This article is written by Shaily Garg, a Fourth year B.Com. LLB (Hons.) Student of University Institute of Legal Studies, Panjab University, Chandigarh.
Transnational Arbitration or International Arbitration is an autonomous juristic entity that is independent of all national courts and all national systems of law. One of the primary purposes of the trans nationalist movement is to break the links between the arbitral process and the courts of the country in which the arbitration takes place. The Arbitration and Conciliation Act, 1996 provides for certain aspects of international commercial arbitration. The term “international commercial arbitration” has been defined in Section 2(1)(f) of the Act, 1996. According to this, arbitration is considered to be an international arbitration when:
- The dispute arises out of a legal relationship which is commercial, irrespective of the fact whether such relationship is contractual or not; and
- At least one of the parties to the dispute is a foreign national or a company registered in a foreign country or a company, management and control of which is exercised from a foreign country or the Government of a foreign country.
The term ‘commercial’ has not been defined in the Act, but should be given a wide interpretation as to cover matters arising from all relationships of a commercial nature, whether contractual or not.
Choice of place and proper law of Arbitration
Section 28 of the Arbitration and Conciliation Act, 1996 provides that in international commercial arbitration:
- The dispute has to be decided under the rules of law designated by the parties as applicable to the substance of the dispute;
- The designation by the parties of the law or legal system of a given country would have to be construed as directly referring to the substantive law of that country and not to its conflict of laws rules;
- Where the parties fail to designate any such applicable law, the Arbitral Tribunal would have to apply the rules of law it considers to be appropriate keeping in mind all the circumstances surrounding the dispute.
In making its choice, the law has to apply the sound ideas of business, convenience, and sense to the language of the contract itself. Where the place of arbitration is by legal choice, it will not, in the absence of any other connecting factor with that place, be sufficient to draw an inference as to the intention of the parties to be governed by the law of that place. The test of discovering the parties’ intention would be objective, that is, what might have been the choice if any reasonable person had applied his mind to the question.
Governing Law of Arbitration
As regards the governing law of arbitration, the Supreme Court of India cited Dicey as saying: “Rule 58.- (1) The validity, effect and interpretation of arbitration agreement are governed by its proper law; (2) The law governing arbitration proceedings is the law chosen by the parties, or, in the absence of agreement, the law of the country in which the arbitration is held.”
This is, however, a rebuttable presumption. The proper law of arbitration will also decide whether the arbitration clause would equally appertain to a different contract between the same parties or between one of those parties and a third party. The parties have the freedom to choose the law which applies to their international commercial arbitration agreement. They may choose the procedural law and also the substantive law. In the case of NTPC v. Singer Co., there was no doubt over this matter because the parties indicated the applicable law and where the proper law is chosen by the parties, such law must, in the omission of an unmistakable intention to the contrary, govern the arbitration agreement which, though collateral or ancillary to the main contract, is nevertheless a segment of such contract. The parties, in this case, stipulated with the ICC Rules and those rules, being in many respects self-contained or self-regulating and constitution a contractual code of procedure, will govern the conduct of the arbitration, except insofar as they conflict with the mandatory requirements of the proper law of arbitration, or of the procedural law of the seat of arbitration. It was held that the terms of the agreement had shown that where any dispute was between the NTPC and a foreign contractor, the arbitration would be under the ICC rules and that same was binding on the parties. This is so because an international commercial arbitration necessarily involves a foreign element giving rise to questions as to the choice of law and jurisdiction of courts.
Cases related to International Arbitration
In the case of Sumitomo Heavy Industries Ltd v. ONGC Ltd., the parties belonged to two different countries. The agreement provided for application of Indian Law to the substance of the matter but provided for a foreign seat of arbitration. The Court held that the procedural law was to be of that country where the seat of arbitration was after deciding the matter under Indian laws, the enforcement would have to be in India and according to Indian laws. At the time when this case was decided, the 1940 act was applicable. The award had to be filed in the court for making it a rule of the court. The jurisdiction for this purpose was held to be that of the relevant courts in India.
In Bank Mellat v. Hellinki Techniki SA, the court of appeal laid down the fundamental principle to the effect that in the absence of any contractual provision to the contrary, the procedural law governing arbitrations was that of the forum of the arbitration, since this was the system of the law with which the agreement to arbitrate in the particular forum would have its closest connection.
The question of proper substantive law and procedural law arose before an English court in Union of India v. Mc Donnell Douglas Corpn. In this case, a party agreed to supply services under a contract that was to be governed by laws in India. The contract contained an arbitration clause which provided that the arbitration was to be conducted by the procedure provided by the Indian Arbitration Act, 1940 and that the seat of arbitration would be in London. A dispute arose which created the question as to whether the proceedings would be conducted according to Indian Procedural Laws. It was held that the proper law applicable to the commercial aspect of the litigation and the arbitration was the law of India. The Court felt that it was inherently unsatisfactory, even so, it is open to the parties to agree that the procedure of arbitration would be governed by a law other than the law of the place of arbitration, but that the Jurisdiction of the English Law could not be excluded by any such agreement. The court was of the view that by choosing the London seat of Arbitration, the parties had opted for English procedural law and that the statement in the contract that the proceedings would be conducted under the Indian Act had the effect of importing from the Indian Act those provisions which were concerned with the internal conduct of the parties arbitration and which were not inconsistent with the choice of English arbitral procedural law.
Part 1 of the Arbitration and Conciliation Act, 1996 governs International Commercial Arbitration. Courts would give effect to the choice of procedural law other than the proper law of the contract only where the partied had agreed that matters of procedure should be governed by a different system of law. The arbitration clause must be considered together with the rest of the contract and the relevant surrounding circumstances. In the absence of express choice, laws of the country where arbitration to be held would be the proper law. The presumption is rebuttable if there was nothing in the contract or correspondence between the parties to rebut the presumption.
 PP 534-35, Vol 1.
 AIR 1993 SC 998.
 (1998) 1 SCC 305.
 (1984) 1 QB 291.
 (1993) 2 Lloyd’s Rep 48.