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Determining the governing law of an arbitration clause

05 March 2013

In the case of Arsanovia Ltd, Burley Holdings Ltd and Unitech Ltd v Cruz City 1 Mauritius Holdings [2012] EWHC 3702 (Comm), 20 December 2012, the governing law of an arbitration agreement was found to be Indian law. This was the implied choice of the parties given the choice of Indian law to govern the contract as a whole, the absence of factors pointing towards a different governing law and the express exclusion, in the clause, of certain provisions of the Indian Arbitration Act. The case emphasises how important it is to specify the governing law of an arbitration agreement as it shows the uncertainty inherent in a court applying the three-pronged test articulated in the SulAmérica decision.

The facts 

The dispute concerned a joint venture for the development of slum areas in Mumbai. To achieve this redevelopment, an investment company – Kerrush Investments Ltd (Kerrush) – was set up with Arsanovia Limited (Arsanovia), one of the claimants, and Cruz City 1 Mauritius Holdings (Cruz City), the defendant, as shareholders. (Unitech Limited is the parent company of the other two claimants, Arsanovia and Burley Holdings Ltd.)

The parties entered into the following contracts:

 – a Shareholders Agreement (SHA) between Arsanovia, Cruz City and Kerrush; and

– a Keepwell Agreement between Unitech Limited, Burley Holdings Ltd and Cruz City (the KA, together with the SHA, the Agreements).

Three separate arbitrations were commenced under the Agreements, presided over by the same tribunal. The Agreements had an identical arbitration and governing law clause. The governing law of the Agreements was Indian law and each of the dispute resolution clauses provided as follows:

"LCIA Arbitration. Any dispute … shall be referred to … arbitration under the [LCIA] Rules … The seat or legal place of the arbitration shall be London, England. The language to be used in the arbitral proceedings shall be English … Notwithstanding the above, the Parties hereto specifically agree that they will not seek any interim relief in India under the Rules or under the Arbitration and Conciliation Act, 1996 (the "Indian Arbitration Act"), including Section 9 thereof. The provisions of Part 1 of the Indian Arbitration Act are expressly excluded…"

The claimants sought to challenge two of the three awards under s67 of the Arbitration Act 1996 (the Act) on the ground that the tribunal lacked substantive jurisdiction. A major element of the claimants' argument turned on the governing law of the arbitration clauses contained in the Agreements (more accurately described as the governing law of the arbitration agreement, because an arbitration clause is treated as a distinct, or "separable", agreement to the agreement within which it is contained – see further below). If it was Indian law (ie the law specified in the governing law clause of the Agreements) and not English law (ie the law of the seat), the tribunal did not have jurisdiction to make the awards it subsequently made.

The relevant principles

The laws that a tribunal may be called upon to apply in an arbitration can be numerous. The substantive law of the contract (or the lex causae) governs the tribunal's interpretation of the parties' rights and obligations arising out of the contract. The law of the seat of the arbitration (also known as the lex fori or lex arbitri) will normally determine the law of the procedure which the tribunal adopts as well as the involvement/intervention, as appropriate, which the courts exercising jurisdiction over the seat will have.

The law of the arbitration agreement is the law that determines the interpretation of the arbitration agreement itself. It may differ from the substantive law of the contract; this is important when determining the scope of the tribunal's jurisdiction. Finally, the law of the reference is the law governing the particular reference to arbitration. That law is usually the same as the law of the arbitration agreement, except in exceptional circumstances. For example, one could conceive of a situation where the arbitration agreement states that it is governed by English law, but the parties execute a side agreement stating that the law that governs the arbitration agreement for a particular dispute is different.

One must consider which conflicts of laws rules a decision maker is applying when asked to determine, eg "what the seat is" or "what the governing law is". Smith J explained that when resolving ambiguities concerning the governing law of an arbitration agreement, the English judge must refer to English common law conflict of law rules, and not Rome I (the EU Regulation on the law applicable to contractual obligations).

As English jurisprudence has increasingly recognised the separability of the arbitration agreement from the substantive contract, a concept codified in the Act (see s7), courts have gradually established a three-prong test:

1. Have the parties expressly chosen the governing law of an arbitration agreement?

2. (if no to 1) Have the parties impliedly chosen the governing law of the arbitration agreement?

3. (if no to 1 and 2) Which system of law has the closest and most real connection with the arbitration agreement? (SulAmérica Cia Nacional de Seguros SA & ors v Enesa Engenharia SA & ors [2012] EWCA Civ 638.)

The decision

Smith J applied the SulAmérica test, emphasising that one should not overlook the question of whether the parties had impliedly made a choice, before considering the connection issue. Both parties relied on the SulAmérica decision to support their respective positions of an implied choice of governing law. In reaching his decision, the judge made it clear that a choice of seat did not amount to an implied choice of governing law.

Smith J concluded that the parties had impliedly chosen Indian law as the governing law for three reasons.

First, the governing law of the agreements was Indian law. In doing so, Smith J expressly followed the reasoning of Moore-Bick J in SulAmérica that "in the absence of any indication to the contrary, an express choice of law governing the substantive contract is a strong indication of the parties' intention in relation to the agreement to arbitration" (paragraph 26 of the SulAmérica decision).

Second, there was no contrary indication that Indian law was not the implied choice except for the choice of a London seat. That was contrary to the position in SulAmérica where there were two "contrary indications" to Brazilian law, the law of the substantive contract, being the law governing the arbitration agreement: the seat of the arbitration was London and the arbitration agreement would have been unenforceable if Brazilian law was the governing law.

Thirdly, the judge considered as relevant the fact that the parties had specifically excluded the operation of the Indian Arbitration Act in the dispute resolution clauses, which meant that they could be taken to have anticipated that Indian law would otherwise have applied.

Smith J made two further points in obiter. First, had the claimants couched their case as one of an express choice, on the basis that the governing law of the Agreements was Indian law, that would have been an argument worth running. Secondly, had he not found an implied choice of Indian law, he would have determined that the arbitration agreement was most closely connected with English law.

Comment: Arsanovia emphasises the importance of expressly identifying the governing law of an arbitration agreement, especially in cases where the substantive governing law of an agreement is different from the seat of arbitration and/or where parties have expressly excluded particular statutory provisions. It also illustrates that, since the application of the three-stage SulAmérica test may lead to different results, it is important not to conflate them.

The reference Smith J made to the parties' exclusion of the Indian Arbitration Act is interesting. Parties have historically tended to exclude these provisions in their contracts simply in order to avoid the Indian courts taking the view that the provisions of Part I the Indian Arbitration Act apply to their proceedings and not as any indication of what specific law should govern their agreement to arbitrate.

One could take the view that the exclusion of the Indian Arbitration Act was an equivocal factor when considering whether there was an implied choice, especially since both parties appear to have relied on it to support their positions. It is unclear from the judgment whether this was material to Smith J's decision: he refers to the exclusion as a "relevant consideration" and stated that "the reference to the [Indian Arbitration Act] in the arbitration agreement supports the claimants' contention that the parties evinced an intention that the arbitration agreement should be governed by Indian law".

The judge's obiter comment that a party's choice of lex causae could amount to an express choice of governing law of the arbitration agreement is also interesting. It is arguably at odds with the concept of separability and also with the entire line of cases that have grappled with the question of the governing law of an arbitration agreement.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.

For more information please contact Sarah Garvey, or tel +44 (0)20 3088 3710.