Problems with Disortho: Flawed Seat-Designation and a Backward Move in LGAA Determination

[Suyash is a student at National Law School of India University.]

The Supreme Court of India (SC) in the case of Disortho SAS v. Meril Life Sciences (Disortho) answered the following question: How to determine the Law Applicable to the Arbitration Agreement (LGAA), in the absence of any clear indications of the seat? The case arose out of a dispute between Meril Life Science, an Indian company and Disortho SAS, a company incorporated in Bogota, Colombia. An application for the appointment of arbitrator, filed by Disortho, was opposed by Meril claiming that Indian courts do not have the jurisdiction as per the agreement between the parties. The SC held that despite no designated seat, the parties have impliedly agreed for the Indian law as the LGAA, since they have chosen it to govern the main contract (paragraph 31). In this piece, the author argues that the decision of the SC in Disortho has two main problems. First, the court fails to appropriately decide the seat. Second, the law laid down by the SC is problematic due to its misconceived implementation of party intention and the principle of separability. 

On Flawed Seat Designation: Ignored Precedents and Party Intentions

In Disortho, the agreement between the parties provided that any dispute between them shall be resolved through arbitration in Bogota DC and the award shall be in consonance with the Colombian law (paragraph 2). However, the Court did not designate Colombia as the seat of the arbitration. In this section, the author seeks to establish that, in Disortho, there are two major reasons for declaring Colombia as the seat:

1. After Arif Azim v. Micromax Informatics FZE (Arif) (paragraph 71), the venue of arbitration is taken to be its seat as long as no significant contrary indicia is established. However, in Disortho, the court held that no seat has been chosen by the parties but fails to point out any contrary indicia that precludes the presumption that Colombia, which is the place of arbitration, should not be treated as the seat of arbitration. The court also ignores important precedents while declaring that Colombia is not the seat of the arbitration. For instance, in the case of Mankastu Impex Private Limited v. Airvisual Limited (Mankastu), the petitioners argued that the mention of the laws of India as the governing law and the courts of Delhi as the jurisdictional courts necessarily imply that the laws of India are the curial law applicable to the arbitration (paragraph 18). However, this argument was rejected by referring to the arbitration clause. The SC held that the phrase “shall be referred to and finally resolved by arbitration in Hong Kong” clearly suggests that the parties intended the seat to be Hong Kong. In Disortho too, the arbitration agreement clearly provides that the disputes shall be committed for final settlement in accordance with the Arbitration and Conciliation Center of the Chamber of Bogota and that the place of arbitration shall be in Bogota.

2. The declaration of the seat of arbitration carries the implication that the courts of the seat have the supervisory jurisdiction (paragraph 71, Arif). This also implies that the arbitral award rendered by the tribunal shall be in consonance with the seat law. In Disortho, the arbitration agreement stipulated that the award shall be in conformity with the Colombian law. This clearly indicates the intention of the parties to keep Colombia as the seat. Despite such clear indications, the Court did not declare Colombia to be the seat in Disortho which goes against its own established precedents. 

Thus, based on the above two reasons, the seat-determination in Disortho goes against established precedents. 

LGAA Determination: The Problem of Unquestioning Reliance on Foreign Judgments and a Flawed Understanding of the Separability Principle

In this section, the author seeks to argue that the law propounded by the court for the determination of the LGAA is erroneous. The basic framework of an arbitration includes four sets of rules: (i) law governing the arbitration agreement; (ii) law governing arbitration; (iii) law applicable to the main contract (lex contractus); and (iv) the rules dictating the conduct of arbitral proceedings (paragraph 7 of Disortho). These four laws can be different depending on the choice of the parties. However, in numerous cases, there can be a lack of clear choices resulting in the courts carrying out their analysis to determine them. In Disortho, the court was concerned with the determination of the LGAA. For such determination, it relied on a three-step test devised by UK courts. 

In the case of Enka Insaat Ve Sanayi AS v. OOO Insurance Company (Enka), the UKSC had provided a structured way of determining the LGAA. It held that (i) when the LGAA is not expressly stated, lex contractus shall apply. The designation of a particular country as the seat of arbitration does not, by itself, override this presumption. However, certain circumstances can shift this assumption (paragraph 170 of Enka). These include situations where (a) the legal system of the seat requires the arbitration agreement to be governed by its own laws, (b) applying the main contract’s law would render the arbitration clause invalid, or (c) the seat was intentionally selected as a neutral venue. This rendition of the law has been reiterated by the Indian SC in Disortho (paragraph 13 and 14) despite its legislative overrule in the UK. Interestingly, even Singapore is considering a change in the law on the determination of LGAA by moving towards a more seat-law based approach. 

Nonetheless, we see that the UK courts adopted the three-step test because (i) in their opinion, it effectuates the intention of the parties by extending the same law over the entire contract, including the arbitration agreement (paragraph 218 in Enka); (ii) the principle of separability does not preclude the presumption of lex contractus being applied to the arbitration agreement. This is because separability only becomes operative upon the derogation of the main contract (paragraph 61 in Enka). 

Both of the above reasons, however, should not have been relied upon unquestioningly by the SC. There are two main reasons for this argument. First, the argument of ‘intention of the parties’ to extend the lex contractus to the entirety of the contract, including the arbitration agreement, creates a legal fiction that may or may not be in consonance with the actual intentions of the parties. Such an assumption is flawed and ignores that the parties can be cognizant (page 408) that the arbitration clause under the contract may be governed by a separate law. Instead of imposing such a legal fiction, courts may be better off by acknowledging that the parties did not contemplate any law to govern the arbitration agreement.  The court may, then, rely on an objective legal criteria to determine the LGAA (page 16), such as Article V(1)(a) of the New York Convention (NY Convention).

The legal fiction on intention of parties also mires the law on the determination of LGAA. This confusion can be gleaned from a survey wherein it was found that in around 40% of the cases, in which the question of relevance of the main contract for the LGAA was discussed, the Courts found that the lex contractus had no relevance for the determination of the LGAA. Such a finding does not only reflect the difference of opinions on the matter but also puts into question the presumption of extension of lex contractus to the arbitration agreement. Simply put, there is an equally convincing argument (page 419) that may be made for extending the law of the seat as the LGAA. Such a position also provides certainty, uniformity and simplicity (page 419) unlike the approach of extending the lex contractus.

As mentioned above, an objective criteria like Article V(1)(a) of the NY Convention which stipulates that, in the absence of any indication of the LGAA, the law of the country where the award was made shall be taken as the LGAA. This means that the law of the seat shall be the LGAA in the absence of any indication. An application of the same is visible in the French case of Kabab-ji S.A.L. v. Kout Food Group (Kabab-ji). The court in Kabab-ji used the NY Convention to conclude that the French law, which was also the seat of the arbitration, shall govern the arbitration agreement.  Interestingly, in Disortho, despite the contractual agreement regarding the arbitral award to be in consonance with the Colombian law, the court held that no seat has been selected and went against Article V(1)(a) of the NY Convention.

Second, the Disortho decision, with its approval for cases like Enka, seems to be endorsing a limited application of the separability doctrine. There are two strong arguments against such a view: (i) the Indian idea of separability is that of substantive independence; and (ii) the UK Law Commission has argued for a different understanding of separability (page 13) than the one developed in cases such as Enka to govern the law on determination of LGAA. The same has been included in the recent Arbitration amendment to the English Arbitration Act 1996. 

While (ii) above highlights that the SC in Disortho relies on outdated judgments, we shall now see how the SC has also gone against the understanding of separability under the Indian arbitration jurisprudence. In India, it has been held (paragraph 112) that the principle of separability does not only operate for purposes of determining the jurisdiction of the arbitral tribunal. It encapsulates the general rule on the substantive independence of an arbitration agreement. In fact, the SC has also previously used this understanding of separability to hold (paragraph 60-62) that there shall be no confusion between the law governing the main contract and the LGAA. This implies that the separability doctrine under the Indian law is not only about conferring jurisdiction on the arbitral tribunals in cases of invalidity of the main contract but can be extended beyond that. Furthering this idea, the reduction of separability as only a rescuer of the arbitration clause upon the invalidation of the main contract is not in consonance with the Indian law. Thus, the SC in Disortho, by placing an unsuspecting reliance on the English standards, has gone against the understanding of separability under the Indian jurisprudence itself.

Conclusion

Therefore, the SC decision in Disortho marks a concerning departure from established principles on seat designation and LGAA determination. The Court not only disregarded the clear indications of Colombia being the seat of arbitration but also laid down a problematic precedent for the future cases concerning the LGAA determination. Such an approach undermines principles of party autonomy and the separability doctrine. A more principled and seat-centric approach for LGAA determination would lead to upholding the above principles.