SEAT AND THE LAW OF ARBITRATION

The "seat approach" for determining the law of arbitration and the presumption of judicial consensus in its support has been challenged by the UK Supreme Court in its decision in Enka v. Chubb. Indian Courts, which steadfastly follow this approach, need to review their position and explore a more nuanced approach.

There is judicial consensus in India that the choice of seat of arbitration determines the forum for supervision of the arbitration proceeding and for challenge to the award made in it. But does the choice of the seat of arbitration also determine the law governing the arbitration agreement if the parties have not specifically chosen that law? This article seeks to explore this issue in light of the decisions of our courts and the decisions of the UK Supreme Court.

In Balco¹, the Indian Supreme Court ruled that "the law of the seat or place where the arbitration is held is normally the law to govern that arbitration. The territorial link between the place of arbitration and the law governing that arbitration is well established in the international instruments"²; and that "the choice of another country as the seat of arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings"³.

Law of Arbitration

Following Balco, Indian courts, have consistently applied the principle that the choice of seat will generally imply the choice of law of the seat to govern the arbitration, i.e., the "seat approach". There is little or no room in current jurisprudence in India for the "main contract approach"⁴, which advocates that in the absence of an express choice of law governing an arbitration agreement, the law governing the main contract (either expressly or by implication) ought to be construed as that law. Indian courts have leaned in favor of the seat approach relying mainly on a line of decisions of English courts⁵ supporting this approach and have presumed there is international consensus in that regard. In a recent decision in Enka v. Chubb,⁶ the UK Supreme Court has challenged this approach and the presumption that there is consensus supporting it.

Enka v. Chubb

In Enka v. Chubb, the UK Supreme Court considered the question: which national law governs the validity and scope of the arbitration agreement in the absence of an express choice by the parties, when the law governing the contract containing it is different from the law of the seat of arbitration.

The Court (by a majority decision) concluded that "As a matter of principle and authority there are therefore strong reasons why an agreement on a choice of law to govern a contract should generally be construed as applying to an arbitration agreement set out or otherwise incorporated in the contract."⁷ It laid down the following rules for identifying the law governing the arbitration agreement:

(i) The choice of the governing law of the contract will generally apply to the arbitration agreement which forms part of the contract.

(ii) The choice of a different country as the seat of arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.

(iii) Additional factors which negate such inference are (a) provision in the law of the seat which mandates its application to arbitration held there; and (b) if the application of the governing law of the main contract will render the arbitration agreement invalid or ineffective.

(iv) A clause providing for arbitration in a particular place will not by itself justify an inference that the contract (or the arbitration agreement) is intended to be governed by the law of that place. Where, however, the parties have chosen the seat of arbitration but have not made a choice of the law to govern the contract or the arbitration agreement within it, the arbitration agreement will be governed by the law to which it has the closest connection, i.e., the law of the seat⁸.

In the facts of the case, the court concluded that the parties had not expressed their choice of law applicable to the contract or the arbitration clause contained in it.⁹ It thus ruled that English law, as the law of the seat, will apply to the arbitration agreement¹⁰.

Impact on jurisprudence in India

Enka v. Chubb ruled that while the parties' agreement on the seat will ordinarily imply their agreement that the law and the court of that country will regulate the arbitration, it does not always imply that such law will also govern the arbitration agreement. Choice of seat, thus, implies choice of curial law and curial court, and not always the law governing the arbitration agreement. Decisions of Indian courts do not clearly recognize this distinction. They often regard the parties' choice of seat as also their choice of law of the seat for all aspects of arbitration without any reference to choice of law for the contract.

Indian Courts have favored the seat approach mainly on the basis of Shashoua principle¹¹ (which is in turn founded on the decision in C v. D¹²) and the decision in Sulamerica (Commercial Court). The decision in Sulamerica was appealed. The decisions of Court of Appeal in Sulamerica and of in C v. D were critically examined in Enka v. Chubb.

Sulamerica¹³

In this case the Court decided against applying Brazilian law, the law governing the main contract, to the arbitration agreement, since it would have been invalid under that law. This the parties could not have intended. This was the decisive reason to construe the parties' intention to apply the English law to arbitration as an implication of choosing London as the seat. The construction was adopted to save the arbitration agreement from invalidity.¹⁴ In fact, the Court approved the main contract approach.¹⁵

C v. D¹⁶

In Enka v. Chubb, the Court questioned the correctness of this decision. It noted¹⁷ the reservation expressed by the Court of Appeal in Sulamerica (at Para 24) that the rule (followed in C v D) that an arbitration agreement is governed by the law of the seat even where there is a choice of law clause in the contract cannot easily be reconciled with the earlier authorities or well-established principle. It found the reason given for disapplying the law chosen by the parties to govern the insurance to the arbitration agreement contained in it, insufficient.¹⁸

In light of the decision in Enka v. Chubb, courts in India may need to reconsider the seat approach which they steadfastly follow, and perhaps adopt a more nuanced approach for determining the law governing arbitration agreements. In pre-Balco cases, which are still coming to the courts, and where the decision turns on the question whether or not parties had excluded Part I of the Arbitration Act by their choice of seat in a foreign country, the change in approach will have a particularly significant role.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.