Applicable Law

According to the primary rule of the autonomy of the parties, the parties have the liberty to elect the law of their choice being applicable to the arbitration agreement. The choice of law clause for the contract in general is not sufficient for the choice of law for the arbitral clause. The main contract may be stipulated to be governed by a particular law while the arbitration agreement may be governed by another law. The parties may stipulate that their contract shall be governed by the laws of India but this does not necessarily mean that the arbitration agreement would also be governed by the Indian laws. This was confirmed by the Delhi High Court in C.O.S.I.D. Inc. v. Steel Authority of India, AIR 1986 Del 8. The main contract and the arbitration clause have different objects. The main contract concerns the relationships between the parties and determines the rights and obligations thereunder as to the substance of the contract; the arbitration clause, on the other hand, is concerned with the procedure for settlement of disputes arising from the main contract between the parties. The parties can, thus, agree that their contract will be governed by laws of India while the arbitration agreement and the procedure therefor shall be governed and regulated by the rules of conciliation and arbitration of the International Chamber of Commerce, Paris. In such a case, the law governing the contract would be Indian substantive law and that governing the arbitration agreement would be International Chamber of Commerce Rules. If the parties provide a genernl choice of law cause they intend to give a directive to the arbitrator as to which law shall be applicable to the substance of the transactions. This would not, however, amount to any positive indication by the parties to apply the same law to arbitration.

In the absence of the parties having made an express choice of law to govern the arbitration, under the rule of implied choice, the law of the place where the arbitration is to take place shall govern arbitration. Thus, if the arbitration takes place in London and the parties have not made any positive stipulation as to what law would govern arbitration, lex fori will apply and the English law would govern the arbitration.

In Compagnie d' Agreement Maritime S.A v. Comoagnie Tunisienne de- Navigation S.A, 1971 AC 572:(1970)3 All ER 71, the House of Lords emphasised the distinction between the law governing the arbitration which was referred to as the "curial law" and the "proper law" of the contract and observed, "it is not open to question that if parties to a commercial contract have agreed expressly upon the system of law of one country as the proper law of their contract and have selected a different curial law by providing expressly that disputes under the contract shall be submitted to arbitration in another country, the arbitrators must apply as the proper law of the contract that system of law on which the parties have expressly agreed."

In James Millers & Partners Ltd. v. White Street Estates, 1970 AC 583, the House of Lords reversing the decision of the Court of Appeal held that "The proper law of the contract was not necessarily the law of arbitration. Arbitration was a matter of procedure to be governed by the 'lex fori'. Bv arbitration was subject to Scottish law," Under the Act of 1996 in any international commercial arbitration the dispute shall be decided by the law designatcd by the parties. The designation of the law or legal system of a country shall mean substantive law of that country and not its conflict of laws. If there is no designation then the arbitral tribunal shal1 apply any law it considers appropriate. But if the place of arbitration is in India and such arbitration is not an international commercial arbitration then such arbitration will definitely be governed by the substantive law of India.

Even though in National Thermal Power Corporatio11 v. Singer Company, AIR 993 SC 998: (1992) 3 SCC 551, the Supreme Court of India, while interpreting the provisions of the Foreign Awards (Recognition and Enforcement) Act, 1961 and after discussing all the relevant decisions and authoritative texts, held that 'where there is no express choice of the law governing the contract as a whole, or the arbitration agreement in particular, there is in the absence of any contrary intention, a presumption that the parties have intended that the proper law of the contract as well as the law governing the arbitration agreement are the same as the law of the country in which the arbitration is agreed to be held'. The Court further pointed out that 'any attempt to exclude the jurisdiction of the competent court of law in force in India was totally inconsistent with the agreement between the parties because the agreement governing the arbitration was Indian law, though the place of arbitration was London'. This principle no longer holds good in view of the enactment of the Act of 1996 'which repeals and replaces Foreign Award (Recognition and Enforcement) Act, 1961.

A practical aspect of the changes made by the Act of 1996 needs to be mentioned. Due to an anomaly in the Indian Foreign Awards (Recognition and Enforcement) Act, 1961, an arbitration being conducted outside India flowing out of a dispute arising out of a contract governed by the laws of India could be interfered with by an Indian court and therefore most of the foreign investors were insisting on arbitration in accordance with laws of their parent countries and clearly brought in a clause relating to the non-applicability of the Indian Arbitration Act, 1940 and the Foreign Awards (Recognition and Enforcement) Act, 1961. The anomaly has now been rectified with the Indian Foreign Awards (Recognition and Enforcement) Act, 1961 being repealed and recast in the Arbitration and Conciliation Act, 1996.

In the circumstances, there is now no need for bifurcation which was being opted for after the Supreme Court of India judgement in the case of Notional Thermal Power Corporation v. Singer Company (supra). The aforesaid judgment had in its interpretation of the Foreign Awards (Recognition and Enforcement) Act, 1961 allowed intervention by Indian courts in respect of arbitration being conducted outside India.

Consequently in the arbitration agreements or arbitration clauses in the agreements entered into between Indian and foreign parties, the provisions relating to the non-applicability of the Indian Arbitration Act, 1940 and the applicability of the Foreign Awards (Recognition and Enforcement) Act, 1961 need to be deleted as both these Acts have now been repealed and their still salutary and expedient provisions have been consolidated and re-enacted in the Act of 1996.