Laws applicable to International Commercial Arbitrations
- In international commercial trade when parties enter into agreements, they are free to agree upon their own terms and to make their own law as they may choose, subject to public policy and ordre public. It has become a trend to incorporate alternate dispute resolution clauses such as, resolution of disputes through arbitration, in international commercial agreements for swift and economical resolution of disputes between the parties whenever they arise. There are different laws that may apply to international commercial arbitrations and autonomy of the parties is recognized as one of the fundamental principles of private international law.
- It is well known that an arbitration agreement is a separate agreement entirely distinct from the substantive contract and is capable of surviving termination of the substantive agreement, and it may be separately drawn as an agreement or may be incorporated as a clause in the substantive contract. This essentially means that the arbitration agreement is governed by a ‘proper law’ of its own. This proper law may or may not be distinct from the ‘proper law of the substantive agreement’. It is important to understand what rights and obligations of the parties these two kinds of ‘proper law’ govern.
Proper Law of the Substantive Agreement versus Proper Law of the Arbitration Agreement
- Proper law of the substantive contract is generally described as the ‘governing law’, ‘applicable law’, ‘substantive law’ as also ‘proper law of the contract’. It is the law governing the substantive rights of the parties, in respect of which the dispute has arisen, whereas proper law of the arbitration agreement governs the obligation of the parties to submit the disputes to arbitration. It governs the validity and performance of the arbitration agreement, assists in determining whether a dispute falls within the scope of the arbitration agreement or whether the arbitrators have the jurisdiction to pass an award.
Choice of proper law of substantive contract
- The choice of proper law of the substantive contract is largely dependent on the place of business/transaction or where the parties reside. It is usual for parties to expressly state their choice of the law in a contract which will govern their rights and obligations under the contract and the substantive issues in dispute. In transactions which are covered by private international law, parties can agree to choose to adjudicate disputes or claims arising between them, by a court which is a neutral forum, i.e., in such a place where neither party resides or has any connection with the transaction or arrangement between them. In this context it may be relevant to reproduce an excerpt from a judgement of the Supreme Court of India, where it referred to Cheshire and North’s Private International Law to determine whether a choice of governing law binding upon the parties and if there is any scope for interpretation by the Courts,
“28. …In Cheshire and North’s Private International Law (11th edn., page 495), while discussing about the interpretation of contracts the authors say : “When the stage has been reached where an obligation, formally and essentially valid and binding on parties of full capacity, has been created, then in the further matters that may require the intervention of the court, there is, speaking generally, no reason in principle why the parties should not be free to select the governing law.” The express choice of law made by parties obviates need for interpretation.”
- Where an agreement does not contain an express choice of proper law of substantial agreement, the court or arbitrator is required to identify the system of law with which the subject matter of the agreement or the transaction has its closest and most real connection with. Then the court or arbitrator has to consider the nationality of the parties, the place where the agreement is to be performed, the place where the contract was made, the language of the contract, et al.
Choice of proper law of arbitration agreement
- If parties have expressly chosen the proper law of the arbitration to be different from the proper law of the substantive agreement, then this choice is considered to be independent of the underlying contract and such choice shall prevail. In the absence of an express choice, it is to be considered if there is an implied choice made by the parties in this regard. In the absence of an express or implied choice of law, the arbitration agreement will be governed by the law with which the agreement has its closest and most real connection. Most often, it is presumed that in the absence of an express or implied choice, the proper law of arbitration agreement is the same as the proper law of the substantial agreement.
- This brings us to a concept of core importance in international commercial arbitration, which is the ‘curial law’ or ‘procedural law of the arbitration’. It is essentially the manner in which parties and arbitrators are required to conduct the reference of a particular dispute. The expression ‘curial law’ is interchangeable with ‘lex arbitri’ or ‘forum’. It governs the existence and proceedings of the arbitral tribunal such as, the procedural capacities and obligations of the arbitrator, questions of evidence, procedure to invoke the powers of a court in relation to the reference, general manner of regulating an arbitral procedure. It may be the same as the proper law of the arbitration agreement or parties may choose to submit the law governing the conduct of the reference to a different law.
Choice of curial law
- Parties may expressly choose the curial law, and it may be different from the proper law of the substantive agreement, but rarely it is different from the proper law of the arbitration agreement. Therefore, in the absence of express choice of curial law by the parties, the court has to consider many factors such as, the proper law of the arbitration agreement, the nationality of the parties, the business/trade/operations of the parties that forms the subject-matter of the agreement, probability of selecting a neutral seat (especially for state parties) unconnected with either party.
- Nevertheless, the curial law is almost always the same as the law of the country where the arbitration is to take place, therefore, in the absence of express choice, it is generally presumed that the parties intend the curial law to be the law of the place where the arbitration proceedings are to be conducted, i.e., the ‘seat’ of the arbitration. Choosing a lex arbitri ensures that arbitral process works seamlessly, as it allows for certain functions such as appointment of arbitrators, filling up of vacancy, setting aside of award, etc. to be exercised by the courts of the seat of arbitration. Conversely, in the event the ‘seat’ of the arbitration is not expressly specified in the agreement, the choice of seat may be inferred from set of arbitration rules associated with a particular country chosen by the parties.
- Parties may also make a choice of a curial law after the dispute has arisen. This may be done by changing the seat of the arbitration, it must be noted that this is different from changing the place to a more geographically convenient location to conduct the arbitration proceedings. This will not automatically change the ‘seat’ of the arbitration and thereby the curial law unless the parties expressly or by implication intend to do so.
Law Governing Enforcement and Recognition of Award
- An arbitral award may be enforced, if so required, in the ‘seat’ of the arbitration, or in another jurisdiction as a ‘foreign’ or ‘international’ award. The former is relatively easier as it is enforced as an award in a domestic arbitration. However, enforcement of a foreign or international award becomes relatively difficult as different set of laws particular to that country where enforcement is being sought comes into play. An arbitrator is obligated to use his best endeavours to pass an award which will be enforceable in the appropriate jurisdiction.
- Enforcement proceedings commence after passing of the award and is entirely independent of the arbitral proceedings. Therefore, it is not governed by the curial law. In practise, this may be governed by more than one system of law, in the event recognition and enforcement of the award is sought in more than one country. It would primarily depend on the procedural and substantial law of the country where the recognition and enforcement of the award is sought.
- In most cases, as stated at the beginning of this article, parties are left to decide their own rules of procedure when conducting arbitration, as long as the parties are treated equally. Nevertheless, even in such situation these rules of procedure would require the sanction of law for them to be effective and enforceable in any jurisdiction.
 Lord McNair, ‘The general principles of law recognized by civilised nations’ (1957) 33 BYIL 1
 Chap 2, Redfern and Hunter, 6th Ed.
 Norske Atlas Insurance Co. Ltd. v. London general Insurance Co. Ltd. (1927 28 Lloyd’s Rep 104)
 Dalmia Dairy Industries Ltd. v. National Bank of Pakistan (1978 2 Lloyd’s Rep 223)
 “9. ..Private international law gets triggered ordinarily when there is a foreign constituent in the transaction obtaining between parties.”- Piramal Healthcare Ltd. v Diasorin S.P.A – (2010 172 DLT 131)
 Piramal Healthcare Ltd. v Diasorin S.P.A – (2010 172 DLT 131)
 British India Steam Navigation Company Limited Vs. Shanmughavilas Cashew Industries and Ors. – (1990 3 SCC 481)
 11th edn., page 495
 Rule 180 of Dicey and Morris, Conflict of Laws, 10th Edn. p. 145; Para 30-006 of Chitty Vol I 33rd Ed.
 Mustill & Boyd Commercial Arbitration 2nd Edn. pg. 71-72.
 Dicey and Morris – Conflict of Laws (8th Edn. p. 1047)
 NTPC v. Singer Co. (1992 3 SCC 551); Sulamerica Cia Nacional de Seguros SA and Ors. V. Enesa Engenharia SA and ors (2012 EWCA Civ 638) at pg. 11
 Chap 3, Redfern and Hunter, 6th Ed.
  EWCA Civ 638, (at 52) per Lord Neuberger of Abbotsbury MR.
 Naviera Amazonica Peruana S.A. vs. Compania Internacionale De Seguros Del Peru (1988 (1) Lloyds Law Reports 116); Also, Parties are free to choose the place of arbitration – Article 21 of the UNCITRAL Model Law, 1985; Article II of the New York Convention.
 Paras 3.84 to 3.90 of Redfern and Hunter on International Arbitration, 6th Ed.
 For instance, Bylaw 300(3) of International Cotton Association provides, “The seat of our arbitrations is in England. No one can decide or agree otherwise.”
 Enercon (India) Ltd. v. Enercon GmbH (2014 5 SCC 1)
 Chap 11, Redfern and Hunter, 6th Ed.
 Thyssen Stahlunion Gmbh Etc. vs Steel Authority of India Ltd. [1999 (9) SCC 334]