Supreme Court of India: How to determine the Applicable law of Arbitration Agreement?
In Disortho S.A.S. v. Meril Life Sciences Pvt. Ltd. 2025 INSC 352, the Supreme Court of India was called upon to decide how to determine the applicable law of arbitration agreement. This was in light of a governing law clause in the underlying contract conferring jurisdiction to the Indian Court in respect of all issues arising out of contract and a multi-tier dispute resolution clause providing for institutional rules, place of arbitration, venue of arbitration and the applicable law of arbitral award. Law on this issue is divided in two line of authorities. First which suggests that the applicable law of arbitration agreement is mostly the applicable law of underlying contract only and second which suggests that applicable law of arbitration agreement is the law of the seat of arbitration. This case was peculiar because the parties have not agreed on the applicable law of arbitration and therefore, the Court had to decide which line of authorities are applicable on the given facts.
Factual Matrix
A Colombian company, Disortho S.A.S. entered into a distributorship agreement with an Indian company, Meril Life Science Pvt. Ltd. Disputes arose between the parties which led to invocation of the dispute resolution clause. But in terms of the clauses of the contract, it was not that easy. There were two clauses in the contract which affected the arbitration and its related processes. One was governing law clause i.e., Clause 16.5 which provided that the contract is governed and construed in accordance with Indian law and all matters arising as a consequence of the contract are subject to the jurisdiction of courts in Gujarat, India.
On the other hand, the clause which was at the heart of deliberation was Clause 18 which was the dispute settlement clause. It was a multi-tier disputes resolution clause which provided the dispute settlement by conciliation followed by arbitration. However, that was not the end of the story. By way of this clause, parties have agreed certain peculiar aspects of any prospective arbitration between them. This included agreement on rules of arbitration institution (i.e., Rules of Conciliation & Arbitration Centre of the Chamber of Commerce of Bogota SC), place of arbitration (Bogota DC), venue of arbitration (i.e., Premises of centre for Conciliation and Arbitration of the Chamber of Commerce of Bogota DC), the applicable law of award i.e., Colombian law.
The said Clauses reads as under:-
“16. Miscellaneous
This agreement shall be governed by and construed in accordance with the laws of India and all matter pertaining to this agreement or the matters arising as a consequence of this agreement with be subject to the jurisdiction of courts in Gujarat, India.
18. Direct Settlement of Disputes
The Parties mutually agree and pact that any dispute, controversy or claim arising during this Agreement related to subscription, execution, termination, breach, as well as non-contractual relationships, related to the clauses mentioned above; They may be submitted to conciliation in accordance with the Rules of Arbitration and Conciliation of the Chamber of Commerce of Bogota DC., or instead. of this city, where the Director of the Centre so determine.
Similarly, the Parties mutually agree and pact that if the dispute or difference has not been settled in conciliation, or to the extent that has not been resolved; it will be committed to Arbitration by either party for final settlement in accordance with the Arbitration and Conciliation Center of the Chamber of Bogota DC. The Arbitral Tribunal shall consist of one (1) arbitrator in cases of minor or no value E according to the Rules of Conciliation and Arbitration Center of the Chamber of Commerce of Bogota DC. Also, in the event of greater amount, the Court of conformity shall comply with the Regulations of the Center for Conciliation and Arbitration of the Chamber of Commerce of Bogota DC., With three (3) arbitrators appointed by the Centre and by drawing lots. The arbitration will take place in Bogota DC. On the premises of Center for Conciliation and Arbitration of the Chamber of Commerce of Bogota DC., or at the place where the Director of the Centre as determined in this city. The award shall be in law and standard will be applicable Colombian law governing the mailer, Expenditure in the conciliation and arbitration proceedings shall be borne equally.”
Parties Contentions
Since the issue involved in the present case was a question of law, the Court has not dealt with the rival contentions of the parties and instead dealt with the position of law only. However, it is apparent from the limited facts available that according to Disortho S.A.S., the courts in India had jurisdiction to appoint an arbitrator between the parties. However, as per Meril Life Science Pvt. Ltd., the courts in India lacked jurisdiction in this regard.
Issue before the Court
In nutshell, the question to be decided by the Court was how to determine the applicable law of arbitration agreement.
Observations of the Supreme Court
The Supreme Court observed as under:-
- Law governing the arbitration agreement inter alia serves as a guiding principle when the dispute resolution mechanism is unclear, inconsistent or when conflicting dispute resolution clauses are bundled together in the same agreement.
- There are four choices of law in arbitration i.e., (i) the law governing the ‘arbitration’ (ii) the proper law of ‘arbitration agreement’ (lex arbitri) (iii) the proper law of contract (lex contractus) and (iv) the procedural rules which apply in the arbitration.
- Law governing the arbitration agreement may differ from law governing the underlying contract (lex contractus) and the procedural law of arbitration (lex fori).
- These choices are either expressly provided or implied by the parties involved.
- The law governing the ‘arbitration agreement’ determines the validity, scope, and interpretation of the agreement. In contrast, the law governing the arbitration itself is concerned with determining which court has supervisory jurisdiction over the arbitration.
- While parties may elect to differentiate between the law governing the arbitration agreement and the law governing the arbitration itself — such a distinction warrants caution. A distinction should not be readily drawn unless the parties intended to preserve such a distinction.
- Invariably, these concepts are subsumed in each other. They are inherently intertwined as a part and parcel of the lex arbitri. Thus it can be seen as under:-
- Matters such as filling vacancies on arbitral tribunals and the removal of an arbitrator through the exercise of supervisory jurisdiction, in the absence of a clear mechanism within the arbitration agreement, should be normally governed by the law applicable to the arbitration agreement (lex arbitri) itself, rather than by the procedural rules that govern the arbitration process (lex fori) since it is the lex arbitri that governs the arbitration and its associated processes. However, this may not be the position in all cases as the mutually agreed terms may stipulate otherwise.
- As noted by the UK Supreme Court in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb 2020 UK SC 38, there are two line of authorities on how to determine applicable law of arbitration agreement. One which suggest that the lex contractus should govern the arbitration agreement and second which law of the seat of arbitration should typically govern the arbitration agreement.
- The tie breaker is provided in Enka (supra) as under:-
- The law governing the arbitration agreement may differ from the law governing the contract. The former should be determined through conflict of law rules.
- The law governing the arbitration agreement is the law chosen by the parties. If no such choice is made, the law most closely connected to the agreement applies.
- However, the law chosen for the arbitration agreement is determined by interpreting the agreement, and if necessary, the entire contract using rules of contractual interpretation.
- When the law governing the arbitration agreement is not specified, the law of the contract (lex contractus) usually applies.
- Selecting a country for the seat of arbitration does not automatically alter the presumption that lex contractus governs the arbitration agreement.
- Factors that may override this presumption may include a situation when the law of the seat mandates that the arbitration agreement must be governed by the law of that country or when there is a serious risk that the agreement will become ineffective, or the dispute will become inarbitrable, if governed by the same law as that of the contract or where the seat is deliberately chosen as a neutral forum. These factors will displace the presumption in favour of lex contractus governing the arbitration agreement. These factors are not exhaustive and there may be other additional factors negating the presumption.
- Where a particular place is chosen as the venue in contrast to the seat of arbitration, a place being chosen, does not by itself justify an inference that the arbitration agreement is intended to be governed by the law of this venue.
- In the absence of any choice of law governing the arbitration agreement, the arbitration agreement will be governed by the law with which it is most closely connected. The close connection test applies only when the law governing the arbitration agreement cannot be ascertained even after applying the earlier paragraphs. In such a case, the law applicable to the seat of arbitration will be the law having the closest connection to the arbitration even if it differs from the parties’ contractual obligations. The closest connection test and a presumption in favour of seat will only apply when the contract does not stipulate the lex contractus.
- Cases relating to attempt to resolve a dispute through good faith, negotiation, mediation, etc. will not generally provide reason to displace the law of the seat of arbitration.
- The law postulated in Enka (supra) is good and correct legal position except on the aspects where the Courts in India have taken a different view. Consistency
- Enka (supra) discusses Sulamérica Cia Nacional De Seguros S.A. and Others v. Enesa Engenharia S.A. and Others [2012] EWCA Civ 638 wherein the English Court of Appeal observes that the law governing the arbitration agreement may differ from the law of the contract. However, it is reasonable to presume that the parties intended for their entire relationship to be governed by the same system of law throughout the contract. In this context, a distinction is made between a stand-alone arbitration agreement and one that is embedded within a contract. In the former, a choice of seat of arbitration becomes highly significant, and the law of the seat would likely govern the arbitration agreement. However, when the arbitration agreement forms part of a contract, the express choice of a lex contractus strongly indicates the parties’ intention. It would generally be inferred that the arbitration is governed by the same law as the substantive contract. However, this presumption is rebuttable as previously highlighted.
- Even when the arbitration agreement is part of the contract, the court must conduct a Three steps Inquiry / Three-fold test for determining the law governing the arbitration agreement i.e.,
- Closest and most real connection
- Second step is applied when the first step is negative, and the third step is applied when the first and second steps are negative.
- To resolve conflicts between competing or inconsistent clauses, the court should read the contract as a whole, striving to give effect to all its provisions. One clause may influence the content of another, and a clause should not be rejected unless it is clearly inconsistent or repugnant to the rest of the agreement. Only when such a reconciliation is not possible will the court consider one clause to prevail over an incorporated standard.
- A clause should not be dismissed as redundant unless it is manifestly inconsistent with or repugnant to the rest of the agreement. This is particularly important when both parties have agreed to the clauses. The Court must seek to interpret the clauses in a manner that harmonizes their provisions, giving effect to each wherever possible.
- The interpretation of a contract involves determining the meaning that a reasonable person, with all relevant background knowledge available to the parties at the time of the contract, would derive from the document.
Held
- Clause 16.5 is clear and unambiguous. It explicitly states that the entire agreement shall be governed by and construed in accordance with the laws of India, and all matters arising from the agreement shall fall under the jurisdiction of the courts in Gujarat, India. Given this, it is reasonable to assume that, when drafting this clause, the parties were fully aware of Clause 18, which provides for arbitration and conciliation under the Arbitration and Conciliation Centre of the Chambers of Commerce in Bogota.
- Bogota has been designated as the venue for conciliation and arbitration, while the courts in Gujarat, India, retain exclusive jurisdiction over disputes. This must, unless there is a divergence in lex arbitri, include jurisdiction over appointments and act as a conduit for the arbitration in Bogota, Colombia.
- The law governing the arbitration agreement, being Indian law, means that its validity, scope, and interpretation will be determined in accordance with Indian law.
- Upon a consistent reading of the Distributor Agreement, it is clear that only the courts in Gujarat, India, are referenced. While it is acknowledged that the venue for arbitration is Bogota, Colombia, and that the procedural rules of the Arbitration and Conciliation Centre at the Chambers of Commerce in Bogota are to apply, this does not diminish the supervisory powers of Indian courts, as explicitly outlined in Clause 16.5.
- Applying the three-step test developed by Sulamérica Cia (supra), first, neither Clause 16.5 nor Clause 18 explicitly stipulates the governing law of the arbitration agreement. Therefore, the next step of the test, which involves identifying the parties’ implied choice of law for the arbitration agreement. At this stage, there is a strong presumption that the lex contractus, i.e., Indian law, governs the arbitration agreement. This presumption may be displaced if the arbitration agreement is rendered non-arbitrable under Indian law. But that is not the case here.
- Furthermore, mere choice of ‘place’ is not sufficient, in the absence of other relevant factors, to override the presumption in favor of the lex contractus. In this case, it is important to note that no seat of arbitration has been explicitly chosen.
- Thus, at this second stage of the inquiry, it is concluded that the parties have impliedly agreed that Indian law governs the arbitration agreement, and the controversy can be resolved accordingly.
- The use of the premises at the Centre, or any other location designated by the Director of the Centre in Bogota, does not imply that Colombian law governs the arbitration agreement. Although Clause 18 specifies that the award shall conform to Colombian law, this provision pertains solely to the arbitration proceedings or the award matters. It does not override or diminish the effect of Clause 16.5, which clearly stipulates that Indian law shall govern the agreement and the related disputes. The legal implications of this would include the applicability of the Indian Arbitration & Conciliation Act, 1996 and the appointment jurisdiction of Indian courts. The final portion of Clause 18 does not undermine the legal impact of Clause 16.5.
- In accordance with Clause 16.5 and 18, the procedural rules of the arbitration would be the rules of the Conciliation and Arbitration Centre of the Chamber of Commerce of Bogota DC, with Bogota DC as the venue of arbitration.
At the conclusion of the proceedings before the Supreme Court, the parties agreed to hold arbitration in India and requested the court to appoint a sole arbitrator. Therefore, the Supreme Court appointed a retired judge of a High Court as arbitrator to decide the disputes between the parties.