Examining the Need for a Legislated Default Rule in India for Law Governing the Arbitration Agreement

Examining the Need for a Legislated Default Rule in India for Law Governing the Arbitration Agreement

Introduction

Arbitration can often be a complex process involving navigating through multiple laws extending to multiple jurisdictions at the same time. In an arbitration involving parties from multiple jurisdictions or a foreign element there can be an intermix of particularly three set of laws at the same time i.e. law governing the main contract (lex contractus), law governing the arbitration or the seat (lex arbitri) and law governing the procedure of the arbitration (lex fora). Lex arbitri and lex fora can often be same in cases of ad hoc arbitrations and when the arbitration is not under any specific institution. Apart from the above three, there is another law that can apply to an arbitration agreement itself which translates into law governing the arbitration agreement.

There are two schools of thought that have been a subject of much debate on choosing the law that governs the arbitration agreement when parties to the agreement have not expressly specified it. One school of thought says that in absence of an express choice by the parties, the law governing the contract (lex contractus) should apply to the arbitration agreement while the other school of thought opines that the law of the seat (lex arbitri) naturally should be the governing law of the agreement to arbitrate.

Recently, the UK legislature resolved this conflict by way of an amendment to its Arbitration Act, 1996.¹ Under the said amendment, the UK Legislature introduced a legislated default rule by inserting section 6A on “law relating to the arbitration agreement”. As per section 6A(1), lex arbitri would be the default for law governing the arbitration agreement. Further by means of section 6A(2), they have further clarified that merely because parties have decided a particular law for governing the contract would not automatically apply to the law governing the arbitration agreement itself. The said position is in variance from the famous decision of Enka Insaat Ve Sanayi AS v. OOO Insurance Company

Chubb (“Enka”)² by the UK SC in 2020 which held that whenever the parties expressly mentioned the law governing the underlying Contract, it will be assumed that lex contractus will be the law governing the arbitration agreement.

Apart from UK, Singapore has also taken up the task of considering reforms to its International Arbitration Act of 1994. The International Dispute Resolution Academy of Singapore tasked with the said reforms suggested in its report³ for a legislated default rule for considering law of the contract as law governing the arbitration agreement. In Malaysia, a bill⁴ was passed which introduced a default rule to make the law of the seat as the law governing the arbitration agreement. The said bill is still left to be signed into a law.⁵

The above developments beg the question if such a default legislated rule is also warranted in India and through this article the author aims to analyze the current position of law with respect to the law governing the arbitration agreement in India and whether such a legislated default rule is required in keeping in terms with the aim of making India a global arbitration hub.

Background

Position in UK

The position of law in India with respect to law governing the arbitration agreement has usually followed the developments happening parallelly in the UK. The first case in UK to decide the issue was the case of Sulamérica Cia Nacional de Seguros SA v. Enesa Engelharia SA⁶ (“Sulemerica”) that suggested the concept of three stage formula. As per this formula, the first two stages required to look for express or implied choice of the parties and the third stage required applying the closest connection test to determine the system of law that the arbitration agreement was most closely related to for determining the law governing the arbitration agreement. However, the court noted that usually the law of the underlying Contract will be considered the law of the arbitration agreement.

The judgement in Sulamerica was further simplified by the decision taken in Enka which was a landmark five-judge bench decision wherein the majority of 3-2, affirming the law down in Sulamerica held that ideally the law underlying the contract should be considered the law of the arbitration agreement. The reasoning provided by the majority was that in normal parlance when parties enter contract, they don’t go into technicalities of the law and assume that the arbitration agreement is effectively part of the underlying contract. The second prong of reasoning was on the doctrine of separability and court rejecting the application of the said doctrine in the case opined that the doctrine only applies in cases to keep the arbitration agreement alive when the underlying contract has become infructuous and cannot be applied in the context of considering arbitration agreement as separate when it comes to determining its law.

Position in India

In India, the most recent decision on the issue is a division bench SC decision of 2025 in Disortho S.A.S. vs. Meril Life Sciences (“Disortho”).⁷ The judgement without delving deep into the issue relied on the reasoning and reaffirmed the judgement in Enka. The judgement held that leaving situations wherein no lex contractus is mentioned or parties have expressly mentioned the law for the arbitration agreement, in all other cases the law of the underlying contract will automatically become the law governing the arbitration agreement. After reaffirming the decision in Enka, the Court goes onto a general discussion on seat and venue. Before the judgement of Disortho, there was judgement of Singer Company⁸ back in 1992 that opined that in cases where the law of the underlying contract is ascertained by the parties, the same law should apply to the arbitration agreement as well. The same principle was reiterated in the W.S. Atkins⁹ case as well and was subsequently quoted in the judgement of Hardy Exploration¹⁰.

When it comes to the High Courts, they appear to be conflicted on the position. In a 2013 division bench decision of Sakuma Exports Ltd. vs. Louis Dreyfus Commodities¹¹ of the Bombay HC which was subsequently reaffirmed by the Hon’ble SC in 2015 had opined that the law of the underlying contract would be the law governing the arbitration agreement. On the other hand, in a 2018 Bombay High Court judgement of Katra Holdings vs. Corsair Investments Ltd.¹², it held that that the law of the seat would be the law of the arbitration agreement though the court never went into a discussion on the same. It is pertinent to note that the issue of law applicable to the arbitration agreement was an ancillary consideration in all the above judgements except Disortho which simply went on to agree with the ratio laid down Enka without undertaking a deeper analysis.

Analysis

Need for Preset Standard

The above exposition on the background tells us that the Indian jurisprudence can be said to be more in a state of flux when it comes to law governing the arbitration agreement. In a complex arbitration wherein parties are from varied jurisdictions, it becomes relevant to have a preset standard when it comes to the law that would determine the arbitration agreement. For example, in the case of Enka, Chubb was a Russian insurance company that wanted the Russian law to apply to the arbitration agreement primarily because Russian courts have narrower interpretation of arbitrability and while English law would have included tort as well as contractual issues to be arbitrated under the arbitration agreement. Thereby, when the application of law that would apply to the arbitration agreement is in a state of confusion, parties can come up with arguments to support their vested interests. Therefore, law of the arbitration agreement becomes important consideration because it is under it that decisions on arbitrability, jurisdiction of arbitral tribunal, enforceability, scope of the dispute amongst others are decided. Having established that it is imperative for a preset standard for law determining the arbitration agreement, now the author will establish as to why it helps to have law of the seat as the default for the law applying on the arbitration agreement in consonance with the amendment brought forth by the UK Arbitration Act.

(i) Overlap Between the Laws

The issues that become the bane of contention under the arbitration agreement like arbitrability, reference often overlap with the curial law of the seat as well. For example, under the Indian Arbitration Act, 1996, in an application brought for setting aside of the arbitral award, appointment of arbitrators, granting of interim reliefs etc., the Indian courts often have to delve into arbitrability of the dispute, interpretation of the arbitration agreement and intention of the parties which requires interpreting the arbitration agreement as well. By logic of convenience, it will always help to have Indian law apply to the arbitration agreement itself as then courts will have to interpret law of their own jurisdiction which is convenient and will also lead to better adjudication unless of course if the parties have indicated otherwise.

(ii) Support for Law of Seat as Law of the Arbitration Agreement

The India courts have been following the reasoning laid down in Sulemerica further developed under the Enka judgement. However, it is important to note that the judgement of Enka had a strong dissenting opinion of Lord Burrows as well. The Enka judgement is held in place by the reasoning that parties in normal course assume arbitration agreement to be an inherent part of the underlying contract but in doing so the ruling in Enka ignores the doctrine of separability as an important facet and principle in arbitration jurisprudence. It is well settled position of law that separability is an independent doctrine, and an arbitration agreement is altogether a separate agreement for all purposes in an arbitration proceeding. By restricting the doctrine to only keep the arbitration agreement alive when the underlying contract becomes infructuous, which has invariably been followed by Indian courts as well is a narrow interpretation of the doctrine of separability. The Bombay HC judgement in Katara while holding that the law of the seat as the law of the arbitration agreement also emphasized on arbitration agreement being independent of the underlying contract.

Further the UNCITRAL Report¹³ for its eighth working session back in 1985 at para 284 had pointed out that the members of the commission were not comfortable in assuming that the law of the underlying contract should automatically apply to the law of the arbitration agreement. The Hon’ble judges in the judgement of Disortho even acknowledged that as much as possible the law governing the arbitration and the law governing the agreement to arbitrate should be same as “they are inherently intertwined as a part and parcel of the lex arbitri”.

Conclusion

It is apparent that when it comes to arbitration jurisprudence in India, there is still a state of confusion as to application of lex contractus or lex arbitri to the arbitration agreement. When we see it in the vein of making India a global arbitration hub, it is but imperative to come to a conclusion and settle the debate as has been happening in arbitration jurisdictions neighboring India. Though we still have to see a judgement that settles the law with respect to the dispute but on analysis, it does make sense to have a legislated default rule in India wherein law of the seat or lex arbitri should be the default law for governing the arbitration agreement. Such an approach will also ensure that parties don’t spend their time in unnecessary litigation on issues that are ancillary and focus on resolution of the dispute thereby resulting into steadfast and efficient arbitration proceedings.