CONUNDRUM OF LEX ARBITRI: A REVIEW OF RECENT JUDICIAL

TRENDS IN INDIA

ABSTRACT

The law governing arbitration is a complex system of national and international laws where in
party autonomy plays a pivotal role in determining rights of parties and the propriety of
arbitration. But the broad spectrum of party autonomy is considered to be subject to the
mandatory rules of the State. Thus lex arbitri or law governing arbitration agreement determines
the scope and extent of party autonomy though there a trend of liberalization of arbitration and
its disenfranchisement from national law. The Arbitration and Conciliation Act, 1996 was
enacted in the lines of the UNCITRAL Model Law and gives due importance to party autonomy.
However, the intricacies of lex arbitri in domestic disputes are not clearly dealt under any of the
provisions of the Act, and the same lead to conflicting decisions.

Keywords: Party autonomy, lex arbitri, foreign seated arbitration.

INTRODUCTION

Arbitration is generally accepted as a process by which parties delegate, by their contract, power
and capacity to settle a dispute between themselves to a neutral third party, the arbitrator 1. Thus,
the arbitrator derives power to settle dispute from the arbitration clause in the contract or from the
arbitration agreement. The power of parties to appoint arbitrator of their choice and entrust him
with the task of dispute settlement is considered as inseparable part of arbitration law which is
otherwise noted as party autonomy. The parties by mutual agreement can decide the course of
proceedings in any manner as long as they adhere to basic rules of fairness. All of this is because
the genesis of arbitration is a contract 2. The Arbitration and Conciliation Act, 1996 encapsulates
this golden principle of arbitration law and it has once again affirmed by the recent amendment
Act, 2015. The frame work of Arbitration Law in India gives the freedom to parties to design the
arbitration process including appointment of arbitrator, course of proceedings, admissibility of
evidence, application of substantive law in case of international commercial arbitration etc,. The
issues propped up recently are inextricably connected with the basic concept of party autonomy.
The right of Indian parties to choose foreign seat of arbitration and their right to go for second
level arbitration are two major issues discussed by the arbitration world in the recent past. Though
states have accepted party autonomy as the basic feature of arbitration law, many of the time, they
reserve certain rights of parties outside the umbrella of party autonomy.

CONCEPT OF PARTY AUTONOMY

Arbitration is the alternative jurisdiction to national courts which are specifically established by
the State to apply and uphold the law and determine all forms of dispute. Arbitration is also the
jurisdiction selected by the parties in preference to national courts3. However, the extent to which
parties can refer their dispute to arbitration is inevitably a matter to be regulated by law. In recent
years, this has been through both national and international law4. The regulatory web for
international arbitration is hierarchical involving elements of party autonomy, the chosen
arbitration rules, international arbitration practices, the applicable arbitration laws as well as the
relevant international arbitration conventions. Party autonomy is the primary source of arbitration
and the procedure.

st
1 Mallika Taly, Introduction to Arbitration 1 ( 1 ed. 2015).
2 Id. at 2.
3Julian D. M. Lew, Loukas A. Mistelis & Stefan Kroll, Comparitive International Commercial Arbitration 17 (2003).
4 Id. at 18.
The arbitration will be governed by what parties have agreed in the arbitration agreement, subject
5
to the limits provided by the mandatory rules . Thus, the legal regime of arbitration proceedings
is complex web of rules ranging from party autonomy to international conventions.
All modern arbitration laws recognise party autonomy i.e. parties are free to determine the
substantive law or rules applicable to the merits of the dispute to be resolved by arbitration. It
also empowers the parties to decide up on the law applicable to arbitration agreement and
procedure. Thus it provides contracting parties with a mechanism of avoiding the application of
6
an unfavourable or inappropriate law to an international dispute . Due to the universal
acceptance of party autonomy in most developed legal systems and its origin in the express or
determinable intention of the parties, it is now recognised that party autonomy operates as a right
7
in itself . The rule has special transnational or universal character and has binding effect because
it has been agreed to and adopted by the parties. Unquestionably, party autonomy is the most
prominent and widely accepted international conflict of laws rule. The national conflict of law
system recognise that contracting parties do express their view as to the law to govern their
contractual relations and the national laws have no reason to ignore and very limited rights to
8
interfere with the expressed will of the parties . The Arbitration and Conciliation Act, 1996
drafted in the line of UNCITRAL Model Law by Indian policy makers incorporated many
9
provisions reflecting the basic norm of party autonomy .

5 Id. at 28.
6 Id. at 412.
7 Id. at 413.
8 Id. at 414.
9 S. 10 of the Arbitration and Conciliation Act, 1996 reads: Number of arbitrators.—

(1) The parties are free to determine the number of arbitrators, provided that such number shall not be an even number.
(2) Failing the determination referred to in sub-section (1), the arbitral tribunal shall consist of a sole arbitrator.

S.19 of the Arbitration and Conciliation Act, 1996 reads: Determination of rules of procedure.—

(1) The arbitral tribunal shall not be bound by the Code of Civil Procedure, 1908 (5 of 1908) or the Indian Evidence
Act, 1872 (1 of 1872).
LAW APPLICABLE TO SUBSTANCE OF DISPUTE AND ARBITRATION
AGREEMENT
The process of determining the applicable law to the dispute, arbitration agreement and
procedure, is very intricate as there are no definite rules guiding to it either internationally or at
the state level. The issue becomes more complex especially in cases of international arbitration
where there is no choice has been exercised by the parties.

(2) Subject to this Part, the parties are free to agree on the procedure to be followed by the arbitral tribunal in
conducting its proceedings.
(3) Failing any agreement referred to in sub-section (2), the arbitral tribunal may, subject to this Part, conduct the
proceedings in the manner it considers appropriate.
(4) The power of the arbitral tribunal under sub-section (3) includes the power to determine the admissibility,
relevance, materiality and weight of any evidence.

S. 20 of the Arbitration and Conciliation Act reads: Place of arbitration.—

(1) The parties are free to agree on the place of arbitration.

(2) Failing any agreement referred to in sub-section (1), the place of arbitration shall be determined by the arbitral
tribunal having regard to the circumstances of the case, including the convenience of the parties.
(3) Notwithstanding sub-section (1) or sub-section (2), the arbitral tribunal may, unless otherwise agreed by the
parties, meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts
or the parties, or for inspection of documents, goods or other property.

S.22 of the Arbitration and Conciliation Act, 1996 reads: Language.—

(1) The parties are free to agree upon the language or languages to be used in the arbitral proceedings.
(2) Failing any agreement referred to in sub-section (1), the arbitral tribunal shall determine the language or
languages to be used in the arbitral proceedings.
(3) The agreement or determination, unless otherwise specified, shall apply to any written statement by a party, any
hearing and any arbitral award, decision or other communication by the arbitral tribunal.
(4) The arbitral tribunal may order that any documentary evidence shall be accompanied by a translation into the
language or languages agreed upon by the parties or determined by the arbitral tribunal.

S.23 of the Arbitration and Conciliation Act, 1996 reads: Statement of claim and defence.—

(1) Within the period of time agreed upon by the parties or determined by the arbitral tribunal, the claimant shall
state the facts supporting his claim, the points at issue and the relief or remedy sought, and the respondent shall state
his defence in respect of these particulars, unless the parties have otherwise agreed as to the required elements of
those statements.
(2) The parties may submit with their statements all documents they consider to be relevant or may add a reference
to the documents or other evidence they will submit.
(3) Unless otherwise agreed by the parties, either party may amend or supplement his claim or defence during the
course of the arbitral proceedings, unless the arbitral tribunal considers it inappropriate to allow the amendment or
supplement having regard to the delay in making it.
However, it is largely agreed that there are broadly three sets of laws which apply to an
10
arbitration :
i. The proper law of the contract i.e., the law governing the contract which creates
the substantive rights of the parties, in respect of which the dispute has arisen
(Substantive law).
ii. The proper law of the arbitration agreement, i.e., the law governing the obligation
of the parties to submit the disputes to arbitration, and to honour the award. (lex
arbitri or the law governing the arbitration agreement).
iii. The proper law of the conduct of the arbitration i.e., the law governing the conduct of
the individual reference. It is usually held to be the law of the seat of the
arbitration. (lex fori/curial law).
In addition to this, in an international agreement, there will be
iv. Other applicable rules, non-guidelines and recommendations and
v. The law governing recognition and enforcement of awards (which may, in practice,
prove to be not one law, but two or more, if recognition and enforcement is sought in
more than one country in which the losing party has, or is thought to have,
11
assets)
The law applicable to substance of dispute and law applicable to arbitration agreement are the
two separate sets of law applicable to arbitration. The law applicable to substance of dispute or
substantive law governs the validity of contract and the contractual rights and obligations of
parties. And parties can either expressly or impliedly apply any law of any nation of their
12
choice .Whereas the proper law of arbitration agreement or lex arbitri determines the internal
and external validity of arbitration agreement. Internal procedure includes the principles of equal
opportunity of parties to present their case and external validity determines the interaction with
local courts of competent jurisdiction. Lex arbitri determines what law governs arbitration and

10 Ejas Karia, Lla Kapoor & Ananya Aggarwal, Post Amendments: What Plagues Arbitration in India? 5 IJAL
230 ,
233 (2016).

1. 11 Nigel Blackaby, Constantine Partasides QC, Alan Redfern, & Martin Hunter, Redfern and
Hunter on International Arbitration 157 (6th ed. 2015).
12 Id. at 158.
which courts will exercise jurisdiction over many of the crucial matters liable to impact on the
13
fate of the arbitration . In case of selection of proper law of arbitration agreement also, parties
can exercise their freedom of choice. In the absence of express provision in the contract, the
14
courts apply different tests to determine the proper of law of agreement .
According to the paradigm that still prevails today, the lex arbitri, together with the will of the
parties, provides the main foundation of the arbitration and of its binding force. The lex arbitri also
provides the framework for the arbitration. It determines the extent of the parties’ right to resort to
15
arbitration and defines the boundaries of their autonomy . There is an undeniable trend towards the
16
liberalization of arbitration and its disenfranchisement from national law . Even in the context of
liberalization of arbitration rules, all legal systems contain at least some rules from which the parties
17
will, under no circumstances, be permitted to derogate . Certain countries are unquestionably less
sympathetic to arbitration than others. In particular, in certain countries that in recent years have
reached a central stage in their economic relations such as China, Russia and India, the attitude
towards international arbitration remains considerably less favourable than in the legal systems
18
where the culture of arbitration first emerged such as France and Switzerland . Arbitration is not
harmonized at the international level. The international convention that constitutes the basis of the
system of international arbitration, the New York Convention, governs only two, albeit crucial
elements of arbitration: the enforcement of arbitration agreements and of arbitral awards. Even in
relation to these two aspects, it is very far from imposing a harmonized regime. Consequently, states
retain total freedom as to how to govern issues relating to arbitration. The only important legal
instrument which goes some way towards bringing about some level of harmonization is the
UNCITRAL Model Law on International Arbitration, which, however, is not binding and, moreover,
19
is silent on many matters .

13 International Commercial Arbitration 48 (,Giuditta Cordero-Moss ed., 2013).

14 Indian courts apply the closest connection test NTPC v. Singer (AIR 1993 SC998), where as English courts
apply three stage test (Sulamerica v.Enesa (2012EWCA Civ638).
See Abhinav Bhushan and Niyati Gandhi, The Ghost of Governing Law Returns: Lex Arbitri v. Curial Law in India,
(March 25, 2018, 3.30 PM), http://arbitrationblog.kluwerarbitration.com/2014/02/26/the-ghost-of-the-governing-
law-returns-lex-arbitri-v-curial-law-in-india/.
15 Cordero-Moss, Supra n. 13 at 43.
16 Id. at 45.
17 For e.g., law governing the number arbitrators or some fundamental principles of procedure. Id.
18 Id. at 47.
19 Id. at 46.
It in this context, the issue of parties domiciled in one country to choose law of arbitration
agreement of another country becomes relevant, and it is pertinent to analyse and understand
whether, permitting such contracts would be contrary to the basic tenants of arbitration law.
Many jurisdictions across the globe permits international arbitration even in domestic disputes.
In the larger spectrum of autonomy, lex arbitri, determines the boundaries, that which cannot be
violated by parties through agreement. As far India is concerned, there is no specific provision in
the Arbitration and Conciliation Act, 1996 governing the party autonomy in choosing foreign
seat of arbitration or governing law in case parties domiciled in India.

PRINCIPLE OF TERRITORIALITY AND PARTY AUTONOMY

Arbitration procedure is generally governed by the arbitration law of the place where the tribunal
20
has its seat, is otherwise known as principle of territoriality . The territoriality principle applies
only to the law governing the arbitration procedure and does not extend to cover the law
21
governing the merits of the dispute . As to the substantive law, parties are at liberty to follow
any specific legal rules to decide the rights of contracting parties. Similarly, some states have
opened up for the parties to choose the law governing the arbitration agreement and procedure.
22
Therefore, in these states the parties may derogate the territoriality principles of lex arbitri .
Hence if parties wish the arbitral proceeding to be regulated by a law different from the law of
the place where the arbitral tribunal is seated, they should make specific reference in the
arbitration agreement. Thus, the autonomy of parties to choose substantive and procedural law
has been an accepted standard of arbitration at least for some countries, though it is not a uniform
standard. Though the UNCITRAL Model Law has provisions ensuring party autonomy, the
rights of parties to choose governing law in case of domestic disputes is not clearly laid down
and the Model Law generally operates on the principle of territoriality. Since India is known as
Model Law country, how far parties can derogate the arbitral law of India in case of domestic
disputes remains as an unresolved issue even after the decision of Supreme Court on this point.

20 Territoriality principles is affirmed in Article 46 of the Swedish Arbitration Act, Article 176 of the Swiss
Private International Law Act, S. 2 of the English Arbitration Act and Article 1(2) of the UNCITRAL Model Law.
Cordero-Moss, Supra n. 13 at 14.
21 Ibid.
22 Article 182(1) of the Swiss Private International Law Act, Article 1494 of the French Civil Procedure Code. Ibid.
CONTOURS OF INDIAN ARBITRATION LAW
The freedom of party autonomy to exercise the choice of substantive law by express inclusion or
implied exclusion may find expression in S. 28 of the Arbitration and Conciliation Act, 1996,
which is recently amended in 2015. S. 28 of the Act follows the same standard as given under the
23
UNCITRAL Model Law .
24
S.28 says that where the place of arbitration is in India and the subject matter is a domestic
arbitration, the tribunal has to decide the dispute in accordance with the substantive law for the time
being in force in India. In an international commercial arbitration, the tribunal has to decide the
dispute according to the rules of law designated by the parties as applicable to the substance of the
dispute. It is further provided that any designation by the parties of the law or legal system of a given
country is to be construed, unless otherwise expressed, as directly referring to the substantive law of
that country and not to its conflict of laws rules. Where parties do not designate any law, the tribunal
has to apply the rules of law which it may consider to be the most appropriate

23 Article 28 of the UNCITRAL Model Law reads: Rules applicable to substance of dispute
(1) 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. Any designation of the law or legal system of a given State shall be
construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict
of laws rules.
(2) Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws
rules which it considers applicable.
(3) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly
authorized it to do so.
(4) In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into
account the usages of the trade applicable to the transaction.

24 S. 28 of the Arbitration and Conciliation Act reads: Rules applicable to substance of dispute.—(1) Where
the place of arbitration is situate in India,—
(a) in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the
dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;
(b) in international commercial arbitration,—
(i) the arbitral tribunal shall decide the dispute in accordance with the rules of law designated by
the parties as applicable to the substance of the dispute;
(ii) any designation by the parties of the law or legal system of a given country shall be construed,
unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict
of laws rules;
(iii) failing any designation of the law under clause (a) by the parties, the arbitral tribunal shall apply
the rules of law it considers to be appropriate given all the circumstances surrounding the dispute.
(2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly
authorised it to do so.
(3) While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the
contract and trade usages applicable to the transaction.
 25
given all the circumstances surrounding the dispute . Thus, one may safely arrive at a
conclusion that S.28 speaks about only the substantive law and not governing law as to
arbitration agreement or procedure. In respect of the international commercial arbitrations, as
agreed generally, the seat of arbitration determines the law governing arbitration and the parties
can exercise their freedom of choice by incorporating the lex arbitri specifically in the arbitration
26
clause or by implied exclusion of any law of the country .
However, on analysing the specific situation in India, S.28 is applicable to settle issues in
connection with the determination of substantive law. The issue becomes more complex on
interpreting S.2 (f) of Act where it is specifically given that an arbitration held outside India
27
cannot be considered as international arbitration . Thus to apply S.28 either of the parties should
have connection with a jurisdiction outside India. Thus if parties in India agree to settle the
dispute outside India, the validity of such agreement may be analysed on the basis of accepted
norms of international arbitration law rather than under the provisions of the Arbitration and
Conciliation Act, 1996, due to the reason that there is no specific indication given in the Act.

SEAT OF ARBITRATION AND THE LEX ARBITRI: THE INDIAN

CONTEXT
The Arbitration and Conciliation Act, 1996 or even the Amendment Act, 2015 are not providing
any specific provision for deciding the questions as to the law governing arbitration agreement.
Since India adopted the UNCITRAL Model Law, the party autonomy plays pivotal role in
deciding the issues relating to substantive law and law governing arbitration agreement along
with the territoriality principle.

25 Justice R.S. Bachawts, Law of Arbitration and Conciliation,1260 (4th ed. 2015).
26 Redfern &Hunter, Supra n. 11 at 157.
27 S. 2(f) of the Arbitration and Conciliation Act, 1996 reads: “international commercial arbitration” means an
arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as
commercial under the law in force in India and where at least one of the parties is—
(i) an individual who is a national of, or habitually resident in, any country other than India; or
(ii) a body corporate which is incorporated in any country other than India; or
(iii) an association or a body of individuals whose central management and control is exercised in any
country other than India; or
(iv) the Government of a foreign country;
DECIDING THE QUESTION OF RIGHT OF INDIAN PARTIES TO
CHOOSE FOREIGN SEATED ARBITRATION: CONTRADICTORY
VIEWS

28
Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Private Limited

In the instant case the two Indian Companies entered into an arbitration agreement, wherein
Clause 23 of the agreement stated that: Arbitration in India or Singapore and English Law to be
applied. The petitioner filed the application under Section 11(6) of the Act 1996 for the
appointment of arbitrator. The petitioner stated that since both the parties are incorporated in
India and are situated in Mumbai and since the said clause 23 provides that the arbitration shall
be in India or Singapore and English law to apply, intention of the parties is clear that the parties
can have arbitration in India. It was argued that since both the parties are from India, the parties
cannot be allowed to derogate from Indian law. The learned counsel for the respondent submitted
that though both the parties are Indian, parties by agreement can agree to the seat of the
arbitration at Singapore and to apply English law.
The Bombay High Court admitted the application of the petitioner for the appointment of
arbitrator by relying on the TDM case by stating that:
A perusal of clause 23 clearly indicates that intention of both parties is clear that the
arbitration shall be either in India or in Singapore. If the seat of the arbitration would
have been at Singapore, certainly English law will have to be applied. Supreme Court in
case of TDM Infrastructure Private Limited has held that the intention of the legislature
would be clear that Indian nationals should not be permitted to derogate from Indian
law. This is part of the public policy of the country.

Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Private Limited
2015 SCC Online Bom 7752

28 2015 SCC OnLine Bom 7752

Thus, the Bombay High Court without differentiating the laws to be applied in respect of
the substance of dispute and procedure, and relying wrongly on TDM Infrastructure Pvt.
29
Ltd. case , where the right of Indian parties to choose foreign seat of arbitration was not at
all a ratio of the decision, came to the conclusion that two Indian parties cannot derogate
Indian law.

30
Sasan Power Limited v. North American Coal Corporation India Private Limited
The appellant was a company registered under the Indian Companies Act, and was a subsidiary of the
Reliance Power Ltd. The respondent was also a company registered in India and was subsidiary of
the North America Coal Corporation (NACC-USA). Sasan Powers entered into an association
agreement with NACC-USA based on the agreement between the Reliance and the NACC-USA.
Consequently, NACC-USA vide an agreement assigned all its rights and responsibilities to its Indian
Company, NACC-India. Disputes started arising between the parties and on 23.7.2014, the
respondent Indian Company issued a letter of termination in respect of the associate agreement and
also filed a request for arbitration with the International Council for Arbitration (ICC) and

29 TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt.Ltd (2008) 14 SCC 271
In this case the case both parties, TDM Infrastructure and UE Development India, were Indian companies registered
and incorporated under the Indian Companies Act, 1956.However Board of directors and shareholders of the
petitioner company were in Malaysia. The petitioner approached the Supreme Court for appointing a sole arbitrator
as per S.11(5) and S.11(6) of the Arbitration and Conciliation Act, 1996. On that point, the Court considered the
main issue of the nationality of the companies and dismissed that petition stating the reason that the centre of control
situates outside India, and rightly noted that:

In respect of `international commercial arbitration', clause (b) of Sub-section (1) of Section 28 of

the 1996 Act would apply, whereas in respect of any other dispute where the place of arbitration
is situated in India, clause (a) of Sub-section (1) thereof shall apply…..Section 28
of the 1996 Act is imperative in character in view of Section 2(6) thereof, which excludes
the same from those provisions which parties derogate from (if so provided by the Act). The
intention of the legislature appears to be clear that Indian nationals should not be permitted
to derogate from Indian law. This is part of the public policy of the country.

30 2015 SCCOnline M.P. 7417

claimed compensation along with compound interest. Matter came before the MP High Court by way
of a miscellaneous appeal filed by the respondent against the injunction granted by the District Court
against arbitration under ICC in favour of the petitioner inter alia with other petitions.
One main issue discussed by court was the intricacies of the choice of substantive and procedural
law in an arbitration. In this case, the court appreciated the difference between substantive and
procedural law by analysing S.28 of the Arbitration and Conciliation Act, and opined that:
As the heading of Section 28 indicates, its only purpose is to identify the rules
that would be applicable to a substance of dispute. In other words, it deals with
the applicable conflict of law rules. This section makes a distinction between
purely domestic arbitrations and international commercial arbitrations, with a
seat in India. Section 28(1)(a) makes it clear that in an arbitration under Part I
to which section 2(1)(f) does not apply, there is no choice but for the Tribunal
to decide the dispute by applying the Indian substantive law applicable to the
contract. This is clearly to ensure that two or more Indian parties do not
circumvent the substantive Indian law, by resorting to arbitrations. The
provision would have an overriding effect over any other contrary provision in
such contract. On the other hand, where an arbitration under Part I is an
international commercial arbitration within Section 2(1)(f), the parties would be
free to agree to any other substantive law and if not so agreed, the substantive
law applicable would be as determined by the Tribunal. The section merely
shows that the legislature has segregated the domestic and international
arbitration. Therefore, to suit India, conflict of law rules have been suitably
modified, where the arbitration is in India.

Sasan Power Limited v. North American Coal Corporation India Private Limited 2015
SCC Online M.P. 7417
In the instant case, the Madhya Pradesh High Court relied on M/S Atlas Export Industries v. M/S
31
Kotak & Company on the ground that the issue was decided by a larger bench . The Court

31 M/S Atlas Export Industries vs M/S Kotak & Company (1999) 7 SCC 61.
reiterated the position taken by the Supreme Court in the Atlas case and observed that such
arbitration agreements are valid and the award will be governed under Part II of the
Arbitration and Conciliation Act, 1996.

LEAVING THE ISSUE UNSETTELED: THE VIEW OF SUPREME

COURT
32
Sasan Power Ltd v. North American Coal Corporation India Pvt. Ltd. , was an appeal case
filed before the Supreme Court against the decision of the Madhya Pradesh High Court, and
the main issue was whether it is permissible under the consolidated Indian law of arbitration
for two Indian Companies (each incorporated and registered in India) to agree to refer their
commercial disputes to an arbitration, with place of arbitration outside India, and with a
different governing law.
The entire case of the appellant was built up on the assumption that the parties to the
arbitration agreement were only two Indian companies. However, Court on perusing the
agreements entered into between two parties and the assignment agreements concluded that it
was dispute among three parties, of which one is an Indian Company, with a foreign element,
i.e, rights and obligations of the American Company. Hence the stipulation regarding the
governing law cannot said to be an agreement between only two Indian Companies. Deciding
the involvement of foreign element, court by oversight gave up the question of law of right of
Indian parties to agree up on foreign seat of arbitration or foreign law of arbitration.

In this case two Indian parties, based on the prior arbitration agreement they entered for settlement of
disputes, arbitrated the dispute where the seat of arbitration was London. Atlas filed application in India for
enforcement of award and it was challenged by Kotak alleging the validity of arbitration agreement and it was
dismissed by the High Court. The case came before the Supreme Court and the Supreme Court considered two
issues such as the validity of arbitration agreement and whether the enforcement of the award would violate sections
23 and 28 of the Indian Contract Act. Division bench decided both the issues, and the Court dismissed the petition
stating that the agreement between Atlas and Kotak was valid and the award will not be against public policy or
against S.23 and 28 of the Indian Contract Act.
32 (2016) SCC 10 813.
Though the question of lex arbitri was a major issue in this case, court took much time to
discuss the foreign element involved in the case, and left the issue unsettled. Thus it requires
further clarification either from the court or an amendment to determine the extent to which
Indian parties many agree on foreign seated arbitration and governing law. As long as it is not
clearly prohibited under the Act, and party autonomy being the basic feature of arbitration law
across the world, it may be assumed that, such agreements are valid. A conflicting view may
also be taken that S.28 clearly speaks about the substantive law. Since there is no clear
indication as to the right of the parties to choose a different law, it may also presume that,
such agreements are invalid, because the law makers had not intended so.

EMERGING JUDICIAL TRENDS: THE UNENDING BATTLE

Very recently, the arbitration world and legal fraternity once again discussed upon the rights
of Indian parties to choose foreign seat for arbitration after proclaiming the validity of such
agreements by the Delhi High Court in 2017. In GMR Energy Limited v. Doosan Power
33
Systems India Private Limited & Ors , the Delhi High Court considered the issue of choosing
lex arbitri where two parties are Indian and it has been well accepted by the arbitration world
as a pro-arbitration judgement.
34
In the instant case GMR Energy Ltd filed the suit for a decree of injunction to restrain Doosan
Power Systems India Pvt. Ltd from instituting or proceeding with arbitration proceedings against
GMR Energy Pvt. Ltd before the Singapore International Arbitration Centre (SIAC). The Delhi
High Court extensively considered inter alia the issue of two Indian parties to enter into a contract
to undergo arbitration in foreign jurisdiction. The Court by relying on Sasan Power Limited v.
North American Coal Corporation India Private Limited (MP) concluded
that arbitration agreement is an independent self- contained agreement not dependant on the

33 2017 SCC OnLine Del 11625

34 GMR Chattisgarh Energy Limited (GCEL) entered into three EPC agreements with Doosan Power Systems India
Private Limited (Doosan India), on 22 January 2010. A separate corporate guarantee was also executed between GCEL,
GMR Infrastructure Ltd (GIL), and Doosan India on 17 December 2013. Thereafter, two Memoranda of Understanding
were executed between Doosan India and GMR Energy Limited (GMR Energy) dated 1 July 2015 and
30 October 2015 . The EPC Agreements, Corporate Guarantee, and the MOUs became the subject matter of a
dispute and Doosan India invoked Arbitration Proceedings against GIL, GMR Energy and GCEL seeking
enforcement of certain liabilities before the Singapore International Arbitration Centre (SIAC). GMR was included
in the arbitration proceedings even if they were not party to EPC Agreements.
substantive agreement, therefore irrespective of the contractual rights and obligations parties
can opt for an international arbitration.

However in the year 2017, yet another conflicting decision came from Uttarakhand High
35
Court. KLA Construction Pvt. Ltd. v. Kajima India Pvt. Ltd , the Court opined that in case
where there the foreign element as given S. 2(1)(f) is absent, the case cannot be referred to
international arbitration and it will be treated as domestic arbitration under the Arbitration and
Conciliation Act, 1996. The court relied upon TDM Infrastructure Pvt. Ltd. v. UE
Development India Pvt. Ltd. and observed that a company incorporated in India can only have
Indian nationality for the purpose of the Act. It cannot be said that a company incorporated in
India does not have an Indian nationality. Hence, where both the parties have Indian
nationalities, then the arbitration between such parties cannot be said to be an international
commercial arbitration.

CONCLUSION
The emerging judicial trends in connection with lex arbitri in India is intricate and add on the
complexity, though there are many decisions, which are welcomed by the arbitration world across
the globe in the recent past. Though the judiciary is taking a pro-arbitration approach it is
quintessential to bring clarity in respect of law governing arbitration agreements, especially in the
context of conflicting High Court decisions. Since S.28 gives the freedom to choose substantive
law to the parties to international arbitrations, there is no specific provision dealing with the of
Indian parties to exercise such options in respect of lex arbitri. Though the Delhi High Court has
recently confirmed the possibility of choosing foreign seat of arbitration by Indian parties, it
subject to rectification. As mentioned earlier, S.28 opens the possibility of two conflicting
interpretations, where the final decision has not yet come from the Supreme

35 Arbitration Petition No. 21 of 2017 .In this case, a contract was executed between the Petitioner and the
Respondent on September 09, 2015 at Delhi. The contract between the parties was for the construction of a factory
at SIDCUL in Haridwar . The Arbitration Clause 20.6 of the agreement read as:
"...20.6. Arbitration. Unless settled amicably, any dispute in respect of which the DAB's decision (if any) has not
become final and binding shall be finally settled by international arbitration. Unless otherwise agreed by both the
parties:
(a) The dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce...".
Court. Though the Delhi High Court relied on the precedents and came to conclusion that the
Arbitration and Conciliation Act, 1996 does not prohibit foreign seated arbitration for domestic
dispute, it is necessary to eliminate the ambiguity in the decisions. It is also pertinent to note that
S.28 authorises the parties to international arbitrations to exercise their autonomy and at the same
time the provision is silent about the rights of parties of domestic disputes. Thus to ensure safe
arbitral climate in India, it is better to reform the law governing lex arbitri.

Asia Pacific Law & Policy Review

Volume 4 (Annual) – July 2018
Access the journal at asiapacific.ccinternational.in