Determining the Governing Law in Arbitration Proceedings

When two parties enter arbitration – especially across borders – one of the first and most critical questions that arises is: which country’s law will apply? This question is far from academic. The governing law shapes how the contract is interpreted, whether the arbitration agreement is valid, what remedies are available, and even whether the final award can be enforced. In India, the Arbitration and Conciliation Act, 1996 provides a structured framework for answering this question, but the complexities multiply when international elements enter the picture. Let’s break down what governing law in arbitration really means, why it matters so much, and how it works in practice.

What does “governing law” mean in arbitration? 🔗

In simple terms, governing law refers to the legal framework that a tribunal applies to resolve the substance of a dispute. But in arbitration, there is not just one governing law – there can be several, each applying to a different aspect of the process. Understanding these distinct layers is essential for anyone dealing with arbitration, whether domestic or international.

According to well-established arbitration practice, an arbitration proceeding can be governed by multiple bodies of law, including the substantive law of the contract (known as the lex contractus), the law governing the arbitration agreement itself, the procedural law of the seat (called the lex arbitri), the institutional rules if applicable, and the law of the place where enforcement is sought (the lex executionis). Each of these can potentially belong to a different jurisdiction, which is what makes international arbitration both flexible and complex.

The substantive law (lex contractus) 🔗

The lex contractus is the law that applies to the core merits of the dispute – the rights, obligations, and liabilities of the parties under their contract. It governs how the contract is formed, interpreted, and enforced. If a breach occurs, this is the law the tribunal will look to for determining what damages are owed, what defences are available, and what limitation periods apply.

Parties are generally free to choose any national law as the substantive law for their contract. They can even agree to apply non-national rules such as the UNIDROIT Principles of International Commercial Contracts, trade usages, or the lex mercatoria – a body of international commercial customs recognised across borders.

The procedural law (lex arbitri) 🔗

The lex arbitri governs the procedural framework of the arbitration itself. It is almost always the arbitration law of the country where the arbitration is seated. This law determines critical matters such as how arbitrators are appointed and challenged, whether courts can intervene in the proceedings, what grounds are available for annulment of an award, and the extent of judicial support available during the process.

Many countries have based their domestic arbitration legislation on the UNCITRAL Model Law on International Commercial Arbitration. India’s own Arbitration and Conciliation Act, 1996 is modelled on this framework, which has created a degree of uniformity in how arbitrations are conducted across different jurisdictions.

The law governing the arbitration agreement 🔗

This is a separate and often overlooked layer. The arbitration agreement – whether a standalone agreement or a clause within a larger contract – is considered legally autonomous from the main contract. This is known as the doctrine of separability. Because of this principle, the law that governs the main contract does not automatically apply to the arbitration clause. It may, but it need not.

When parties fail to expressly designate a law for the arbitration agreement (which is common), courts and tribunals must determine it. Different jurisdictions take different approaches. English courts follow a three-stage enquiry: they first look for an express choice, then an implied choice, and finally apply the law with the closest and most real connection to the agreement. Indian courts have broadly considered similar factors, though a clear, unified position is still evolving.

How Section 28 of the Arbitration Act governs the choice of law in India 🔗

Section 28 of the Arbitration and Conciliation Act, 1996 is the key statutory provision that determines which law applies to the substance of disputes in arbitration proceedings seated in India. It draws a clear distinction between domestic and international arbitration.

Domestic arbitration 🔗

Under Section 28(1)(a), when the arbitration is purely domestic – meaning it does not involve any international commercial element – the tribunal is mandated to decide the dispute according to the substantive law in force in India. There is no room for the parties to opt out of Indian law in this scenario. For instance, if two Indian companies are arbitrating a construction dispute in Mumbai, the tribunal must apply Indian contract law, irrespective of what the parties may prefer.

International commercial arbitration 🔗

The position changes significantly for international commercial arbitrations seated in India. Under Section 28(1)(b), the parties are free to designate the rules of law applicable to the substance of their dispute. This is a direct expression of party autonomy – a cornerstone principle of arbitration law worldwide.

There are important sub-rules within this provision. Any designation of a country’s law is construed as referring to the substantive law of that country, not its conflict of laws rules. So, if parties agree that English law applies, the tribunal applies English contract and commercial law directly – not the English rules that might redirect to yet another country’s law. This prevents an infinite loop of cross-referencing between legal systems.

If the parties fail to designate a governing law altogether, Section 28(1)(b)(iii) empowers the tribunal to apply whatever rules of law it considers appropriate, taking into account all the circumstances surrounding the dispute. This gives the tribunal significant discretion – a feature consistent with the UNCITRAL Model Law framework that India follows.

The role of trade usages and contractual terms 🔗

Under Section 28(3), as amended by the 2015 Amendment Act, the arbitral tribunal must in all cases take into account the terms of the contract and trade usages applicable to the transaction. The shift from the earlier phrase “decide in accordance with” to “take into account” was significant. It gives tribunals more interpretive flexibility – they can now look at the commercial intent behind the contract rather than being strictly bound by its literal language.

The role of the seat of arbitration 🔗

The seat (or juridical seat) of arbitration is one of the most consequential decisions parties make. It determines the procedural law that governs the arbitration, which courts have supervisory jurisdiction, and on what grounds an award can be challenged.

Indian courts have consistently held that the seat of arbitration functions like an exclusive jurisdiction clause. Choosing a seat automatically imports the arbitration law of that jurisdiction. This means even if parties don’t specify which procedural law applies, the law of the seat fills the gap by default.

This is why the seat should never be chosen casually. Selecting a seat in a jurisdiction with heavy court intervention, limited grounds for interim relief, or restrictions on arbitrability can significantly affect the outcome. Parties should consider whether the jurisdiction is arbitration-friendly, whether its courts respect the principle of minimal interference, and how enforceable awards made there are internationally.

Separability doctrine and its implications 🔗

The separability doctrine (also called the doctrine of autonomy of the arbitration agreement) holds that the arbitration clause within a contract is an independent agreement. Even if the main contract is invalid, terminated, or void, the arbitration agreement can survive and remain enforceable.

This principle has a direct impact on governing law questions. Because the arbitration clause is treated as a separate agreement, it can be governed by a different law than the main contract. In the well-known English case of Sulamerica v Enesa, the main contract was governed by Brazilian law, but the arbitration was seated in London. The English Court of Appeal held that since applying Brazilian law would invalidate the arbitration agreement, the parties could not have intended it to apply. Instead, English law – as the law of the seat – was found to govern the arbitration agreement.

In the Indian context, the Bombay High Court in HSBC PI Holdings v Avitel Post Studioz similarly considered the law of the seat as having the closest connection to the arbitration agreement. While the Indian Supreme Court has not yet laid down a definitive test on this point, there is growing recognition that the law of the seat serves as a natural default when parties have not expressly chosen a law for their arbitration agreement.

Why does the choice of governing law matter so much? 🔗

The governing law affects virtually every aspect of a dispute. Here’s what is at stake when parties make (or fail to make) this choice:

Validity of the arbitration agreement: A particular law may render the arbitration clause invalid – for example, if the subject matter is not arbitrable under that law. Getting this wrong could mean the entire arbitration is undermined.

Interpretation of the contract: Different legal systems interpret contracts differently. Common law jurisdictions tend to focus on the literal meaning of the words used, while civil law jurisdictions may give more weight to the parties’ intent and good faith obligations.

Available remedies and damages: The scope of remedies – specific performance, injunctive relief, consequential damages, penalty clauses – varies significantly across legal systems. The governing law determines what the winning party can actually recover.

Limitation periods: The time limit within which a claim must be brought can differ dramatically. Under Indian law, it might be three years for a contract claim; under another jurisdiction’s law, it could be shorter or longer.

Enforceability of the award: Under the New York Convention, an award can be refused enforcement if the arbitration agreement is not valid under the law the parties subjected it to, or failing that, under the law of the country where the award was made. A poorly considered choice of governing law can therefore threaten the very enforceability of the tribunal’s decision.

Practical tips for choosing the governing law 🔗

Given the stakes involved, parties and their legal advisors should approach the choice of governing law with care. Here are some practical considerations:

Be explicit: Always specify the governing law in the contract clearly. Do not assume the tribunal will fill in the gaps the way you expect. The more explicit the agreement, the less room there is for costly disputes over which law applies.

Align the seat and procedural law: The procedural law should generally be the law of the seat. Choosing a different procedural law from the seat creates confusion and can lead to parallel proceedings in different jurisdictions.

Consider the law of the arbitration agreement separately: Don’t assume it will be the same as the law of the contract. If the seat is in a different jurisdiction from the governing law, add a clause specifying what law governs the arbitration agreement itself.

Evaluate enforceability: Think about where you might need to enforce the award. Ensure that the chosen governing law and seat do not create barriers under the New York Convention or local enforcement rules in the relevant jurisdiction.

Check arbitrability: Certain types of disputes – for instance, matters related to fraud, insolvency, or competition law – may not be arbitrable under the governing law. This should be verified before the arbitration agreement is finalised.

India’s evolving position on governing law 🔗

India has taken significant steps in recent years to strengthen its arbitration framework and establish itself as a global arbitration hub. The 2024 Draft Amendment Bill proposes further reforms to reduce court intervention, promote institutional arbitration, and streamline timelines. These developments signal a continued commitment to making arbitration more efficient and globally competitive.

At the judicial level, Indian courts have increasingly adopted a pro-arbitration stance, limiting interference and respecting party autonomy in the choice of governing law. However, the absence of a definitive Supreme Court ruling on the law governing the arbitration agreement remains an area where clarity is needed. Until then, parties are well advised to specify every layer of applicable law explicitly in their agreements.

What do you think? Should Indian courts adopt a fixed default rule – such as always applying the law of the seat – when parties fail to designate the law governing their arbitration agreement? And in your view, how much freedom should parties have in choosing non-national legal frameworks like the lex mercatoria in domestic arbitration?

References

1. https://www.indiacode.nic.in/bitstream/123456789/1978/3/a1996-26.pdf
2. https://www.acerislaw.com/laws-applicable-to-an-international-arbitration/
3. https://www.unidroit.org/instruments/commercial-contracts/unidroit-principles-2016/
4. https://uncitral.un.org/en/texts/arbitration/modellaw/commercial_arbitration
5. https://www.nortonrosefulbright.com/en/knowledge/publications/5033d6e5/the-governing-law-of-the-arbitration-agreement-q-and-a
6. https://indiankanoon.org/doc/65067/
7. https://iclg.com/practice-areas/international-arbitration-laws-and-regulations/india
8. https://www.globallegalinsights.com/practice-areas/international-arbitration-laws-and-regulations/india/
9. https://cms.law/en/int/expert-guides/cms-expert-guide-to-international-arbitration/india
10. https://www.ibanet.org/article/699fd751-0bd4-4a15-bf84-e2542a8219c9
11. https://disputeresolution.cyrilamarchandblogs.com/2024/08/law-governing-arbitration-agreement-which-way-are-indian-courts-headed/
12. https://uncitral.un.org/en/texts/arbitration/conventions/foreign_arbitral_awards
13. https://www.ashurst.com/en/insights/quickguide-international-arbitration-clauses/
14. https://www.whitecase.com/insight-alert/keeping-times-government-india-proposes-new-arbitration-law-reforms