2025 INSC 352
SUPREME COURT OF INDIA
(HON’BLE
SANJIV KHANNA, CJI. HON’BLE SANJAY
KUMAR, J. AND HON’BLE K.V. VISWANATHAN, JJ.)
DISORTHO S.A.S
Petitioner
VERSUS
MERIL LIFE SCIENCES
PVT. LTD.
Respondent
Arbitration
Petition No.48 OF 2023-Decided on 18-03-2025
Arbitration
(A)
Arbitration and Conciliation Act, 1996, Section 11(6) – Arbitration -
Appointment of arbitrator for Trans-border arbitration – Jurisdiction - International Exclusive Distributor
Agreement - Conflict of law principles -
Learned counsel for both parties
unanimously stated that, should the present application under Section
11(6) of the Arbitration and Conciliation Act, 1996, be allowed, the parties
are agreeable to the arbitration being held in India - Furthermore, the parties
have consented to the appointment of a sole arbitrator to adjudicate and decide
the disputes in question - In view of
this consensus, a retired judge of the High Court of Delhi, appointed as the sole arbitrator - The venue
of the arbitration shall be decided mutually by the parties and the learned
arbitrator - The arbitration shall be governed by the rules applicable to
the Delhi International Arbitration Centre attached to the High Court of
Delhi - The fee schedule applicable to international arbitrations shall apply.
(Para
34 and 35)
(B)
Arbitration and Conciliation Act, 1996, Section 11(6) – Arbitration -
Appointment of arbitrator for Trans-border arbitration – Jurisdiction - There exists a divergence of
opinion, both internationally and domestically, on the appropriate test to
determine jurisdiction in a case of trans-border arbitration - This divergence
stems from the interaction between three distinct legal systems which come into
play when a dispute occurs: (i) lex-contractus, the law governing the
substantive contractual issues; (ii) lex arbitri, the law governing the
arbitration agreement and the performance of this agreement; and (iii)
lex-fori, the law governing the procedural aspects of arbitration - These legal
systems may either differ or align, depending on the parties’ choices -
Furthermore, there may be internal splits within these legal systems, such as
for lex arbitri - Lex arbitri might be
split into two components if the parties so desire – (i) law governing the
agreement to arbitrate or the proper law of arbitration and (ii) the law
governing the arbitration. While the former relates to validity, scope and
interpretation of the arbitration agreement, the later refers to the
supervisory jurisdiction exercised by the courts - Secondly, when contractual clauses conflict, as is the case here,
the resolution becomes legalistic and complicated.
(Para
3)
(C)
Arbitration and Conciliation Act, 1996, Section 11(6) – Arbitration -
Appointment of arbitrator for Trans-border arbitration –
Jurisdiction - International Exclusive Distributor Agreement - Conflict of law principles -There is
conflict between two clauses of the Distributor Agreement - Clause 16.5
stipulates that the agreement shall be governed by and construed in accordance
with laws of India - It further provides that all matters arising from the
agreement shall be subject to the jurisdiction of the courts in Gujarat, India
- Clause 18, which deals with the settlement of disputes, outlines both a
conciliation and arbitration process - Should disputes or differences remain
unresolved through conciliation, either party has the right to submit them to arbitration
- The arbitration will be conducted by the Arbitration and Conciliation Centre
at the Chambers of Commerce in Bogota - The arbitration will take place in
Bogota, either at the Centre's premises or at a location determined by the
Director of the Centre - The award shall be in law and in the standard as
per the Colombian law governing the mailer (sic matter). The costs of
arbitration and conciliation will be shared equally by the parties – Held that
Clause 16.5 is clear and unambiguous - It explicitly states that the entire
agreement shall be governed by and construed in accordance with the laws of
India, and all matters arising from the agreement shall fall under the
jurisdiction of the courts in Gujarat, India -
Given this, it is reasonable to assume that, when drafting this clause,
the parties were fully aware of Clause 18, which provides for arbitration and
conciliation under the Arbitration and Conciliation Centre of the Chambers of
Commerce in Bogota - Bogota has been designated as the venue for conciliation
and arbitration, while the courts in Gujarat, India, retain exclusive
jurisdiction over disputes - This must, unless there is a divergence in lex
arbitri, include jurisdiction over appointments and act as a conduit for the
arbitration in Bogota, Colombia.
(Para
25, 26 and 28)
(D) Arbitration and
Conciliation Act, 1996, Section 11(6) – Arbitration - Appointment of arbitrator
for Trans-border arbitration – Jurisdiction - International Exclusive Distributor
Agreement - Conflict of law principles
-There is conflict between two clauses of the Distributor Agreement – Held that
the law governing the arbitration agreement, being Indian law, means that its
validity, scope, and interpretation will be determined in accordance with
Indian law ---Upon a consistent reading of the Distributor Agreement, it is
clear that only the courts in Gujarat, India, are referenced - While it is
acknowledged that the venue for arbitration is Bogota, Colombia, and that the
procedural rules of the Arbitration and Conciliation Centre at the Chambers of
Commerce in Bogota are to apply, this does not diminish the supervisory
powers of Indian courts, as explicitly outlined in Clause 16.5 - Neither Clause
16.5 nor Clause 18 explicitly stipulates the governing law of the arbitration
agreement - At this stage, there is a strong presumption that the lex
contractus, i.e., Indian law, governs the arbitration agreement - This
presumption may be displaced if the arbitration agreement is rendered
non-arbitrable under Indian law - But that is not the case here - Furthermore,
the mere choice of ‘place’ is not sufficient, in the absence of other relevant
factors, to override the presumption in favour of the lex contractus – In this
case, no seat of arbitration has been explicitly chosen.
Held
that the parties have impliedly agreed that Indian law governs the arbitration
agreement, and the controversy can be resolved accordingly - Use of the
premises at the Centre, or any other location designated by the Director of the
Centre in Bogota, does not imply that Colombian law governs the arbitration
agreement - Although Clause 18 specifies that the award shall conform to
Colombian law, this provision pertains solely to the arbitration
proceedings or the award matters - It does not override or diminish the effect
of Clause 16.5, which clearly stipulates that Indian law shall govern the
agreement and the related disputes - The legal implications of this would
include the applicability of the A&C Act, and the appointment jurisdiction
of Indian courts - Affirm the applicability of the A&C Act
under Section 11(6) of the Arbitration and Conciliation Act - In
accordance with Clause 16.5 and 18, the procedural rules of the arbitration
would be the rules of the Conciliation and Arbitration Centre of the Chamber of
Commerce of Bogota DC, with Bogota DC as the venue of arbitration.
(Para
30 to 33)
JUDGMENT
Sanjiv Khanna, Cji. :- Disortho S.A.S, [Hereinafter referred to as, “Disortho”.]
the petitioner before us, is a company incorporated in Bogota, Colombia. The
respondent, Meril Life Science Private Limited, [Hereinafter referred to as, “Meril”.] is a company incorporated
in Gujarat, India. Disortho and Meril executed an International Exclusive
Distributor Agreement, [Hereinafter
referred to as, “Distributor Agreement”.] dated 16th May 2016, for distribution of
medical products in Colombia. Later, disputes emerged between the parties.
2.
Disortho has filed this petition under Section 11(6) of the Arbitration and
Conciliation Act, 1996[Hereinafter
referred to as, “A&C Act”.], for appointment of an arbitral panel in
terms of Clauses 16.5 and 18 of
the Distributor Agreement. Meril has opposed the petition on jurisdictional
grounds, contending that these clauses do not grant Indian Courts jurisdiction
to appoint arbitrators. The clauses 16.5 and 18 read:
“16. Miscellaneous
16.5. This Agreement shall be governed by and construed in accordance with the
laws of lndia and all matter pertaining to this agreement or the matters
arising as a consequence of this agreement with be subject to the jurisdiction
of courts in Gujarat, India.
18. Direct Settlement
of Disputes The Parties mutually agree and pact that any dispute, controversy
or claim arising during this Agreement related to subscription, execution,
termination, breach, as well as non- contractual relationships, related to the
clauses mentioned above; They may be submitted to conciliation in accordance
with the Rules of Arbitration and Conciliation of the Chamber of Commerce of
Bogota DC., or instead. of this city, where the Director of the Centre so
determine.
Similarly, the Parties
mutually agree and pact that if the dispute or difference has not been settled
in conciliation, or to the extent that has not been resolved; it will be
committed to Arbitration by either party for final settlement in accordance
with the Arbitration and Conciliation Center of the Chamber of Bogota DC. The
Arbitral Tribunal shall consist of one (1) arbitrator in cases of minor or no
value E according to the Rules of Conciliation and Arbitration Center of the
Chamber of Commerce of Bogota DC. Also, in the event of greater amount, the
Court of conformity shall comply with the Regulations of the Center for
Conciliation and Arbitration of the Chamber of Commerce of Bogota DC., With
three (3) arbitrators appointed by the Centre and by drawing lots. The arbitration
will take place in Bogota DC. On the premises of Center for Conciliation and
Arbitration of the Chamber of Commerce of Bogota DC., or at the place where the
Director of the Centre as determined in this city. The award shall be in law
and standard will be applicable Colombian law governing the mailer, Expenditure
in the conciliation and arbitration proceedings shall be borne equally.”
3.
What initially appeared to be a straightforward question has, in fact, become a
vexed one, primarily for two salient reasons. First, there exists a divergence
of opinion, both internationally and domestically, on the appropriate test to
determine jurisdiction in a case of trans-border arbitration. This divergence
stems from the interaction between three distinct legal systems which come into
play when a dispute occurs: (i) lex-contractus, the law governing the
substantive contractual issues; (ii) lex arbitri, the law governing the
arbitration agreement and the performance of this agreement; and (iii)
lex-fori, the law governing the procedural aspects of arbitration. These legal
systems may either differ or align, depending on the parties’ choices.
Furthermore, there may be internal splits within these legal systems, such as
for lex arbitri. [Lex arbitri might be
split into two components if the parties so desire – (i) law governing the
agreement to arbitrate or the proper law of arbitration and (ii) the law
governing the arbitration. While the former relates to validity, scope and
interpretation of the arbitration agreement, the later refers to the
supervisory jurisdiction exercised by the courts. We will refer to this split
later in this judgment.] Secondly,
when contractual clauses conflict, as is the case here, the resolution becomes
legalistic and complicated.
4.
In the interest of avoiding prolixity, we deem it unnecessary to separately
address each argument raised or delve into the extensive body of jurisprudence
surrounding the issue. It suffices to note that a similar, though not in pari
materia, question was examined by this Court in M/s. Arif Azim Co. Ltd. v. M/s.
Micromax Informatics Fze. [(2024) INSC
850.] This judgment references earlier precedents of this Court on the
subject, and we will discuss these judgments subsequently.
5.
We begin by referring to Redfern and Hunter’s Commentary on International
Arbitration. [Blackaby KC, Nigel,
Constantine Partasides, and Alan Redfern, Redfern and Hunter on International
Arbitration, 7th Edition (2022), Oxford University Press.] Chapter 7, titled “Agreement to Arbitrate”,
emphasizes the cardinal importance of parties’ chosen law. It is stated that
the law governing the arbitration agreement sets the rules and norms that
determine the validity, scope, and interpretation of the agreement. This chosen
law assumes paramount significance when disputes arise concerning the
tribunal’s jurisdiction. For instance, disputes related to actions in rem may
not be arbitrable in India but arbitrable in another jurisdiction.
Additionally, it determines whether the arbitration agreement extends to third
parties, such as parent or sister concerns.
[See the Group of Companies Doctrine, Cox and Kings Ltd. v. SAP India Pvt.
Ltd. and Another, 2023 INSC 1051.] Equally, it plays a key role in
determining the validity of the arbitration agreement itself—some national laws
may render the agreement void or unenforceable, thereby affecting the
arbitrability of the dispute, while others may uphold its enforceability.
Finally, this law serves as a guiding principle when the dispute resolution
mechanism is unclear, inconsistent or when conflicting dispute resolution
clauses are bundled together in the same agreement.
6.
In our opinion, the law governing the arbitration may differ from both the lex
contractus and the lex fori. [This is
assuming that the law governing the (i) agreement to arbitrate, and (ii)
arbitration itself, are the same, which is most often the case. As explained
earlier, the former relates to validity, scope, and interpretation of the
arbitration agreement, while the later relates to inter alia the supervisory
jurisdiction by national courts.] This distinction was succinctly brought
out in the recent English High Court decision of Melford Capital Partners
(Holdings) LLP and Others v. Frederick John Wingfield Digby. [[2021] EWHC 872 (Ch).] This decision
refers to the earlier decision of Paul Smith Ltd. v. H&S International
Holdings Inc., [[1991] 2 Lloyd’s Rep
127.] which dealt with two conflicting clauses. One clause provided for
resolution of disputes through ICC arbitration, while the other designated the
courts of England as having exclusive jurisdiction. The conflict between these
provisions was resolved by the Steyn J. by adopted the following analysis:
“Fortunately, there is
a simple and straight forward answer to the suggestion that cll. 13 and 14 are
inconsistent. Clause 13 is a self-contained agreement providing for the
resolution of disputes by arbitration. Clause 14 specifies the lex arbitri the
curial law or the law governing the arbitration, which will apply to this
particular arbitration. The law governing the arbitration is not to be confused
with (1) the proper law of the contract, (2) the proper law of the arbitration
agreement, or (3) the procedural rules which will apply in the arbitration. These
three regimes depend on the choice, express or presumed, of the parties. In
this case it is common ground that both the contract and the arbitration
agreement are governed by English law. The procedural rules applicable to the
arbitration are not rules derived from English law. On the contrary, the
procedural regime is the comprehensive and sophisticated ICC rules which apply
by virtue of the parties' agreement.
What then is the law
governing the arbitration? It is, as Martin Hunter and Alan Redfern, International
Commercial Arbitration, p. 53, trenchantly explain, a body of rules which sets
a standard external to the arbitration agreement, and the wishes of the
parties, for the conduct of the arbitration. The law governing the arbitration
comprises the rules governing interim measures (e.g. Court orders for the
preservation or 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. filling a vacancy in the composition of the arbitral
tribunal if there is no other mechanism) and the rules providing for the
exercise by the Court of its supervisory jurisdiction over arbitrations (e.g.
removing an , arbitrator for misconduct).
(emphasis
supplied)”
7.
This ratio distinguishes between four choices of law – (i) the law governing
the arbitration, (ii) the proper law of arbitration agreement, (iii) the proper
law of contract, and (iv) the procedural rules which apply in the arbitration.
These choices are either expressly provided or implied by the parties involved.
The passage also highlights the subtle distinction between the proper law of
arbitration agreement (i.e., law governing the agreement to arbitrate) and the
law governing the arbitration as a whole. The law governing the agreement to
arbitrate determines the validity, scope, and interpretation of the agreement.
In contrast, the law governing the arbitration itself is concerned with
determining which court has supervisory jurisdiction over the arbitration. This
jurisdictional framework pertains to the conduct of the arbitration, the rules
governing interim measures, and the provisions under which the court may
exercise its supervisory authority, such as in the removal of arbitrators.
8.
While parties may elect to differentiate between the lex arbitri — the law
governing the agreement to arbitrate and the law governing the arbitration
itself — such a distinction warrants caution. A distinction should not be
readily drawn unless the parties intended to preserve such a distinction.
Invariably, these concepts are subsumed in each other.
They
are inherently intertwined as a part and parcel of the lex arbitri. This is
particularly apparent in matters such as the filling of vacancies within the
arbitral tribunal or the removal of an arbitrator for misconduct. In these
situations, the law governing the arbitration agreement and the law governing
the arbitration overlap, as both are essential to the functioning and integrity
of the arbitral process. Consequently, unless the parties have provided
otherwise, it is prudent not to divide lex arbitri.
9.
A more common distinction exists between the lex arbitri and the lex fori, that
is the governing law of arbitration and the procedure of arbitration. The lex
arbitri determines which court exercises supervisory jurisdiction. In Melford
Capital (supra), it was held that both the contract and the arbitration
agreement would be governed by English Law but the procedural rules shall be
the rules of ICC.
10.
This position is also clear from the judgment of Christopher Clark, J. in Ace
Capital Limited v. CMS Energy Corporation,
[2008 EW SC 1843 Comm.] which had examined Paul Smith (supra) to observe
that the law governing the arbitration decides the extent of the court’s
supervisory jurisdiction. Agreeing on the approach adopted in Ace Capital
(supra), the judgment in Milford Capital (supra) states that it is the
appropriate lodestar.
11.
We are of the view that matters such as filling vacancies on arbitral tribunals
and the removal of an arbitrator through the exercise of supervisory
jurisdiction, in the absence of a clear mechanism within the arbitration
agreement, should be normally governed by the law applicable to the arbitration
agreement itself, rather than by the procedural rules that govern the
arbitration process. It is, after all, the lex arbitri that governs the
arbitration and its associated processes. However, as noticed above, this may
not be the position in all cases as the mutually agreed terms may stipulate
otherwise.
12.
At this juncture, the pertinent question that arises is: how do we determine
the law that governs the arbitration agreement?
13.
In Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb, [2020 UK SC 38.] the UK Supreme Court examined this legal issue
and divergent opinions surrounding it. One line of precedents suggest that the
lex contractus should govern the arbitration agreement. Although the
arbitration agreement is separable from the main contract, it is not completely
detached from it. Conversely, there is case law indicating that the law of the
seat of arbitration should typically govern the arbitration agreement. Enka
Insaat (supra) follows the principles stipulated in Sulamérica Cia Nacional De
Seguros S.A. and Others v. Enesa Engenharia S.A. and Others, [[2012] EWCA Civ 638.] which it observes straddles both views. The
Court ultimately establishes the following principles:
“X Conclusions on
applicable law
170. It may be useful
to summarise the principles which in our judgment govern the determination of
the law applicable to the arbitration agreement in cases of this kind:
i) Where a contract
contains an agreement to resolve disputes arising from it by arbitration, the
law applicable to the arbitration agreement may not be the same as the law
applicable to the other parts of the contract and is to be determined by
applying English common law rules for resolving conflicts of laws rather than
the provisions of the Rome I Regulation.
ii) According to these
rules, the law applicable to the arbitration agreement will be (a) the law
chosen by the parties to govern it or (b) in the absence of such a choice, the
system of law with which the arbitration agreement is most closely connected.
iii) Whether the
parties have agreed on a choice of law to govern the arbitration agreement is
ascertained by construing the arbitration agreement and the contract containing
it, as a whole, applying the rules of contractual interpretation of English law
as the law of the forum.
iv) Where the law
applicable to the arbitration agreement is not specified, a choice of governing
law for the contract will generally apply to an arbitration agreement which
forms part of the contract.
v) The choice of a
different country as the seat of the arbitration is not, without more,
sufficient to negate an inference that a choice of law to govern the contract
was intended to apply to the arbitration agreement.
vi) Additional factors
which may, however, negate such an inference and may in some cases imply that
the arbitration agreement was intended to be governed by the law of the seat
are: (a) any provision of the law of the seat which indicates that, where an
arbitration is subject to that law, the arbitration agreement will also be
treated as governed by that country’s law; or (b) the existence of a serious
risk that, if governed by the same law as the main contract, the arbitration
agreement would be ineffective. Either factor may be reinforced by
circumstances indicating that the seat was deliberately chosen as a neutral
forum for the arbitration.
vii) Where there is no
express choice of law to govern the contract, a clause providing for
arbitration in a particular place will not by itself justify an inference that
the contract (or the arbitration agreement) is intended to be governed by the
law of that place.
viii) In the absence
of any choice of law to govern the arbitration agreement, the arbitration
agreement is governed by the law with which it is most closely connected. Where
the parties have chosen a seat of arbitration, this will generally be the law
of the seat, even if this differs from the law applicable to the parties’
substantive contractual obligations.
ix) The fact that the
contract requires the parties to attempt to resolve a dispute through good
faith negotiation, mediation or any other procedure before referring it to
arbitration will not generally provide a reason to displace the law of the seat
of arbitration as the law applicable to the arbitration agreement by default in
the absence of a choice of law to govern it.
(emphasis
supplied)”
14.
The conclusions in Enka Insaat (supra) summarizes the tie breaker rules.
Sub-paragraph (i) explains that the law governing the arbitration agreement may
differ from the law governing the contract. The former should be determined
through conflict of law rules. Sub-paragraph (ii) states that the law governing
the arbitration agreement is the law chosen by the parties. If no such choice
is made, the law most closely connected to the agreement applies. However,
sub-paragraph (ii) must be read alongside sub-paragraph (iii), which clarifies
that the law chosen for the arbitration agreement is determined by interpreting
the agreement, and if necessary, the entire contract using rules of contractual
interpretation. Sub-paragraph (iv) states that when the law governing the
arbitration agreement is not specified, the law of the contract (lex
contractus) usually applies. Sub-paragraph (v) highlights that selecting a
country for the seat of arbitration does not automatically alter the
presumption that lex contractus governs the arbitration agreement.
Sub-paragraph (vi) outlines factors that may override this presumption. This
can happen when the law of the seat mandates that the arbitration agreement
must be governed by the law of that country. For instance, this becomes
relevant in the context of the A&C Act. Section 2(2) of the A&C Act
stipulates that Part I of the A&C Act applies to arbitrations seated in
India. [See Arif Azmi (supra) quoted in
paragraph 25 post.] The second
exception is when there is a serious risk that the agreement will become
ineffective, or the dispute will become inarbitrable, if governed by the same
law as that of the contract. [See Anupam
Mittal v. Westbridge Ventures II Investment Holdings, [2023] SGCA 1.]
Third factor is where the seat is deliberately chosen as a neutral forum. These
factors will displace the presumption in favour of lex contractus governing the
arbitration agreement. The factors mentioned in sub-para (vi) are not exhaustive and there may be other additional factors
negating the presumption. Sub-para (vii) deals with cases where a particular
place is chosen as the venue in contrast to the seat of arbitration. A place
being chosen, does not by itself justify an inference that the arbitration
agreement is intended to be governed by the law of this venue. Sub-para (viii) states that in the absence of
any choice of law governing the arbitration agreement, the arbitration
agreement will be governed by the law with which it is most closely connected.
The close connection test applies only when the law governing the arbitration
agreement cannot be ascertained even after applying the earlier paragraphs. In
such a case, the law applicable to the seat of arbitration will be the law
having the closest connection to the arbitration even if it differs from the
parties’ contractual obligations. [For
the Indian Law relating to closest connection test see Arif Azmi (supra).]
The closest connection test and a presumption in favour of seat in terms of
sub-para (viii) will only apply when the contract does not stipulate the lex
contractus. Sub-para (ix) states cases relating to attempt to resolve a dispute
through good faith, negotiation, mediation, etc. will not generally provide
reason to displace the law of the seat of arbitration[Recently enacted Arbitration Act, 2025, in the United Kingdom, which
subject to significant exceptions takes a different position from that in Enka
Insaat (supra).] .
15.
We believe the above conclusions state the good and correct legal position,
except on the aspects where the Courts in India have taken a different view.
Consistency and uniformity in applying legal principles are crucial for
ensuring fairness and comity in international commerce and dispute resolution
mechanisms.
16.
Earlier, Sulamérica Cia (supra) had laid down this three-fold test to determine
the law governing the arbitration agreement:
“25. Although there is
a wealth of dicta touching on the problem, it is accepted that there is no
decision binding on this court. However, the authorities establish two
propositions that were not controversial but which provide the starting point
for any enquiry into the proper law of an arbitration agreement. The first is
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 second is that the proper law is to be determined by undertaking
a three-stage enquiry into (i) express choice, (ii) implied choice and (iii)
closest and most real connection. As a matter of principle, those three stages
ought to be embarked on separately and in that order, since any choice made by
the parties ought to be respected, but it has been said on many occasions that
in practice stage (ii) often merges into stage (iii), because identification of
the system of law with which the agreement has its closest and most real
connection is likely to be an important factor in deciding whether the parties
have made an implied choice of proper law: see Dicey, Morris & Collins, op.
cit. paragraph 32-006. Much attention has been paid in recent cases to the
closest and most real connection, but, for the reasons given earlier, it is
important not to overlook the question of implied choice of proper law,
particularly when the parties have expressly chosen a system of law to govern
the substantive contract of which the arbitration agreement forms part.
(emphasis
supplied)”
Sulamérica
Cia (supra) observes that the law governing the arbitration agreement may
differ from the law of the contract. However, it is reasonable to presume that
the parties intended for their entire relationship to be governed by the same
system of law throughout the contract. In this context, a distinction is made
between a stand-alone arbitration agreement and one that is embedded within a
contract. In the former, a choice of seat of arbitration becomes highly
significant, and the law of the seat would likely govern the arbitration
agreement. However, when the arbitration agreement forms part of a contract,
the express choice of a lex contractus strongly indicates the parties'
intention. It would generally be inferred that the arbitration is governed by
the same law as the substantive contract. However, this presumption is
rebuttable as previously highlighted. Even when the arbitration agreement is
part of the contract, the court must conduct a three-step inquiry: first,
looking at the express choice of law; second, considering any implied
choice; and third, determining the closest and most real connection. Second
step is applied when the first step is negative, and the third step is applied
when the first and second steps are negative.
17.
In BYC v. BCZ, [[2016] SGHC 249.] the
High Court of Singapore references Sulamérica Cia (supra) and notes sharply
divided legal opinions. Some argue that the choice of law, often expressed in
broad and general terms, would usually distinguish the main contract from the
arbitration agreement. The opposing view is that courts would require
additional factors to apply a governing law different from that of the seat of
arbitration. However, BCY (supra) favours the first view. The argument of
severability, it was observed, would be ineffective. The doctrine simply
ensures that the arbitration clause remains enforceable even if the main
contract is found to be invalid. It is designed to prevent arbitration from
being avoided by denying the existence of the underlying contract. This,
however, does not mean that the arbitration clause is completely insulated or
detached from the main contract.
18.
BCY (supra) acknowledges that the seat of arbitration is chosen based on a
desire for a neutral forum. The law of seat would govern the procedure of arbitration.
However, it does not necessarily follow that the said law would govern the law
of formation of the arbitration agreement, its validity, etc. Therefore, where the
arbitration agreement is a part of the main contract, the lex contractus is a
strong indicator of the law governing the arbitration agreement unless there
are indications to the contrary. The choice of a seat different from the lex
contractus is not, by itself, enough to displace this presumption.
19.
In BNA v. BNP and Another, [[2019] SGCA
84.] the Singapore Court of Appeal noted each of the following may be
distinct – a seat of arbitration, the arbitral institution, the arbitral rules
and the governing law of arbitration agreement. It endorsed the three-step test
from Sulamérica Cia (supra) and BCY (supra). In this case, the phrase
"arbitration at Shanghai" was interpreted to indicate Shanghai as the
seat of arbitration. This was based on a natural reading of the clause.
Although Singapore International Arbitration Centre[Hereinafter referred to as, “SIAC”.] governed the procedural
aspects of arbitration, the Court ruled that the implied choice of the law
governing the arbitration agreement was the same as the seat and lex
contractus— the law of the People’s Republic of China.
20. In Enercon
(India) Ltd. v. Enercon GmbH,
[(2014) 5 SCC 1.] this Court affirmed the principle that the parties may
agree to hold arbitration in a particular place or country (Country X), but
subject it to the procedural laws of another country (Country Y). The Court
also distinguished between the venue and seat of arbitration. It accepted the
notion that the parties could agree on
the law of one country to govern the arbitration, irrespective of where the
arbitration takes place. Reference was made to Braes of Doune Wind Farm
(Scotland) Ltd. v. Alfred McAlpine Business Services Ltd., [[2008] EWHC 426.] and the Court of Appeal’s decision in C v.
D[[2007] EWCA Civ 1282.]. Reference
was also made to Sulamérica Cia (supra), with which the court agreed. In that
case, despite the venue of the arbitration proceedings being London, it was
held that the seat of arbitration was not necessarily London. In international
commercial arbitration, the venue can differ from the seat. The argument for
concurrent jurisdiction was rejected.
21.
In Arif Azim (supra), this Court has examined the arbitration regime change
following the Constitution Bench judgment in BALCO v. Kaiser Aluminium
Technical Services Inc[2016 (4) SCC 126.]. Reference
was made to the Court's decision in Bhatia International v. Bulk Trading
S.A. and Another[(2002) 4 SCC 105.].
There is also a discussion on applicability of Section 9 of the A&C Act to
international commercial arbitrations. It was observed that Part 1 of the
A&C Act and its provisions apply when the arbitration takes place in
India—i.e., (i) when the seat of arbitration is in India; or (ii) when the
arbitration agreement is governed Indian law. The Court also referred to
Sulamérica Cia (supra) and Roger Shashoua (1) v. Sharma[[2009] EWHC 957 (Comm).].
22. In Mankastu
Impex Private Limited v. Airvisual Limited,
[(2020) 5 SCC 399.] the agreement stipulated that all disputes arising
out of the contract shall be referred to and finally resolved by arbitration
administered in Hong Kong. The contract was to be governed by the laws of India
and the courts in Delhi shall have jurisdiction. Clause 17 reads as under:
“17. Governing law and
dispute resolution 17.1 This MoU is governed by the laws of India, without
regard to its conflicts of laws provisions and courts at New Delhi shall have
the jurisdiction.
17.2 Any dispute,
controversy, difference or claim arising out of or relating to this MoU,
including the existence, validity, interpretation, performance, breach or
termination thereof or any dispute regarding non-contractual obligations
arising out of or relating to it shall be referred to and finally resolved by
arbitration administered in Hong Kong.”
In
the context of Clause 17(2), this Court refused to entertain an application for
appointment of an arbitration panel. It stated that the parties must approach
the courts of Hong Kong. Clearly a distinction was drawn between the law
governing the arbitration agreement and the law governing the contract i.e.,
lex contractus. The lex contractus was Indian law, but the law applicable to
the arbitration agreement had to be in terms of Hong Kong law. Thus it was held
that, lex contractus, being different from lex arbitri, the Indian Courts
lacked jurisdiction.
23. In Roger
Shashoua (2) and Others v. Mukesh Sharma and Others, [[2009] EWHC 957 (Comm).] this Court affirmed Roger
Shashoua (1) (supra), leading to the acceptance of the Shashoua principle.
In that case, London was explicitly designated as the place of arbitration,
with no alternative location as the seat. Given this, along with the
application of a supranational body of arbitration rules, and the absence of
any significant contrary indications, London was determined to be the juridical
seat, with English law as the curial law.
24.
In Arif Azim (supra), the Shashoua principle was applied to the dispute
resolution clause. The dispute resolution specified that any disputes or
differences arising from the agreement, including its validity and
applicability, would be referred to arbitration under the UAE Arbitration and
Conciliation Rules. The venue for the arbitration was designated as Dubai, UAE.
A separate clause related to law and jurisdiction stated that the agreement
would be governed by and construed in accordance with the laws of the UAE,
subject to the non-exclusive jurisdiction of the Dubai courts. In this factual
background, it was held that the courts in Dubai, UAE, not Indian courts, would
have the jurisdiction to appoint an arbitrator. The conclusions drawn by the
Court are as follows:
“E. CONCLUSION
71. From the above
exposition of law, the following position of law emerges:
(i) Part I of the
Act, 1996 and the provisions there under only applies where the
arbitration takes place in India i.e., where either (I) the seat of arbitration
is in India OR (II) the law governing the arbitration agreement are the laws of
India.
(ii) Arbitration
agreements executed after 06.09.2012 where the seat of arbitration is
outside India, Part I of the Act, 1996 and the provisions there under
will not be applicable and would fall beyond the jurisdiction of Indian courts.
(iii) Even those
arbitration agreements that have been executed prior to 06.09.2012 Part I
of the Act, 1996 will not be applicable, if its application has been
excluded by the parties in the arbitration agreement either explicitly by
designating the seat of arbitration outside India or implicitly by choosing the
law governing the agreement to be any other law other than Indian law.
(iv) The moment ‘seat’
is determined, it would be akin to an exclusive jurisdiction clause whereby
only the jurisdictional courts of that seat alone will have the jurisdiction to
regulate the arbitral proceedings. The notional doctrine of concurrent
jurisdiction has been expressly rejected and overruled by this Court in its
subsequent decisions.
(v) The ‘Closest
Connection Test’ for determining the seat of arbitration by identifying the law
with which the agreement to arbitrate has its closest and most real connection
is no longer a viable criterion for determination of the seat or situs of
arbitration in view of the Shashoua Principle. The seat of arbitration cannot
be determined by formulaic and unpredictable application of choice of law rules
based on abstract connecting factors to the underlying contract. Even if the
law governing the contract has been expressly stipulated, it does not mean that
the law governing the arbitration agreement and by extension the seat of
arbitration will be the same as the lex contractus.
(vi) The more
appropriate criterion for determining the seat of arbitration in view of the
subsequent decisions of this Court is that where in an arbitration agreement
there is an express designation of a place of arbitration anchoring the
arbitral proceedings to such place, and there being no other significant
contrary indicia to show otherwise, such place would be the ‘seat’ of
arbitration even if it is designated in the nomenclature of ‘venue’ in the
arbitration agreement.
(vii) Where the curial
law of a particular place or supranational body of rules has been stipulated in
an arbitration agreement or clause, such stipulation is a positive indicium
that the place so designated is actually the ‘seat’, as more often than not the
law governing the arbitration agreement and by extension the seat of the
arbitration tends to coincide with the curial law.
(viii) Merely because
the parties have stipulated a venue without any express choice of a seat, the
courts cannot sideline the specific choices made by the parties in the
arbitration agreement by imputing these stipulations as inadvertence at the
behest of the parties as regards the seat of arbitration. Deference has to be
shown to each and every choice and stipulations made by the parties, after
all the courts are only a conduit or means to arbitration, and the sum and
substance of the arbitration is derived from the choices of the parties and
their intentions contained in the arbitration agreement. It is the duty of the
court to give weight and due consideration to each choice made by the parties
and to construe the arbitration agreement in a manner that aligns the most with
such stipulations and intentions.
(ix) We do not for a
moment say that, the Closest Connection Test has no application whatsoever,
where there is no express or implied designation of a place of arbitration in
the agreement either in the form of ‘venue’ or ‘curial law’, there the closest
connection test may be more suitable for determining the seat of arbitration.
(x) Where two or more
possible places that have been designated in the arbitration agreement either
expressly or impliedly, equally appear to be the seat of arbitration, then in
such cases the conflict may be resolved through recourse to the Doctrine of
Forum Non Conveniens, and the seat be then determined based on which one of the
possible places may be the most appropriate forum keeping in mind the nature of
the agreement, the dispute at hand, the parties themselves and their
intentions. The place most suited for the interests of all the parties and the
ends of justice may be determined as the ‘seat’ of arbitration.”
25.
We now turn our attention to the two clauses of the Distributor Agreement.
Clause 16.5 stipulates that the agreement shall be governed by and construed in
accordance with laws of India. It further provides that all matters arising
from the agreement shall be subject to the jurisdiction of the courts in
Gujarat, India. Clause 18, which deals with the settlement of disputes,
outlines both a conciliation and arbitration process. Should disputes or
differences remain unresolved through conciliation, either party has the right
to submit them to arbitration. The arbitration will be conducted by the Arbitration
and Conciliation Centre at the Chambers of Commerce in Bogota. The arbitration
will take place in Bogota, either at the Centre's premises or at a location
determined by the Director of the Centre. The award shall be in law and in
the standard as per the Colombian law governing the mailer (sic matter). The
costs of arbitration and conciliation will be shared equally by the parties.
26.
To decide the controversy, we will address the conflict between these clauses.
Accordingly, we turn our attention to the conflict of law principles. Milford
Capital Holdings (supra) states that to resolve conflicts between competing or
inconsistent clauses, the court should read the contract as a whole, striving
to give effect to all its provisions. One clause may influence the content of
another, and a clause should not be rejected unless it is clearly inconsistent
or repugnant to the rest of the agreement. Only when such a reconciliation is
not possible will the court consider one clause to prevail over an incorporated
standard. This approach marks a slight departure from the principle that
prioritizes the first clause in the event of conflicting terms. While we do not
need to explore these principles exhaustively, it is significant to note that a
clause should not be dismissed as redundant unless it is manifestly
inconsistent with or repugnant to the rest of the agreement. This is
particularly important in the present case, as both parties have agreed to
these clauses. We must seek to interpret the clauses in a manner that
harmonizes their provisions, giving effect to each wherever possible.
27.
In Arnold v. Britton, [2015 AC 1619.]
the Supreme Court of United Kingdom observed as under:
“When interpreting a
written contract, the court is concerned to identify the intention of the
parties by reference to “what a reasonable person having all the background
knowledge which would have been available to the parties would have understood
them to be using the language in the contract to mean”, to quote Lord Hoffmann
in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, para 14. And
it does so by focussing on the meaning of the relevant words, in this case
clause 3(2) of each of the 25 leases, in their documentary, factual and
commercial context. That meaning has to be assessed in the light of (i) the
natural and ordinary meaning of the clause, (ii) any other relevant provisions
of the lease, (iii) the overall purpose of the clause and the lease,
(iv) the facts and
circumstances known or assumed by the parties at the time that the document was
executed, and (v) commercial common sense, but (vi) disregarding subjective
evidence of any party’s intentions […].”
28.
The interpretation of a contract involves determining the meaning that a
reasonable person, with all relevant background knowledge available to the
parties at the time of the contract, would derive from the document. A similar
principle is outlined in Chitty on Contracts, [Hugh Beale, Chitty on Contracts, Sweet and Maxwell, Vol. 1, 33rd Ed.
(2019).] which, when discussing inconsistent terms, observes:
“Where the different
parts of an instrument are inconsistent, effect must be given to that part
which is calculated to carry into effect the purpose of the contract as
gathered from the instrument as a whole and the available background, and that
part which would defeat it must be rejected. The old rule was, in such a case,
that the earlier clause was to be received and the later rejected; but this
rule was a mere rule of thumb, totally unscientific, and out of keeping with
the modern construction of documents. When considering how to interpret a
contract in the case of alleged inconsistency, the courts distinguish between a
case where the contract makes provision for the possibility of inconsistency
and the case where there is no such provision. In the latter case the contract
documents should as far as possible be read as complementing each other and
therefore as expressing the parties’ intentions in a consistent and coherent
manner.”
29.
Clause 16.5 is clear and unambiguous. It explicitly states that the entire
agreement shall be governed by and construed in accordance with the laws of
India, and all matters arising from the agreement shall fall under the
jurisdiction of the courts in Gujarat, India. Given this, it is reasonable to
assume that, when drafting this clause, the parties were fully aware of Clause
18, which provides for arbitration and conciliation under the Arbitration and
Conciliation Centre of the Chambers of Commerce in Bogota. In our view, Bogota
has been designated as the venue for conciliation and arbitration, while the
courts in Gujarat, India, retain exclusive jurisdiction over disputes. This
must, unless there is a divergence in lex arbitri, include jurisdiction over
appointments and act as a conduit for the arbitration in Bogota, Colombia.
30.
The law governing the arbitration agreement, being Indian law, means that its
validity, scope, and interpretation will be determined in accordance with
Indian law. But which national courts—those in India or Colombia—exercise
supervisory jurisdiction over the arbitration proceedings? Does the A&C Act
apply to these arbitration proceedings? Upon a consistent reading of the Distributor
Agreement, it is clear that only the courts in Gujarat, India, are referenced.
While it is acknowledged that the venue for arbitration is Bogota, Colombia,
and that the procedural rules of the Arbitration and Conciliation Centre at the
Chambers of Commerce in Bogota are to apply, this does not diminish the
supervisory powers of Indian courts, as explicitly outlined in Clause 16.5.
31.
While recording the above findings, we are also guided by the principles
outlined above for locating the law governing the arbitration agreement. We
begin by applying the three-step test developed by Sulamérica Cia (supra).
First, neither Clause 16.5 nor Clause 18 explicitly stipulates the governing
law of the arbitration agreement. Therefore, we proceed to the next step of the
test, which involves identifying the parties' implied choice of law for the
arbitration agreement. At this stage, there is a strong presumption that the
lex contractus, i.e., Indian law, governs the arbitration agreement. As
explained earlier, this presumption may be displaced if the arbitration
agreement is rendered non-arbitrable under Indian law. But that is not the case
here. Furthermore, the mere choice of ‘place’ is not sufficient, in the absence
of other relevant factors, to override the presumption in favor of the lex
contractus. In this case, it is important to note that no seat of arbitration
has been explicitly chosen. In conclusion, at this second stage of the inquiry,
we find that the parties have impliedly agreed that Indian law governs the
arbitration agreement, and the controversy can be resolved accordingly.
32.
We reiterate that the use of the premises at the Centre, or any other location
designated by the Director of the Centre in Bogota, does not imply that
Colombian law governs the arbitration agreement. Although Clause 18 specifies
that the award shall conform to Colombian law, this provision pertains
solely to the arbitration proceedings or the award matters. It does not
override or diminish the effect of Clause 16.5, which clearly stipulates that
Indian law shall govern the agreement and the related disputes. The legal
implications of this would include the applicability of the A&C Act, and
the appointment jurisdiction of Indian courts. We do not interpret the final
portion of Clause 18 as undermining the legal impact of Clause 16.5. Therefore,
we affirm the applicability of the A&C Act under Section 11(6) of
the Arbitration and Conciliation Act.
33.
In accordance with Clause 16.5 and 18, the procedural rules of the arbitration
would be the rules of the Conciliation and Arbitration Centre of the Chamber of
Commerce of Bogota DC, with Bogota DC as the venue of arbitration.
34.
However, during the course of the hearing, the learned counsel for both
parties, Meril and Disortho, unanimously stated that, should the present
application under Section 11(6) of the Arbitration and Conciliation
Act, 1996, be allowed, the parties are agreeable to the arbitration being held
in India. Furthermore, the parties have consented to the appointment of a sole
arbitrator to adjudicate and decide the disputes in question.
35.
In view of this consensus, we appoint Mr. Justice S.P. Garg, retired judge of
the High Court of Delhi, as the sole arbitrator. The venue of the arbitration
shall be decided mutually by the parties and the learned arbitrator. The
arbitration shall be governed by the rules applicable to the Delhi
International Arbitration Centre attached to the High Court of Delhi.
The
fee schedule applicable to international arbitrations shall apply.
36.
The arbitration petition is allowed in the above terms and disposed of
accordingly.
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