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Substantive Law of the Contract


Substantive Law of the Contract
Substantive Law of the Contract

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The three laws applicable to an arbitration are:


  1. Substantive Law: This governs the rights and obligations of the parties involved in the contract. It deals with the actual subject matter of the dispute.

  2. Law Governing the Arbitration Agreement: This determines the validity, interpretation, and scope of the arbitration agreement itself. It is distinct from the substantive law and governs the agreement to arbitrate.

  3. Law Governing the Conduct of the Arbitration (Lex Arbitri): This refers to the procedural law that governs the arbitration process itself, including matters such as the appointment of arbitrators, the conduct of hearings, and the enforcement of awards.



In an international commercial arbitration, parties have the freedom to choose different laws for the substantive dispute and the arbitration agreement.


They can also select an arbitral seat, which determines the procedural law (lex arbitri) governing the arbitration proceedings. Typically, the lex arbitri is the arbitration legislation of the arbitral seat.



For India-seated arbitrations, Section 28 of the Arbitration and Conciliation Act of India, 1996 (1996 Arbitration Act) specifies the applicable laws:


  • Domestic Arbitrations: The arbitral tribunal decides the dispute according to the substantive law in force in India.


  • International Commercial Arbitrations: The arbitral tribunal decides the dispute based on the rules of law designated by the parties. If the parties haven't specified the applicable law, the tribunal applies the rules of law it deems appropriate given the circumstances.



Regarding non-India-seated arbitrations involving Indian parties, Indian courts have ruled that Indian parties are free to choose a foreign seat and arbitrate outside India.


Awards resulting from such foreign-seated arbitrations between Indian parties are considered foreign awards under the Act.



However, there have been cases, like the one before the Rajasthan High Court, where the jurisdiction to grant interim relief in a Singapore-seated arbitration between two Indian parties was questioned.



The High Court classified it as falling under a "third situation," where the arbitration isn't international but the resulting award is enforceable as a foreign award under the New York Convention. This decision raised questions about the classification of arbitrations involving Indian parties seated outside India.

 
 

SUBSTANTIVE LAW OF THE CONTRACT


The substantive law of the contract, also known as the lex causae, governs the subject matter and merits of a dispute arising from a contract.



It encompasses various aspects such as the interpretation and validity of the contract, the rights and obligations of the parties, modes of performance, consequences of breaches, available remedies, types of damages, limitation defences, and burden of proof.



Parties generally have the freedom to choose the law applicable to their contract, and they are bound by their express choice of substantive law.


This principle is reflected in international conventions and model rules, including Article 28 of the UNCITRAL Model Law on International Commercial Arbitration, which states that the dispute shall be decided in accordance with the parties’ chosen applicable law.



In contracts between two Indian parties, the choice of substantive law is typically Indian law. This ensures that Indian parties cannot circumvent substantive Indian law by selecting a foreign governing law. Section 28 of the Indian Arbitration and Conciliation Act, 1996, reinforces this requirement for India-seated arbitrations.



However, for non-India-seated arbitrations involving Indian parties, the choice of substantive law is based on judicial precedents.



In international commercial arbitrations seated in India, parties are free to agree to any substantive law. If the parties do not make such an agreement, the tribunal will determine the applicable substantive law.


This flexibility allows parties to tailor the governing law to their specific contractual arrangements and commercial needs.




Indian Parties and Choice of Foreign Law


In arbitration between Indian parties, Section 28(1)(a) of the 1996 Arbitration Act mandates the application of Indian law to the contract. This statutory requirement supersedes any contrary provision or agreement between the parties.



Although this provision is applicable only to arbitrations seated in India, it reflects the legislative intent and public policy to prevent two Indian parties from opting for a foreign law as the substantive law of their contract, especially when performance is to take place in India.



The scope of Section 28(1)(a) was elucidated by the Supreme Court in the Bharat Aluminium Co. case, which emphasised that Indian law must govern the substantive aspects of contracts between Indian parties.


Violating this mandate would be considered against public policy, as reiterated in the TDM Infrastructure case, which clarified the jurisdiction of courts under Section 11 of the Act.


While decisions in Section 11 petitions are not binding precedents, they have been cited and relied upon by various High Courts.



In TDM Infrastructure, the Supreme Court also outlined that arbitration is international only if at least one party is incorporated outside India, a principle recognized by the 2015 Amendment.


This interpretation was applied by the Bombay High Court in Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Pvt. Ltd., where it directed arbitration between two Indian parties to be conducted under Indian law, despite a clause suggesting application of English law and arbitration in Singapore or India.



However, the High Court's stance that two Indian parties cannot arbitrate outside India may be an overreach, as indicated by earlier Supreme Court decisions. Despite this, there is no prohibition on Indian parties selecting a foreign seat for arbitration.



While Indian law governs the substantive dispute, parties can choose a different law for the arbitration agreement. The choice of seat determines the applicable procedural law (lex arbitri), which could be non-Indian law in a foreign-seated arbitration.

 
 

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