BY SHUBHAM SINGH, A THIRD-YEAR STUDENT AT NATIONAL LAW UNIVERSITY, ODISHA

Introduction

Contracts often integrate arbitration through dedicated clauses or standalone agreements. While most arbitration agreements or clauses are well-structured, some of them exhibit ambiguity or omissions in terms of governing law, seat, or venue of arbitration. These inconsistencies risk misinterpretations, necessitating litigation to resolve disputes over the arbitration clause itself.

A unique dilemma arises when a main contract with a comprehensive arbitration clause omits to mention the governing law. Domestically, it is easy to resolve this dilemma as all matters fall under one jurisdiction and revolves around one statute i.e., the statute of arbitration under that jurisdiction. However, international arbitration introduces complexities regarding this issue.  Variations of law across jurisdictions can lead to differing interpretations and nuanced issues.

In its latest report titled Review of the Arbitration Act 1996, the United Kingdom Law Commission (‘Law Commission’) addresses the dilemma of governing laws and proposes solutions to address this issue. This article examines the Law Commission’s recommendations on governing law while comparing them with Singapore’s interpretation of governing laws and providing insights for India from these two jurisdictions. Furthermore, this article will attempt to understand to what extent it is beneficial to decide the issue of governing laws in international arbitration.

Decoding the Recommendation and its Reasoning

The backdrop of the report can be aptly summarised using Enka Insaat Ve Sanayi A.S. v. OOO Insurance Company Chubb(‘Enka v. Chubb’), which serves as the case to illustrate the current stance of the United Kingdom regarding governing law in arbitration.

The Enka v. Chubb ruling establishes that the governing law of an arbitration agreement typically aligns with the law chosen by the parties involved. If there is no explicit designation in the arbitration agreement, it is implied that the law selected to govern the main contract extends to the arbitration agreement, except if applying that law would invalidate the arbitration agreement. In such cases, an alternative law will be applied using the validation principle, which prioritizes interpretations that uphold the validity of contract in instances of contractual ambiguity. Therefore, in situations where no governing law is specified, the arbitration agreement will be governed by the law most closely associated with it, a principle often referred to as the ‘law of the seat’.

The Law Commission recommended that the applicable governing law should either be the one expressly agreed upon by the parties or if no such agreement exists, the law of the seat of arbitration. Thus, it discarded the prevailing practice of applying the law of the main contract to the arbitration agreement in the absence of a pre-decided governing law.

The Law Commission reasoned that implementing the recommended changes would safeguard party autonomy in arbitration, mitigating risks associated with foreign governing laws that may offer less favourable provisions on arbitrability, scope, and separability. Furthermore, it is believed that the recommended approach would eliminate the need for the application of a very uncertain validation principle and reduce the likelihood of disputes over position of foreign arbitration laws in these matters. 

Analysing the United Kingdom and Singapore Perspective

The Law Commission through its recommendations may have aimed to eliminate the complex hierarchy for determining the governing laws, established by Sulamerica Cia Nacional De Seguros S.A. v. Enesa Engenharia S.A. (‘Sulamerica’). This hierarchy has been influential in various succeeding cases, notably, Enka v. Chubb and Kabab-Ji SAL v. Kout Food Group (‘Kababji’). Enka and Kababji relied on the Sulamerica hierarchy. Sulamerica hierarchy proposed the following sequence for ascertaining the governing laws:

• the express choice of law made by the parties; 
• the implied law reflecting their intention; 
• the law closely connected to the arbitration.

This hierarchy has been used in many jurisdictions, especially Singapore through judgments such as BCY v. BCZ (‘BCY’) and BNA v. BNB (‘BNB’). However, Singapore accepting the Sulamerica case hierarchy, formulated its own interpretation regarding the governing laws. The case of BCY asserts that an arbitration agreement typically aligns with the main contract’s governing law unless such alignment negates the arbitration agreement. Meanwhile, the BNB decision holds that merely specifying the governing law for a contract is inadequate to qualify as an express choice for the proper law of the arbitration agreement.

Based on Singaporean case laws and UK Law Commission recommendations, it is clear that both jurisdictions suggest that the main contract’s governing law may not always govern arbitration. It is so because it potentially impacts party autonomy or may negate the arbitration process as a whole. Parties often choose the seat of arbitration based on favourable laws, expediting the process. Thus, prioritizing party choice or the seat’s laws over hierarchical considerations from the Sulamerica case to Enka v. Chubb, enhances party-friendly nature of arbitration rather, as, the outcome of the Sulamerica hierarchy which was further developed in the Enka v Chubb suggests that arbitration agreements could fall under the jurisdiction of foreign laws. This stems from the fact that while arbitration agreements may not consistently indicate a governing law, main contracts frequently stipulate foreign laws as the governing authority and it can be treated as an expressed choice. This observation was also put forth by the Law Commission.

Criticism of the United Kingdom and Singapore Perspective

Singapore and the Law Commission prioritize shielding of arbitration proceedings. This is evident in their emphasis on linking the arbitration agreement to a governing law which does not negate arbitration, thereby ensuring the viability of arbitration. However, this focus risks neglecting the broader picture of international arbitration, particularly the critical matter of award enforcement. While their commitment to safeguarding proceedings is laudable, overlooking enforcement mechanisms creates potential hurdles in realizing the global effectiveness of arbitration outcomes.

Indian Perspective and Its Criticism

In India, as per Union of India v. Reliance Industries Limited and Ors., if the governing law is not expressly mentioned, the substantive law of the main contract will apply.

The Indian approach prioritizes enforceability, as the jurisdiction where the main contract originates often serves as the place for enforcing arbitral awards. However, this position also raises concerns about limiting party autonomy, which could potentially restrict the freedom to choose the governing law for arbitration independently. While prioritizing enforcement is undeniably essential for successful arbitration outcomes, striking a balance with upholding party autonomy remains paramount. After all, party autonomy is a cornerstone of the arbitration process, allowing flexibility and tailored solutions for diverse business transactions.

Mixing The Ingredients – A Scenario-Based Approach

While respecting party autonomy and ensuring the viability of arbitration is crucial, every jurisdiction should consider the entire arbitration process, from initiation to award enforcement, while crafting its framework. In this section, the author will propose a scenario-based approach, integrating the analysed approaches of the jurisdictions mentioned above.

In scenarios where the enforcement of the arbitral award occurs in a jurisdiction that supports the arbitrability of the dispute, solving the governing law issue will not be a problem. In this case, it will assist the parties in completing the arbitration process.

In scenarios where the enforcement of arbitral awards must be done in a jurisdiction where the dispute between the parties is non-arbitrable, delving deep into the issue of governing law is not appropriate. Implementing a law that upholds arbitration proceedings may seem like a solution, but ultimately, if the arbitral award cannot be enforced, the mechanism of arbitration does not benefit the party.

For example, in the case of Anupam Mittal v. Westbridge Ventures II Investment Holdings (‘Anupam Mittal’), Anupam and Westbridge had signed a Shareholders’ Agreement with an arbitration clause impliedly designating Singapore as the arbitration seat. Anupam Mittal filed an oppression and mismanagement petition with the National Company Law Tribunal (‘NCLT’). Westbridge obtained an injunction from the Singapore High Court to halt NCLT proceedings, to which Mittal appealed to the Singapore Court of Appeal. The Court of Appeal also granted a permanent injunction, directing arbitration under Singaporean law. Indian courts, similarly, issued an anti-suit injunction over the arbitration proceedings, as oppression and mismanagement disputes are not arbitrable in India but are in Singapore. However, since the Shareholders’ Agreement concerned an Indian company, enforcement of the arbitral award would ultimately fall under Indian jurisdiction, where, according to Indian law, the award would be null and void.

It is argued that ultimately, if the enforcement of the arbitral award will be null and void, why go through the arbitration process? It is suggested that enforcement should also be considered a primary element of arbitration when deciding disputes over arbitration agreements or clauses. Arbitration, introduced to reduce litigation- as shown in cases like Anupam Mittal– can lead to over-litigation and burden the parties if enforcement is not considered. Parties involved in international arbitration may find themselves navigating various jurisdictions to sustain arbitration through litigation, thus defeating its purpose.

Conclusion

Jurisdictions must acknowledge the importance of time and efficiency. Where enforcement of an arbitral award is expected to be smooth, delving into the governing law can facilitate timely resolution. However, if non-enforcement looms, it is preferable to defer the dispute to the courts of the enforcing jurisdiction, especially if the dispute would not be arbitrable where the arbitral award will be enforced. In such cases, forcing parties through full arbitration followed by litigation in the enforcing jurisdiction is wasteful and inefficient. Allowing the enforcing court to decide on arbitrability upfront helps streamline the process and avoids subjecting parties to unnecessary double proceedings.