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Rules of Law applicable to Domestic and International Commercial Arbitration

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" In practice arbitrators may allow themselves a greater freedom as to rules of substantive law than the courts are inclined to do. The arbitrators will above all be guided by the terms of the international contract and the customs of the
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  Rules of Law applicable to Domestic and International Commercial Arbitration Krusch P Antony “ In practice arbitrators may allow themselves a greater freedom as to rules of substantive law than the courts are inclined to do. The arbitrators will above all be guided by the terms of the international contract and the customs of the international trade. At least this is what parties, as a rule, expect them to do. ” Pieter Sanders 1.0   Introduction Arbitration is all about Party Autonomy and freedom to choose the law that govern one’s dispute. Party Autonomy is recognized in Indian Arbitration as well as in International Arbitration. Article 7 of the European Convention on International Commercial Arbitration 1961 provides: - “… the parties shall be free to determine by agreement, the law to be applied by the arbitrators to the substance of the dispute”. Party autonomy and freedom to choose the law that govern arbitral dispute is truer in International Arbitration, comparing to the domestic arbitration. Domestic Arbitration in many countries still follows outdated parochial rules of  practice. Applicable rules of law to Domestic and International Commercial Arbitration is a serious concern, since the same is very much involved with choice of law  by parties, and the applicability of conflict of laws rules. Arbitration agreement need not be same as the law of contract. Arbitration agreement can be governed  by different law than the governing law of the substantive contract.  The law applicable are: - 1) The law governing the substantive contract; 2) the law governing the arbitration procedure or legal seat; 3) the law governing the arbitration agreement; 4) the law of the state (s), where the award will be enforced. 2.0   Why Choice  –   of  –   Law Clauses in Arbitration is important? Institutions as well as Courts are recognizing and giving due importance and relevance to choice - of - law clauses in arbitration agreements. This is because a contractual choice  –  of- law clause is more certain, predictable and sure to avoid a hostile forum. Arbitral Institutions and Arbitrators are duty bound to respect the wishes of the parties as expressed in their written agreement as to the parties’ choice of law in a commercial transaction. The party autonomy is, however, with a Caveat. The concerns of party autonomy as to choice of law is that, it may operate to undermine important  public policy. This is because parties may opt out of state laws that might otherwise be applicable, thereby making that State’s public policy inapplicable. 3.0   Choice of Law in Indian Arbitration In Indian Arbitration, part-1 of the Arbitration and Conciliation Act, 1996, shall  be applicable to domestic and International Commercial Arbitration seated in  India. Part -2 of the Arbitration and Conciliation Act, 1996, deals with foreign awards in International Commercial Arbitration. In International Commercial Arbitration, parties can chose their seat of Arbitration. If parties select India as seat of Arbitration, Part-1 is applicable. Part- 1 of the Arbitration and Conciliation Act, 1996, will not be applicable to any foreign seated arbitration, with exception to sec 2 ( as amended  –  w.e.f 23-10-2015), of the Arbitration and Conciliation Act, 1996. The amended position has clarified from the Supreme Court decision in BALCO (2012) (9) SCC 552. As amended, Part-1 will not apply to any foreign seated Arbitration except Sec 9, 27 and clause (a) of sub-section (1) and sub- section (3) of sec 37 unless an agreement exists to the contrary. So, as to Indian  parties’  choice of seat, when governing law of Arbitration is non- Indian and proceedings take place outside India, part-2 is applicable. Where the governing law of Arbitration is Indian and arbitration is concluded outside India, Part-1 will apply. The rules applicable to substance of dispute is defined in sec 28 of the Arbitration and Conciliation Act, 1996. The Arbitral Tribunal, other than the International Commercial Arbitration, shall decide the dispute submitted in accordance with the substantive law for the time being in force in India. Often, it happen that the agreement does not expressly provided clarity as to choice  –  of-law as to the seat or law governing the Arbitration Agreement. In Dozco vs Doosan {(2011) 6 SCC 179}, SC relies on the principle stated by Mustill and Boyd    “  In the absence of express agreement, there is a strong prima facie presumption that the parties intend the curial law to be the law of the ‘seat’ of the arbitration, i.e. the place at which the arbitration is to be conducted, on the  ground that that is the country most closely connected with the proceedings. So in order to determine the curial law in the absence of an express choice by the  parties it is first necessary to determine the seat of the arbitration, by construing the agreement to arbitrate .” 4.0   Governing Law V/s Curial Law The SC in Dozco vs Doosan {(2011) 6 SCC 179}, distinguishes between the Governing Law of Arbitration and the Curial law or proceeding rules of Arbitration. The proper law of the Arbitration agreement governs the validity of the arbitration agreement, the question whether a dispute lies within the scope of arbitration agreement; the validity of the notice of arbitration; the constitution of the Tribunal; the question whether an award lies within the jurisdiction of the arbitrator; the formal validity of the award; the question whether the parties have  been discharged from any obligation to arbitrate future disputes. The curial law governs; the manner in which the reference is to be conducted; the  procedural powers and duties of the arbitrator, question of evidence, the determination of the proper law of the contract. 5.0   Approaches as to choice- of- law in Arbitration   A single Arbitration may give rise to a number of choice of law issues, and, occasionally, resolution of these issues may be as complex as deciding the substance of the dispute. The law governing the substance of the dispute is the law or rules of law governing the contract out of which the dispute arises. The applicable substantive law (law governing the contract) determines the legal rights and obligations of the parties, in particular, may also affect the causes of action that may be advanced, the substantive remedies, the types of damages reasonable, limitation defenses, the calculation of the quantum of damages and even burden of proof (Doug Jones 2014). 6.0   Applicable Law  –     Amiable Compositor  . Article 35 of the UNCITRAL Model Law states that the Arbitral Tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the Arbitral Tribunal shall apply the law which it determines to be appropriate. Arbitral Tribunal shall decide as “  Amiable Compositor” or “ ex aequo et bono” only if the parties have expressly authorized the Arbitral Tribunal to do so. Similar provision in clause (2) of Sec 28 of The Arbitration and Conciliation Act, 1996. This means, Arbitrator acting in fairness, equity and good conscience, if authorized by parties. Indian Law gives importance to the principle of territoriality and the center of gravity for determining law governing arbitration is the juridical seat of arbitration. Indian Law recognizes the difference between the juridical seat of
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