India as an International Commercial Arbitration Hub Vis-À-Vis Its Conflict of Laws System

Kulsoom Farhat Khan and Vinisha Jain*

Abstract

International Commercial Arbitration (“ICA”) as the method of dispute resolution has become a conventional practice over the past few years and due to this growth, the idea of becoming the hub for ICA is garnering traction in developing countries. Bahamas has recently enacted its 2020 Bill that aims making it ‘the seat and venue of choice’ for international commercial arbitration and is said to have cloned Mauritius’s 2013 Act. India is no stranger to this trend and it is also striving to become an ICA hub. However, there are several challenges and problems to this accomplishment and the authors have particularly focused on the potential challenge that imperfection in the conflict of law rules in India might pose.

Introduction

India has passed the Arbitration & Conciliation (Amendment) Act, 2021. The amendment is aimed at fostering ICA in India and attracting ‘eminent’ international arbitrators to India. This is yet another endeavor towards actualizing the vision of making India an appealing destination for foreign companies for ICA. Although the diligence and constant improvement in its direction shall undoubtedly lead to fruition, however it still has a further way to go to reach the popularity of the arbitration institutions of Singapore, Hong-Kong etc. One of the areas that require attention of the law-makers is the position and application of conflict of law rules in arbitration proceedings in India. The private international law principles which are in the form of the conflict of law rules determine the applicable law in disputes involving persons from different countries or involving a foreign element. For instance, in a case that involves a dispute requiring determination of personal laws of the parties involved, the principle of lex domicilii is applied. It refers to the law of the place where such persons are domiciled. There are numerous such principles that need to be applied in ICA cases in certain circumstances. This article analyzes why the controversies and imperfections in the conflict of law rules in India need to be removed to ensure a pull towards India as the ICA hub.

Relevance of Conflict of laws in ICA

The application of conflict of laws rules are particularly relevant in ICA when the parties fail to expressly or impliedly choose the law that they want  their contract or dispute to be governed by. In this regard, Article 28 of the UNCITRAL Model Law provides the tribunal with the discretion to decide upon such conflict rules which it considers applicable. This provision is mirrored in institutional rules and national legislations for arbitration such as Rule 31.1 of Singapore International Arbitration Centre (SIAC) Rules and Section 28(1)(b)(ii) of Indian Arbitration and Conciliation Act, 1996 (“the Act”) allowing the Tribunal to apply the conflict rules it considers appropriate. This approach is in line with the delocalization theory of arbitration which seeks to free arbitration from the parochial clutches of one national legal system. The main attributes of this theory is that the arbitration is detached from the procedural rules of the place of arbitration (lex fori) or any specific national law. Thus, it gives liberty to the arbitrator to apply the system of conflict of laws best suited in a given case giving effect to the intentions of the parties such as the system with fewer restrictions on choosing the proper law of the agreement. The arbitrator is at liberty to either cumulatively apply all the conflict of laws systems connected to the dispute, international conflict of laws system or even decide the applicable law without applying any conflict rules at all. The last method although gives huge liberty to the arbitrator in doing away with the formal rules of conflict of laws but it also opens more scope for arbitrary decisions by the tribunal in absence of application of a concrete accepted rule but only what the arbitrator deems appropriate. Applying the conflict rules hence not only puts a necessary circumscription to what law the arbitral tribunal can apply to the merits of the case, but also provides a legal basis to the proceedings. Thus, application of conflict of law rules is still the most preferred option. Conversely, the localization theory proposes the traditional approach of applying the conflict of laws system of the seat or forum of the arbitration vide the rule of lex fori and discourages the liberal methods such as cumulative application of conflict rules. This approach can as well be adopted by the courts but the modern arbitration promotes denationalization leading to reinforcement of party autonomy and application of laws that give effect to the intention of the parties rather than strictly following the law of the seat.

In cases related to ICA, the conflict of laws principles of lex contractus (law of the main contract), lex nexus (law of closest connection) and lex fori (law of the forum before which the dispute is brought) have been applied by the courts generally to analyze as to which law shall be the applicable law in the given circumstances where no express choice has been made by the parties.

Legal Position in UK and Singapore

The Supreme Court of UK in the recent case of Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb discussed a clear approach towards determining the proper law of arbitration. The country has a well-developed and codified system of Conflict of Laws. The English courts decide the issue of conflict of laws with respect to contracts by applying Rome Regulation I. Since it expressly excludes arbitration agreement from its scope of application, the Court had to take resort to common law principles. It thus found that the proper law would be the same as the law of the main contract if expressly chosen by the parties. In the absence of such choice, the law having the closest connection with the arbitration agreement shall be the proper law of the arbitration. The Court applying the test found the law of the seat to be most closely connected and thus held it to be the proper law of the arbitration.

The Singapore Courts also follow a well-defined approach of doctrine of characterization of the issues for choice of the applicable law purposes. The procedural aspects are governed by lex fori while the substantial issues are further characterized and the connecting factors of such category indicate the law applicable. The conflict of laws system is up to date and yet evolving to meet the best standards of justice. This was reflected by the judgment of BCY v BCZ which applied the closest connection test to determine the governing law of the arbitration agreement and rejected the former approach of equating law of seat as the proper law of arbitration taken up by the court in the judgment of First Link Investments v. GT Payment previously.

India’s Position

Indian Courts do not apply any uniform practice in respect of conflict of law rules. The Private International Law system is underdeveloped in the country as firstly, there is no proper codified law reflecting the conflict of laws rules and secondly, there is no systematic approach which has led to irregular and abrupt decision of courts pertaining to choice of law issue.

Indian Supreme Court in the case of NTPC v. Singer held that law governing the main contract will be construed as the substantive law governing the arbitration agreement. Only if there is no express choice then the test of ‘closest connection’ needs to be applied. Applying the test, the Court found the law of the seat to be the most closely connected and hence the proper law of the arbitration agreement. However, in the case of HSBC PI Holdings Limited v. Avitel Post Studioz Limited, the Bombay High Court adjudged the law of the seat to be the governing law of arbitration even when there was an express choice of proper law of the main contract.

These contradicting approaches only show how there is a lack of a definite and proper approach to determine the conflict of law issue. It is due to the absence of a proper legislation on the Conflict of Laws Rules adopted by India. Although, Section 28(b)(iii) of the Act empowers the Arbitral Tribunal to decide the rules applicable to the substance of the dispute it considers appropriate given the circumstances, but it fails to define the approach for the courts on how to take into account the conflict of laws rules to determine the law applicable to the substance of the dispute. It thus gives more scope of interpretation to courts which has thus lead to contradicting decisions made by the Courts in this regard on the same issue.

Analysis

India has numerous benefits to offer as a seat for ICA, cost efficiency alongwith adequate infrastructure is probably the most appealing factor. However, some of the other contributing factors that are taken into account while choosing the seat are the efficiency of the local arbitrators, the national arbitration laws and strength of surrounding legal jurisprudence. The ‘conflict of law’ rules of a country have a subtle but direct effect on all these three factors in the cases where they need to be applied to determine the substantive or proper law.

India has set up the New Delhi International Arbitration Centre (NDIAC) with the view to make India the ICA hub. This institution has travel quite further to prove its worth in the current global competition. Where countries like Thailand and United Kingdom have codified laws on conflict rules and others like Singapore have defined systematic approaches for resolving conflict of laws issues, India seems to have only a blur idea leading to irregular application in complex cases. Therefore, similar to SIAC Rules, the codified rules of NDIAC must provide for an objective, unambiguous and systematic application of conflict of law rules.

Conclusion

India needs to take efficient steps in developing the conflict of laws rules and consider their codification especially now when it strives to become the hub for International Commercial Arbitration. The panel of arbitrators if decides to apply the conflict of laws rules of the seat of the arbitration in determining the proper law of the arbitration agreement then it would face difficulties in identifying the not so developed jurisprudence of the private international law of India. This infirmity would frustrate the initiative of making India the hub of ICA. Thus, it is crucial to mend and develop the conflict of law rules in India to prevent any challenges that it might pose for the desirability of India as a hub for ICA.


*The authors are fourth-year students at Institute of Law, Nirma University, Ahmedabad.


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