International Arbitration: Navigating Conflicting Clauses

Introduction

In the evolving landscape of international commercial arbitration, determining the appropriate jurisdiction and the governing law of arbitration agreements remains a complex challenge, especially when contractual clauses appear to conflict. The recent judgment by the Court provides crucial clarity on navigating such intricate scenarios, offering a robust framework for interpreting agreements where the

(law governing the substantive contract) and (law governing the arbitration) seem to diverge. This article dissects the Court’s analytical approach, examining the factual background, legal issues, arguments presented, and the nuanced reasoning that culminated in a significant determination regarding jurisdiction and the appointment of an arbitrator.

1. Factual Background and Procedural History

The case involves Disortho S.A.S. (Petitioner), a company incorporated in Bogota, Colombia, and Meril Life Sciences Private Limited (Respondent), a company incorporated in Gujarat, India. The parties entered into an International Exclusive Distributor Agreement on May 16, 2016, for the distribution of medical products in Colombia. Subsequently, disputes arose between Disortho and Meril, leading Disortho to file a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“A&C Act”), seeking the appointment of an arbitral panel.

Meril opposed the petition on jurisdictional grounds, arguing that the relevant clauses of the Distributor Agreement, specifically Clauses 16.5 and 18, did not grant Indian Courts jurisdiction to appoint arbitrators.

The pertinent clauses of the Distributor Agreement are:

• Clause 16.5 (Miscellaneous): Stipulated that the Agreement would be governed by and construed in accordance with the laws of India, and all matters pertaining to or arising as a consequence of the agreement would be subject to the jurisdiction of courts in Gujarat, India.
• Clause 18 (Direct Settlement of Disputes): Provided for dispute resolution through conciliation and, if unresolved, by arbitration. It specified that arbitration would be conducted under the Rules of Arbitration and Conciliation of the Chamber of Commerce of Bogota DC, with Bogota DC as the venue for arbitration. Furthermore, it stated that the arbitral award “shall be in law and standard will be applicable Colombian law governing the mailer (sic matter).”

The conflict between these two clauses presented a “vexed question” to the Court, highlighting the divergence in international and domestic opinions on determining jurisdiction in trans-border arbitration, involving the interplay of and (law governing procedural aspects of arbitration). The petition led to the present judgment, where the Court had to reconcile these seemingly conflicting jurisdictional and governing law provisions.

During the course of the hearing, both parties, Meril and Disortho, agreed that should the Section 11(6) application be allowed, the arbitration could be held in India, and they consented to the appointment of a sole arbitrator.

2. Identification of Legal Issues

The central legal issue before the Court was:

• How should conflicting clauses within an international commercial agreement, specifically those designating different governing laws for the contract and different venues/rules for arbitration, be interpreted to determine the proper law governing the arbitration agreement and the supervisory jurisdiction for the appointment of arbitrators?

This overarching issue required the Court to delve into several sub-issues:

• The distinction and potential overlap between (split into the law governing the arbitration agreement and the law governing the arbitration process itself), and
• The applicability of the “closest connection test” versus the “Shashoua principle” in determining the seat of arbitration.
• The effect of a designated “venue” of arbitration versus a “seat” of arbitration on jurisdictional matters.
• The principles for interpreting conflicting contractual clauses to give effect to the parties’ true intention.

3. Arguments of the Parties

Arguments of the Petitioner (Disortho S.A.S.):

Although the judgment does not explicitly detail the Petitioner’s arguments in a separate section, it can be inferred from the filing of the petition under Section 11(6) of the A&C Act that:

• Disortho contended that Indian courts possessed the jurisdiction to appoint an arbitral panel, implying that despite the Bogota venue and Colombian procedural rules, the arbitration agreement was governed by Indian law or fell within the supervisory ambit of Indian courts.
• The Petitioner’s action for appointment of an arbitrator in India suggests a belief that either India was the implied seat, or the Indian governing law clause (Clause 16.5) extended to cover the arbitration agreement, thereby invoking the applicability of Part I of the A&C Act.

Arguments of the Respondent (Meril Life Sciences Private Limited):

Meril opposed the petition, asserting jurisdictional grounds:

• Meril contended that Clauses 16.5 and 18, when read together, did not grant Indian Courts jurisdiction to appoint arbitrators.
• This implied that, in their view, the designated venue in Bogota and the procedural rules of the Bogota Chamber of Commerce, coupled with the reference to Colombian law for the award, meant that the seat of arbitration was Bogota, thereby precluding Indian courts from exercising jurisdiction under Section 11(6) of the A&C Act. Their opposition aligned with the view that the law of the seat governs the supervisory jurisdiction over the arbitration.

4. Court’s Analysis and Reasoning

The Court embarked on a comprehensive analysis, drawing extensively from international and domestic jurisprudence on the choice of law in international arbitration.

Distinction Between Laws: The Court began by acknowledging the interplay of three distinct legal systems: (substantive contract law),(law governing the arbitration agreement and the arbitration itself), and (procedural law of the forum). It cited Redfern and Hunter’s Commentary on International Arbitration to emphasize the cardinal importance of the parties’ chosen law for the arbitration agreement, which determines its validity, scope, and interpretation.

The Court further elaborated on the distinction, referencing English High Court decisions like Melford Capital Partners (Holdings) LLP and Others v. Frederick John Wingfield Digby and Paul Smith Ltd. v. H&S International Holdings Inc. These cases distinguish between the (curial law or law governing the arbitration, related to supervisory jurisdiction) and the proper law of the arbitration agreement, the proper law of the contract, and the procedural rules. While parties can differentiate between these, the Court cautioned against readily drawing such distinctions unless clearly intended, as they are often “inherently intertwined.”

Determining the Law Governing the Arbitration Agreement: The Court then turned to the crucial question of how to determine the law governing the arbitration agreement. It heavily relied on the UK Supreme Court’s decision in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb (2020 UK SC 38), which summarizes “tie-breaker rules” for this determination. The key principles from Enka Insaat highlighted by the Court include:

• The law applicable to the arbitration agreement may differ from the.
• The law governing the arbitration agreement is chosen by the parties, or, in its absence, the law with which it is most closely connected.
• A choice of governing law for the main contract will generally apply to the arbitration agreement if the latter is part of the former.
• The choice of a different country as the seat of arbitration is not, without more, sufficient to negate the inference that the applies to the arbitration agreement.
• Factors that may negate this inference (and imply the law of the seat) include:
  • Provisions of the law of the seat indicating that the arbitration agreement will also be governed by that law (e.g., Section 2(2) of the A&C Act for Indian seated arbitrations).
  • A serious risk that the arbitration agreement would be ineffective if governed by the.
  • Deliberate choice of the seat as a neutral forum.
• In the absence of any choice of law for the arbitration agreement, the “closest connection test” applies, which generally points to the law of the seat.

The Court noted that while these conclusions from Enka Insaat represent a “good and correct legal position,” they must be applied with due consideration to aspects where Indian courts have taken a different view.

Indian Jurisprudence and the Shashoua Principle: The Court also extensively referred to Indian precedents, specifically Mankastu Impex Private Limited v. Airvisual Limited (2020) and Arif Azim Co. Ltd. v. M/s Micromax Informatics Fze (2024). These cases established that:

• Part I of the A&C Act applies when the seat of arbitration is in India or when the arbitration agreement is governed by Indian law.
• For agreements executed after September 6, 2012, if the seat is outside India, Part I of the A&C Act generally does not apply, and Indian courts lack jurisdiction.
• The moment a “seat” is determined, it functions as an exclusive jurisdiction clause, with the courts of that seat having supervisory jurisdiction over the arbitral proceedings. The “notional doctrine of concurrent jurisdiction” has been rejected.
• The “Closest Connection Test” for determining the seat is no longer the primary viable criterion in view of the “Shashoua Principle,” which holds that an express designation of a place of arbitration, with no significant contrary indications, signifies that place as the “seat” even if termed a “venue.”
• If a curial law or supranational rules are stipulated, it is a positive indicium that the designated place is the “seat.”

Reconciling Conflicting Clauses (Clauses 16.5 and 18): The Court then applied principles of contractual interpretation, citing Milford Capital Holdings (supra) and Arnold v. Britton, emphasizing that contracts should be read as a whole to give effect to all provisions, and a clause should not be rejected unless it is “clearly inconsistent or repugnant.” The goal is to harmonize provisions and give effect to each wherever possible.

Applying the three-step test (express choice, implied choice, closest connection) from Sulamérica Cia Nacional De Seguros S.A. and Others v. Enesa Engenharia S.A. and Others to the Distributor Agreement:

1. Express Choice: Neither Clause 16.5 nor Clause 18 explicitly stated the governing law of the arbitration agreement. Clause 16.5 specified Indian law for the entire agreement, and Clause 18 mentioned Colombian law for the award.
2. Implied Choice: The Court found a strong presumption that the i.e., Indian law (from Clause 16.5), impliedly governs the arbitration agreement. This presumption could only be displaced if Indian law rendered the agreement non-arbitrable, which was not the case. The mere choice of Bogota as a “place” (venue) was insufficient to override this presumption, especially since no “seat” was explicitly chosen.
3. Closest Connection: The Court concluded that since the implied choice of Indian law could resolve the controversy, the “closest connection test” was not strictly necessary but would also point to the seat if no was stipulated.

The Court distinguished between the venue (Bogota) and the supervisory jurisdiction. While the procedural rules of the Bogota Centre would apply, and the award would conform to Colombian law, this did not diminish the supervisory powers of Indian courts, as explicitly outlined in Clause 16.5. The Court emphasized that the reference to Colombian law in Clause 18 pertained solely to the arbitration proceedings or the award matters, not to the underlying arbitration agreement or the supervisory jurisdiction over it.

Thus, the Court interpreted Clause 16.5 (governing law of India and Gujarat courts’ jurisdiction) as encompassing the supervisory jurisdiction over the arbitration agreement, making the A&C Act applicable. Bogota was merely the “venue” for conciliation and arbitration, while Indian courts retained exclusive jurisdiction.

5. Final Conclusion and Holding

The Court concluded that, based on a consistent reading of the Distributor Agreement, particularly Clause 16.5, the parties had impliedly agreed that Indian law would govern the arbitration agreement. This meant that Indian courts possessed the supervisory jurisdiction.

In view of this finding and the parties’ unanimous consent during the hearing for arbitration to be held in India and the appointment of a sole arbitrator, the Court allowed the arbitration petition. It appointed Mr. Justice S.P. Garg, retired judge of the High Court of Delhi, as the sole arbitrator. The venue of the arbitration was left to be mutually decided by the parties and the arbitrator, and the arbitration would be governed by the rules applicable to the Delhi International Arbitration Centre.

The judgment clarifies that when a contract contains conflicting clauses regarding governing law and arbitration venue, the Court will meticulously analyze the parties’ implied intent, prioritize the for the arbitration agreement in the absence of explicit choice, and strictly differentiate between a “venue” and a “seat” for determining supervisory jurisdiction. The clear designation of governing law and judicial jurisdiction in the main contract (Clause 16.5) was held to override the procedural and award-related stipulations of the arbitration clause (Clause 18) in determining the supervisory jurisdiction.

FAQs:

1. What happens when arbitration clauses conflict with contract governing law?

When arbitration clauses conflict with the main contract’s governing law, courts interpret the entire agreement to find the parties’ true intention. Often, the law governing the main contract will also be considered the governing law for the arbitration agreement, especially if no explicit law is chosen for the arbitration clause itself.

2. What is the difference between an arbitration ‘venue’ and ‘seat’?

An arbitration ‘venue’ is the physical location where arbitration hearings take place. The ‘seat’ of arbitration, however, is the juridical or legal home of the arbitration. The law of the seat determines which courts have supervisory jurisdiction over the arbitration proceedings, even if hearings occur elsewhere.

3. Does the law of the arbitration ‘venue’ always govern the arbitration agreement?

No, the law of the arbitration ‘venue’ does not automatically govern the arbitration agreement. Courts distinguish between a mere procedural venue and the legal seat. Unless explicitly stated or strongly implied, the choice of a venue does not displace the governing law chosen for the overall contract or the law of the actual seat.

4. How do courts determine the governing law of an arbitration agreement?

Courts typically follow a three-step inquiry: first, checking for an express choice of law by the parties for the arbitration agreement; second, identifying any implied choice; and third, if neither is found, determining the law with the “closest connection” to the arbitration agreement, which is often the law of the seat.

5. Can an arbitration initially set for a foreign country be moved to India?

Yes, an arbitration initially designated for a foreign venue or governed by foreign procedural rules can be moved to India, particularly if Indian courts are determined to have supervisory jurisdiction over the arbitration agreement and if both parties mutually consent to hold the arbitration in India and appoint an Indian arbitrator.

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