Sulamérica's Case And The Three-Stage Inquiry To Determine The Law Of Arbitration: Recent Developments & The Divergent Indian Approach (Part II)

Other Cases following Sulamérica's Case

U.K. Cases

Following the Court of Appeal's Judgment in Sul América's Case, in Arsanovia's Case^[2], the Queen's Bench Division (Commercial Court) accepted the law of contract (Indian) as the implied choice of the law of arbitration despite the parties having expressly choosing England as the "seat". The Court thereafter applied the substantive law provisions in the Indian Arbitration and Conciliation Act, 1996 to decide the disputes arising out of the arbitration agreement, by taking assistance of expert witnesses on Indian Arbitration Law on existence of arbitration agreement between the parties.

In Habas Sinai's Case^[3], Hemblen J interpreted Sul America's Case as prescribing that the choice of the seat of arbitration is likely to be overwhelmingly significant in a situation where no substantive law is expressed in the main contract; but where the substantive law is expressed in the main contract, this is a "strong indication" in relation to the parties' intention as to the proper law governing the arbitration agreement, so much so that parties' choice of the seat may not in itself be sufficient to displace the indication of choice implicit in the express choice of substantive law.

The Judgment of the Court of Appeal on 2^nd January, 2020 in Kabab- Ji SAL's Case^[4] is also a recent development of case law on the subject. Art. 1 of the main contract provides that 'This Agreement consists of' all the terms listed therein. Art. 14 provides that the dispute is to be settled by arbitration in Paris. Art. 15 provides that 'This Agreement' shall be governed by English law. Parties dis not specify any law governing the arbitration agreement. The arbitrators concluded that the governing law of arbitration is French Law (Paris being Seat), and found that the defendant ('KFG') was a party to the arbitration agreement. Under section 103(2)(a) and (b) of the English Arbitration Act 1996, KFG challenged the enforcement of the award in England and Wales. The Court cited Sul America's case and concluded that Articles 1 and 15 of the FDA provided for an express choice of English law to govern the arbitration agreement and applied English law to hold that KFG is not a party to the contract or the arbitration agreement. The Court therefore refused enforcement and recognition of the award. It is interesting to note that the Court of Appeal refused to stay the English proceedings while proceedings challenging the Award at the seat before Paris Cour d'appel are pending setting stage for a potentially conflicting judgments in in England and Wales and France.

Singapore Cases

The Singapore High Court in BCY's case^[5], followed the decision of the Court of Appeal in Sul America's case. It is noteworthy that BCY was a departure from First Link Investment Corp. Ltd. Vs. GT Payment Pte. Ltd. (First Link)^[6], a decision of Assistant Registrar, Singapore just two year's prior. In BCY's Case the parties simply chose Singapore to be the Seat of Arbitration and for the main Contract to be governed in accordance with New York Law. Chong J noted that "the doctrine of separability would not be used to justify preferring the Seat law over the substantive law. This is because separability is a limited doctrine which goes no further then saying that any challenge that the Arbitration agreement is invalid does not in itself effect the validity of the Arbitration agreement. It does not mean that the Arbitration agreement is distinct from the main Contract for all intense and purposes, once the main contract has been framed". Interestingly, Chong J referred to how Arts 34(2)(a)(i) and 36(1)(a)(i) of the Model Law merely "give effect to any express or implied choice-of-law by the parties and, failing such agreement, prescribing a default rule, select the law of the arbitral seat" citing Gary B Born, International Commercial Arbitration (Wolters Kluwer Law & Business, 2nd Ed, 2014) at p. 526.].

The Judgment in BCY's Case was followed later by Singapore High Court in BMO Vs. BMP^[7].

4. Scheme of the English and Indian Arbitration Law

English Arbitration Act, 1996

The scheme of the English Arbitration Act, 1996, allows parties the freedom to choose both the proper and procedural law applicable to the dispute except for certain express mandatory provisions^[8] which mandatorily applies to London seated arbitrations. These relate primarily to the powers of the English Courts to intervene in an arbitral dispute, the immunity of the arbitrator, and enforcement. The Arsanovia's Case noticed above is an example where English Court (London being the Seat of Arbitration) has applied the proper or substantive law provisions of Indian Arbitration and Conciliation Act, 1996 to decide the disputes. It may not be out of place to mention here that in National Iranian Oil Company v Crescent Petroleum Company International Ltd v. Crescent Gas Corporation Ltd ^[9], the parties had agreed to refer the dispute to arbitration seated in London but Contract to be governed by Iranian Law. In a challenge to the Award it was argued that section 7 of the English Arbitration Act, 1996 (which provides for separability of arbitration agreement), being a non-mandatory substantive provision and not a procedural one, would not apply as the proper law of the contract is Iranian Law. The Court rejected this argument holding that since arbitration was seated in London, s7 of the Act applied unless it was disapplied by the parties by "agreement to the contrary". While s7 is not a mandatory provision, the Court held that an "agreement to the contrary" in relation to the specific provision is required to disapply it and that the choice of Iranian law as the proper law of the contract was not an agreement to the contrary in relation to separability .

The Arbitration and Conciliation Act, 1996

Unlike in England, if the seat is held or found to be in India, the three-stage enquiry in Sul America's Case may not be consistent with the scheme of the Indian Arbitration and Conciliation Act, 1996 ('the Act, 1996'). The Act,1996 ensures party autonomy in respect of most curial matters but proper law provisions, in contrast, are made non-derogable, even though the Act, 1996 does not use the expression "mandatory". The wording of Section 2(2) suggests that the intention of the Legislature was to make provisions of Part I compulsorily applicable to an arbitration, including an international commercial arbitration, which takes place in India. Parties cannot, by agreement, override or exclude the non-derogable provisions of Part I in such arbitrations^[10]. Broadly speaking (barring few exceptions), the curial law is contained in Chapters III to VI, whereas proper law of the contract is covered in large measure in the other Chapters of Part I^[11]. In BALCO's Case ^[12], the Supreme Court of India held that the Arbitration and Conciliation Act, 1996 has accepted the territoriality principle which has been adopted in the Uncitral Model Law and further that Part I of the Arbitration Act, 1996 would have no application to international commercial arbitration held outside India. Section 2(2) makes a declaration that Part I of the Act, 1996 shall apply to all arbitrations which take place within India. Consequently therefore, once the seat is held or found to be within India, even the non-derogable substantive provisions of the Act, 1996 shall mandatorily govern the arbitration agreement which would include questions relating to existence, legality and validity of the Arbitration Agreement.

But where the arbitration agreement is silent on both the law of arbitration and the seat/place of arbitration, implied choice of the law governing the underlying contract as the law of arbitration may play a crucial role in determining the Court's supervisory jurisdiction. However, in two cases which were decided earlier under the Bhatia Principle ^[13] namely Indtel Technical Services Private Ltd. v. W.S. Atkins Rail Limited ^[14] and Citation Infowares Ltd. v. Equinox Corpn^[15], the Supreme Court of India rejected the plea of implied choice of law of contract to apply as the law of arbitration. The said plea was raised relying on the judgment of the Supreme Court in NTPC v. Singer^[16] (a judgment under the old arbitration law regime before the Act, 1996), where the Court held that where the proper law of the contract is expressly chosen by the parties, 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.

It is desirable that there is clarity in law and a uniform approach in deciding the choice of applicable laws in international commercial arbitrations as divergent approaches may set the stage for potentially rival conflicting judgments across different jurisdictions and create hurdles in recognition or enforcement of awards.