Supreme Court Rules on Jurisdiction in International Commercial Arbitration: A Landmark Judgment

In a significant ruling that impacts the landscape of international commercial arbitration, the Supreme Court of India, on March 18, clarified key principles regarding the determination of the governing law of an arbitration agreement. In a case involving a dispute between a foreign entity based in Colombia and an Indian company, the Court held that in the absence of an express law governing the arbitration agreement, the applicable law should be determined based on the parties' intentions. Importantly, the Court laid down a strong presumption in favour of the law governing the main contract, or lex contractus.

Background of the Case

The dispute arose between the Petitioner, a Colombia-based entity, and the Respondent, an Indian entity based in Gujarat. The Petitioner approached the Indian courts seeking the appointment of an arbitrator to resolve the disagreement between the parties, citing that the governing law of the main contract was Indian law. This, according to the Petitioner, meant that Indian courts had jurisdiction over the appointment of the arbitrator.

The Respondent, however, opposed this claim, arguing that the entire arbitration process was to be conducted in Colombia, and the governing law of the arbitration was Columbian law. Hence, they contended that the court in Colombia should appoint the arbitrator.

The Court was tasked with determining whether Indian courts could appoint an arbitrator despite the arbitration proceedings taking place in a foreign jurisdiction.

The Issue of Conflicting Clauses

The central issue in the case revolved around two conflicting clauses in the main agreement between the parties. Clause 16.5 stated that the agreement would be governed by Indian law, and any disputes arising from the agreement would fall under the jurisdiction of the courts in Gujarat, India. On the other hand, Clause 18 provided that the disputes would be resolved through arbitration under the rules of the Arbitration and Conciliation Centre of the Chamber of Commerce of Bogota, Colombia, with the arbitration to take place in Bogota, and the award governed by Colombian law.

The question that arose was how to reconcile these two conflicting clauses — one specifying Indian law for governing the contract, and the other designating Colombia as the venue for arbitration and prescribing Colombian law for the arbitration process.

The Court's Approach: The Three-Step Test

To address this issue, the Supreme Court turned to a well-established principle in international arbitration jurisprudence — the three-step test for determining the governing law of an arbitration agreement. The test, established in the case of Sulamérica Cia Nacional De Seguros S.A. v. Enesa Engenharia S.A. (2012), involves three stages:

1. Express Choice: Whether the parties have explicitly chosen the law governing the

arbitration agreement.

2. Implied Choice: In the absence of an express choice, whether the parties have

implicitly selected the law through their conduct or the context of the agreement.

3. Closest and Most Real Connection: If no express or implied choice is identified, the

court applies the "closest and most real connection" test, considering factors such as the

parties' intentions, the place of performance, and the nature of the dispute.

In this case, the Court found that there was no express stipulation regarding the law governing the arbitration agreement, and therefore, it moved to the next step — determining the implied choice of the parties.

Applying the Implied Choice Test

The Court applied the implied choice test and inferred that the parties intended Indian law to govern the arbitration agreement, given that Clause 16.5 of the contract explicitly designated Indian law to govern the main agreement. The Court reasoned that since there was no clear indication of a different governing law for the arbitration agreement, it would be reasonable to assume that the parties intended Indian law to apply.

Moreover, the Court observed that the presence of Indian law in the contract was a significant factor that indicated the closest connection to the arbitration agreement. The presumption in favour of lex contractus — the law governing the main contract — was strong, and the mere choice of Colombia as the venue for arbitration could not override this presumption.

Harmonizing Conflicting Clauses

One of the key aspects of the judgment was the Court's emphasis on harmonizing conflicting clauses in contracts. The Court noted that both Clause 16.5 and Clause 18 could coexist. While Clause 16.5 specified Indian law as the governing law for the contract, Clause 18 merely designated Colombia as the venue for arbitration and prescribed Colombian law for the arbitration proceedings. This, the Court clarified, did not diminish the effect of Clause 16.5.

The Court stressed that the mere designation of a venue for arbitration did not imply that the law of that country would govern the arbitration agreement itself. While Colombian law would apply to the arbitration proceedings and the award, the Court held that Indian law would govern the arbitration agreement, as stipulated in Clause 16.5.

The Court’s Conclusion and Appointment of Arbitrator

The Supreme Court ultimately ruled in favour of the Petitioner and allowed the appointment of an arbitrator by Indian courts. The Court appointed Mr. Justice S.P. Garg, a retired judge of the Delhi High Court, as the sole arbitrator to adjudicate the dispute.

The Court also made it clear that while the arbitration could take place in Colombia, the Indian courts retained supervisory jurisdiction over the proceedings. The venue of the arbitration would be mutually decided by the parties and the appointed arbitrator. The arbitration would be governed by the rules applicable to the Delhi International Arbitration Centre, and the fee schedule for international arbitrations would apply.

Significance of the Judgment

This judgment clarifies the jurisdictional issues surrounding international commercial arbitration. It underscores the importance of parties' intentions when determining the governing law of an arbitration agreement and reinforces the presumption in favour of the law governing the main contract. Additionally, the judgment highlights the Court’s role in harmonizing conflicting clauses in contracts, allowing both the law of the contract and the venue of arbitration to coexist. By upholding the jurisdiction of Indian courts in appointing an arbitrator and emphasizing the applicability of Indian law to the arbitration agreement, the Court has set an important precedent for future cases involving cross-border arbitration.

In conclusion, this judgment provides clarity on how international arbitration agreements should be interpreted in cases of conflicting clauses, offering guidance to parties and legal practitioners navigating the complexities of international arbitration.