Tag: arbitration agreement

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Arbitration appointments and appointing authorities – Drafting to prevent court involvement in arbitrator appointments

SindhuSivakumar_DraftingForArbitrationMostly of the ad hoc kind, domestic arbitrations in India regularly break down and seek assistance from the courts. The process breaks down almost as soon as it is commenced, when parties cannot constitute the tribunal on their own. They invoke Section 11 the Arbitration and Conciliation Act, 1996 (“ACA”) to have a high court make the appointments for them. As the annual reports of various high courts will testify, a significant volume of Section 11 applications are pendingclogging up before them . and Arbitration practitioners too corroborate that a domestic arbitration that does not involve a Section 11 application is rare.

Section 11 proceedings are not efficient by any means. While practitioners suggest that the duration of these proceedings depends on the high court in question and on the complexity of each case, they have been known to sometimes stretch up to five years. They are also potentially subject to long review proceedings before the Supreme Court through the Special Leave Petition process. A 2013 survey conducted by Price Waterhouse Coopers found that the constitution of the arbitral tribunal consumed the most amount of time in the arbitral process in India, more than other time-consuming factors such as the discovery and inspection of documents and the enforcement of awards.

Here, we will discuss the need to contractually avoid requiring the support of the courts in the constitution of the tribunal and the means of doing so.

Judicial overreach is not the reason for the glut of Section 11 applications

Most literature on arbitration in India posits the problem of the involvement of courts in arbitrator appointments as one of ‘judicial overreach’, that is, the judiciary is seen as unnecessarily ‘interfering’ in the appointments process. Judicial overreach is undoubtedly a part of the problem and is the reason arbitrator appointments are subject to the special leave petition review process. Ultimately however, it is the parties who are responsible for the large number of Section 11 applications pending before the courts. Section 11, after all, requires an application from a party to initiate the process; the proceedings are not suo motu. Thus, merely changing judicial attitudes (of interference) towards arbitration is unlikely to be the only answer to the problem of arbitration-court entanglement in arbitrator appointments in India; rather, we need to understand what drives the practice of parties routinely approaching courts to appoint arbitrators, and what can be done to avoid this.

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The real reasons

Both statute and arbitral infrastructure (or lack thereof) create the perverse incentive structures that drive the frequent invocation of Section 11. For one, there is a lack of awareness amongst practitioners of simple drafting practices than can avoid the need to resort to a Section 11 application. Most arbitration clauses we have examined do not provide for either institutional arbitration or an appointing authority in case of ad hoc arbitration, both of which can avoid the need to approach a high court when, as is often the case, a respondent fails to cooperate in the constitution of the tribunal.

Secondly, there is a perception that Section 11 is not the most time-consuming or costly affair. This is partially true in the sense that the court fees involved in Section 11 (only Rs. 500 in Karnataka) are likely to be lower than what an arbitral institution or trade body will charge to act as an appointing authority; however, when one factors in counsel fees as well as the potential duration of Section 11 proceedings (especially when SLP proceedings are also involved), the costs become significant.

Statute panders to the ‘uncooperative respondent’

Another important driver of the large number of Section 11 applications seems to be statute itself. The ACA does not provide for the eventuality of one of the parties turning uncooperative (in appointing arbitrators), even though recalcitrant behavior is quite typical in adversarial proceedings (one party usually always stands to benefit from engaging in dilatory tactics). Under the ACA, if one of the parties does not cooperate in appointing the arbitrator(s), the court is automatically called into play. In England, by contrast, the default provision provides for the other side’s appointment to be final, thereby eliminating the need for court intervention in typical cases of respondent non-cooperation. A simple correction of the default rule of arbitrator could go a long way in reducing the number of Section 11 applications, especially since practitioners suggest that the ‘uncooperative respondent’ is common feature of arbitration appointments in India.

Drafters should opt for institutional arbitration or provide for an appointing authority

The court fee required to file a Section 11 application before the Karnataka High Court (above) is only five hundred rupees. That should not obscure the fact that proceedings can drag on for years and drive up legal costs.

The court fee required to file a Section 11 application before the Karnataka High Court (above) is only five hundred rupees. That should not obscure the fact that proceedings can drag on for years and drive up legal costs. Image above is from Börkur Sigurbjörnsson’s photostream on Flickr. CC BY 2.0

While statutory reform is out of a contractual drafter’s control, drafters can choose to opt in for institutional arbitration (whose rules will inevitably provide that the institution will act as appointing authority should the parties be unable to agree on the tribunal within a stipulated timeframe) or provide for an appointing authority as a fallback in their ad hoc arbitration clauses to avoid the need to go to the courts under Section 11. There are several trade bodies and arbitral institutions willing to act as appointing authorities, and any costs incurred in making use of these facilities is likely to be offset by the costs saved in going through the Section 11 process.

(Sindhu Sivakumar is a solicitor on the rolls of England and Wales and qualified as an advocate in India.)

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Pre-BALCO arbitration agreements with foreign seat: SC decision does little to improve clarity on Part 1 exclusion

SindhuSivakumar_DraftingForArbitrationA few months ago (May 28, 2014), in Reliance Industries Limited and Another v. Union of India, the Supreme Court of India elaborated on the law laid by it in relation to the jurisdiction of Indian courts over foreign-seated arbitrations in the 2012 decision in Bharat Aluminium v. Kaiser Aluminium, (2012) 9 SCC 552.

Without getting into the substantive details, the dispute and arbitration arose out of two production-sharing contracts between the parties. While Indian law governed the agreement, the arbitration clause provided for arbitration seated in London and English law expressly governed the arbitration clause (or agreement). Over the course of arbitration proceedings, the Union of India challenged the arbitrability of four issues. This was resisted by Reliance, and ultimately, the three-member arbitral tribunal decided in favour of Reliance through an award on September 12, 2012. This award of the tribunal (on arbitrability) was challenged under Section 34 of the Indian Arbitration and Conciliation Act, 1996 (“Act”) by the Union of India before the Delhi High Court.

Surprisingly, the Delhi High Court accepted its jurisdiction to hear the Section 34 set-aside application even though the award in question was passed in a foreign-seated arbitration. The reasoning of the High Court in accepting jurisdiction is suspect; the High Court seemed to suggest that the law of the seat only governed the conduct of arbitration, not the issues of arbitrability or public policy, which are also subject to the law of the contract, that is, Indian law. The High Court also took into account the fact that the parties had not expressly excluded Part 1 of the Act. Since the arbitration agreement pre-dated the Bharat Aluminium decision (it was a 1994 agreement), the fact that Part 1 was not excluded, was taken to imply that Indian courts had the jurisdiction to set aside the foreign award under Section 34 (following the logic of the Supreme Court in Bhatia International v. Bulk Trading S.A., (2002) 4 SCC 105).

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Reliance filed an appeal before the Supreme Court, and the Supreme Court overruled the Delhi High Court’s judgment on its jurisdiction to hear the Section 34 application. The Supreme Court essentially went back to the post-Bhatia, pre-Bharat Aluminium line of cases that dealt with what constituted an effective ‘exclusion’ of Part 1 of the Act under Bhatia International. One of these cases was Yograj Infrastructure Limited v. Ssang Yong Engineering and Construction Company Limited, (2011) 9 SCC 735, where the Supreme Court had held that the choice of a foreign seat (in this case, Singapore) amounted to an ‘implied exclusion’ of the Part 1 of the Indian Act, and that accordingly, Indian courts had no jurisdiction in such foreign seated arbitrations. Another pre-BALCO decision the Supreme Court referred to in Reliance was Videocon Industries v. Union of India, (2011) 6 SCC 161, in which the Supreme Court had held that a foreign law governing the arbitration agreement (as well as a foreign seat) amounted to an exclusion of Part I of the Indian Act. In the present case, as there was a choice of an English seat and because English law was the law governing the arbitration agreement, Part 1 was clearly excluded. Further, the Supreme Court also made it clear that the law of the seat did not just govern the conduct of the arbitration; it meant that the courts at the seat had exclusive supervisory jurisdiction to hear challenges to awards based on arbitrability and public policy. Further, the Supreme Court reiterated its ruling in Enercon that recognised the separability principle.

All in all, this decision of the Supreme Court is very much in line with the recent ‘pro-arbitration’ trend in the Indian courts. The ‘pro arbitration’ trend is reflective of a larger strategy of the present Indian government to convert India into a global arbitration hub (2014 BJP Manifesto). On the flip side, this decision does not do much to clarify the position on pre-BALCO (that is, before September 6, 2012) arbitration agreements that provide for a foreign seat: on the one hand, you have the Yograj decision which seemed to (correctly) indicate that the providing for a foreign seat was enough to exclude the application of Part 1 and Section 34, and on the other, the Videocon decision, which relied on the presence of a foreign law governing the arbitration agreement to imply the exclusion of Part 1. The Reliance case could have been the perfect opportunity for the Supreme Court to clarify that a foreign seat alone is sufficient to exclude Part 1; unfortunately, the Supreme Court did not bite.

(Sindhu Sivakumar is part of the faculty on myLaw.net.)

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The choice-of-seat dilemma and the separability question in Enercon

SindhuSivakumar_DraftingForArbitrationThe previous post discussed the Supreme Court’s views in Enercon (India) v. Enercon GmBH (dated February 14, 2014) on how arbitration clauses ought to be interpreted. In this post, we will look at two other issues related to the arbitration clause – namely, the choice-of-law issues that the vaguely drafted Clause 18 (the arbitration clause) in the Intellectual Property Licence Agreement (“IPLA”) gave rise to, and the discussion on separability that the challenge to the IPLA led to.

On the choice of seat

“18.3 All proceedings in such arbitration shall be conducted in English. The venue of the arbitration proceedings shall be London… The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply.”

It is really difficult to work out what the parties intended when they were drafting this clause. Did they intend for London to be the seat, using the word “venue” as an alternative for “seat”? But if that were the case, why insert the words, “The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply”? Was it merely a reference to Part II of the Arbitration and Conciliation Act, 1996, inserted to ensure that an English award is enforceable in India? It is a very real possibility, as many India related foreign-seated arbitration clauses expressly include the application of Part II (and expressly exclude Part I).

The net result of this clause was confusion about what the seat was, whether the seat was different from the curial (that is, procedural) law, and what the law governing the arbitration agreement was.

On this point, we are not entirely in agreement with the reasoning of the Supreme Court. The Supreme Court believed that the parties had made no choice on the seat. They disregarded the language “The venue of the arbitration proceedings shall be London” holding that this sentence only indicated the parties’ choice of a convenient “venue” for their hearings, never mind the fact that there was no indication in the current case that suggested that London would be convenient. The obiter views of Eder J. in the English High Court proceedings in the same case, [2012] EWHC 689 (Comm), illuminate this point.

“London was not a convenient geographical venue for disputes concerning an Indian joint venture; intellectual property in India; an Indian and German company; where the evidence would be located in India and possibly to some extent in Germany. In my judgment, the designation of London therefore had to have some other function for it to be explicable.”

Having decided that the parties had only designated a venue and not a seat in Clause 18.3, the Supreme Court went on to consider the jurisdiction with which the arbitral proceedings had its closest connection – the ‘closest connection’ test is what is generally used by tribunals and courts to determine the seat in the absence of a choice by the parties. The Court cited Dicey and Morris on the Conflict of Laws in this regard.

This is where things get murky. The Court seems to assume that the words, “The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply” indicate that the parties have chosen Indian law to govern the arbitration, that is, they have chosen Indian law (including Part I of the Arbitration and Conciliation Act, 1996) as the “curial” or “procedural” law. Having come to the conclusion that the procedural law was Indian law, the Court found that designating London as the seat would lead to an absurdity – as Part I of the Indian Arbitration and Conciliation Act, 1996 cannot apply to a foreign-seated arbitration (following BALCO), and further, English law itself does not allow for the procedural law to be different from the law of the seat. In other words, the designation of London as a seat would render what the Court believed was the parties’ choice of curial law (the words “The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply”) redundant.

As far as the proper law of the arbitration agreement was concerned, the Court understood this to be Indian law without too much reasoning on the point, although one can argue that the proper law of the arbitration agreement follows the substantive law of the contract (the NTPC v. Singer argument) and as Indian law was the governing law of the IPLA (Clause 17), the proper law of Clause 18 should also be Indian law.

Having worked out that the curial law, the proper law of the arbitration agreement, and the governing law were all Indian law, the Court held that the seat should also be India, as the arbitration as a whole has its closest connection with India.

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While we agree that the arbitration had its closest connection with India, we are not sure that there was a need to resort to this test in this first place. In other words, we do not entirely agree with the Court’s dismissal of the commonsense understanding of the parties’ designation of London as the “venue” to mean the “seat”, especially in light of the fact that London would not have been a “convenient” geographical venue.

The Court also discussed and distinguished several English judgments that supported the argument that the words, “The venue of the arbitration proceedings shall be London”, indicated the parties’ choice-of-seat.

One very similar case was Shashoua v. Sharma [2009] EWHC 957, where Cooke J. had held that in an ICC arbitration clause that provided that “the venue of arbitration shall be London, United Kingdom”, meant that London was the juridical seat and English law was the curial law.

“When therefore there is an express designation of the arbitration venue as London and no designation of any alternative place as the seat, combined with a supranational body of rules governing the arbitration and no other significant contrary indicia, the inexorable conclusion is, to my mind, that London is the juridical seat and English law the curial law…”  (Para 30)

The Supreme Court believed that this reasoning was not applicable in the Enercon case, as the parties had not designated any supranational body of rules like the ICC Rules to govern the arbitration; instead they had chosen the India’s arbitration statute (Para 118). This reasoning (for distinguishing Enercon from Shashoua) is not entirely convincing.

Another case worth mentioning is Union of India v. McDonnell, [1993] 2 Lloyd’s Rep 48 where, similar to the Enercon clause, the arbitration agreement contained conflicting provisions: “The arbitration shall be conducted in accordance with the procedure provided in the Indian Arbitration Act of 1940 …” and “The seat of the arbitration proceedings shall be London, United Kingdom.” Saville J. held that the reference to the Indian Arbitration Act, 1940, did not have the effect of changing the “seat” designated by the parties. Rather, the phrase was only a reference to the internal conduct of the arbitration. The Supreme Court mentions this case in Para 119, but does not really distinguish it.

The Court also discussed a few other recent English cases on the proper law of the arbitration agreement and the “closest and most real connection” test (we have discussed these at length in a previous post). We won’t spend too much time on all the cases discussed by the Court (Paras 100 to 125) – but it is interesting to note that the Court seems to use the test prescribed in these cases on the proper law of the arbitration agreement – to work out the choice-of-seat.

The assumption that the parties designated Indian law as the curial law is also curious, and there is not enough discussion in the judgment on the possible alternative constructions of the sentence, “The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply”. It can be read as referring simply to Part II of the Indian 1996 Act, that is, the enforcement provisions, which is something international arbitration clauses often have to clarify.

On separability

One of the issues in dispute was whether the IPLA was a valid and enforceable contract. Enercon India argued that the IPLA had not been executed properly and on this basis, argued that the arbitration agreement, which was contained in Clause 18 of the IPLA, was also not valid or enforceable.

The Supreme Court dismissed this argument and rightly so. The Court discussed how Enercon India’s argument was not that the arbitration agreement was “null and void, inoperative and incapable of being performed” (Section 45) but that “ the matter cannot be referred to arbitration as the IPLA, containing the arbitration clause/agreement, is not a concluded contract.” (Para 75)

FUND-Legal-Writing-and-Professional-Communication-PLThe logical leap Enercon Indian made in making that submission was incorrect as the arbitration agreement is a separate agreement (‘separate’ from the underlying contract) that is not affected by the lack of validity of the underlying contract. Here, there was absolutely no question that the arbitration agreement alone (that is, Clause 18) was agreed to by the parties (Para 76). Accordingly, the arbitration agreement in this case was valid, and unaffected by any ruling to the contrary in relation to the IPLA.

Since the validity of the IPLA was a substantive issue in dispute and formed part of the parties’ reference to arbitration, the Court left this issue to be decided by the arbitral tribunal in accordance with this arbitration agreement.

Drafting lessons

The drafting lessons from Enercon are fairly simple and easy to implement, but, as this dispute reflects, it is very important to get them right.

– One, specify the seat. And use the word, “seat”. This case, as well as the Shashoua case, highlights the confusion that can be caused by calling the “seat” by some other name.

– Secondly, think through the arbitral process that you spell out in your agreement. What is the appointment mechanism? Who appoints the chairman? Ensure that you don’t have an unworkable mechanism like under Clause 18.1 in this case — you don’t want to have to depend on a court to make sense of your drafting.

(Sindhu Sivakumar is part of the faculty on myLaw.net.)

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“Agreement in writing” and the formal validity of arbitration agreements

SindhuSivakumar_DraftingForArbitrationMost jurisdictions require arbitration agreements to be in writing if they are to be recognised. Article II of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“the New York Convention”), Article 7 of the original UNCITRAL Model Law on International Commercial Arbitration (1985) before it was amended in 2006 (“the 1985 Model Law”), and Section 7 of India’s Arbitration and Conciliation Act, 1996 (“the Indian Act”), all contain this requirement.

We know that there are different ways of entering into contracts — including electronically, by reference to other documents, and orally. Sweden and Norway could not find any rational basis for treating arbitration agreements any differently. Article 1 of the Swedish Arbitration Act and Articles 3 to 10 of the Norwegian Arbitration Act recognise any kind of agreement through which the parties have reached a consensus to arbitrate. The 2006 version of the UNCITRAL Model Law on International Commercial Arbitration (“the 2006 Model Law”), in Article 7, allows states to abolish all formal requirements of validity. Some states, like England, have taken a halfway house approach. While requiring the arbitration agreement to be in writing, they also allow that requirement to be met quite easily.

The recent Bombay High Court decision in Mody v. Kerwala (September 19, 2013) is in contrast to this approach. The Court held that not only must an arbitration agreement be in writing according to Section 7(3) of the Indian Act, the fact that the agreement is in writing can only be proved as specified in Section 7(4) of the Act.

Without debating the relative merits of the strict “in writing” approach, let us look at the enforcement issues that arise from the multiplicity of legal approaches on this point.

Written_arbitration_agreement_validityjpgConsider Part II of the Indian Act, which gives effect to India’s obligations under the New York Convention. Section 44 of the Indian Act defines a “foreign award” as an award made in a New York Convention signatory state (and notified by the Central Government as fulfilling the reciprocity requirement), and made pursuant to an agreement in writing. Every other provision in Part II, including an Indian court’s obligation to refer stay proceedings brought in breach of foreign-seated arbitration agreements (Section 45), its obligation to recognise a foreign award as final and binding (Section 46), and its obligation to enforce and execute the award (Sections 47 to 49), is contingent on the award being a “foreign award” under Section 44, that is, made pursuant to an agreement in writing.

So, would an award made pursuant to an oral agreement in say Sweden (a country notified by the Central Government), be a “foreign award” under Section 44? Can it be enforced in India? How would it satisfy Section 47’s evidentiary requirement of producing the original arbitration agreement for enforcement?

Chances are, an Indian court will not enforce such an award. It has no reason to, considering the scheme of Part II and the New York Convention. The same goes for other NY Convention signatories. There is an inherent discrepancy in the New York Convention approach and the approach endorsed in the 2006 UNCITRAL Model Law that states like Norway and Sweden follow.

However this is resolved at the national and international level, the drafting lesson here is very clear. Always ensure that your arbitration agreement is valid under the law of the seat, the law applicable to the arbitration agreement (which should always be specified), as well as the law at the place of enforcement. Otherwise, there is a very real danger that your award might not be enforceable, even if your agreement and award are perfectly valid at your seat.

(Sindhu Sivakumar is part of the faculty on myLaw.net.)

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Always specify the law governing the arbitration agreement

SindhuSivakumar_DraftingForArbitrationI had referred to the Sulamerica decision a couple of weeks ago in the context of inconsistency in drafting arbitration agreements. There, the contract in question contained both an exclusive jurisdiction clause (to the courts in Brazil) as well as arbitration clauses referring disputes to arbitration in London. While the inconsistency issue was resolved (in favour of the arbitration agreement) in the High Court itself, the Court of Appeal had to be brought in to decide another critical question — what was the proper law of the arbitration agreement in the absence of an express choice by the parties?

Most of us know that as a consequence of the doctrine of separability, the law governing the arbitration agreement need not be the same as either the governing law of the contract or the law of the seat of arbitration. Most of us also know the importance of the law governing the arbitration agreement – it decides issues concerning the scope, validity, and interpretation of the arbitration agreement.

Drafting-and-Reviewing-Comm-Contracts-Ad-2In spite of its importance however, arbitration clauses rarely specify the law governing the arbitration agreement. Even though they should. This is especially so because courts in different jurisdictions have not been consistent at all on how to decide, in the absence of an express choice made by the parties, which law governs the arbitration agreement.

The governing law (of the contract) approach

Older English decisions had held that in the absence of an express choice made by the parties, the law governing the arbitration clause would follow the governing law of the underlying contract. It was implied, they felt, that the parties intended for their express choice of governing law to also govern the arbitration clause.

Indian decisions also followed this approach (see the Supreme Court’s decision in N.T.P.C. v Singer (1994). Only where the parties did not specify either the governing law of the contract or the law governing the arbitration agreement would a presumption arise that the latter follows the law of the seat of arbitration.

The law of the seat approach

Recent English decisions (such as C v. D, [2007] EWCA Civ 1282) however, seem to favour the objective “closest and most real connection” test in deciding the proper law of the arbitration agreement, which invariably leads to the law of the seat of arbitration.

In Sulamerica, the governing law of the insurance policy was Brazilian law while the arbitration was English-seated. The law governing the arbitration agreement was not specified. The High Court, following other recent English decisions, held that the proper law of the arbitration agreement was English law because it had its closest and most real connection with the law of the seat.

This decision was appealed on the ground that the High Court judge should have held that the parties had made an implied choice of Brazilian law as the proper law of the arbitration agreement (following their express choice of Brazilian law as the governing law of the contract).

The Court of Appeal dismissed the appeal.  Lord Justice Moore-Bick stated that the proper law was to be determined by undertaking a three-stage enquiry.

The test

ProperLaw_ArbitrationAgreement_LordJusticeMoore-Brick_SulamericaFirst, look into the express choice of the parties, if any. If this did not exist, then the courts should turn to the implied choice of the parties, and if this could not be determined, the courts should determine the system of law with which the arbitration agreement had its “closest and most real connection”.

No implied choice

There was no express party choice in Sulamerica, so Lord Justice Moore-Bick went on to consider the implied choice of the parties. He said that “in the absence of any indication to the contrary”, an express choice of law governing the substantive contract was a strong indication that implied the choice of the same law in relation to the agreement to arbitrate; unless of course “there are other factors present which point to a different conclusion.”

Two important factors in this case indicated that the parties had not impliedly chosen Brazilian law to govern the arbitration agreement. The first was the choice of London as the seat, and second was the fact that a choice of Brazilian law meant that the arbitration agreement was enforceable only with the insured’s consent (which, according to the court, the parties could not have intended!).

Law of the seat has the closest and most real connection to the arbitration agreement

Because there was no express or implied choice of the law governing the arbitration agreement, he then went on to consider which system of law the arbitration agreement had the closest and most real connection. The court determined that the arbitration clause had its closest and most real connection with the law of the seat, that is, English law.

It is interesting to note Lord Justice Moore-Bick’s words in this regard. You may disagree with this assessment, but to me, it almost seems as if once the enquiry proceeds to the third stage, it will be the law of the seat that will almost always have the closest connection to the arbitration agreement.

“… No doubt the arbitration agreement has a close and real connection with the contract of which it forms part, but its nature and purpose are very different. In my view an agreement to resolve disputes by arbitration in London, and therefore in accordance with English arbitral law, does not have a close juridical connection with the system of law governing the policy of insurance, whose purpose is unrelated to that of dispute resolution; rather, it has its closest and most real connection with the law of the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective. Its closest and most real connection is with English law. I therefore agree with the judge that the arbitration agreement is governed by English law.”

Lord Neuberger’s observations – back to the High Court’s approach?

In Sulamerica, Lord Neuberger agreed with Lord Justice Moore-Bick’s three-stage enquiry. However, while referring to C v. D, he added the following observations:

“….there are a number of cases which support the contention that it is rare for the law of the arbitration to be that of the seat of the arbitration rather than that of the chosen contractual law, as the arbitration clause is part of the contract, but …the most recent authority is a decision of this court which contains clear dicta (albeit obiter) to the opposite effect, on the basis that the arbitration clause is severable from the rest of the contract and plainly has a very close connection with the law of the seat of the arbitration.”

Again, you may disagree with this analysis, but it seems to me that he gives precedence to the ‘close connection’ test (over the parties’ implied choice) on the basis of the doctrine of separability (unlike Lord Justice Moore-Bick who resorted to the third step only because there was no implied choice).

Subsequent application of the three-step test

However, it is Lord Justice Moore-Bick’s three-step test that has been applied since Sulamerica. In Arsanovia Ltd v. Cruz City 1 Mauritius Holdings, [2012] EWHC 3702 (Comm), which involved Indian governing law and an English seat, Justice Andrew Smith (in the High Court) applied the three-step test and concluded that as a matter of contractual interpretation, the parties had demonstrated their mutual Arsanoviacase_arbitrationagreement_Indianlaw.jpgintention that the arbitration agreement be governed by the law of India. Because the judge was able to determine the implied choice of the parties in this case, there was no need to resort to the closest and most real connection test (which, according to him, would have been the law of the seat).

It will be interesting to see how Indian courts apply these decisions. The recent English decisions do not give a whole lot of certainty as to the principles that should be followed in determining the proper law of the arbitration agreement, and it will be interesting to see if Indian courts adopt the C v. D — Lord Neuberger reasoning and give precedence to the law of the seat, Lord Justice Moore-Bick’s three step test, or come up with a completely different line of reasoning.

In any case, the drafting lesson here is clear – specify the law governing the arbitration agreement. With the uncertainty on the law in this area, it seems safest to think about and solve the problem at the drafting stage itself.

(Sindhu Sivakumar is part of the faculty on myLaw.net.)