The Disortho v. Meril Landmark Ruling

The dispute arose from an International Exclusive Distributor
Agreement signed in May 2016 between Disortho S.A.S., a Colombian company,
and Meril Life Sciences Private Limited, an Indian company, for distributing
medical products in Colombia. The agreement contained two seemingly
contradictory clauses that created jurisdictional confusion:

Clause
16.5 stated that the agreement
“shall be governed by and construed in accordance with the laws of India
and all matter pertaining to this agreement…will be subject to the
jurisdiction of courts in Gujarat, India”.

Clause 18 provided for disputes to be resolved
through “Arbitration by either party for final settlement in accordance
with the Arbitration and Conciliation Center of the Chamber of Bogota DC”
with arbitration taking place in Bogota and awards governed by Colombian law.

The Legal Framework: Multiple Laws in
Play

The Supreme Court identified the
complexity arising from three distinct
legal systems that interact in cross-border arbitration:

·      
Lex-contractus: The law governing substantive
contractual issues

·      
Lex arbitri: The law governing the arbitration agreement and its
performance

·      
Lex-fori: The law governing procedural aspects of arbitration

The court emphasized that these legal
systems “may either differ or align, depending on the parties’
choices,” and noted that there may be “internal splits within these
legal systems”.

International Precedents and the
Three-Stage Test

The judgment extensively referenced the
UK Supreme Court’s decision in Enka
Insaat v. OOO Insurance Company Chubb, which established a comprehensive
framework for determining the law applicable to arbitration agreements. The court endorsed the three-stage inquiry from the earlier Sulamérica case:

1.       Express
choice of law governing the arbitration
agreement

2.       Implied
choice by the parties

3.       Closest
and most real connection test

The court noted that “the law
governing the arbitration agreement will be (a) the law chosen by the parties
to govern it or (b) in the absence of such a choice, the system of law with
which the arbitration agreement is most closely connected”.

Key Legal Principles Established

Presumption in Favor of Contract Law

The Supreme Court reaffirmed that when an arbitration agreement forms part of
a larger contract, there is a strong presumption that the law governing the
main contract (lex contractus) also governs the arbitration agreement. This presumption can only be displaced by specific factors
such as:

·      
Risk of
the arbitration agreement becoming ineffective under the contract’s governing
law

·      
Explicit
legal provisions requiring arbitration agreements to be governed by the seat’s
law

·      
Clear
indication that the seat was chosen as a neutral forum

Distinction Between Venue and Seat

The court clarified the important
distinction between the venue
(physical location) and seat (legal
jurisdiction) of arbitration. The mere choice of a venue “does not,
without more, sufficient to negate an inference that a choice of law to govern
the contract was intended to apply to the arbitration agreement”.

The Court’s Analysis and Decision

Applying the established legal
framework, the Supreme Court conducted a harmonious
interpretation of both clauses rather than treating them as irreconcilably
conflicting. The court concluded:

1.       Indian
law governs the arbitration agreement based on the express choice in Clause 16.5

2.       Indian
courts retain supervisory jurisdiction over the arbitration proceedings

3.       Bogota
serves as the venue for
arbitration proceedings with Colombian procedural rules applying

4.      The Arbitration and Conciliation Act, 1996 applies to these proceedings

The court emphasized that “Bogota
has been designated as the venue for conciliation and arbitration, while the
courts in Gujarat, India, retain exclusive jurisdiction over disputes”.

Practical Resolution

In a practical turn, both parties consented during the hearing to hold the
arbitration in India with a sole arbitrator. The Supreme Court appointed Justice S.P. Garg, a retired Delhi High
Court judge, as the sole arbitrator, with the arbitration to be governed by Delhi International Arbitration Centre
rules.

Broader Implications for International
Commerce

This judgment provides several
important takeaways for international commercial relationships:

Clarity in Drafting

The case underscores the critical importance of clear, consistent
dispute resolution clauses in international agreements. Ambiguous or
conflicting provisions can lead to expensive jurisdictional battles.

Predictability in Cross-Border Disputes

The court’s adoption of internationally
recognized principles from Enka Insaat
and Sulamérica enhances predictability and aligns Indian jurisprudence with
global best practices.

Harmonious Interpretation Approach

Rather than mechanically applying
conflict rules, the court’s approach of seeking
harmony between clauses provides a more commercial and practical resolution
method.

Conclusion

The Disortho v. Meril judgment represents a significant contribution to
Indian arbitration jurisprudence, particularly in the context of international
commercial disputes. By adopting well-established international principles
while maintaining respect for party autonomy, the Supreme Court has provided
much-needed clarity on jurisdictional issues in cross-border arbitration.

The decision reinforces that consistency and uniformity in applying
legal principles are crucial for ensuring fairness and comity in international
commerce and dispute resolution mechanisms. For practitioners and businesses
engaged in international trade, this judgment offers valuable guidance on
structuring dispute resolution clauses and understanding the interplay between
different legal systems in arbitration agreements.

This ruling will likely serve as a foundational precedent for future cases
involving conflicting jurisdiction and governing law clauses in international
arbitration agreements, contributing to India’s growing reputation as an
arbitration-friendly jurisdiction.