Conflict in contractual clauses while determining jurisdiction in case of trans-border arbitration.

Conflict in contractual clauses while determining jurisdiction in case of trans-border arbitration. 

Recently, the Hon’ble Supreme Court of India in Disortho S.A.S. v. Meril Life Sciences Private Limited, examined the vexed question of jurisdiction in case of trans-border arbitration. The said divergence emerges from the interaction between three distinct legal systems which come into play when a dispute occurs: (i) lex-contractus, the law governing the substantive contractual issues; (ii) lex arbitri, the law governing the arbitration agreement, and the performance of this agreement; and (iii) lex-fori, the law governing the procedural aspects of arbitration. 

 

Let us first understand the facts of the case: 

The petitioner is a company incorporated in Colombia and the respondent is a company incorporated in Gujarat, India. The petitioner and the respondent had executed an International Exclusive Distributor Agreement dated 16.05.2016 for distribution of medical products in Colombia. Subsequently, disputes arose between the parties, and the petitioner filed a petition under Section 11(6) for appointment of arbitral panel in terms of the agreement. The said petition was opposed on the ground that the clauses of the agreement do not grant Indian court’s jurisdiction to appoint the arbitrators. One of the clauses of the agreement provided that the agreement shall be governed by and construed in accordance with the laws of India and conferred courts at Gujarat, India to have jurisdiction. Another clause of the agreement provided that the disputes may submit to conciliation of the Chamber of Commerce of Bogota DC., or instead of this city, where the Director of the Centre so determines. Further, in case the disputes are not resolved the parties had agreed for settlement in accordance with the Arbitration and Conciliation Centre of the Chamber Bogota DC. 

Now, let us read through the analysis/observations by the Hon’ble Supreme Court of India. 

The Hon’ble Court noted that the law governing arbitration may differ from both the law governing the procedural aspects of arbitration and the law governing the contractual clauses, the said was also brought forth in the recent English courts decisions of Melford Capital Partners (Holdings) LLP and Others v. Frederick John Wingfield Digby, this decision also referred to an earlier decision of Paul Smith Ltd. v. H&S International Holdings Inc., which dealt with two conflicting clauses. The Hon’ble judge in England in Paul Smith Ltd. had observed that the law governing arbitration are a body of rules which sets a standard external to the arbitration agreement, and the wishes of the parties, for the conduct of the arbitration. Thus, there being four choices of law – (i) the law governing the arbitration, (ii) the proper law of arbitration agreement, (iii) the proper law of contract, and (iv) the procedural rules which apply in the arbitration. The Hon’ble Court has also noted that a careful distinction should be drawn between the law governing the agreement to arbitrate and the law governing the arbitration itself. 

The Hon’ble Court agreed with the conclusions/summary being provided by Sulamérica Cia Nacional De Seguros S.A. and Others v. Enesa Engenharia S.A. and Others, wherein the English Courts held that law governing the arbitration agreement is the law chosen by the parties. If no such choice is made, the law most closely connected to the agreement applies. Further, it was also observed that law chosen for the arbitration agreement is determined by interpreting the agreement, and if necessary, the entire contract using rules of contractual interpretation. When the law governing the arbitration agreement is not specified, the law of the contract (lex contractus) usually applies. A place being chosen, does not by itself justify an inference that the arbitration agreement is intended to be governed by the law of this venue. Close connection test, applies when the law governing the arbitration agreement cannot be ascertained even after applying the earlier paragraphs. 

3 step process endorsed by Sulamérica Cia Nacional De Seguros S.A. and Others v. Enesa Engenharia S.A. was followed by the Hon'ble Supreme Court of India as well is laid down as below: 

Firstly, according to the said case, the law governing the arbitration agreement may differ from the law of the contract. 3 step enquiry is explained as under: 

1.     1. looking at the express choice of law; 

2.     2. considering any implied choice; 

3.    3. determining the closest and most real connection. Second step is applied when the first step is negative, and the third step is applied when the first and second steps are negative.

Court was also of the view that the matters such as filling vacancies on arbitral tribunals and the removal of an arbitrator through the exercise of supervisory jurisdiction, in the absence of a clear mechanism within the arbitration agreement, should be normally governed by the law applicable to the arbitration agreement itself, rather than by the procedural rules that govern the arbitration process.  

In the present case, Clause 16.5 is clear and unambiguous. It explicitly states that the entire agreement shall be governed by and construed in accordance with the laws of India, and all matters arising from the agreement shall fall under the jurisdiction of the courts in Gujarat, India. Given this, it is reasonable to assume that, when drafting this clause, the parties were fully aware of Clause 18, which provides for arbitration and conciliation under the Arbitration and Conciliation Centre of the Chambers of Commerce in Bogota. Court held that Bogota has been designated as the venue for conciliation and arbitration, while the courts in Gujarat, India, retain exclusive jurisdiction over disputes. This must, unless there is a divergence in lex arbitri, include jurisdiction over appointments and act as a conduit for the arbitration in Bogota, Colombia. As the law governing the arbitration agreement, being Indian law, means that its validity, scope, and interpretation will be determined in accordance with Indian law. In accordance with Clause 16.5 and 18, it was held that the procedural rules of the arbitration would be the rules of the Conciliation and Arbitration Centre of the Chamber of Commerce of Bogota DC, with Bogota DC as the venue of arbitration. Court also affirmed the applicability of the A&C Act under Section 11(6) of the Arbitration and Conciliation Act. Even when the agreement was set to be governed by foreign centre, the Supreme Court re-affirmed the supervisory jurisdiction of Indian Courts. 

Which national courts—those in India or Colombia—exercise supervisory jurisdiction over the arbitration proceedings?

Does the A&C Act apply to these arbitration proceedings?

Upon a consistent reading of the Distributor Agreement, it is clear that only the courts in Gujarat, India, are referenced. While it is acknowledged that the venue for arbitration is Bogota, Colombia, and that the procedural rules of the Arbitration and Conciliation Centre at the Chambers of Commerce in Bogota are to apply, this does not diminish the supervisory powers of Indian courts, as explicitly outlined in Clause 16.5. 

Read the entire case at - https://api.sci.gov.in/supremecourt/2023/29296/29296_2023_1_1501_60293_Judgement_18-Mar-2025.pdf