrary, as is the situation in the matter on hand.

In this case parties had expressly chosen laws of England as the law governing the arbitration proceedings and hence it was held that provisions of Part I of A&C were expressly excluded and it would be the English law that would govern arbitration proceedings. Therefore parties could not invoke the Indian Courts under Part I of A&C.

A different view has been taken in Citation Infowares where the SC distinguished the case from the principles enumerated in NTPC’s case, and holds that provisions of Part I of A&C act are applicable to the subject dispute. The relevant arbitration clause between the parties is given below-

“This agreement shall be governed by and interpreted in accordance with the laws of California, USA and matters of dispute, if any, relating to this agreement or its subject matter shall be referred for arbitration to a mutually agreed Arbitrator"

The SC held that the parties had agreed upon the substantive law and had not agreed either on the judicial seat of arbitration or the curial law. It also stated that there was nothing in the arbitration clause to exclude impliedly provisions of Part I of A&C and hence it was held that Part I of A&C is applicable and powers were exercised under Section 11 of the Act to appoint the arbitrator.

This view is contrary to principle enumerated in NTPC’s case wherein it was held that where there is no separate arbitration agreement but, arbitration agreement forms part of the principal agreement as a clause thereof and if there is no specific agreement between the parties to the contrary, law governing principal agreement would govern the arbitral proceedings. In Citation Infowares, though the parties had agreed upon the substantive law applicable to the contract, and the contract was silent on the curial law, it would have been the law of the contract that would be applicable to the arbitration proceedings. Since place of arbitration was not specified, SC held that the principle enunciated in the NTPC case would not be applicable. In my view, the omission by the parties to agree on place of arbitration makes Part I of A&C applicable is contrary to principles stated earlier. It introduces one more criterion to be considered in determining the intention of the parties which did not exist previously. When the parties had contemplated laws relating to California as the substantive law and there was nothing in the agreement to suggest that the parties negated the applicability of Californian laws as curial law. The natural inference would be that parties had positively agreed to subject themselves to laws of California as substantive and curial law.

In Dozco vs Doosan, SC held that by specifying the substantive law, and the seat of arbitration as Republic of Korea it becomes fairly clear that the parties had agreed to exclude Part I of A&C and hence petition under Part I is not maintainable.

The arbitration clause that was agreed by the parties is given below for ready reference -

Article 23.1

“This agreement shall be governed by and construed in accordance with the laws of The Republic of Korea.

All disputes arising in connection with this Agreement shall be finally settled by arbitration in Seoul, Korea (or such other place as the parties may agree in writing), pursuant to the rules of agreement then in force of the International Chamber of Commerce (emphasis supplied)”

The SC held that language of Article 23.1 clearly suggests that all the three laws i.e the substantive law, curial law and the law relating to conduct of arbitration are the laws of The Republic of Korea. Hence parties impliedly excluded the application of Part I of A&C.

SC in Dozco’s case though has not stated in as many words but has followed the principles laid down in NTPC case. As in Bhatia International, the parties in Dozco had agreed upon ICC Rules of Arbitration. Since the substantive law applicable to the contract was the law relating to the Republic of Korea and the place of arbitration was Seoul which added up to enable SC reach conclusion that Part I of A&C was excluded by the parties and hence petition under Section 11 before SC was not maintainable. However as stated earlier, parties had agreed on ICC Rules and not on procedural law of Republic of Korea.

Lastly, traversing the decision in Videocon Industries Ltd vs Union of India, SC upheld the decision of Gujarat HC and the principles enunciated in Bhatia International and NTPC’s case. The clause of arbitration read as follows-

33.1 Indian Law to Govern

Subject to the provisions of Article 34.12, this Contract shall be governed and interpreted in accordance with the laws of India.

33.2 Laws of India Not to be Contravened

Subject to Article 17.1 nothing in this Contract shall entitle the Contractor to exercise the rights, privileges and powers conferred upon it by this Contract in a manner which will contravene the laws of India.

34.12. Venue and Law of Arbitration Agreement

The venue of sole expert, conciliation or arbitration proceedings pursuant to this Article, unless the Parties otherwise agree, shall be Kuala Lumpur, Malaysia, and shall be conducted in the English language. Insofar as practicable, the Parties shall continue to implement the terms of this Contract notwithstanding the initiation of arbitral proceedings and any pending claim or dispute. Notwithstanding the provisions of Article 33.1, the arbitration agreement contained in this Article 34 shall be governed by the laws of England.

The above clauses make it amply clear that substantive law is Indian Law and the curial law applicable is English law. Therefore the forum to be approached is English Courts and all the arbitration proceedings including interim measures, setting aside of award shall be in accordance with the provisions of English law.

To conclude, the decision of Bhatia International and NTPC is followed in all the cases. There is a distinction made in the case of Citation Infowares where even though the parties had agreed on the substantive law, and had omitted to agree on the place of arbitration and curial law, the SC differed from NTPC’s principle and held that omission by the parties to agree upon judicial seat of arbitration and language of arbitration resulted in applicability of Part I of A&C. When the parties had agreed upon the substantive law, the SC ought not to have looked at other considerations to determine applicability of Part I of A&C and the law governing the contract would be curial law as there is no contrary intention demonstrated by the parties to negate the applicability of substantive law as curial law. The decision is also not practically in accordance with the intention of the parties as SC appointed an Indian National to adjudicate the dispute in accordance with the laws of State of California.

It is necessary to state here that SC in Dozco’s case relies on the principle stated by Mustill and Boyd “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. So in order to determine the curial law in the absence of an express choice by the parties it is first necessary to determine the seat of the arbitration, by construing the agreement to arbitrate.”

In my view, this presumption would arise only when the parties had agreed on the judicial seat of arbitration. When the parties had agreed on the substantive law and omitted to agree on the curial law and on the seat of arbitration, it did not give cause for holding that Part I becomes applicable to the parties. Part I of A&C cannot be applied to give benefit of doubt to the parties. When substantive law has been agreed with open eyes, unless contrary is shown it is presumed that parties would not agree to contrary with respect to curial law (NTPC case).

2 comments:

Anonymous said...

In my opinion, inference of the Judgement is "When contract is governed by a foreign law, Indian courts do not have jurisdiction."

Does it apply for any type of contract or only for arbitration contract?

Anonymous said...

In my opinion, inference of the Judgement is "When contract is governed by a foreign law, Indian courts do not have jurisdiction."

Does it apply for any type of contract or only for arbitration contract?