Conflict of Laws vis-à-vis Foreign Seat of Arbitration

Introduction

Since a very long time, it has been obvious that the conflict of law between the parties in an arbitrational dispute has been one of the most prevalent issues in international arbitration. Although the claims in the international arbitration are so substantial, no side is willing to jeopardise their claims. To understand more, an attempt is made to address circumstances in which the parties pick their own national law and foreign law as the rule for arbitration, as well as the issue in which both parties are from the same country but choose a location outside India.

The arbitrator should evaluate whether there is arbitration based on the party’s national law, whether to put the parties' right to choose the relevant law under a conflict of law system to the test, or to acknowledge that freedom without resorting to any conflict of law rule. Both civil law and common law generally acknowledge the independence of the parties. However, the ability to select the relevant law is not often left entirely up to the parties in a given jurisdiction. This means that the party autonomy concept, and by extension arbitration, must rely on and draw its presence from a national law system, as every right, authority, or obligation of a person has its source in the law of the nation.

Due to disagreements, parties may agree to have their disputes arbitrated in accordance with international law or non-national standards, with the latter being characterised in several ways, including international customs, international law or usages, and transnational law.¹ Despite the variations in terminology, it is likely that the same phenomena are at play: the establishment of customs among the merchant class to govern the flow of goods across national boundaries. The issue here is whether or not the arbitrator should defer to the parties’ decision. Further, “lex mercatoria”² (the set of rules for international trade that have been formulated by the customs) is not a well-developed system, therefore it does not include all things that could be the subject of a dispute.

Choice of law: When the parties fail to select a seat for arbitration

Any disputes that cannot be resolved through arbitration should be resolved in accordance with the conflict of law rules of the nation which would have jurisdiction if an arbitration clause has not been included. Arbitration is governed by the conflict of law rules of the nation which would have jurisdiction over the dispute between both the parties if an arbitration provision had not been inserted in the contract. Since the arbitration provision effectively stripped that nation of its jurisdictional power, it is within its rights to assert its dominance over the arbitration process in this manner. There are two key points of contention among the critics of the hypothesis. First, the arbitrator has the heavy responsibility of deciding which national court will have jurisdiction if the parties had not agreed to submit to arbitration. Second, this is a circular solution, which is unacceptable. To determine whether the country would have jurisdiction, an arbitrator must apply the conflict of laws rule; hence, the problem of the appropriate private international law system emerges.³

Arbitral Tribunal's seat and the applicability of conflict laws

This argument upholds the principle of party autonomy by allowing them to decide the appropriate conflict of laws rules by selecting the seat of the arbitration. Like any other contract among private parties, an arbitration clause must be grounded on a provision of domestic law or it will be null and void.⁴

Shift in paradigm: Indian perspective

The Supreme Court’s decision in PASL Wind Solutions (P) Ltd. v. GE Power Conversion (India) (P) Ltd.⁵ resolved a protracted fight over whether domestic parties might select an overseas location as the seat of arbitration under the Arbitration and Conciliation Act, 1996⁶. According to the Court's interpretation of Part II of the Act, an award issued by a court or tribunal located outside India is considered a “foreign award”. This precedent-setting decision will be essential in strengthening India's pro-arbitration stance, and it has also elevated the value of party autonomy.⁷

Whether the Supreme Court enabled PASL to reverse the decision?

In support of its position, PASL⁸ cited the case of TDM Infrastructure (P) Ltd. v. UE Development (India) (P) Ltd.⁹, in which it was determined that two Indian parties could not be permitted to derogate the Indian law by choosing a foreign seat of arbitration since doing so would be against the public policy of India. Although, the Supreme Court of India did not buy this reasoning. It made clear that a foreign award rendered in a conflict between two Indian parties cannot be automatically deemed to be against public policy just because it is situated in a foreign jurisdiction, and that such an award may be contested during the enforcement processes.¹⁰

According to the Court, a breach of Sections 23 and 28 of the Contract Act, 1872¹¹ would not occur if the parties just chose a foreign seat of arbitration, citing the precedent set by Atlas Export Industries v. Kotak & Co.¹² The Court also ruled that an agreement between Indian parties must be implemented provided the parties entered into it with their “eyes open” and the parties’ choice of a foreign arbitration seat. It was also made clear by the Court that just because an agreement precludes parties from settling disputes in India does not mean that it violates Indian public policy. As a result, the Court decided that the Division Bench ruling in Atlas Export¹³ is a precedent that must be followed and that two Indian parties are permitted to arbitrate in a foreign country.

Applicability of Part II of the Act vis-à-vis foreign seat

The Act’s Part II only relates to foreign awards, hence PASL¹⁴ argued that the arbitration happening outside of India did not fall under its purview. As the Supreme Court ruled, the nationality of the parties does not matter for purposes of determining whether or not Part II of the Act applies. When the arbitration hearing takes place elsewhere other than India, Section 2 of the Act¹⁵ applies. Part II, however, requires not only that the arbitration take place outside of India, but also that the country hosting the arbitration be a signatory to New York Convention¹⁶. The Delhi High Court reasoned in GMR Energy Ltd. v. Doosan Power Systems (India) (P) Ltd.¹⁷ that because Singapore is a foreign seat of arbitration, any arbitration between two Indian parties heard there would be subject to Part II of the Act rather than Part I. This reasoning was based on the precedent set in Atlas Export case¹⁸. Part II of the Act, however, prohibits the enforcement of foreign awards that run counter to the “core policy of Indian law” or “the most basic ideas of justice and morality”. This provision may be found in Section 48(2)(b) of the Act.¹⁹

Judicial precedents with respect to party autonomy

In Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.²⁰, the Supreme Court ruled that “the fundamental and guiding spirit of arbitration” is the independence of the parties involved. Based on this, the Court observed that parties are allowed to select three separate laws to govern their whole relationship: the proper law of the contract, the proper law for the arbitration agreement, and the proper law for the conduct of the arbitration.

In the judgment of the Delhi High Court in Dholi Spintex (P) Ltd. v. Louis Dreyfus Co. (India) (P) Ltd.²¹, the Court considered this same issue, establishing that the autonomy of the parties is the foundation of acceptance of foreign law as the legitimate law of arbitration. The Supreme Court’s ruling in Centrotrade Minerals and Metal Inc. v. Hindustan Copper Ltd.²², which emphasised the importance of party autonomy, was relied on by the Delhi High Court.

The Supreme Court also concluded in Centrotrade Minerals case²³ that even if a foreign law conflicts with Indian law, it cannot be ignored since it violates the norms of private international law. Because their arbitration agreement is separate from the substantive contract, two Indian parties are free to pick a foreign law to govern it.²⁴

Conclusion

When the parties to an agreement get to the stage when they have to choose the law that will apply to the case, they frequently find themselves in a challenging position. It is a common opinion that the arbitrator should be allowed to use their own rules on conflicts of laws.

The arbitrator may identify a contractual agreement offering an express choice of law to apply to the resolution of the dispute. The law of the territory or international legislation shall regulate and be followed in relation to the legality, interpretation, and performance of the contract. The Indian Supreme Court has finally brought to rest the important issue of Indian parties arbitrating abroad through the PASL judgment²⁵. The judgment will provide immense help to the enterprises which are registered in India but wanted to have dispute settlement outside the border.