Scroll Top

CONFLICT OF LAWS IN INTERNATIONAL COMMERCIAL ARBITRATION

Since the emergence of Globalisation, international commercial relations have become the essence of Indian trading and commerce. However, every contract is subjected to a dispute, and thus, the contract includes a clause for arbitration. When it comes to international arbitration, one of the most prevalent issues has been the conflict of laws between the parties in an arbitrational case. Notwithstanding the importance of the claims in international arbitration, no party is ready to jeopardize their position.

When the laws of two or more nations vary in a case, there is a conflict of laws that determines which country’s law will be used to resolve each contested issue. When assessing arbitral jurisdiction, or the ability of an arbitral tribunal to hear a dispute and make a decision on its merits, a conflict of laws examination is frequently necessary.

ARBITRATION AND CONCILIATION ACT, 1996

With the need for global commercial arbitration, the Arbitration Act of 1940 was amended to the present law, for alternate dispute resolution to incorporate the second part of the act, which includes the rules for enforcing foreign judgments, as per the rules of the New York Convention, 1958.

Section 2(1)(f) of the act, defines “international commercial arbitration”. Hence, any dispute resolution process involving a foreign contractor qualifies as international commerce. Also, Section 2(2) of the Arbitration and Conciliation Act, 1996, specifies that Part I of such act, i.e. substantial laws for arbitration are to be applicable when India is the location of the arbitration. It directly inferences that Part II of the act shall apply to arbitrations conducted outside India. 

In Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. the Apex Court of India held 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 distinct laws to regulate their entire relationship: 

However, if a consensus between the parties is regarding the arbitration’s location or the applicable law, then the arbitration will be controlled by the country’s laws of conflicts of law, which would be pertaining to the dispute between the parties. 

Section 19(2) of the act states that the procedure by which the arbitral tribunal will conduct its proceedings may be agreed upon by the parties at their discretion. Failing which in accordance with this Part, the arbitration panel is free to carry out the proceedings in any way it sees fit [Section 19(3)]. It is believed that the arbitrator has the freedom of will” to select the conflict rules in this process. However, if the existence, legality, meaning, or scope of laws chosen by the parties is contested, the dispute must be settled through the application of additional legal principles.

ARBITRAL TRIBUNAL’S SEAT AND THE APPLICABILITY OF CONFLICT LAWS

In arbitration, the notion of the party’s free will is paramount, and that has always been kept for the foremost consideration, for the selection of the venue of the arbitration and the applicable statutes. The question is whether as per the Arbitration and Conciliation Act, of 1996, those involved may choose to hold the arbitration in a country outside India. 

The apex court of India in its decision of PASL Wind Solutions (P) Ltd. v. GE Power Conversion (India) (P) Ltd interpreted Part II of the Act stating that an award issued by a court or tribunal located outside India is considered a “foreign award”. The Supreme Court made it clear that simply because a foreign nation bestows an arbitral award, it cannot automatically be assumed to be against public policy, and that an award of this kind may be contested throughout the enforcement procedures.

Section 28(1)(b) of the act explains the regulations that apply to the dispute’s core issues, where it states that unless otherwise stated, any reference by the parties to the law or legal system of a particular nation must be understood to refer solely to the substantive law of that nation and not to that nation’s regulations addressing conflicts of laws. The arbitral tribunal will adjudicate the dispute in line with the laws that the parties have agreed are relevant to the dispute’s core issues. 

As to the choice of law, the Supreme Court in its decision in NTPC v Singer Co cited the following passage from Dicey and Morris, The Conflict of Laws “Rule 180”:

“The term ‘proper law of contract’ means the system of law by which the parties intended the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.”

The complete agreement must be examined in all such situations. It is entirely up to individuals who are entering into a contract in such circumstances to specify in the terms that they use the system of law. Where the parties’ intentions are not evident from their clauses or inferences, the courts try to ascribe them by determining which legal system the transaction is most directly and substantively connected to. The only restriction on the parties’ purpose is that it must demonstrate a genuine choice and not conflict with public policy.  Thus, the selection of the seat of arbitration cannot be ad-hoc, but when the selection is made, the laws of the seat of arbitration bind and follows. 

APPLICABILITY OF PART II IN TERMS OF A FOREIGN SEAT

In the case of PASL Supreme Court held that the parties’ nationality is irrelevant when deciding whether or not the second part of the statute applies. Section 2 of the law is applicable when the arbitration hearing takes place somewhere other than India. However, Part II stipulates that the arbitration must take place outside of India and that the host nation must, in addition, be a signatory to the New York Convention requiring that the arbitration proceedings are held outside of India. In addition, the Supreme Court concluded that foreign law, even if it clashes with Indian law, cannot be disregarded because it violates the principles of international private law. The two Indian parties are allowed to select any foreign law they choose to implement to their consent for arbitration because it is independent of the core contract.

CONCLUSION

The phrase “International Commercial Arbitration” is generally acknowledged to be accurate which inferences to the first chapter of the present act of arbitration, while it refers to geography in Part II. Consequently, “extra-territorial arbitration” would be considered to be taking place between two Indian parties under the second part of the Arbitration Act (i.e., the resulting award would be a foreign arbitral award under Part II). However, parties cannot use this tool only to avoid India’s legal obligations and benefit from the provisions maliciously. The act focuses to provide the parties with a hassle-free resolution and thus, makes consent the ruling principle of arbitration. Thus, the arbitration act’s section 2(6) read in conjunction with section 28 provides the basis for the interpretation that parties could not overrule the mandatory laws of their own country.

Author(s) Name: Madiha Haider (Amity University, Kolkata)