THE PRO PER LAW OF THE ARBITRATION AGREEMENT

Introduction:- The existence of a valid arbitral agreement is the

basis for commencement of the arbitral process. There can be no
valid arbitration without there being a valid agreement to arbitrate.
‘For example under both the New York Convention and the Model
Law, recognition and enforcement of an arbitral award may be
refused if the parties to the arbitration agreement were under
some incapacity or if the agreement was not valid under its own
governing law®^’.

The arbitration agreement grants the parties in any dispute

the option of referring their dispute to arbitration. An arbitration
agreement primarily has its scope defined as an agreement by
which the parties to the said agreement submit to arbitration,
disputes which have arisen or which may arise between the
parties with regards to a well defined legal relationship, which
may be contractual or not. The arbitration agreement may be
either in the form of an arbitration clause in a contract or it may be
in the form of a separate agreement, and may be for an existing
or a future dispute which may arise. Generally, it is difficult for the
parties to come to terms to agree to arbitrate when a dispute has
already arisen, hence the majority of the professional
associations, have made it a norm to have an arbitration clause in
the underlying contract or enter into a separate arbitration
agreement when the contract is entered into. In India, the
Government or Governmental Organizations are a major
economic player and their underlying contract, invariably contains
an arbitral clause. The arbitral clause is the base structure of the

Redfern and Hunter para 1.38 page 15

71
entire arbitration proceeding on which rests the arbitrators’
jurisdiction as well as the validity of their award. Section 7 of the
1996 Act defines “arbitration agreement" and it replicates the
language of Article 7 of the Model Law. The Supreme Court in
Enercon (India) Ltd^^ has taken a view that the issue whether
there is a concluded contract, can be decided by the Arbitral
Tribunal. In so holding, the Court observed that, whilst
interpreting the arbitration agreement and/or the arbitration
clause, the Court must be conscious of the overarching policy of
least intervention by courts or judicial authorities in matters
covering the Indian Arbitration Act.

The majority of the statutes and International Conventions

define, as to what is an arbitration agreement, however these
definitions to a large extent overlap and hence limit the scope of a
comparison between these definitions. The definition given by
Article 7 of the UNCITRAL Model Law is:
“Arbitration agreement is an agreement by the parties to
submit to arbitration, whether or not administered by a
permanent arbitral institution, all or certain disputes which
have arisen or which may arise between them in respect of
a defined legal relationship, whether contractual or not. An
arbitration agreement may be in the form of an arbitration
clause in a contract or in the form of a separate
agreement."

To constitute an Arbitration agreement the parties must be

at ad idem^"^. In Arbitration Law does this imply mutuality? On this
there is a controversy whether mutuality is necessary or not. In

Enercon (India) Ltd & Others v. Enercon GMBH & Another (2014)5
SCO 1
(Union of India Vs. Atwal & Co, 1996 (3) SCC 568).
72
Barn v. Sunderland Corporation®*, the Court of Appeal held that
it is a necessary ingredient of arbitration that it confers bilateral
rights of reference to both sides. However, in Pittalis and Ors. V.
Sherefeltin®^ the Court of Appeal, held that there need not be
mutuality in an agreement between the parties which conferred
on one of them alone the right to refer the dispute to arbitration.
Only when there exists an arbitration agreement, can the
arbitrators assume jurisdiction as their jurisdiction is solely
derived from the Arbitration agreement. Further, “the Arbitrators
have jurisdiction to deal only with matters arising from the
contract which the parties agree to refer to^”.” “But it is settled law
that to constitute Arbitration Agreement in writing it is not
necessary that it should be signed by the parties and that it is
sufficient, that the terms are reduced to writing and the agreement
of the parties thereof is established'^*.” This is recognized by
Section 7(4) of the 1996 Act.

When can it be said, that there is written agreement in

existence, by correspondence The following tests have been laid
by Lord Justice Lloyd^^ “(1) In order to determine whether a
contract has been concluded in the course of correspondence,
one must firstly look into the correspondence as a whole (2) Even
if the parties have reached Agreement on all the terms of the
proposed contract, nevertheless they may intend that a contract
shall not become binding until some further conditions have been

(1966) 2 Q.B. 56
®®(1986)2WLR 1003
Prabartak Commercial Corporation vs. CaD Products, AIR 1991 S.C.
957.

Jugal Kishore Rameshwardas vs. Gulbai Hormunsji AIR 1955 S.C.

812.
Pagnan SPA vs. Food Products Limited 1987 Lloyd’s L.R. 601
fulfilled. That is the ordinary, “subject to contract" case. (3)
Alternatively they may intend that the contract shall not become
binding until some further term or terms have been agreed. (4)
Conversely the parties may intend to be bound forthwith even
though there are further terms still to be agreed or some further
formalities to be fulfilled; (5) If the parties failed to reach
Agreement on such further terms, the existing contract is not
invalidated unless the failure to reach agreement on such further
terms renders the contract as a whole unworkable or void for
uncertainty: (7) It is sometime said that parties must agree on
essential terms and that is only matters of detail which can be left
over; (8) The expression “essential” is ambiguous. If by essential
one means a term without which the contract cannot be enforced,
then the statement is true the law cannot enforce an incomplete
contract. If by essential means a term which the parties have
agreed to be essential for the formation of a binding contract, then
the statement is tautologus. If by essential one means a term
which a Court means Impossible as opposed to a term which the
Court regards as less importance or a matter of detail the
statement is untrue”.

The essential elements of the arbitration agreement:- An

arbitration agreement has certain features which gives it its
essence like Party autonomy and the contractual nature of the
agreement, as well as the basic elements in principle as per the
provisions of the UNCITRAL Model Law. The focus on
“LexArbitrii” or the Seat of arbitration is of utmost importance in
the prevalent International commercial scenario though not much
relevant in a domestic arbitration, as in India the law will be the
same. The essential elements of the arbitration agreement are
researched and propounded in a brief manner.
 The essentials of an Arbitration Agreement are (1)
There must arise a dispute presently or in the future in connection
with some existing contractual relationship: (2) Parties must
intend to settle such difference by a private Tribunal; (3) The
parties must agree in writing to be bound by the decision of such
Tribunal: (4) The parties must be ad idem. The essential
elements which must be contained in an arbitration agreement in
order to ensure that it validly binds the parties, can be
summarized as under:- “Firstly, there must be an arbitration
agreement concluded between two or more parties who are
determined and determinable and as such persons have capacity
to arbitrate: Secondly, the arbitration agreement must clearly
express the parties intention to refer or submit disputes arising
under the contract to arbitration: Thirdly, the arbitration agreement
must specify the object of the dispute submitted to the
Arbitrators. Fourthly, the arbitration agreement must directly or
indirectly connect the arbitration to a legal system which will
ensure its effectiveness in the absence of any mechanism to this
effect^^’’.

We consider here that the arbitration agreement should be

tailored so as to take into account the particular circumstances of
the contract. In drafting the clauses certain elements are
indispensable. In this respect party autonomy should be
respected. In other words, the parties can agree on the numbers
of arbitrators, the place of arbitration, the proper law of the
contract, the law of the arbitration agreement, the procedural law,
the appointment of the Tribunal, the language of proceedings
amongst others. Post the judgment in Sulamerica CIA Nacional

Poudret - Besson - Para 112

De Seguros v. Enesa Engenharia it is necessary to
expressly specify tlie proper law of the arbitration agreement. It is
not helpful to agree on provisions which may have to be
reviewed, modified or even abandoned. We already observe here
that the non essential clauses, such as those concerning the
procedure, are not subject to the formal requirements of the
arbitration agreement. The Supreme Court in Yog Agarwal v.
Inspirational Clothes’^ held that two conditions must be satisfied
to constitute an arbitration agreement: (i) it should be between the
parties to the dispute and (ii) it should relate to or be applicable to
the dispute.

The elements which are not essential yet deemed

important are often recommended to practitioners^^ The
determination of the number and qualification of arbitrators is not
necessary if the agreement refers to an arbitral institution or an
institutional mechanism. In such a case, the institution will
determine the number of arbitrators or will even appoint them. In
the contrary case, the supporting court will generally have the
same powers. The language of the arbitration and the rules
governing the conduct of the procedure can be determined by the
arbitrators if the parties have failed to do and if these issues are
not dealt with in the set of rules adopted by the parties. Such a
power in India is conferred under Section 19 of the 1996 Act. It
may be premature to determine the procedure to be followed
before the exact nature of the dispute is known and it is advisable
to allow the arbitrators the freedom to tailor make the procedural
rules.

[2012]EW CACW 638

(2009) 1 s e e 372
See in particular eraig. Park and Paulsson, pp. 91-126, 7.01 - 8.14;
76^
 An agreement would normally contain a clause reflecting
tlie party choice of the proper law of contract. In the absence of
the parties identifying the proper law of the contract, Courts will
have to identify and determine the applicable system of law which
has a close connection. While embarking on the enquiry the
Courts would normally apply these principles:-
(a) Place of contracting:
(b) Place of performance;
(c) Place of residence or business of the parties;
(d) Nature and subject of the Contract^^.

A majority of parties entering into arbitration agreements

presume that once a choice of law is made, that law exclusively
will determine the legal framework between the parties. However,
this overlooks the fact that circumstances remain in which an
arbitrator will be required to apply rules arising from a legal
regime other than the one chosen by the parties. Where the
dispute in question is international to its character, such
restrictions on party autonomy may arise under several of the
legal systems associated with the parties’ transaction. The
problem, however, is that there Is no universally accepted legal
method for resolving which set of restrictions on party autonomy
must be applied by the arbitral forum. It is critical to resolve this
question if parties are to be able to properly evaluate their rights
and liabilities in an arbitral dispute.

The Supreme Court in Enercon (India) Ltd. & Ors. v.

Enercon GMBH & Another’^ approved the dictum on the

In Re United Railways, etc. (1960) OH 52,

Enercon (India) Ltd & Others v. Eneran GMBH & Another (2014) 5
SCO 1
applicable law as set out in Naviera Amazonica Peruana
by quoting the following extract “all contracts which provides for
arbitration and contain a foreign element may involve three
potentially relevant systems of law (1) the law governing the
substantive contract, (2) the law governing the agreement to
arbitrate and the performance of that agreement; (3) the law
governing the conduct of the arbitration. In a majority of cases all
these will be the same. But (1) will often be different from (2) and
(3). And occasionally, but rarely, (2) may also be different from
(3)”.

SEAT OF ARBITRATION:- “The seat of arbitration plays a

dual role in most of the countries considered here. First, it
determines the scope of application of the Lex Arbitri. This law
only applies to arbitral proceedings “Taking place”, that is to say
having their seat, in the country in question. Secondly, the seat
defines the jurisdiction of national Courts to review the Award.
National Courts can only have jurisdiction for reviewing the Award
which were rendered in their country i.e. to say Awards resulting
from arbitral proceedings having the seat in this country®”. In the
absence of a clause providing for the Seat of Arbitration, what has
to be determined is the territory that will have the closet and most
intimate connection with the arbitration. The Indian Supreme
Court has approved the law of the Seat, in BALCO®*. The terms
that are normally used to denote Seat are “Venue” “Place” or
“Seat”. Under the 1996 Act the terminology used is ‘place’.

The Court in BALCO took a view that the issue whether

there is a concluded contract, can be decided by the Arbitral

^^ 1988 (1) Lloyd’s Rep. 116

Poudret Besson para 115
Bharat Aluminum Co. v. Kaiser Aluminum Technical Services Ltd
(2012) 9 s e e 545.
Tribunal. It has been further categorically held that Part I of the
Indian Arbitration Act 1996, will have no application, if the Seat of
Arbitration is not in India. ‘It must be pointed out that the law of
the Seat or Place where the arbitration is held, is normally the law
to govern that arbitration. The territorial link between the place of
arbitration and the law governing that arbitration is well
established in International Instruments namely the New York
Convention of 1958 and the UNCITRAL Model Law of 1985®^”

In Sanshin Chemicals Industry vs. Oriental Carbons &

Chemicals Ltd^^ the issue before the Apex Court was whether
an incorrect decision as to venue of arbitration which had a
bearing on the procedure ultimately followed in the arbitral
proceedings and the Award passed thereunder could be
challenged under Section 34(2) of the Act of 1996. The Court
held:-
“The ultimate arbitral Award could be assailed on the
grounds indicated in sub-section (2) of Section 34 and an
erroneous decision on the question of venue which
ultimately affected the procedure that has been followed in
the arbitral proceedings, could come within the sweep of
Section 34(2).

The Supreme Court in BALCO summed up the position in

the following words “The legal position that emerges from a
conspectus of all the documents, seems to be that the choice of
another country as the Seat of Arbitration invariably imports an
acceptance that the law of that country relating to the conduct and
supervision of arbitration will apply to the proceedings”.

(2012) 9 s e e 545
2001 (3) SCO 341
Substantive Law and Curial Law and the Interpretation of the
Doctrine of Proper Law of Arbitration agreement:- The
traditional view has been that there must exist a Lex Arbitri i.e., a
unique law which globally governs an arbitration and by the
standards of which the validity of the arbitral proceedings and the
ensuing Award are evaluated*'*. The Lex Arbitri can be different
from the law of the underlying contract though in most cases it
may be the same. The seat of arbitration as discussed earlier has
a major practical importance in arbitration as it directly influences
the several issues. As observed by Gary Born:-
....The location of the arbitral place an essential role in
determining the legal frame work for International Arbitral
Proceedings and International Arbitral Award. In general
the law of the arbitral seat provides a mandatory legal
frame work applicable to the conduct of the arbitral
proceedings, and to the form, notification, correction and
annulment of an arbitral Award*^

The main characteristic of an International arbitration is its

consensual nature. Parties to an international contract can agree
to design their own arbitral proceedings on the choice of law. This
is one area in which the principle of party autonomy is
predominant and especially in the choice of applicable laws. The
first and most important occasion for the parties to take control
over their arbitration is during the drafting of their arbitration
clause. During this exercise the parties have substantial freedom
in the determination of the structure of their arbitration. But this
freedom involves that the parties have to be extremely careful

(G. Petrochilos Procedural Laws in International Arbitration 2004

cited para 11.03 page 1537 Gary B. Born).
Gary [Link] para 2.04 page 343
while drafting. Provisions should be clear and unequivocal. The
slightest mistake can have considerable impact in terms of results
and procedure. There is no such thing as a single “model”,
“miracle” or “all purpose” clause suitable for all occasions*^ Each
clause has to be carefully adapted to the exigencies of every
situation, taking into account the types of disputes that are likely
to arise, the needs of the parties’ relationship and the applicable
laws.

The contractual character of arbitration allows the parties to

shape it in the way they deem appropriate. Therefore, it is
possible to assume that drafting can be used for the
implementation of a strategy. The interest of the parties is not
only to solve their disputes, but also to give themselves the best
possible odds. From a strategic point of view it appears that the
choice of law has a particular importance in the arbitration clause.
And a bad choice or worse no choice at all can have serious
effects for both parties, which they had not visualized. With these
concepts in mind, the following part will attempt a comprehensive
analysis of the choice of law provision as part of the arbitration
clause.

Article 28(1) of the UNCITRAL Model law provides thus:-

“The arbitral tribunal shall decide the dispute in accordance with
such rules of Law as are chosen by the parties as applicable to
the substance of the dispute..... ”. Section 28(1) of the 1996 Act
has adopted this language. These provisions of arbitration are
discussed below under various headings. We shall consider these
provisions under three areas, namely substantive law, law of
arbitration agreement and procedural law. We may also add a

Stephen Bond, How to draft an Arbitration Clause (Revisited), 1 ICC

Int’l Ct. Arb. Bull. 14 (Dec. 1990)
fourth area, namely law of the place of enforcement, which may
be different from the law of place of award. There is also the
lexmercatoria and the inclusion of equity clauses. The choice of
applicable law is a very essential factor as the dispute would be
decided according to it as the parties are bound by the law
chosen by them*^ The different laws are in a position to operate
simultaneously with regards the different aspects of arbitration
and if the parties fail to make express choice and/or fail to make a
clear choice of the applicable law then the arbitral tribunal shall
apply the law determined by the conflict of laws rules.

Choice of Law:- Parties may well choose a particular place of

arbitration precisely because of its lex arbitri is one which they
find attractive. Nevertheless, once a place of arbitration has been
chosen, it brings with it its own law. If that law contains provisions
which are mandatory so far as arbitrations are concerned those
provisions must be obeyed. It is not a matter of choice any more,
then the notional motorist is free to choose which local traffic laws
to obey and which to disregard. In National Tliermal Power
Corporation vs. Singer Company and others*®, the Appellant
had filed an application in the Delhi High Court to set aside the
interim Award made at London by a Tribunal constituted by the
International Court of Arbitration. The High Court had held that
the Award was not governed by the Arbitration Act, 1940 and the
Arbitration agreement on which the Award was made was not
governed by the law of India and as London being the Seat of
Arbitration English Courts alone had jurisdiction to set aside the
Award. The Appellants had appealed against this order. The
Agreement contained a clause which set out that the laws

See Compagnie d’Armement Maritime SA v CompagnieTunisienne

de Navigation SA (1971) AC 752
1992 3 se e 551
applicable to the contract shall be laws in force in India and the
Delhi Courts shall have exclusive jurisdiction in all matters arising
under the contract. There was another clause which provided
that the Tribunal would be constituted of Three Members and all
Rules of Conciliation and Arbitration of International Chamber of
Commerce would be applicable. The fundamental question before
the Court was whether the Arbitration agreement contained in the
contract is governed by the law of India so as to save it from the
ambit of the foreign award and attract the provisions of the Act of
1940. The Court noted that in the absence of an express
statement about the governing law, the inferred intention of the
parties determines that law. The true intention of the parties “in
the absence of express selection has to be discovered by
applying sound ideals of business convenience and sense to the
language of the contract itself. In such a case selection of Courts
of a particular country as having jurisdiction in the matter arising
under the contract is usual, but not invariably an indication of the
intention of the parties that the system of law followed by those
Courts is the proper law by which they intend their contract to be
governed.” The Court further held as under:-
“The proper law of the Arbitration agreement is normally the
same as the proper law of the contract. It is only in exceptional
cases that it is not so even where the proper law of the contract is
expressly chosen by the parties. Where, however, there is no
express choice of the law governing the contract as a whole, or
the arbitration agreement as such, presumption may arise that the
law of the country where the Arbitration agreement is to be held
as the proper law of the Arbitration agreement. But this is only a
rebuttable presumption^^

In Dozco India Private Limited vs. Sossan Infra

Company Limited^®. The contract provided that the Agreement
shall be governed and construed in accordance with the laws of
the Republic of Korea and all disputes arising in connection with
the Agreement shall be finally settled by Arbitration in Seoul,
Korea (or such other place as the parties may agree in writing)
under the rules of the International Chamber of Commerce as
then in force. The learned designated Judge was approached
under Section 11(6) for constitution of the Tribunal under the
1996 Act. The Respondent’s contention was that considering the
arbitral clauses, the Courts in India would have no jurisdiction.
The learned Designate Judge relied on the law laid down by the
Supreme Court in Sumitomo Heavy Industries Ltd. vs. ONGC
Limited^’. The Court there took the view that the arbitrability of
the dispute is to be determined in terms of the law governing
Arbitration agreement and the arbitration proceedings have to be
conducted in accordance with Korean Law. On facts the Court
held that the seat of arbitration is Seoul, the governing law is the
law of the Republic of Korea and the arbitral procedure is
governed by the Rules of International Chamber of Commerce
and consequently held that Part I would not be attracted and as
such Section 11(6) of the Act and the appointment of Arbitrator in
terms of that provision would not be attracted. The judgment has
correctly reiterated the position of law in India where the seat of
Arbitration is outside India.

(See Dicay. Morris & Collins Vol. 1, P. 539 See the observation in
Whiteworth Street Estate (Manchester) Ltd. vs. James Miller and
Partners Ltd., 1970 1 All l.R. 796)”.
2011 (6)S.C .C . 179
1998 1 SCO 305
 Parties to an international commercial contract will in most
cases make a choice of law by including a choice of law clause in
their contract. Even if the parties have not made an explicit choice
of law, the ,arbitrators may conclude that the parties have made a
so-called implied or tacit choice of law. This is done by inferring a
choice of law from the contract or the surrounding
circumstances^^. However, according to the Rome Convention a
choice of law “must be expressed or demonstrated with
reasonable certainty by the terms of the contract or the
circumstances of the case^^”. Hence, an implied choice of law can
only be identified where it is reasonably clear that it is an
authentic choice made by the parties^^ Worth mentioning in this
context is that the maxim qui indicem forum elegit ius (‘a choice of
forum is a choice of law’) is rejected by most scholars and is
almost totally abandoned in arbitral practice. The choice of a
particular forum is at present generally only considered to be one
of many factors which may be relevant when trying to identify an
implied choice of law.

Absence of Choice of Law:- In the absence of an explicit or

implied choice of law, one approach is to apply more than one
law. According to this approach the arbitrators must avoid
applying the national law of one of the parties and instead apply
the common parts of both parties’ national laws - this being
closer to the intentions of the parties. The parties in a majority of
commercial agreements use their right, to choose a substantive
law. In the few situations where the parties have not made a
choice of law there are different options open to the arbitrators

Redfern and Hunter (1999) Page 129.

Article 3(1), The Rome Convention,(1980)
Hunter and Redfem (1999) Page 129.
when trying to determine which substantive law or rules of law to
apply. The arbitrators can either focus on the silence of the
parties and try to interpret the absence of a choice of law (the so-
called subjective approach) or they can apply conflict rules of
private international law and consider relevant connecting factors
(the so-called objective approach)^^

The subjective approach has clearly lost ground even if

occasionally applied by arbitral tribunals. The objective approach
is more commonly used. It offers a “magic tool” for the arbitrators
to use when deciding which substantive law to apply^^ Even
where the objective approach, referring to conflict rules, is used
the question which conflict rules should be applied remains. This
topic has been widely discussed and examined by legal scholars.
It is also the main discussion point of this study: namely, which
system of private international law should govern party autonomy
and be applied to determine its scope?

Substantive Law (Proper Law of the Contract):- As one

can conclude from the foregoing discussion, it is not enough to
know what the parties of an international contract have agreed
upon, it is also essential to know which law governs the parties’
contractual relationship.^’ The general principle is that the parties

95 Blessing, Marc, Regulations in Arbitration Rules on Choice of Law.

Abstract from; van den Berg, Albert Jan, Planning Efficient arbitration
Proceedings. The law Applicable in International Arbitration,
International Council for Commercial Arbitration’Congress series no. 7,
Vienna , 3-6 November 1994, Kluwer Law International, (1999), Page
406
Blessing, Marc, Regulations in Arbitration Rules on Choice of
[Link] from; van den Berg, Albert Jan, Planning Efficient
arbitration Proceedings. The law Applicable in International Arbitration,
International Council for Commercial Arbitration Congress series no. 7,
Vienna , 3-6 November 1994, Kluwer Law International, (1999), Page
406 - 408
Redfern and Hunter (1999), Page 94.
have the freedom to choose which law shall govern the substance
of their contract^*. The choice of law is an essential decision as it
determines the risks arising from the contract. Even if the
avoidance of courtroom proceedings is the most significant
reason for parties to enter into an arbitration agreement it is
obvious that commercial men in the field of international
commercial transactions choose arbitration because they wish to
have the freedom to select applicable law^^

Without a full understanding of the principle of party

autonomy in respect of the right to choose applicable law, it is
impossible to examine how to determine its scope. Thus, it is
essential that the basics of the principle are recognized and
comprehended. The following section therefore discusses and
analyses the principle. Party autonomy has gained acceptance in
international law and has received recognition in almost all
national jurisdictions*”®. The principle provides a right for the
parties of an international commercial agreement to choose the
applicable substantive law. When the parties have made a choice
of substantive law this choice generally refers to the law
governing the parties’ contractual relationship. Unless otherwise
provided for, such choice does not refer to the conflict rules
arising under private international law'”‘. The modern view is that

See Redfern and Hunter (1999), Page 94.

Kuhn, Wolfgang, Expressed an Implied Choice of Substantive Law in
the Practice of international Arbitration. Abstract from; van den Berg,
Albert Jan, Planning Efficient arbitration Proceedings, The law
Applicable in International Arbitration, International Council for
Commercial Arbitration Congress series no. 7, Vienna, 3-6 November
1994, Kluwer Law International, (1999),page 380.
Chukwumerije, Okezie, Choice of Law in International Commercial
Arbitration, Quorum Books, Westport, CT (1994), ISBN 0-89930-878-3,
page 105-106; see further n 23
Blessing, Marc, Regulations in Arbitration Rules on Choice of Law.
Abstract from; van den Berg, Albert Jan, Planning Efficient arbitration
87
the parties have the freedom to choose any substantive laws or
rules of law even if these do not have any connection to the
parties or the specific dispute’^. The parties are not only free to
choose a system of national law, but may also choose to rely on
trade usage, national rules of law, transnational law,
lexmercatoria, general principles of law or general principles of
international law’°^. Where the law or legal system is so
determined by the parties, unless otherwise expressed the law
shall be construed as referring to the substantive law of that
country and not its conflict of laws rules. In majority of the cases
the arbitral tribunal shall decide in accordance with the terms of
the contract and shall take account of the usages of the trade
applicable to the transaction. In Tzortlst v Monark Line it
was held that there was a rebuttable presumption that the proper
law is the law of the forum. Naturally, the presumption may be
rebuttable for a number of reasons. This could be rebutted for a
number of reasons by showing that the forum was chosen for
example, for convenience, for its neutrality or indeed the available
facilities for arbitration.”

Proceedings. The law Applicable in International Arbitration,

International Council for Commercial Arbitration Congress series no. 7.
Vienna , 3-6 November 1994, Kluwer Law International, (1999), ISBN
9041102248 Page 393.
Kuhn, Wolfgang, Expressed an Implied Choice of Substantive Law
in the Practice of international Arbitration. Abstract from; van den Berg,
Albert Jan. Planning Efficient arbitration Proceedings, The law
Applicable in International Arbitration, International Council for
Commercial Arbitration Congress series no. 7, Vienna, 3-6 November
1994, kluwer Law International, (1999),page 384
Blessing, Marc, Regulations in Arbitration Rules on Choice of Law.
Abstract from; van den Berg, Albert Jan. Planning Efficient arbitration
Proceedings. The law Applicable in International Arbitration,
International Council for Commercial Arbitration Congress series no. 7,
Vienna , 3-6 November 1994, Kluwer Law International. (1999), ISBN
9041102248 page 400; see also Redfern and Hunter, (1999), page 98
(1968) All ER 949
 Where the parties have neither chosen a law nor agreed
other considerations to govern the substance of their dispute, the
Tribunal has to apply the law determined by the conflict of law
rules it considers applicable’”^ Of course in international
commercial arbitration, there are many connecting factors e.g. the
law of the place where the contract was made, the law of the
place where the contract is to be performed, the seat of
arbitration, and the national law of a state party to the contract
where one of the parties is a state or state agency.

Where there is no express choice of proper law of the

matrix contract nor of the arbitration agreement, but the seat of
arbitration is specified, the law of that place may govern both the
matrix contract and the arbitration agreement. Indeed express
reference of the law of the seat may determine the law of the
arbitration agreement even if there is a different proper law of the
contract'”^. Support for this view can be found in James M iller &
Partners Ltd v Whitworth Street Estates (Manchester)
where standard form building contract with an arbitration clause
was made between an English company which owned land in
Scotland and a Scottish company which was to do work on that
land. The contract did not disclose a choice by the parties of
either the governing law or the procedural law. The House of
Lords held that the proper law of the contract was English law,
because of the use of RIBA form of contract and that of
procedural law of the contract was Scots law because of the
conduct of the parties.

Russell on Arbitration, (Sutton. Gill, Gearing eds.) para. 2-092 pg.

80
Russell on Arbitration, (Sutton, Gill, Gearing eds.) para. 2-092 pg.

(1970) AC 583
 In Compagnie’ Armement Maritime SA v Compagnie de
Navigation SA, the house of Lords held thus:-
“An agreement to refer disputes to arbitration in a particular
country may carry with it, and is capable of carrying with it an
implication or inference that the parties have further agreed that
the law governing the contract (as well as the law governing the
arbitration procedure) is to be the law of that country”.

The tribunal may however be specifically instructed by the

arbitration agreement to decide the dispute on some basis other
than the law. An agreement to this effect has generally become
known as an “equity clause”. For example, the parties may agree
that the tribunal is to decide the dispute in accordance with
concepts variously known as “honourable engagement”, “amiable
composition”, “equity”, “ex aequo et bono", the “general principles
of law recognized by civilized nations” or the “/ex mercatoria^^^”.
The courts attitude to such clauses has been inconsistent. In
Schachtbau'-und TiefbohrgeseilschaftmbH v. Ras Ai Khaimah
National Oil Co. and Shell International Petroleum Co. Ltd.
(Nos. 1 and 2/°^ it was held by the English court of Appeal that
an enforcement of an international arbitration award should not be
denied because the arbitral award applied “internationally
accepted principles of law governing contractual relations” in an
arbitration governed by Swiss Law. The award was valid in
Switzerland.

In Home and Overseas Insurance Co. Ltd v. Mentor

Insurance Co. (U.K.) Ltd (in liquidation)^^'' the English Court of

See generally Russel on Arbitration (Sulton, Gill, Gearing eds) Cit.

at 163
(1988) 2 Lloyd’s Rep. 293
(1990) I W .L R . 153
Appeal upheld a clause under which the tribunal were to interpret
the contract as “honourable engagement with a view to effecting
(its) general purpose in a reasonable manner rather than in
accordance with a literal interpretation of the language." The
proper law of contract may be different from the law of arbitration
agreement and that of procedural law. As stated In Russel:-
“It is possible for several different laws to apply to a dispute
referred to arbitration. First, there is the law governing the
substance of the dispute. Where the dispute concerns the
performance of obligations under a matrix contract, this will
usually be the ‘‘governing law" or the “proper law of the
contract’’. Secondly, there is the law of the arbitration
agreement which governs the obligation to sublit disputes
to arbitration and to honour and award. Thirdly, there is the
procedural law which is the law governing the conduct of
the arbitration, also known as cuhal law or lex arbitri^^K”

Law of the Arbitration Agreement:- The lex arbitri builds the

foundation (Grundnorm) for the effectiveness of the arbitration
agreements together with public international law, it constitutes
one of the two potential bases for arbitration"^

The Arbitration Agreement is distinct and separate from the

main contract based on the principle of separability or
severability. The law of arbitration agreement or lex arbitri may be
different from the governing law. Parties have the freedom to
choose the law. The parties may choose a different law of the
contract in so far as the law governing the arbitral agreement. In
the arbitration agreement itself, the parties may agree that
different laws may govern the substance of and the procedure for

Russell on Arbitration, (Sutton, Gill, Gearing eds.) para. 2-088.

Poudret-Besson, para 112 pg.83
the arbitration. In cases wliere the parties have made no specific
choice of law for the arbitration agreement the applicable law will
have to be considered in the context of the closet connection as
enunciated in India in BALCO^'^ “Since the arbitration clause is
only one of many clauses in a contract, it might seem reasonable
to assume that the law chosen by the parties to govern the
contract will also govern the arbitration clause. If the parties
expressly choose a particular law to govern their agreement why
should some other law - which the parties have not chosen to be
applied to, but one of the clauses in the agreement, simply
because it happens to be the arbitration clause^

The most relevant aspect of arbitral procedure is to

determine the lex arbitri or the proper law of the Arbitration
agreement. The proper law of the arbitration agreement has to
be determined in accordance with the established rules for
ascertaining the proper law of any contract. This principle requires
the court, to recognize and give effect to the parties’ choice of
proper law, express or implied, failing which it is necessary to
identify the system of law with which the contract has the closest
and most real co nn ectio n'Sectio n 16 recognizes the doctrine
of the arbitration agreement forming part of a contract is
separable, as it has an existence independent from that of the
contract in which it is found. The Model Law has recognized it in
Art.16” ^ This principle recognizes that parties to a contract who
have included an arbitration clause, intend that all questions
arising out of their relationship should be determined in

^^^(2012)9 s e e 545
Redfem and Hunter para 3.12 pg. 166/167
[see Dicey, Morris & eollins, The eonflict of Laws, 14 ed.
Paragraph 16R-001]
Fiona Trust & Holding eorp v Privalov [2007] UKHL 40, [2008] 1
Lloyd’s Rep. 254
accordance with their chosen procedure. It was well recognised,
that the proper law of an arbitration agreement which may form
part of a underlying contract, may differ from that of the
underlying contract. In the absence of any contrary indication of
the parties intent it is presumed that the parties intended the
whole of their relationship will be governed by the same system of
law. Parties normally provide for an express choice of law to
govern their contract, but often ignore to provide a clause
governing the law of arbitration agreement contained within it. If
they have not done so, the natural inference is that they intended
the proper law chosen to govern the substantive contract also
would govern the agreement to arbitrate''^ we may quote Lord
Mustill observations in Channel Tunnel:-
“It is by now firmly established that more than one national
system of law may bear upon an international arbitration.
Thus, there is the proper law which regulates the
substantive rights and duties of the parties to the contract
from which the dispute has arisen. Exceptionally, this may
differ from the national law governing the interpretation of
the agreement to submit the dispute to arbitration. Less
exceptionally it may also differ from the national law which
the parties have expressly or by implication selected to
govern the relationship between themselves and the
arbitrator in the conduct of the arbitration; the “curial law” of
the arbitration, as it is often called.” (Emphasis added.)

In Mustill & Boyd, Commercial Arbitration, the three steps

that are to be taken in determining the proper law of the
arbitration agreement are set out:-

Channel Tunnel group Ltd v. Balfour Beatty Construction Ltd [1993]

A.C. 334 Lord Mustill page 357-8
 “The starting point is to determine the proper law of the
contract in which the arbitration is embedded. As a general
rule the arbitration agreement will be governed by the same
law, since it is part of the substance of the underlying
contract. But this is not an absolute rule, since other factors
may point clearly to some other system of law. Thus if the
arbitration is to be held in the territory of a state which is
party to the New York Convention on the Recognition and
Enforcement of Awards, section 5(2)(b) of the Arbitration
Act 1975 [now section 103(2)(b) of the Arbitration Act 1996]
appears to give rise to a rebuttable presumption that the
law governing the validity of the arbitration agreement is the
law where the award is to be made. The presumption would
we submit readily be rebutted in favour of the proper law of
the underlying contract'

In Heavy Industries Ltd. V. Oil and Natural Gas

Commlssion^^^ Potter J stated that the proper law of arbitration
agreement covered, inter-alia, questions as to the validity of the
arbitration agreement, the validity of the notice of arbitration, the
constitution of the tribunal and the question whether an award lies
within the jurisdiction of the arbitrator. In Dallma Dairy Industries
Ltd V National Bank of Pakistan^^^ it was held that the proper
law of the arbitration agreement not only includes the
interpretation and validity of the agreement but also the voidability
and discharge of the agreement to arbitrate. Therefore whether a
particular dispute falls within the ambit of an arbitration clause will
be within the purview of the arbitration agreement. These

''''® Mustill & Boyd, Commercial Arbitration pg.63

(1994) I Lloyd’s Rep. 45 at 57
(1978) 2 Lloyd’s Rep. 223
authorities will now have to be considered in the iight of law as
enunciated in C v and as approved in Suiamerica'^^

Procedurai Law (LexFori) - The juridicai seat as a

geographicai location prescribing the procedural law of
arbitration:- The procedural or curial law is usually that of the
place of arbitration. It is this law that governs the existence and
proceeding of the arbitral tribunal. In Paul Smith Ltd. v. HNS
International Holding Inc*^^ it is held as under:- “A body of rules
which sets a standard external to the arbitration agreement, and
the wishes of the parties, for the conduct of arbitration. The law
governing the arbitration comprehends the rules governing interim
measures (e.g.: court order for preservation of storage of goods),
the rules empowering the exercise by the court of supportive
measures to assist an arbitration which has run into difficulties
(e.g.: filing a vacancy in the composition of Arbitral Tribunal if
there is no other mechanism) and the rules providing for the
exercise by the Court of its supervisory jurisdiction over arbitration
(e.g.: removing an arbitrator for misconduct)”.

The procedural rules may be determined by agreement of

the parties, by the arbitral tribunal and by the lex arbitri. Section
19 of the Act provides that parties to an agreement are free to
agree on the procedure to be followed by the Arbitral Tribunal in
conducting the proceedings in the manner it considers
appropriate, which includes the power to determine the
admissibility, relevance, materiality and weight of any evidence.
The parties to an arbitration in International Arbitration are free to

2007 EWCA Civ 1281

^22 2012 EWCA Civ 638
^23 [1991] 2 Lloyd’s Rep.127, 130
choose other rules like that of ICC, LCIA and AAA. Where the
parties adopt the rules, the arbitral tribunal will conduct the
proceedings in accordance with the rules and in such a manner
as it considers appropriate, provided that both parties are treated
with equality and fairness. The importance of the seat of
arbitration is underscored by the fact that one of the grounds on
which recognition or enforcement of an award may be refused is
where the arbitral procedure was not in accordance with the law
of the country where the arbitration took place.

It should be noted that the expression “seat is often used to

refer to a particular city chosen, rather than a country and while
the parties agreement is on the city, the crucial choice is of the
jurisdiction in which the city is located. It is possible to choose to
hold arbitration in one country but make it subject to the
procedural law of another country, however in practice it creates a
lot of difficulties. The courts have been pragmatic in interpreting
such clauses and resolving the conflicts emanating from the
same. The matters covered by the procedural law vary from
country to country. However, it generally covers matters like the
appointment and revocation of authority of the arbitrator, powers
and duties of the arbitral tribunal, challenges to the award and the
question which law is to apply to the substance of the disputes.

There is always a probability of conflict arising between the

procedural law, the proper law of contract and of the law of the
arbitration agreement or the law of the place of enforcement,
particularly on the issue of arbitrability, validity of agreement and
the form and validity of the award. However, if the principle of
party autonomy is properly construed, this may not arise. As has

Collins, L et al (ed) Dicey and Morris, Conflict of Laws 12‘^ Ed,

(London: Sweet & Maxwell; 1993) P. 582.
96
been observed, the courts are usually pragmatic in such
matters'^^
Even though arbitration was conducted abroad in a different Seat
the Indian Supreme Court in Bhatia International'^^ held that
Indian Court could grant interim measures, notwithstanding the
lex arbitri and the lex fori. Similarly in Venture Global'^^ took a
view that an award made in a foreign country could be challenged
before the Indian Courts under Section 34 of the 1996 Act. In a
landmark decision the Supreme Court in BALCO'^*, overruled
Bhatia by placing reliance on several English Authorities. The
judgment is analyzed separately.

The discussion above clearly shows that the legal regime

regulating issues of applicable law and conflict of laws rules in
international commercial arbitration are not harmonized. The
substance as well as the applicability of different conflict rules
varies depending on the relevant legal system and the subject
matter of the dispute. However, all laws and rules of law have the
same starting point; the arbitrators shall apply the law chosen by
the parties. If no such choice is made the arbitrators shall apply
the conflict rules chosen by the parties. Failing a choice of
conflict rules, arbitral practice shows that numerous methods
have been used. This is in line with institutional arbitration rules
and national arbitration laws which have adopted different
approaches. However, one must remember that most arbitral
awards are not published and it is therefore difficult, if not
impossible, to know how arbitral tribunals proceed in reality.

See also Dallma Dairy Industries Ltd. V. National Bank of Pakistan.

Supra.
(2 0 0 2 )4 S C C 1 0 5
(2 0 0 8 )4 S C C 1 9 0
^28 (2012) 9 SCO 545
 Modern laws and rules have evolved to take a flexible
approach and freed the arbitrators from the obligation to use the
conflict rules of lexfori. In fact, when the parties have made no
choice of law the arbitrators are according to most provisions not
obliged to use any conflict rules at all. The doctrine of voiedirecte
has won ground and the use of conflict rules has almost been
abandoned. Most provisions allow the arbitrators to apply rules
from one or several of systems of law. It is the rule as such, and
not the legal system, which is relevant. This approach reflects the
basics of the delocalization theory which provides that arbitrators
not ought to be tied to a specific system of law or jurisdiction. A
majority of the provisions that is in fact in force the arbitral tribunal
to use conflict rules let the tribunal freely determine which specific
conflict rule to apply. The arbitrators are not bound to select a
whole system of private international law and are free to pick and
choose rules from different systems (and perhaps even make up
its own rules) as long as an application of that rule is “appropriate”
or “applicable”. Hence, the modern approach appears to applaud
the discretion of the arbitrators.

The Principle of Separability and/or Severability vis-a-vis

Doctrine of Proper Law: The arbitration agreement as
discussed earlier is an ‘adjunct or collateral to the main contract.
This often raises an issue as to what happens, if the main
contract is declared void or has been performed or brought to an
end by breach. Can the arbitral clause in such circumstances be
deemed as independent from the underlying contract? Is it
separable?

This principle ensures that parties intent to arbitrate any

disputes which arise out of their contractual relationship, without
undue Court interference notwithstanding a party’s cjiaiienge to
the validity of the contract or the arbitration agreement it contains.
It is considered that once parties have validity given their consent
to arbitration the obligation to arbitrate survives because it is
separable from the rest of the contract'^^’. The principle of
autonomy or (separability) of the arbitration agreement is the
cornerstone of the whole system, which would certainly not exist
without such principle.

The principle is now statutorily recognized. Article 16(1) of

the Model Law provides that when parties enter into a contract
contained in arbitral clause, they conclude not one but two
agreements. As such the validity of each contract does not
depend on that of the other. Separability means that the validity
of the arbitration clause must be assessed independent of the
main contract. Consequently the Arbitrator has the authority not
only to determine his own jurisdiction but also the validity or
existence of the contract. “The doctrine of Separability underlines
the potential width of an arbitration agreement because it
establishes that an arbitration agreement has a separate life from
the matrix contract for which it provides the means of resolving
disputes. This enables the arbitration agreement to survive
breach or termination of the matrix contract of which it forms
part‘^°. The rationale for separability postulates that “The parties
agreement to arbitrate is ancillary, separate, distinct and
independent from the parties agreement in the underlying
contract in so far as it relates to the “procedural" issue or dispute

Philippe Leboulanger ‘The Arbitration Agreement”, still

autonomous? In Albert Van Den Berg (ed) International Arbitration
2006 Back to Basics? ICCA Congress Series 2006 Montreal 13
(Kulwer Law International 2007) pp.3.31.]

Russell on Arbitration, 23'^'^ Edition, para 2. Pg 9

99
resolution as opposed to the “substantive” issues of the parties
rights under the contract.

The origins of the Separability presumption pre-dates

Contemporary Internatiqnal Conventions. In many legal systems
national contract law includes principles of Separability or
Severability that have been developed with respect to other
contractual terms. These principles typically address the
question whether an invalid provision of a contract may be
‘severed’ thus permitting the remainder of the contract
enforced'^^. “Ever since Heyman vs. V. Darwins Ltd., the
English common law have been evolving towards a recognition
that an arbitration clause is a separate contract which survives
the destruction (or other termination) of the contract. Heyman vs.
V. Darwins Ltd. itself was a case on termination by accepted
repudiation. A major evolutionary step was taken in l-iarbour vs.
Kansa in which it was decided that the arbitration clause applied
to a dispute whether the agreement in which it was embedded
was void for initial illegality'll

A learned designate Judge of the Supreme Court in Shin

Satellite Co. Ltd. Vs. Jain Studios Ltd’^^ was considering an
Agreement containing an arbitral clause in which there was a
further clause stating that the award is binding and parties waive
all rights to appeal or objection in any jurisdiction. The learned
designate Judge held that such a clause was severable from the

Robert H. Smit Separability - Competence - Competence in

International Arbitration Ex Nihilo Nihil Fit? Or Can Something
Indeed come from Nothing.
Gary B. Born 358-359
Fiona Trust and Holding Corporation & Anr. Vs. Privalov & Anr.
2007 (2) Lloyd’s, Rep. 267
(2005) 7 se e 234
main contract as it would not effect tlie validity of tlie main
contract and arbitral clause can be enforced. Doctrine of
severability was followed in Rashtriya Ispat Nigam v Verma
Transport’^^ In these judgments the issue of severability of the
Arbitral clause did not arise. Even prior to the 1996 Act the
Supreme Court in National Thermal Power Corporation vs.
Singer Co. & Ors*^^ was pleased to observe as under:-

“29. The arbitration agreement contained in the arbitration

clause in a contract is often referred to as a collateral or
ancillary contract in relation to the main contract of which it
forms a part. Repudiation of the breach of the main
contract will not put an end to the arbitration clause which
might still survive for measuring the claims arising out of
the breach and for determining the mode of their
settlement” . [See F.N. Heyman vs. V. Darwins Ltd,
Bremer Vulkan Schiffbau and Machinenfabrik vs. South
India Shipping Corporation, See also Mustill and Boyd,
Commercial Arbitration, Second Edition (1989)]’’.

The principles of Separability not only entails that the

validity of the underlying contract and the arbitration agreement
(clause) must be determined separately. But that they also can be
governed by different laws. This arises from the freedom given to
parties to choose their law. This has been discussed earlier. We
may however note some observations from Sulamerica Cia
Nacional De Seguros S.A. & Ors. & Enesa Engenharia S.A.
and Ors'^"^. the Court was considering the issue as to whether the
law of arbitration could differ from that of the governing law and

(2006)7 8 0 0 278
^36 (1992)3 8 .0 .0 .5 5 1
2012 EW OAOIV 638
the law as explained in C vs. We may gainfully reproduce
the two paragraphs from the judgment of the Master of the Rools.
“53. Lord Mustill in Channel Tunnel Group Ltd. v.
Balfour Beaty Construction Ltd. [1993] AC 334, 357-8,
appears to have regarded it as ‘exceptional’ for the law of
the arbitration agreement to differ from that governing the
interpretation of the agreement, a view which he also
expressed when at first instance in Black Clawson
International Ltd. v. Papierwerke Waldhof-
Aschaffenberg AG [1982] 2 Lloyd’s Rep. 446, 455, 456.
Other first instance Judges expressed the same view in the
cases referred to in paras 13 and 14 above, as have the
editors of Dicey, Morris & Collins, The Conflict of Laws, 14**^
edition, para 16-017. As explained by Cooke J in one of
those cases Leibinger v. Stryker Trauma GmbH [2005]
EWHC 690 (Comm) 690, this is justifiable on the basis that
the arbitration agreement is an ‘adjunct’ to, or part of, the
contract of which the proper law has been specifically
agreed between the parties.

54. On the other hand, the most recent learning on the

issue, which is to be found in the decision of this Court, C
v. D [2007] EWCA Civ 1282, [2008] 1 All ER (Comm)
1001, suggests a somewhat different approach. In that
case, Longmore LJ (with whom Sir Anthony Clarke MR and
Jacob LJ agreed) said at para 25 that ‘it would be rare for
the law of the (separable) arbitration agreement to be
different from the law of the seat of the arbitration’. After
referring to the observations of Lord Mustill, both in the
House of Lords and at first instance, he explained this
 conclusion on the basis that ‘an agreement to arbitrate will
normally have a closer and more real connection with the
place where the parties have chosen to arbitrate than with
the place of the law of the underlying contract”.

“Every modern regime of arbitration take separability as a

cornerstone of the entire structure. “Entrusting the validity
of the underlying contract to arbitrators since universally
recognized as being necessary both to guard the integrity
of arbitral decision making on the merits, and to allow the
process to get smoothly underway. Difference in
application exists. But. there is strong tendency towards
uniformity leading the international community to the
recognition of the autonomy of the arbitration agreement‘s^

This principle of separability is further elaborated in

Chapter IV. In India Section 16(1) of the 1996 Act expressly
recognizes separability of the arbitral agreement as distinct from
the underlying contract.

Analysis of Sulamerica v Enesa Engenharia:- We may now

analyse the decision in Sulamerica v Enesa Engenharia^"^^. The
Court of Appeal was considering whether the proper law of an
arbitration agreement should follow the governing law of the
underlying contract or the law of the seat of arbitration agreed by
the parties. The Court of Appeal laid down a useful test to
approach this question and held that, on the facts before it, the

Philippe Leboulanger “The Arbitration Agreement”, still

autonomous? In Albert Van Den Berg (ed) International Arbitration
2006 Back to Basics? ICCA Congress Series 2006 Montreal 13
(Kulwer Law International 2007) pp.3.31.
Sulamerica Cia Nacional de Sequros SA v. Enesa Engenhana SA
[2012 EWCA CW 638
arbitration agreement liad “its closest and most real connection”
with the law of the seat of arbitration. In so doing, the Court of
Appeal confirmed that the governing law of the contract does not
automatically govern the arbitration agreement. In this case, the
underlying contract was governed by Brazilian law and Brazilian
Courts had exclusive jurisdiction, whereas the parties had agreed
that the Seat of arbitration would be in London.

The main issue in dispute concerned the question of what

law governed the arbitration agreement. The insured argued that
Brazilian law should apply, being the law that the parties had
agreed to govern the Policy and considering the exclusive
jurisdiction of Brazilian Courts. The insurers, on the other hand,
argued in favour of English law, being the law of the seat of the
arbitration. Both parties agreed that “the proper law of the
arbitration agreement is to be determined in accordance with the
established common law rules for ascertaining the proper law of
any contract.” However, counsel for both parties relied on English
legal authorities which appeared to support their opposing
positions. In coming to its decision, the Court of Appeal
highlighted the established principle that the arbitration
agreement is separable from the substantive contract in which it
is contained, as had been emphasized by the House of Lords in
Fiona Trust v. Privalov. The Court of Appeal accordingly
proceeded from the starting point that “even if the agreement
forms part of a substantive contract (as is commonly the case), its
proper law may not be the same as that of the substantive
contract.” The Court of Appeal went on to state that the proper
law of the arbitration agreement is to be determined by
undertaking a three-stage enquiry into;
(i) whether there was an express choice of the law of the
arbitration agreement;
 whether there was an implied choice of the law of the
arbitration agreement; and

the law with which the arbitration agreement has its closest
and most real connection.

As is commonly the case, the arbitration agreement (as

opposed to the Policy itself) did not contain an express choice of
law clause. The Court of Appeal accepted that the parties’
express choice of Brazilian law to govern the Policy provided a
“strong indication of the parties’ intention in relation to the
agreement to arbitrate,” and that this is likely to constitute an
implied choice of the law to govern the arbitration agreement,
“unless there are other factors present which point to a different
conclusion.” However, the Court of Appeal was influenced by a
factor that it described as “powerful”, concerning the
consequence of the application of Brazilian law to the arbitration
agreement. The insured submitted that the application of Brazilian
law would render the arbitration agreement enforceable only with
its consent. The Court of Appeal did not consider that the
arbitration agreement, properly construed, was a one-sided
agreement that should depend on one party’s consent for its
effectiveness. Accordingly, although the Court of Appeal
recognized that, “one may start from the assumption that the
parties intended the same law to govern the whole of the contract,
including the arbitration agreement”, the fact that the application
of Brazilian law would retract the insurers’ ability unilaterally to
initiate arbitration led to the conclusion that this cannot have been
the parties’ intention. The Court of Appeal noted that the choice of
a country as the seat of arbitration “imports an acceptance that
the law of that country relating to the conduct and supervision of
arbitrations will apply to the proceedings.” The choice of London
as the seat of arbitration provided further evidence of a shared
intention between the parties for English law, not Brazilian law, to
govern all aspects of the arbitration agreement. Accordingly, the
Court of Appeal held that English law should apply to the
arbitration agreement.

Whilst this judgment does not prescribe an absolute rule as

to what law should govern an arbitration agreement in the
absence of an express choice of law, it confirms that the
governing law of an underlying contract does not necessarily
determine the law of an arbitration agreement. If there may be
any issue as to the governing law of the arbitration agreement,
contracting parties should ideally specify it expressly. However,
and recognizing the fact that arbitration clauses rarely contain
such choice of law provisions, this decision provides a clear and
helpful test as to how this question should be approached and
offers a reminder of the pro-arbitration stance adopted by English
courts when London is designated as the seat of arbitration.

Interestingly the “Master of the Rolls” in his judgment

noted that in Channel Tunnel Corporation Lord Mustill,
“appears to have regarded it as ‘exceptionaP for the law of the
arbitration agreement to differ from that governing the
interpretation of the agreement on the basis that the arbitration
agreement is an ‘adjunct’ to, or part of the contract of which the
proper law has been specifically agreed between the parties. He
then noted that ‘CVD’*'*^ suggests a somewhat different approach
by quoting ‘Longmore L.T. conclusions on the basis that ‘an
agreement to arbitrate will normally have a closer and more real

(1993) AC 334
(2007) EWLA Civ 1282
connection with the place where the parties have chosen to
arbitrate them with the place of the law of the underlying contract.

An Analysis of Habas Sinai'''^:- The agreement was to be

governed by the Turkish law and the disputes were to be referred
to "Turkish arbitration". However, Steel Park and Charter Alpha
continued to negotiate with VSC, and Steel Park eventually
signed and sent a version of the Contract to VSC by email, which
although did not specify a governing law but provided for disputes
to be referred to ICC arbitration in Paris. After further negotiations
between Charter Alpha and VSC, it was agreed that the seat of
the arbitration would be changed to London.

While arriving at his decision, Hamblen J applied the

guidance provided in Sul America and A^sanovia’'‘^ which
suggest that if an underlying contract does not contain a
governing law clause, the significance of the choice of seat of the
arbitration agreement contained therein is likely to be
"overwhelming" in determining the applicable law of the arbitration
agreement. Further, Hamblen J added to the discussion by
opining that the terms of the arbitration agreement may
themselves connote an implied choice of law. Hamblen J
concluded that as the Contract contained no express choice of
law clause and the seat of the arbitration was London, the
applicable law of the arbitration agreement was English law.

Habas Sinai v. Tibbi Gazlar Istihsai Endustrisi AS [2013] EWHC

4071 (Comm)
Arsanovia Ltd. & Others v. Cruz City I Mauritus Holidays [2012]
EWHC 3702 (Comm)
 The Court summarized the principles laid down in Sul
America and Arsanovia, including the three stage test that the
proper law is to be determined by undertaking a three stage
enquiry into: (i) express choice; (ii) implied choice; and (Hi) the
system of law with which the arbitration agreement has the
closest and most real connection. The Court added that the terms
of the arbitration agreement may also indicate an implied choice
of law of the arbitration agreement. Further, the Court observed
that in a situation where the terms of an arbitration agreement
eventually operates as an implied choice of the law of the
substantive contract, then in such instances, they must equally
operate as an implied choice of law for the arbitration agreement
as well.

Hamblen J held that even assuming that the underlying

contract was governed by Turkish law and accepting that there
was no actual authority to agree to the London arbitration clause,
the applicable law to the arbitration would still remain English law
based on the choice of seat in the arbitration agreement. The
Court held that there is no logical or principled link between the
issue of authority and the issue of the law with which a contract
has its closest connection. The Court was of the opinion that
determining the latter question involves a consideration of the
terms of the contract as made, rather than the authority with
which it was made and held that it would potentially make major
and uncertain inroads into the well-established common law
doctrine that validity of a contract is determined by the putative
proper law of the contract. It would mean according special
treatment to actual authority for conflicts of law purposes, but as a
matter of English law, actual authority is not a stronger or more
effectual form of authority than ostensible authority. The Court

108
found that Habas' agents had ostensible authority to agree to the
London arbitration agreement and that Habas had not shown that
the agents had no actual authority to enter into the arbitration
agreement: even if it was the case that there was no actual
authority to agree the London arbitration clause, the applicable
law of the arbitration agreement would be English law. The Court
held that even assuming that the requirements under the Turkish
law had to be met (i.e. the arbitration agreement had to be in
writing and signed), the requirements had been met because the
agreement was in writing and was contained in a signed contract.
The amendment to refer to London was either inserted by the
signatory, Mr. Kurtogiu, or expressly approved by him and this
would satisfy the signature requirements under the Turkish law.

The case adds to the principles cited in cases such as

Sulamerica and Arsanovia on how to determine the applicable
law of an arbitration agreement, in the absence of any express
choice. It highlights, in particular, that the terms of the arbitration
clause themselves may suggest an implied choice of law. The
practical takeaway from this case is the importance of expressly
including a governing law clause in the arbitration agreement in
international commercial contracts. It is safe to expressly state the
governing law as applicable to the arbitration agreement to avoid
any confusion at a later date.

An Analysis of BALCO''^^:- In Bhatia International, the

Supreme Court had held, that Part I of the Act applied even to
International Commercial Arbitrations seated outside of India,
unless the parties had expressly or impliedly agreed to exclude
Part I of the Act. This decision appears to be an attempt by the

Bharat Aluminum v. Kaiser Aluminum (2012)9 SCO 545

109
Court to deal with what if perceived to be a lacuna in the Act. The
Court held that otherwise there is no power in a Court to order
interim relief in support of arbitration proceedings in respect of
properties situated in India, if Part I of the Act did not apply. As a
consequence even where the Seat of Arbitration was not in India,
Part I of the Act was held not excluded and courts in India could
entertain a Petition under Section 9 of the 1996 Act, one of the
parties to the arbitration agreement was from India could, and a
court could grant interim relief in support of the arbitration.

In Venture Globar^ following Bhatia, it was further held,

that an Indian Court could even consider a challenge to an award
made outside India, if one of the Parties was from India. The
Court in Venture Global, in answering the issue did not address
itself to the question whether the ratio decedendi of the Bhatia
judgment required reconsideration. The basic question as to
what is the law of the Vex Arbitri’ was not addressed as the Court
had proceeded to consider the statutory import of section 11 of
the Act of 1996 for if it had considered the issue of ‘Seat of
arbitration’ then considering the travaux prepartories in
formulating the Model Law, commentaries and case law under the
Model Law to arrive at a conclusion that the remedy is before the
Court of the Seat of arbitration. In Venture Global, following
Bhatia without considering its correctness, the Court held that a
‘Foreign Award’ could be challenged in India. The court chose not
to address itself to the issue, that an ‘award’ made in a territory to
which the New York Convention applied, the remedy was
enforcement of the award in that territory. The challenge to the

Venture Global Engineering v. Satyam Computer Services Ltd and

Another [(2008) 4 SCC 190

no
award would before the appropriate court, in ttie country wtiere
the award was made. The remedy of challenge to an award would
not be available in India, as the remedy contemplated by Chapter
VII, is to an award made by a Tribunal in India. In making the
award, the Tribunal had to consider all the predicates of Section
28 and this could only be where the Seat of arbitration is in India.
The Substantive law of the contract in Global Ventures, was the
law of the State of Michigan (U.S.A.). The argument in the context
of Section 48(1 )(e) read with Section 48(3) and Section 44 was
noted but rejected because of the view taken in Bhatia, that part I
of the 1996 Act would apply to all arbitration including
International Commercial Arbitration held even outside India. The
Bhatia Judgment had been criticized by jurists in India to point out
that the propositions based on what Bhatia was decided were
incorrect*'*’. The judgment can be described as a 'clear instance
of judicial legislation’

In both these judgments the applicable law of the

Arbitration Agreement and its consequent impact on the remedies
were not considered. The substantive law governing the
underlying contract was not of India. So also the law of the
arbitrate agreement and the procedural law was not of India. Yet,
Indian courts it was held could entertain a Petition to challenge
under to an award Section 34. The governing law of the
agreement in Venture Global, was the law of the State of
Michigan (U.S.A.). Both these judgment came up for
consideration before a larger Bench in Bharat Aluminum*'**.

Dholakia S.K. “Bhatia International v. Bulk Trading S.A. (2003) 5

SCO (J) 22.
Bharat Aluminum v. Kaiser Aluminum (2012)9 SCO 545
 The Court in BALCO adopted a 'seat-centric approach'.
The Court held that the only relevant distinction under the Act was
between 'domestic arbitrations' (i.e. arbitrations with a seat in
India) and 'foreign arbitrations' (i.e. arbitrations with a seat outside
India): Part I would only apply to arbitrations with a Seat in India
and not to International Commercial Arbitrations, were the Seat of
Arbitration was outside India. The Court in considering the
applicability of the “applicable law of arbitration” considered
several English Authorities. The Court’s finding was that awards
rendered in a seat which was not India are only subject to the
jurisdiction of Indian courts when they are sought to be enforced
in India under Part II of the Act. The seat-centric approach has
two important aspects:- 1) Setting-aside of Arbitral Awards:
Courts in India are not empowered to set aside foreign arbitral
award where the Seat of Arbitration is outside India. The Court
specifically clarified that this would even be in a case, if the
substantive law of the dispute was Indian law. Such an approach
it held is consistent with Article V(1)(e) of the New York
Convention. Under the New York Convention, the challenge to an
arbitral award is available at the seat of the arbitration and, where
these courts are not empowered, then the courts of the country
whose laws govern the procedure of the arbitration. The New
York Convention does not empower courts of the country whose
substantive laws apply, to the arbitration, to set aside arbitral
awards; 2) Granting Interim Relief: Courts in India will have no
power to grant interim relief in support of foreign-seated
arbitrations. After re-examining the Bhatia and Venture Global
judgment, the Courts Conclusions, may be summed up thus:-
a) The principle of territoriality governs the Principle of the
Arbitration Act, 1996. Thus the Seat of Arbitration determines the
jurisdiction of the Courts; b) The provisions contained in Part I of
the Act and the provisions contained in Part II do not overlap; c)
Part I of the Act has no application to international commercial
arbitrations, seated outside India, even if the substantive law of
the underlying contract is of India; d)ln awards rendered by
Tribunals whose ‘Seat’ was not India, the jurisdiction of the Indian
courts would apply only if enforcement is sought in India, e)
Courts cannot order interim relief in support of foreign seated
arbitrations and the remedy a party will have, is to apply to the
courts of the jurisdiction in which the arbitration is seated; f)
Courts in India cannot entertain an applications for Interim Relief
in aid of foreign arbitration as interim relief is not a substantive
cause of action, warranting institution of a civil suit under Indian
Law; g) Part I of the 1996 Act will continue to apply to all
arbitrations (i.e. domestic and international) seated in India. In
arbitrations seated in India, the courts in India, in their capacity as
the supervisory courts at the seat of arbitration, will have broad
jurisdiction under Part I of the 1996 Act to supervise and support
the arbitral process including the power to set aside an award
made pursuant to such arbitration; h) The Bhatia International and
Venture Global judgments will continue to apply to arbitration
agreement entered into before the date of judgment unless the
parties had expressly excluded the application of Section 9 and
Section 34 of the Act, to the Agreement. Thus making the
judgment prospective and applicable to arbitral agreements
entered into after the judgment.

The Court in an interesting development though, proceeded

on a direct inquiry as to the intention and purpose behind the
relevant provisions of the UNCITRAL Model Law and the New
York Convention, as discernible from the travaux preparatoires, in
addition to appreciating how those operative provisions are

113
understood in several other jurisdictions. This allows Courts in
India to consider the relevant international conventions, as they
are internationally understood.

The law of ex arbitri in the opinion of the Researcher in

India, appears to be in a flux. The outcome of the apparently
Sulamerica test though followed in Indian in BALCO is
demonstrably uncertain. Post Balco, in Enercon (India), the
Supreme Court sought to make a distinction beat “Seat” and
“Venue”. The stakes are high, the potential detriment caused by
satellite injunctive litigation and challenges to awards is huge -
not least in wasted time and costs. Those who get it wrong fall
into two camps: those who do not even consider these issues at
the drafting stage, and those who relied on Longmore L J’s
analysis in C v D by simply selecting the seat and thinking no
more about it. The former are taking a number of considerable
risks in any event. The latter, however, thought they were
protected. Following Sulamerica and Arsanovia and BALCO and
Enercon (India) in India, parties cannot simply rely on their
selection of a seat to avoid protracted injunctive or post-award
litigation. The solution is a simple one. An express statement of
the governing law of the arbitration agreement, normally should
avoid all of these issues. It is noticeable that very few standard
arbitration clauses from the major arbitral institutions deal with the
question of governing law of the agreement to arbitrate. As these
cases demonstrate, the choice is not a minor matter and
deserves specific attention

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