Report No. 176
2.19 Law applicable to substance of dispute:
Amendments to Section 28 proposed: The questions under section 28, are (i) whether, when all the parties agree that the law applicable to the substance of the dispute would be foreign law, (ii) whether, in case the parties could refer the said question to an institution, it could have said that the law applicable to the dispute would be a foreign law?
Under Section 2(6) of the 1996 Act, which corresponds to Section 2(d) of the Model law, (already set out in our discussion under sec. 20(1)), the parties cannot ask the institution to decide the issue relating to the matters covered by section 28. This is clear from Section 2(6) which excludes section 28 from its scope and, therefore, the parties could not have referred to the institution any issue regarding the law applicable to the substance of the dispute.
Obviously, even if the parties had made such a reference to the institution for deciding the applicable law, it would have refused to do so having regard to Article 2(d) of the Model law as well as Section 2(6) of the 1996 Act. In fact in Dr. P.C. Rao's commentary on the 1996 Act (see Page 47), it is clearly stated that such a question relating to the law applicable to the substance of the dispute could not be referred to a third party or to an institution for decision.
This disposes of the second issue. Coming to the first issue, we shall assume on the above facts, that the parties had agreed that a foreign law would apply to the contract. On that basis, we shall go into the question whether such an agreement could be made by the parties under the 1996 Act? We can approach this problem from general principles of law and also on the basis of the conclusions arrived at in our discussion under sec. 20(1).
On the basis of general principles, the following appears to be the legal position. Leading writers have said that, as between citizens of the same country who enter into a contract for the purpose of executing works in that country, it is not permissible for them to agree that a law other than the law of that country would be applicable to the contract. Russell on arbitration states (see Para 2.090) as follows:
"General: In arbitration between parties in England and Wales, the issue of the choice of law to be applied does not usually arise; unless there is some other provision, the arbitration will be subject in all respects to English law. However, the issue thus arises in every international arbitration and can be of fundamental importance."
The word "in all respects" is significant and has reference to the law applicable to the agreement of arbitration, to the substance of the main contract and also to the procedure before arbitral tribunal and the Court. Redfern and Hunter state as follows, (see para 2.03); "International Arbitration, unlike its domestic counterpart, will usually involve more than one system of law or legal rules".
Therefore, if it is not an 'international arbitration', there is no question of choice of the law by agreement of parties. The word 'choice' implies that more than one system of law or legal rules are attracted. Thus, on the fact stated above and upon general principles of law, if the arbitration is between Indian nationals with reference to a contract entered into in India for works to be executed in India, the Indian law alone can apply and not the foreign law.
Alternatively, we shall examine the position on the basis of the conclusions arrived at under sec. 20(1), in relation to the place of arbitration under sec.20. We shall try to find out if there is anything basically wrong with the words in sec. 28(1), namely, "where the place of arbitration is situated in India" used at the beginning of the said section. The use of the said words has indeed given an impression that there is an option, in the case of such purely domestic arbitrations between Indian nationals enabling them to select a place of arbitration outside India. Section 28 of the Act reads as follows:
"Sec.28: The rules applicable to substance of dispute: (1) Where the plea of arbitration is situate in India -
(a) In an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India';
(b) In international commercial arbitration -
(i) the arbitral tribunal shall decide the dispute in accordance with the rule of law designated by the parties as assailable to the substance of the dispute;
(ii) any designation by the ranks of the law or legal system of a given country shall be construed, unless otherwise agreed, as directly referring to the substantive law of other country and not its conflict laws rules;
(iii) failing any designation of the law under sub-clause (a) by the parties, the arbitral tribunal shall apply the rules of law it considers to be appropriate, given all the circumstances surrounding the dispute.
(2) ... ... ... ... ... .... ... ... ... ... ... ...
(3)... ... ... ... ... .... ... .... .... .... ....
In Dr.P.C.Rao's commentary on section 28, it is stated as follows:
"Section 28 lays down the rules applicable to the substance of the dispute. It is applicable only when the place of arbitration is in India, be it domestic arbitration or international commercial arbitration. Freedom given to the parties under rule 2(6) is not available to the parties under Section 28". We have already referred to Dr. P.C. Rao's Commentary on sec.20(1) (page 83) in our discussion under sec. 20(1). It was stated therein that, in the case of a purely domestic arbitration between Indian nationals, the place of arbitration cannot be outside India.
However, in the passage extracted above (at page.96-97) the words: " it is possible only when the place of arbitration is in India, be it domestic", gives an impression that in the case of a purely domestic arbitration between Indian nationals, the place of arbitration can, in the alternative, be outside India. But, once it is clear from our discussion under sec. 20(1), relying on the commentary of Dr.P.C.Rao (at page.83), that in the case of purely domestic arbitration between Indian nationals, the place of arbitration under sec.20(1) cannot be outside India, it is obvious that the observations at page.96-97 of the book, as extracted above, require to be properly understood in that light.
Clause (1)(a) of sec.28 cannot, in our opinion, be governed by the opening words "Where the place of arbitration is in India", in as much as these words give an impression that in respect of purely domestic arbitrations between Indian nationals, there can also be another alternative, viz., place of arbitration outside India. In this context, we may also refer to another passage from Dr. P.C. Rao's commentary with regard to sec.28 (1)(a), (at page 97) where the author says that the Model Law does not have a clause like sec. 28(1)(a).
Obviously, the Model Law which deals with international arbitration could not have a clause like Clause(1)(a) of sec. 28which deals with purely domestic arbitration. That passage (at page 97) of the commentary, is as follows: "clause (a) (of sub section (1)) provides that in domestic arbitration, the arbitral tribunal is required to decide the dispute in accordance with the substantive law of India. The parties and the tribunal have no choice in this regard. Since the Model Law deals with international commercial arbitration, there is no provision therein corresponding to sub section(1) of section 28" .
Thus, whether on general principles of law or on the basis of our conclusions while dealing with section 20(1), the words 'where the place of arbitration is in India' cannot be allowed to stand at the beginning of sec. 28(1)(a) so as to apply to purely domestic arbitration between Indian nationals.
It is, therefore, proposed to omit the words "Where the place of arbitration is situate in India," from the opening part of sec.28 so that they will not govern sub section (1)(a) and so that , for the purpose of the said sub section (1)(a) dealing with purely domestic arbitration between Indian nationals, they do not give an impression that parties could alternatively agree for a place of arbitration outside India. It is proposed to confine the words "Where the place of arbitration is situate in India" to sub section 28(1)(b) which deals with "international arbitration" in India.
2.19.1 It is also necessary to make a formal amendment in sub-section (1) of section 28 in view of the proposed definitions of the terms "international arbitration" and "international commercial arbitration" in the proposed clauses (eb) and (f) respectively of sub-section (1) of section 2. Accordingly, in section 28 of the principal Act, in sub-section (1), in clauses (a) and (b) for the words "international commercial arbitration", the words "'international arbitration (whether commercial or not)" shall be substituted. 2.19.1(A)
In as much as this section treats an arbitration as an 'internationbal arbitration' where a company incorporated in India may be under management and control exercised from outside India and such cases are now proposed to be covered by sections 28A, 28B and 28C which are on the lines of section 202 of Title 9 of the US Statute.
We proposed to add sub-section (1B) in section 28. This aspect can be better understood on a reading of para 2.19.3 which deals with sections 28A, 28B and 28C. In this context, we do not think it necessary to amend section 45 and 54 of Part II in as much as those sections refer to an agreement in sections 44 and 53, respectively. In section 28A, 28B and 28C, we have provided that the agreements between parties referred to in section 28A will not be covered by the New York and Geneva Conventions.