Determining the Law Governing the Arbitration Agreement — Is the Unsettled Really Settled?

Introduction

In the context of arbitration, it is essential to recognise the interplay of three principal legal frameworks: the lex contractus, which governs the rights and obligations stemming from the contract; the law governing the validity and interpretation of the arbitration agreement (LGAA); and the lex arbitri, which regulates the procedural aspects of arbitration at the designated seat. When parties clearly delineate their intentions regarding all three frameworks, the process of interpretation is typically straightforward. However, ambiguities arise when only some of these elements are specified.

This concern was notably evident in the Supreme Court of India’s ruling in Disortho SAS v. Meril Life Sciences (P) Ltd.¹, in this case, while both the lex contractus and lex arbitri were explicitly chosen, the LGAA was left unspecified, resulting in significant interpretative challenges.

This analysis critiques the Court’s reasoning in Disortho case², arguing that it may undermine India’s objective of being recognised as an arbitration-friendly jurisdiction.

The reasoning in Disortho: A critique

In Disortho case³, the dispute centred on a distributor agreement for medical products in Colombia, wherein Clause 16.5 designated Indian law as the governing law of the contract (lex contractus), while Clause 18 stipulated arbitration “in accordance with the Rules of Arbitration and Conciliation of the Chamber of Commerce of Bogota DC”. When the petitioner invoked Section 11(6)⁴ of the Arbitration and Conciliation Act, 1996⁵, seeking judicial appointment of arbitrators, the respondent contested the Indian courts’ jurisdiction. Confronted with the absence of an express LGAA, the Supreme Court of India (SC) undertook to determine this critical question.

The Court’s analysis commenced with an examination of the United Kingdom Supreme Court’s decision in Enka Insaat ve Sanayi AS v. OOO “Insurance Company Chubb” (Enka)⁶. The Supreme Court extracted from Enka⁷ the principle that where parties have specified the lex contractus and the lex arbitri without explicitly designating the LGAA, the lex contractus presumptively governs the arbitration agreement, subject to rebuttal in narrowly circumscribed circumstances, such as when application of the lex contractus would render the arbitration agreement invalid.⁸ However, this uncritical adoption of foreign jurisprudence without sufficient contextual adaptation to the Indian legal framework represents a problematic jurisprudential transplantation that merits rigorous scholarly scrutiny.

The SC’s endorsement of these conclusions, ostensibly grounded in the need for “consistency and uniformity in applying legal principles” to ensure “fairness and comity in international commerce and dispute resolution mechanisms”, lacks substantive justification for the wholesale importation of the Enka framework into Indian jurisprudence. The Court’s perfunctory reference to domestic precedents such as Arif Azim Co. Ltd. v. Micromax Informatics FZE⁹, Mankastu Impex (P) Ltd. v. Airvisual Ltd.¹⁰ and Roger Shashoua v. Mukesh Sharma¹¹ represents a significant analytical misstep, as these authorities exclusively address seat determination in the absence of explicit party designation, a fundamentally distinct issue from identifying the LGAA where parties have remained silent. This misapplication of precedent constitutes a troubling jurisprudential error that undermines the judgment’s credibility.

Furthermore, the Court’s conspicuous failure to engage with alternative methodologies for determining the law governing arbitration agreements reveals a concerning intellectual insularity. While this critique does not evaluate the comparative merits of such alternatives, it necessarily highlights the Court’s deficient reasoning in its adoption of the Enka framework, a methodological shortcoming that raises significant questions about the judgment’s doctrinal soundness and its implications for international commercial arbitration in India.

The shortcomings of applying Enka in the Indian arbitration framework

The uncritical transplantation of the Enka framework presents significant doctrinal challenges in the Indian arbitration landscape. The UK Supreme Court’s hierarchical approach, wherein the LGAA is primarily determined through express party designation, secondarily through the lex contractus as implied choice, and finally through the default rule of the seat’s legal system, fails to account for India’s distinctive statutory architecture. This methodological importation warrants critical scrutiny rather than mechanical adoption.

Firstly, the fundamental deficiency in this approach lies in its disregard for the complex interplay between lex arbitri and arbitration agreements. The lex arbitri transcends mere procedural governance, frequently encompassing substantive provisions regulating critical aspects of arbitration agreements, often through mandatory rules that supersede party autonomy. When the Enka principle is applied without contextual adaptation, presuming the lex contractus governs arbitration agreements absent explicit designation, jurisdictional conflicts inevitably emerge. For instance, consider a contractual arrangement designating Brazilian law as the lex contractus and Indian law as the lex arbitri, with no explicit LGAA. While Enka would presume Brazilian law governs the arbitration agreement, Section 2(2) of the Arbitration and Conciliation Act, 1996 unequivocally mandates that arbitrations seated in India fall within Part I’s purview, subjecting fundamental aspects like validity to Section 7¹² and arbitrator appointments to Section 11(6).¹³ This statutory reality renders the Enka framework’s application problematic in the Indian context.

Secondly, the SC’s approach fundamentally contravenes established international arbitration frameworks. Article 5(1)(a) of the New York Convention explicitly stipulates that absent party-selected law, the arbitration agreement’s validity falls within the purview of the seat’s legal system.¹⁴ Article 34(2) of the United Nations Commission on International Trade Law (UNCITRAL) Model Law similarly designates the seat’s law (referred to as “this State”) as determinative for assessing arbitration agreement validity where parties have not specified an applicable law.¹⁵ While these provisions ostensibly address enforcement and setting-aside proceedings respectively, this distinction provides no coherent justification for applying divergent legal regimes at different procedural stages.

The incongruity of subjecting arbitration agreements to the lex contractus at the commencement phase, only to later evaluate their validity under the seat’s law during enforcement or annulment proceedings, creates a troubling jurisdictional discontinuity that undermines legal certainty. This bifurcated approach introduces the potential for contradictory assessments of the same arbitration agreement at different procedural junctures, a result that frustrates the very consistency and predictability that international arbitration instruments seek to establish.

Thirdly, the Court’s reliance on the Enka principle, as subsequently elucidated in UniCredit Bank GmbH v. RusChemAlliance LLC¹⁶, rests upon a flawed premise. The UK Supreme Court’s assertion that it is “reasonable to infer” that the lex contractus extends to arbitration agreements stems from the conventional understanding that contractual governing law applies to all provisions within the contract absent specific exclusion. This reasoning employs a classical deductive framework wherein the general (lex contractus) necessarily encompasses the particular (arbitration clause).

The SC’s reasoning suffers from a fundamental analytical flaw in failing to recognise the distinctive juridical character of arbitration agreements vis-à-vis standard contractual provisions. Unlike conventional clauses that delineate substantive rights and obligations between parties, an arbitration clause constitutes a procedural mechanism for dispute resolution that possesses its own juridical identity. Significantly, an arbitration agreement uniquely maintains the capacity to be governed by a legal system distinct from that governing the substantive contract, a characteristic seldom applicable to other contractual provisions. Consequently, the presumptive application of the lex contractus to arbitration agreements represents a conceptual incongruity that disregards their distinctive function and autonomy.

The UNCITRAL Model Law itself acknowledges this fundamental differentiation through various provisions. Most notably, the heightened emphasis on consent manifests in stricter formal requirements imposed on arbitration agreements, typically mandating written form and bilateral execution, which stands in stark contrast to the relaxed formalities applicable to ordinary contractual terms. Furthermore, the exceptional capacity of arbitration agreements to bind non-signatories in specific circumstances distinguishes them from standard contractual provisions, which generally operate within the confines of privity except in limited instances of assignment or third-party beneficiary arrangements. This judicial conflation of arbitration agreements with standard contractual terms therefore represents a significant doctrinal misstep that undermines the judgment’s analytical coherence.

Lastly, the Court’s adoption of Enka¹⁷ demonstrates a concerning lack of critical engagement with subsequent developments in UK jurisprudence. The UK Law Commission’s Review of the Arbitration Act, 1996¹⁸ explicitly characterised the Enka framework as “complex and unpredictable” (para 12.20).¹⁹ More significantly, the Commission proposed an alternative approach whereby, absent express agreement to the contrary, “the law of the seat” should govern arbitration agreements (para 12.15).²⁰ The Supreme Court’s failure to acknowledge this authoritative critique of Enka²¹ represents a significant oversight that undermines the judgment’s doctrinal foundation.

Conclusion

The SC’s adoption of the Enka framework in Disortho²² to determine the LGAA reflects a legally flawed and jurisprudentially regressive stance. By defaulting to the proper law of the contract in the absence of an express choice, the Court failed to appreciate the doctrinal separability of arbitration agreements and the risk of incompatibility with the mandatory provisions of the lex arbitri. This presumption also runs counter to the interpretative framework envisaged under the New York Convention and the UNCITRAL Model Law, both of which underscore the primacy of the seat in determining key procedural aspects. Notably, Enka²³ approach has been subjected to significant criticism within its own jurisdiction, prompting the UK Law Commission to advocate a return to a seat-centric analysis. For India to credibly claim arbitration-friendly credentials, it must align its conflict-of-laws reasoning with prevailing international norms, ensuring both legal certainty and deference to the autonomy of the arbitral process.