Choice of law refers to the body of law that parties choose to govern an agreement. It also refers to the law that a forum chooses to apply to the parties in a dispute. If the parties have not chosen a law to apply to them, it is left to the forum to do so. Invariably in such a situation, the forum (especially courts and judicial tribunals) will apply the law of the land, whether it is substantial or procedural. It is more of an issue where the parties belong to different jurisdictions and choice of law is ambiguous.
Courts invariably apply their own rules of interpretations of what they think the choice of law is. Such a situation may be anomalous for the parties themselves where they have intended (though not articulated or at least not in clear terms) that a particular body of law shall be the governing law. Historically, courts have a tendency to assume jurisdiction over matters where there is scope of ambiguity as to the choice of law. In a sales contract, it is common for courts in many parts of Europe to treat the seller as the so-called characteristic performer of the contract. Consequently, the courts end up applying the law of the seller's place of business to the sales contract even when in a sales contract, the buyer is in a dominant position and would expect the courts to apply the law of the buyer's place of business. There may be another issue as to applicable law. The forum may not give effect to the procedural aspects of the applicable law and therefore decide to choose to apply the procedure as applicable in its jurisdiction and apply only the substantive aspects of the applicable law.
Court's attitude towards choice of law
Lord Macaulay, while in debate on Charter Bill 1833 in India, said: "I believe that no country ever stood so much in need of a Code of law as India, and I believe also that there never was a country in which the want might be so easily supplied. Our principle is simply this, - uniformity when you can have it; diversity when you must have it; in all cases, certainty." The applicable law in India, codified and uncodified, barring personal laws, remains largely similar to the laws of the commonwealth countries.
In India, the substantive provisions of contractual law do not curtail the freedom of parties to agree on the terms of any agreement. There are however few provisions (and they would be common to most of the jurisdictions) which cannot be contracted out. An agreement to do something illegal cannot be sought to be made valid by seeking to govern it by a body of law which treats it differently. That being the case, as long as parties do not go against the fundamental principles of the law of contracts (and any mandatory provisions of law) applicable otherwise in such jurisdiction, they retain immense freedom to choose such things as the time of performance, the place of performance, the manner of performance, and how disputes are to be settled. One of the areas which parties can choose what works best for them is that which deals with the law that governs the contract. If the parties have expressed the choice of law in the agreement, courts in India would invariably uphold it unless it is a wholly unconnected law. So there should be some connecting factor or nexus between the choice of law and the subject matter in the agreement.
 |
| Public policy is an “unruly horse”, according to the Supreme Court |
In India, the courts will not apply foreign law if the court feels that it is in conflict with the public policy of the country. In India, according to the Supreme Court, public policy is an unruly horse and the earlier trend of not widening its scope has been upset recently.
Parties may also not realise that sometimes they land themselves in trouble where, in the absence of consistency as to choice of law and jurisdiction, a forum (a court in India) concludes that though a foreign law (German law) is applicable, it will try the dispute. Before the Indian court, German law is required to be proved as a fact since Indian courts will not take judicial notice of a non-India law. This can prove costly for parties and cumbersome for judges, since both the lawyers and judges may be unfamiliar with German law. The costs and time spent understanding and applying a foreign law would be enormous and may defeat the very purpose for a proper and effective resolution of a dispute. One also has to bear in mind the added uncertainty attached to a decision on a subject governed by foreign law but decided by an Indian court.
A so-called rebound situation can also arise. In any given case, the parties may have expressed a choice of neutral law in the agreement, say Korean law. The Seoul court may apply the Korean law including its rules of private international law. The court may also draw the absurd conclusion that the law applicable to the agreement as per the Korean choice of law is in fact the law of the place of residence of a party. Such an approach would defeat the very purpose of a neutral governing law clause. Although courts in major countries have not been known to rebound often in this manner, it would be prudent to stipulate that a particular law will be the governing law except for its conflict of law rules.
Clarity on choice of law is also important when parties from multiple jurisdictions are involved. It is also critical how the courts in each of such jurisdiction view the parties' choice of law in the background of laws held applicable to certain types of disputes. The problem in India is that one could land with the party's choice of law being upheld but not choice of jurisdiction. The situation is exacerbated if the subject matter of the dispute is the exclusive domain of specialised forums. The situation becomes all the more aggravated when this means that international commercial arbitration agreed between the parties will be ignored or not given effect to.
Whether the parties' choice of law extends not only to substantive law but also to procedural law should also be evaluated. A particular provision of law may be treated as a "substantial law" in a jurisdiction while it may be treated as "procedural law" in another jurisdiction. In the countries treating the law of limitation as procedural, the legal remedy gets barred after the expiry of the period of limitation while the right still remains notionally. But in countries which treat the limitation law as substantive, the substantive right also gets extinguished in addition to the removal of the judicial remedy. So where a contract is entered into or any other manner of assuming legal obligations in a foreign country, and judicial remedies being resorted to in another country cannot be ruled out, the distinction as to whether the law of limitation is procedural or substantive becomes important and should be considered when deciding on the choice of law.
Dispute resolution
Dispute resolution refers to a forum where parties settle their dispute. The reference to dispute resolution is also therefore to the jurisdiction of a forum to hear a dispute.
The chosen forum may either be the country of one or both of the parties, or it may be neutral. The jurisdiction clause may provide for a submission to the courts of a particular country, or to a court identified by a formula in a printed standard form, such as bill of lading, referring disputes to the courts of the carrier's principal place of business. It is a question of interpretation, whether a jurisdiction clause is exclusive or non-exclusive, or whether the claim which is the subject matter of the action falls within its terms. If there is no express choice of the proper law of the contract, the law of the country of the chosen court will usually, but not invariably, be the proper law. In a case where multiple forums are available, any one of the forums may assume jurisdiction of the subject matter of the dispute on the application of classical principles like defendant residing or working for gain or where cause of action, in part or in whole, arises.
Exclusive and non-exclusive
The selection of a forum as exclusive or non-exclusive is also relevant in the context of one party trying to breach the jurisdiction clause, and therefore the non-breaching party starting an anti-suit injunction against such breach.
If the clause grants exclusive jurisdiction to a court, it would ordinarily be given effect too. In India, this would not be the case, only in exceptional circumstances where a party is able to demonstrate "good and sufficient" reasons. When parties agree, under a non-exclusive jurisdiction clause, to approach a neutral foreign forum, the courts may give effect to in favour of such preferred forum as it would be presumed that the parties have thought over their convenience and all other relevant factors before submitting to the non-exclusive jurisdiction of their choice which cannot be treated just as an alternative. The real test is whether by making a person approach a court of choice (whether exclusive or non-exclusive), the proceedings can be treated as oppressive. Such a course may be viewed as aiding breach of the contract.
While choosing jurisdiction of a court, parties should also consider whether the judgments passed by a foreign court are enforceable in the same manner in the courts in India by virtue of reciprocity. This would become all the more important where substantial assets of the defendant are based in India.
Alternative dispute resolution
"It is the spirit and not the form of law that keeps the justice alive." said LJ Earl Warren. The lengthy delays in the court process lead to the evolution of alternative dispute resolution which refers to arbitration, conciliation and mediation. But the process of conciliation and mediation is yet to be fully developed in India. The arbitration law, first enacted during British India, culminated in the Arbitration and Conciliation Act, 1996 (Arbitration Act). The Act, which was based on the Uncitral Model Arbitration Law, was enacted for a speedier and meaningful resolution of disputes.
The Arbitration Act shows that the civil procedure code and evidence law are not applicable to the arbitration. Courts interference was intended to be minimal.
Parties may also choose the law of arbitration agreement which can be different from the law of the contract. Within the arbitration agreement itself it is open to the parties to specify the law governing the procedure for arbitration different from the law of arbitration agreement. In the absence of chosen law governing the arbitration, the law of the place of arbitration will apply both is respect of substantive law and procedural law.
Under the Arbitration Act, contractual submission (at least in all commercial agreements) to arbitration is mandatorily enforceable and courts in India cannot assume jurisdiction regarding such an agreement. The Arbitration Act permits parties to opt for institutional arbitration. Institutional rules specifically provide the procedure to be followed in reference to arbitration and thereby limit (if not eliminate) the interference of a court.
Part I of the Arbitration Act applies to arbitrations where the place of arbitration is in India and expressly permits courts in India to exercise certain powers in relation to such arbitration proceedings. Crucially, provision for institutional arbitration would virtually oust the jurisdiction of Indian courts even in domestic arbitration.
Part II of the Arbitration Act applies to arbitration proceedings conducted outside India. India is a signatory to the Geneva Convention and also the New York Convention. It is necessary that a signatory country to either convention is notified by the Indian Government for this purpose. Both a foreign award (from a notified reciprocating country) and a domestic award are deemed as a decree of Court in India and can be executed accordingly. However please note that, while an arbitral award (where the arbitral tribunal is in India or a notified reciprocating country) is deemed a decree of a court, the parties would still have to move the Courts in India, for the purpose of enforcement. Under the Arbitration Act, courts in India would not sit in judgement over the arbitral award. This is however subject to the usual principles of natural justice and public policy considerations.
Providing for arbitration with the place of arbitration outside India effectively removed the jurisdiction of Indian Courts. So to completely eliminate the possibility of an Indian Court assuming jurisdiction (notwithstanding the contractual provision of a non-Indian court being vested with jurisdiction), and thereby delaying the process of dispute resolution, parties should consider providing a place of arbitration outside India for arbitration. Such a clause is neither illegal, nor opposed to public policy and is not affected by Section 28 (restraint of legal proceedings) of the Indian Contract Act, 1872.
When dealing with Indian counterparties, contractually providing for arbitration is critical (more so with state owned or controlled entities). Including provisions for resolving disputes through arbitration outside India eliminates the uncertainty with regard to submission to jurisdiction of a non-Indian court and the discretion of Indian courts to assume jurisdiction with reference to the subject matter of dispute referred to arbitration.
For arbitration in India under Indian institutional rules, the courts do have some scope for interference. In relation to international commercial arbitration (arbitration where one of the parties is a non-Indian incorporated entity), the Indian courts have limited jurisdiction to interfere in the process (even if the place of arbitration is in India). If the place is outside India, the parties may (in their contract) expressly exclude the applicability of Part I of the Arbitration Act and thereby remove the jurisdiction of courts in India as regards the process of arbitration.
The arbitration should preferably be conducted in London, Paris, Singapore (in no order of preference) or Mumbai if the parties decide that the place of arbitration should be in India. In either case, we would recommend LCIA or ICC Rules and in any event provide for some institutional rules in order to prevent the courts in India from having any jurisdiction in relation to the process of arbitration.
However, arbitration in India has not served the purpose for which it was enacted. Enough judicial precedents have been propounded in India on arbitration law and instead of simplifying the law to achieve its purpose, the judicial precedents have complicated it and have in fact adopted an approach alien to the scheme of the Arbitration Act. For instance, the Supreme Court has sought to apply Part I to arbitrations held outside India which results in foreign awards and to which only Part II is applicable. The Supreme Court has also ordained that (though in the context of the court having to appoint arbitrators) the courts in India have to decide upfront whether there exists a valid arbitration clause in the agreement in a domestic arbitration which power otherwise statutorily resides with the arbitral tribunal.
It is important that in a contract, parties are clear about choice of law, whether it is substantive or procedural. Arbitration is always a preferred dispute resolution method and providing for institutional arbitration is preferable to adhoc arbitration. However, it is difficult to have boilerplate clauses on choice of law and dispute resolution. A lot would depend on the facts and circumstances of each case. Lawyer's advice on such matters is a must. However, it is not the lawyers that drive the business.
| Author biographies |
Huzefa Nasikwala
Juris Corp
Huzefa Nasikwala, an advocate and a qualified solicitor on the rolls of Supreme Court of England and Wales, started his career with the law firm Mulla & Mulla & Craigie Blunt & Caroe in September 1999. He was with Mulla's till 2005 in which he gained considerable experience in real estate and litigation. He then branched on his own before he joined Juris Corp as a partner designate in March 2007. His practice areas are dispute resolution, real estate and conveyancing and structured finance. He has been handling complex litigation matters in various courts across India. |