This article is authored by Akash Krishnan, a law student from ICFAI Law School, Hyderabad. It discusses in detail the laws applicable to arbitration, the importance and evolution of the seat in arbitration, and the test of closest connection in arbitral proceedings.
Table of Contents
The origin of arbitration lies in a contract. It accords greater flexibility and freedom to the parties to not only choose the law governing the contract, the arbitration agreement, the seat of arbitration but also allows them to follow a set of procedures of their own choice which is most suited to the dispute at hand.
The entire arbitral process is dependent on the arbitration agreement which should be valid to put the arbitral machinery into operation. This is the requirement that is mentioned in the New York Convention, 1959 and in the UNCITRAL Model Law, 1985. Parties to a dispute can enter into the agreement to submit existing as well as future disputes to be settled through arbitration. So, for this, some written record or evidence is required that the parties want to settle issues through arbitration, rather than through the courts, which are the institutions established by the countries for providing relief.
Laws applicable to the arbitration
In international commercial arbitration, since the parties or the corporations involved are from different countries, different laws are applicable for conducting the arbitration in an effective manner. Arbitration agreement will contain the name of the place where the arbitration will be conducted so as to make the law of that place relevant to the arbitration. In Naviera Amazonica Peruana SA vs. Compania Internacional de Seguros del Peru (1988), the Court of Appeal in England summarised the relevant laws applicable to an arbitration agreement. The laws are as follows:
- Law governing the agreement to arbitrate, i.e., juridical seat or lex arbitri.
- Law governing the substantive contract, i.e., an applicable/governing law.
- Law governing the procedure of the arbitration, i.e., curial law.
Law of the place of arbitration
Parties who wish to settle their dispute through arbitration have to mention the place of arbitration either at the time of entering into the contract or in the submission agreement that they form when the dispute has arisen, if not mentioned earlier. One of the fundamental characteristics of the arbitration is that the parties will often choose a neutral venue as the place of the arbitration. They will choose a country, which is not their place of residence or neither is it the one in which they have some commercial business running. This means that, in practice, the law of the place of arbitration, the lex arbitri, will often be different from the law that governs the substantive matters in dispute or in other words actual issues in the dispute. If the arbitration agreement provides that the seat of the arbitration is London and the substantive law is the Indian law, it means that the arbitral proceedings will be conducted according to English law, however, the main issues between the parties will be decided according to the Indian law. This difference between the lex arbitri and the law governing the substance of the dispute is well established in international commercial arbitration.
It is important that the parties mention the place of arbitration. If the parties have not mentioned the place of arbitration, the choice will have to be made for them, either by the arbitral tribunal itself or by a designated arbitral institution, if they have mentioned the name of the institution to conduct their arbitral proceedings.
It is firmly established that arbitration is governed by the law and the place of the arbitration which is the ‘seat’ or lex arbitri of arbitration is not merely a matter of geography. It is the territorial link between the arbitration itself and the law of the place in which that arbitration is taking place or in other words, provisions of the law of the place of the arbitration will be applied while conducting the arbitration.
By choosing a particular country as the seat or the place of arbitration the parties have not restricted the movement of the tribunal. The tribunal can conduct the proceedings out of that country, but it cannot change the procedural law. Since in international commercial arbitration, parties are in different countries, and in these circumstances, it is common for an arbitral tribunal to hold meetings or hearings in places other than the designated place of arbitration. It may be for the convenience of the parties, witnesses and also for the purpose of taking evidence. However, each move on the part of the arbitral tribunal does not in itself mean that the seat of the arbitration changes. The seat of the arbitration remains the place initially agreed by or on behalf of the parties.
Law applicable to the substance of the dispute
Procedure as to how arbitration has to proceed is regulated by the law of the place of the arbitration but the law that will deal with the core issues in the dispute will also have a very important impact on the arbitral process. Therefore, it is imperative to know what choice has been made by the parties. In case the dispute relates to the parties living in the same country, the domestic law of that country will be the applicable law. In the case of the international commercial contracts, parties from different countries are involved, moreover, since the choice has to be made by the respective parties they can choose the national law of the particular country or they can blend the laws of two countries to regulate their agreement. There may be two or more different national systems of law that may be applicable and it is also possible that these different national systems may contain contradictory rules of law on the particular point or points in issue.
Law dealing with the capacity of the parties to enter into an agreement
Law that will deal with the capacity of the parties will be the law of the country of their domicile or residence. In international commercial arbitration, the capacity of the parties to enter into an arbitration agreement should also be checked under the law that will deal with the substantive issues in the dispute. In the case of the corporation, capacity will be seen according to the place where the corporation or the company has been constituted. In case one of the parties to the arbitration agreement is the state or the state agency, then it should be checked that the state is allowed to resolve its disputes through arbitration or there is a need for the authorisation before the state can resolve its issues through arbitration.
Law governing the arbitration agreement
An agreement to arbitrate is incorporated in the submission agreement or in the arbitral clause. Where an arbitration clause is written into a contract, it is not usually laid down as to the law which will govern that clause. For instance, the standard ICC Arbitration Clause, which is set out in twelve languages, including Arabic, Chinese, Japanese and Russian, does not refer to any specific law governing the arbitration clause itself. So, if it is not expressly laid down as to what law will deal with the arbitration agreement, the presumption is that it will be the same law that will deal with the core issues in the dispute. This presumption is based on the assumption the arbitration clause is part of the main contract so it should be regulated by the same law as that is dealing with the core issues.
The evolution of laws governing the seat of arbitration in India
Bhatia Trading v. Bulk Trading SA (2002)
This case was one of the landmark cases in the pre-Balco regime wherein the importance of seat and place of arbitration and the applicability of the Arbitration and Conciliation Act, 1996 (Arbitration Act) was discussed. The case has been discussed in detail below:
In a contract between the Appellant and the Respondent, the dispute resolution clause provided an arbitration in accordance with the Rules of the International Chamber of Commerce (ICC). In furtherance of the same, the parties agreed to the arbitration being held in Paris, France and a sole arbitrator was appointed by the ICC. An application was filed by the Respondent in the District Court of Indore, Madhya Pradesh, seeking an order for an injunction against any form of alienation of the property by the Appellant. After the order was passed in favour of the Respondent and the same was confirmed by the High Court, the order of the High Court was challenged by the Appellant on the ground that Part-1 of the Arbitration Act does not apply to arbitrations occurring outside India.
Whether Part-1 of the Arbitration Act is applicable in cases of arbitrations where the place of arbitration is outside India?
- If the arbitration is happening in India, then Part-1 of the Arbitration Act will be applicable.
- In the case of an international commercial arbitration wherein, the place of arbitration is outside India, provisions of Part-1 will be applicable unless they are excluded by an express or implied agreement between the parties.
The Supreme Court failed to consider the difference between the ‘seat’ and ‘venue’ of arbitration while deciding this dispute. The Indian arbitration laws could have been deemed to be applicable only if the seat of arbitration is in India irrespective of the place of arbitration.
Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. (2012)
This case has set the benchmark when it comes to interpretation of the terms seat and place of arbitration and has been followed as a precedent ever since. This judgment also led to the 2015 Amendment of the Arbitration Act. The case has been discussed in detail below:
In a contract between the Appellant and the Respondent, the dispute resolution clause provided an arbitration. In furtherance of the same an Arbitral Tribunal was constituted and the arbitration proceedings were carried out in England. Two awards were passed by the Tribunal. The Appellant filed a petition under Section 34 of the Arbitration Act for setting aside the two awards in the District Court of Bilaspur. The District Court dismissed the petition on the ground that it was not maintainable. On an appeal filed to the Chhattisgarh High Court, the High Court upheld the order passed by the District Court. Thus, the Appellants approached the Supreme Court through this appeal.
Whether Part 1 of the Arbitration Act is applicable in cases of arbitrations where the place of arbitration is outside India?
- The Arbitration Act follows the territoriality principle as provided under the UNCITRAL Model Law. Thus, Part-1 of the Arbitration Act will only be applicable when arbitration is taking place within India (venue) or is following the Indian laws of arbitration (seat).
- Part-1 of the Arbitration Act will not be applicable to international commercial arbitrations if the place of arbitration and the seat of arbitration is outside India.
- The term ‘place’ that has been utilised in Section 20(1), and Section 2(2) should be read as the seat of arbitration.
- The term ‘place’ that has been utilised in Section 20(3) should be read as the venue of arbitration.
The 246th Law Commission Report
Amendment of Section 2(2)
The word ‘place of arbitration’ should be replaced by the term ‘seat of arbitration.’
Insertion of Section 2(3)
Amendment of Section 20 (1)
The phrase ‘place of arbitration’ should be replaced by the term seat and venue of arbitration.
Amendment of Section 20 (3)
The phrase ‘place of arbitration’ should be replaced by the term venue of arbitration.
The Arbitration and Conciliation (Amendment) Act, 2015
The Amendment Act of 2015 incorporated all the amendments suggested by the Law Commission Report regarding the seat and venue of arbitration.
The closest-connection test
A question may arise as to what happens if the parties mention the venue to arbitration in the agreement but fail to mention the seat of arbitration. In such cases, can the venue of arbitration be deemed to be the seat of arbitration as well?
In Dozco India Pvt Ltd. v. Doosan Infracore Co. Ltd (2011), the Supreme Court held that if the parties fail to mention the seat of arbitration in the agreement, the presumption is that the parties have intended the laws of the venue of the arbitration to be the laws governing the arbitration as well unless an intention to the contrary has been shown. This is called the closest-connection test as the country/place that is most closely connected with the arbitral proceedings is used to determine the seat of arbitration.
In BGS SGS Soma JV v. NHPC Ltd (2020), the Supreme Court held that in the absence of an express mention of the seat of arbitration, the venue of the arbitration would be deemed to be the juridical seat since the venue of arbitration is most closely connected with the arbitral proceedings.
In Inox Renewables Ltd. v. Jayesh Electricals Ltd (2021), the parties to the arbitration had mutually agreed to shift the venue of arbitration from Jaipur to Ahmedabad. It was contended by the Respondent that in the absence of a written agreement, the shift in the venue of arbitration does not result in the shift in the seat of the arbitration. It was also contended that the courts in Rajasthan will have exclusive jurisdiction to hear the disputes arising out of the arbitration. The Supreme Court held that the parties to an arbitration can shift the venue of the arbitration without a written agreement. By changing the venue of the arbitration, the seat of the arbitration also changes, and thus the courts in Gujarat will have exclusive jurisdiction to deal with the issues arising out of the arbitration.
In the course of the arbitral proceedings, the arbitrators are required to deal with a number of preliminary and substantive issues such as whether they have the jurisdiction, laws that will be applicable or not and limitations of the action, etc. The determination of the juridical seat of arbitration is one of the most essential aspects of arbitration because only if the seat of arbitration is known, the arbitrators can apply the correct law for governing the arbitration process and pass an award that can be enforced in a court of law. In case the seat of arbitration has not been expressly mentioned by the parties, the test of closest-connection will be applicable and the venue of arbitration would be considered as the seat of arbitration as well.
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