NATIONAL LAW INSTITUTE UNIVERSITY

BHOPAL

INTERNATIONAL TRADE LAW – I

PROJECT

JURISDICTIONAL ISSUES IN SETTLEMENT OF DISPUTED OF

INTERNATIONAL CONTRACTS

SUBMITTED TO - PROFESSOR MONIKA RAJE

SUBMITTED BY - VINITA SOLANKI 2012B.A.LLB87

1
TABLE OF CONTENTS

Introduction.............................................................................................3
Existence and validity of the arbitration agreement...........................4
Scope of the arbitration agreement.......................................................7
Arbitrability of the said dispute............................................................9
Seat of the arbitral tribunal.................................................................11
Conclusion.............................................................................................13

2
INTRODUCTION
International economic cooperation has increased exponentially in the past decade and has
resulted in a number of cross border contractual disputes and complex questions of law such as
choice of governing law, jurisdiction of the chosen forum, consequences of ambiguity of
contractual provision et cetera. Litigation is not a viable alternative for dispute settlement on the
international stage due to the costs involved.

Arbitration, sometimes preceded by some non-adjudicatory method of dispute resolution, has

emerged as the popular method due to its well-known advantages. Although it is worth
reiterating that it gives parties the leeway to appoint mutually agreeable arbitrators who may be
experts in the field of the contract or the said dispute and allows further cooperation between the
parties by preventing court intervention. It is also easier to enforce arbitral awards as opposed to
judgments rendered by the courts across international boundaries by virtue of their being party to
certain international convention and treaties. However, a number of objections have been raised
to the jurisdiction of the arbitral tribunal constituted under the arbitration agreement (hereinafter
‘the Agreement’) entered into by parties arising out of the lacunae in drafting of such
agreements.

Owing to the foregoing reasons and existence of extensive research on jurisdictional issues of
courts, this project shall restrict itself to four of the most important jurisdictional issues in
arbitration of international contracts with no intention to elaborate on international contracts
themselves, the method of determining arbitrability used by different fora or other related topics.

The project is divided into six parts comprising an introduction, the issues of existence and
validity, scope of the Agreement, arbitrability, seat of arbitration and conclusion. It discusses the
questions of appropriateness of court determination of validity of arbitration agreement, self-
determination of jurisdiction and construction of the Agreement by the arbitral tribunal,
connotation of ‘arbitrability’, liberal approach to objective arbitrability and proper law as
affected by the seat.

3
EXISTENCE AND VALIDITY OF THE ARBITRATION AGREEMENT
Consent and intention of the parties is of utmost importance in the formation of a valid
arbitration agreement and its existence may be challenged in the absence of consent. Parties also
challenge existence of the Agreement to avoid arbitration but an unequivocal and valid clause
will prevent or other legal requirement may prevent them from doing so 1. The identity of the
parties is also fundamental to the arbitration agreement.2

A number of factors affect the formal and substantive validity of arbitration agreement.
Substantive validity is vitiated by misrepresentation, the dissolution of the chosen institution,
ambiguity, mistakes regarding the relationship between the arbitrator and parties, 3 the insolvency
of the parties, the exclusion of statutory rights and remedies and the lack of arbitrability.

Formal validity of international arbitration agreement includes “written requirement, signature or

exchange” of written communication. Article II (1), II (2) of New York Convention, 1958,
Article VII (2) of UNCITRAL Model Law on International Commercial Arbitration and Article
178(1) of Swiss Law on Private International Law are provisions that deal with ‘agreement in
writing’. Even as Courts differ on the measure of strictness with which to implement the
requirements for written agreements as laid down in the New York Convention, S. 5 of English
Arbitration Act, 1996 recognizes categories of oral arbitration agreements.

Kompetenz-Kompetenz rule

Lex loci arbitri grants the arbitral tribunal the necessary competence to decide on its own
jurisdiction, which is widely accepted as the kompetenz-kompetenz rule.4 Legislations such as
the Indian Arbitration and Conciliation Act 1996, the English Arbitration Act 1996, Commercial
Arbitration Rules of American Arbitration Association and ICC Arbitration Rules expressly
confer upon the arbitral tribunal the power to rule on its own jurisdiction, including any
objections to the existence, scope or validity of the arbitration agreement.

1
Entico Corporation Ltd v UNESCO [2008] EWHC 531 (Comm)
2
Internaut Shipping GmbH and Sphinx Navigation Ltd of Liberia v Fercometal Sarl [2003] EWCA Civ 812
3
Consorts Ury v SA Galeries Lafayette [1975] Rev Arb 235
4
Gary B. Born, International Arbitration Cases and Materials ( South Asian Reprint edn, Wolters Kluwer Law &
Business 2011) 855

4
Traditionally, however, the courts have decided objections to the existence of a valid arbitration
agreement.5 The U.S. Supreme Court in John Wiley & Sons, Inc. v Livingston6 explained – “the
duty to arbitrate being of contractual origin, a compulsory submission to arbitration cannot
precede judicial determination that the arbitration agreement exists and is valid.” Likewise, in
Kaye v Nu Skin UK Ltd.,7 the question of validity was discussed by the Courts instead of the
arbitral tribunal. Allianz Spa and anr v West Tankers Inc.8 has illustrated that despite the
existence of kompetenz -kompetenz rule; it has not been implemented in its real form. In the said
case the seat of arbitration was London, however, the Italian court ruled on its jurisdiction and
the validity of the arbitration agreement applying Italian law on a challenge by West Tankers.

Courts will usually grant a stay of proceedings9 in favour of arbitration unless the arbitration
agreement is null and void, inoperative or incapable of being performed. 10 For instance, in JSC
BTA Bank v Ablyazov and ors.,11 the Court stayed the proceedings against the defendant in the
absence of ‘nullity’ or ‘voidability’ of arbitration agreement.

As per Indian law, the courts are under an obligation to determine whether the agreement is
valid, operative and capable of being performed at the threshold of arbitration. 12 Following the
precedent of SBP Co v Patel Engineering13 the court in Chloro Controls India (P) Ltd v Severn
Trent Water Purification Inc14 held that arbitral tribunal cannot review the Court’s decision on
the validity of the arbitration agreement.

However, in the recent decision of Bio Power Limited v Dalkia India Pvt. Ltd.,15 the court held
that the arbitral tribunal is allowed it to rule upon the existence and validity of the arbitration
clause independent of the courts.

5
Steven H. Reisberg, ‘The American Review of International Arbitration: The Rules Governing Who Decides
Jurisdictional Issues: First Options v Kaplan Revisited’ Vol 20, No 2
6
[1964] 376 US 543
7
[2009] EWHC 3509 (Ch)
8
C-185/07 [2009] EUECJ
9
The English Arbitration Act 1996
10
Hotels Com v Zuz Tourism Ltd [2006] Y B Comm Arb 791 (Israeli S Ct)
11
[2011] EWHC 587 (Comm)
12
Chloro Controls India (P) Ltd v Severn Trent Water Purification Inc [2013] 1 SCC 641
13
[2005] 8 SCC 618
14
Chloro (n 11)
15
Arb P No 184/2012

5
In Apollo Computer, Inc. v Berg,16 there was a binding arbitration agreement in which the
disputes had to be decided according to the arbitration rules of the ICC. The contract conferred
upon the arbitrator jurisdiction to determine the validity of the Agreement.

Judicial intervention in the arbitral process introduces litigation cost; increases time consumed
and discourages arbitral remedies. Courts should compel specific performance of arbitration
agreement in case a valid agreement exists. If a court intervenes at the very threshold of arbitral
proceedings, it vitiates the latter’s purpose.

Doctrine of Separability

The principle of treating the arbitration agreement as being independent from the parent contract
was established in the landmark decision in Fiona Trust and Holding Corp v Privalov.17 It is
established that the arbitration agreement must be treated as a "distinct agreement" and can be
rendered void or voidable only on grounds which relate directly to the arbitration agreement and
that it shall not be affected by a possible invalidity of the main contract. This was reflected in
Harbour Assurance Co. (UK) Ltd. v Kansa General International Insurance Co Ltd.,18 wherein,
the Court of Appeal held that although the underlying contract was illegal the arbitration clause
could still survive as the illegality of the underlying contract did not impeach the arbitration
agreement. However, where a contract is void ab initio, the arbitration agreement shall also be
considered non-existent.19 Subsequently, the courts ruled in Buckeye Check Cashing v
Cardegna20 that a challenge to the validity of the main contract should be made before arbitrators
in face of a valid and enforceable arbitration agreement.

16
[1989]886 F 2d 469, 473
17
[2007] Bus LR 1719 at [17]
18
[1993] QB 701
19
[2006] 546 US 440
20
[2006] 546 US 440

6
SCOPE OF THE ARBITRATION AGREEMENT
Once the existence and validity of the arbitration agreement has been conclusively determined,
the parties may object to the arbitrability of the said dispute or to it being within the ‘scope’ of
the arbitration agreement, which refers to the subject matter it includes within its circumference.

Arbitration being a consensual mode of dispute resolution, party autonomy is of primary

importance for determining the scope of the Agreement. It encompasses two elements: free
consent and intention of the parties. Parties should either expressly consent to subjection of the
substance of the said dispute to arbitration, at least have intended to do so, or it must have been
in the contemplation of both parties that such a dispute may arise and may, subsequently, be
settled by arbitration. Also, it is important that such consent is given freely as proof of corruption
leads to a challenge of the Agreement itself.

A three part inquiry was laid down for proper construction of the terms of the contract in
Cummings v FedEx21 as follows:

1. The court should classify the clause as being narrow or broad.

2. It should then determine if the dispute, prima facie, falls within its purview or is collateral
to it.
3. If the clause is broad, then, collateral issues would also fall within its purview but not if
it’s narrow.

It was held that the phrase ‘arising out of’ is wider than ‘arising under’ and includes tort claims
related to the main contract22. The liberal approach was also developed by the US 23, UK24, and
Germany25 on the premise that any two rational parties will intend the disputes arising out of one
agreement to be heard by a single forum to avoid fragmentation and duplicity of proceedings

21
[10th Cir 2005] 404 F.3d 1258, 1261
22
Aggeliki Charis Compania Maritima SA v Pagnan SpA [1995] 1 Lloyd's Rep 87
23
Invista North America SARL v Rhodia Polyamide Intermediates SAS [2007] 503 F. Supp. 2d 195
24
Fiona Trust and Holding Corp v Privalov [2007] Bus LR 1719 at [17]
25
[1990] Arbitration International vol. 6, No. 1 p. 79

7
regarding the same26. Public policy also plays a role in determination of scope as courts work on
a ‘presumption in favour of or against arbitration’ of a particular issue.

In brief, the principles established in the landmark judgment of AT&T27 were as follows:

1. Arbitration is a matter of contract and parties cannot be forced to resolve their disputes in
a manner they did not agree upon.
2. Parties are free to assign jurisdiction to determine scope to the arbitrator but not the
validity of the Agreement.
3. The court shall not rule upon the merits of the underlying dispute while ruling upon the
validity of the Agreement.
4. The court shall decide scope presuming that the parties had agreed to arbitrate the subject
matter.

It was questioned in Conoco Phillips Inc. v Local United Steelworkers Int’l Union 28 whether the
parties to a collective bargaining agreement (CBA) had agreed to arbitrate the scope of the
Agreement. The Union filed a grievance after an employee was discharged consequent to his
failing of a drug test. The CBA specifically excluded from arbitration matters of employment
and discharge. The arbitral tribunal determined he had jurisdiction to hear the matter and
delivered an award against the employer which was subsequently vacated by the Court of Appeal
in the 5th Circuit. It declared that the language of the Agreement was specific and exclusive and
that the parties did not intend to confer on the arbitrator jurisdiction to rule on its own
jurisdiction. This was in line with principles 1, 2 and 4 cited above.

In Stolt-Nielsen, S.A. v Animal Feeds Int’l Corp.29, the Supreme Court held that the arbitrator
does not have the authority to permit class action unless there is a specific contractual basis to do
so. In light of this ruling, there was speculation of whether class arbitration will be permitted in
Oxford Health Plans LLC v John Ivan Sutter 30 under a clause, stating that no disputes shall be
referred to a civil court. The Supreme Court upheld the construction of the arbitration clause that
class arbitration, though not specifically mentioned, was valid.

26
Fiona (n 25)
27
AT&T Technologies Inc v Communications Workers of America [1986] 475 US 643
28
[2014] No. 12-31225
29
[2010] 130 S Ct 1758
30
[2013] 133 S Ct 2064

8
Arbitration clauses maybe incorporated by explicit reference to other documents containing
agreements to arbitrate. For instance, when only the latter of the two successive contracts in the
same chain of transaction contains an arbitration clause, it may be extended to the disputes
arising out of the first contract, as seen in Norscot Rig Management Pvt. Ltd. v Essar Oilfields
Services Ltd.31 an initial Memorandum of Understanding for purchase of certain equipment was
converted into Operations Management Agreement. Subsequently, a dispute arose due to sale of
defective equipment and petitioners approached the arbitral tribunal, which was challenged as
being without jurisdiction in the present matter. Justice Burton, however, held that although the
dispute did ‘not arise out of’ the OMA is ‘related to’ it, therefore the arbitral tribunal had
jurisdiction. English judges tend to place reliance in the case of Fiona Trust32 to give a liberal
interpretation favouring arbitration as was done by Blackburne J., in Wedlake Bell v Jones33
wherein a completely distinct Severance Agreement was subjected to arbitration despite the
absence of such a clause, as the contract made reference to rights and liabilities of partners which
arose out of the Partnership Agreement, referring ‘all disputes’ to arbitration.

31
[2010] EWHC 195
32
Fiona (n 25)
33
[2007] EWHC 1143 (Ch)

9
 ARBITRABILITY OF THE SAID DISPUTE
The U.S. Supreme Court has added various connotations to ‘arbitrability’ and perpetuated misuse
since its landmark judgment of First Options34, the most recent example being the case of Nitro-
Lift Technologies, LLC v. Howard,35 wherein the U.S. Supreme Court discussed the two
threshold issues of arbitrability: its validity and enforceability, and whether the dispute fell
within the scope of the agreement.

However, there is broad consensus in the remainder of the international community that the
question of arbitrability relates to; (i) whether the signatory parties were entitled to submit their
disputes to arbitration, and (ii) whether the said dispute is capable of being determined by an
arbitral tribunal. The former is known as subjective and the latter as objective arbitrability.

Arbitrability is often considered to be a choice-of-law problem. 36 Nonetheless, it is a problem of

jurisdiction. “It arises from the scope of national legal order for certain matters of persons the
state forum has exclusive jurisdiction and thus does not recognize unilaterally jurisdiction to any
other forum, arbitral or state.”37 The Indian jurisdiction recognizes arbitrability as a problem that
“would result in rendering the claims or subject matter presented before the Arbitral Tribunal as
non-arbitrable either being barred by law or due to falling outside the scope of the and thereby
taking away the jurisdiction of the Arbitral Tribunal to rule on the said claims would certainly be
included in the plea of ‘does not have jurisdiction’, as prescribed under Section 16 (2) of the
Arbitration and Conciliation Act, 1996.”38 Once this is acknowledged, there is a strong argument
favouring the arbitral tribunal as the proper forum to decide whether or not it has jurisdiction
over the question of arbitrability, keeping the general rule of kompetenz-kompetenz.

Arbitrability is determined by the law applicable as per conflict-of-law analysis in case of

international and national laws in case of domestic arbitration while proceedings are going on

34
Fiona (n 25)
35
[2012] 568 U.S. 133 S. Ct. 500
36
Lew, Mistelis And Kroll, Comparative International Commercial Arbitration (Kluwer 2003) 196
37
Loukas A. Mistelis & Stavros L. Brekoulakis (eds), Arbitrability: International And Comparative Perspectives,
(Wolters Kluwer 2009) 125
38
National Highways Authority India v MECON-GEA Energy Systems India Ltd JV O.M.P. 790/2012

10
and by the national law of the country where enforcement is sought at that time. 39 Aspects of
arbitrability like its method of determination in different countries and fora are beyond the scope
of this essay.

Subjective arbitrability is the legal capacity of a person to enter into an arbitration agreement.
The general rule is that any natural or legal person capable of entering into a valid contract has
the capacity to conclude a valid arbitration agreement 40, excluding some state controlled
economies lacking capacity due to absence of foreign trading license.

Insolvency of a party is an issue of subjective arbitrability as is seen in Elektrim SA v Vivendi

Universal41, the Swiss Supreme Court had upheld the decline of jurisdiction by the arbitrators on
declaration of insolvency of Elektrim in its country of origin, Poland. The case laid down that the
legal capacity of an entity was determined by the law at the place of incorporation. This decision
was met with massive criticism from the arbitration community which argued that the legislation
that was relied on, Polish Bankruptcy and Reorganization Act, did not affect the capacity of a
person to be party to a foreign seated arbitration. This approach was revisited and decided
contrarily in a recent decision dated 16/10/2012 (case reference 4A_50/2012), establishing that
Swiss lex arbitri governed the capacity of all parties to a Switzerland-seated arbitration, and the
only requirement under it was legal personality.

Despite the recent trend of bringing most disputes within the purview of arbitration for the ease
of conduction of business, certain matters are made determinable exclusively by the national
courts of the country to prevent questions of public policy and national interests from being
determined by arbitrarily constituted tribunals. This is objective arbitrability. Each country has a
different law, however, the arbitrability of certain matters like crime, human rights, investment
in natural resources, securities transaction, insolvency, anti-trust, corruption and intellectual
property is somewhat disputed42.

39
UNCITRAL Model Law Article 1(5)
40
Belgium, Judicial Code Article 1676(2)(1)
41
[2007] SA Rev 1 App LR 01/ 19
42
Sutton, Gill, Gearing, Russell on Arbitration, ( 23rd edn, London Sweet & Maxwell 2009)

11
SEAT OF THE ARBITRAL TRIBUNAL

The choice of seat of arbitration is one of the primary questions for the contracting parties as
the arbitral tribunal derives its authority in accordance with and is governed by the law of the
seat i.e. lex arbitri. Even though there is no consensus among different jurisdictions as to
which law, the lex arbitri or substantive law i.e. lex causae, should govern the agreement, the
scales weigh in favour of lex arbitri.

The substantive law, governing law and lex fori are usually the same.43 However, there exist
cases where all these laws differ and there is discrepancy in their application. Where the
parties have not expressly specified the law governing the arbitration agreement and the
conduct of arbitration, then lex arbitri would apply which is also known as curial law.

The seat of arbitration may be different from its venue. Although the two are often used
interchangeably, it is the seat which determines the legal framework within which the
arbitration takes place, not the location where the parties or the tribunal choose to conduct the
proceeding for reason of convenience of the parties, witnesses or the tribunal itself. 44 This is
permitted under most national laws, Article 20 of UNCITRAL Model law and institutional
arbitration rules such as Article 18 of UNCITRAL Arbitration Rules, Article 16(2) of London
Court of International Arbitration Rules and Article 18 of ICC Rules of Arbitration. In Black-
clawson v Papierwerke45 and C v D,46 it was stated that it is rare for parties to choose a lex
arbitri distinct from the law of the seat. Also, arbitration in contracts that do not specify
procedural rules for appointment of the tribunal and the conduct of arbitration will be
determined in accordance with the law of the seat.

If the arbitration agreement does not specify a seat for the arbitration then the lex arbitri
cannot be determined until a seat is agreed upon by the parties or chosen by the arbitral

43
Miller v Whitworth Street Estates Ltd [1970] 1 Lloyd's Rep 269
44
Redfern and Hunter, The Law and Practice of International Commercial Arbitration (London Sweet & Maxwell
1999) 69
45
[1981] 2 Lloyd’s Rep 446, 483
46
[2007] EWCA Civ 1282

12
tribunal or a nominating authority.47 Often, the arbitration agreement is found to be very
closely connected with the law of the seat, which is also the place where the award is treated
as "made" for the purpose of the New York Convention.48

In U&M Mining Zambia Ltd v Konkola Copper Mines,49 it was held that in the absence of any
other indication, “place” meant “seat.” Likewise, in Shashoua v Sharma50 the specification of
a ‘venue’ but no seat was considered as strong evidence of intention that the seat should be in
the same jurisdiction. Notably, there was no express choice of alternative curial law.

The recent case of Enercon India v Enercon GMBH51 discussed the laws that may potentially
govern the arbitration agreement. The court held that the geographically convenient place like
the venue of arbitration, London, should not be confused with the seat of arbitration which
was undoubtedly India. The parties had clearly stated the curial law to be the Indian
Arbitration Act, 1996 and therefore, could not have intended the seat of arbitration to be
London when all other applicable laws were Indian. It is seen that the Indian Courts give
preference to the substantive law of the contract and it is considered to have the “closest
connection” with arbitration agreement unlike England where the law of the seat of arbitration
qualifies the “closest and real connection” test. Recently, in Sulamerica Cia Nacional De
Seguros v Enese Engenharia52 stated that the seat of the arbitration determines the curial law
and concluded that the law with which the agreement to arbitrate had its closest and most real
connection was the law of England, i.e. law of the seat rejecting the appellant’s argument that
the arbitration agreement was governed by Brazilian law, the substantive law of the contract.

Similarly, in Habas Sinai v VSC,53 where the substantive and governing laws were not
specified, the closest connection test was applied and the law of the seat was concluded to be
the law applicable to the arbitration agreement. As an exception to the above stated general
approach of the English Courts, in Braes of Doune Wind Farm (Scotland) Ltd v Alfred

47
Andrew Tweeddale Keren Tweeddale, Arbitration of Commercial Disputes, International and English Law and
Practise, (OUP Oxford 2007)
48
Dicey, Morris & Collins, The Conflict of Laws, (14th edn, Sweet and Maxwell 2006)
49
[2013] EWHC 260 (Comm)
50
[2009] EWHC 957 (Comm)
51
Civ App 2086/7 of 2014
52
[2012] EWCA Civ 638
53
[2013] EWHC 4071 (Comm)

13
McAlpine Business Services Ltd54 the English Arbitration Act, 1996 was held to be applicable
even when the seat was designated as Scotland.

CONCLUSION
The project has briefly discussed the formal and substantive requirements for a valid arbitration
agreement, effective implementation of kompetenz-kompetenz principle, importance of consent
and intention of parties in determination of scope, deference to arbitrators’ interpretation of the
Agreement, the transition from a restricted to a liberal approach to arbitrability of disputes in
three core areas and the importance of choice of seat.

From the above discussion, it would be reasonable to conclude that Court’s determination of
disputed existence and validity of the Agreement is in line with the principle of natural justice,
namely, nemo judex in causa sua. This is especially important in light of the recently developed
court tendency of giving extreme deference to the arbitrators’ determinations and also the fact
that this challenges the fundamental presumption that the parties mutually agreed to submit the
dispute to arbitration.

Further, the court should then determine whether the parties have expressly conferred upon the
tribunal the jurisdiction to determine scope of the Agreement. If it finds the answer in the
negative, then, it should also determine the scope before referring the dispute to arbitration since
arbitration is a consensual process and the parties should not be forced to arbitrate anything more
than what they agreed to. This will also preclude the contingency of the arbitrator declining
jurisdiction forcing the parties to come back to the court. It is, therefore, evident that a well
drafted arbitration agreement with clear statement of the parties’ intention is the only measure
that will allow the parties to enjoy the benefits of arbitration.

The seat of arbitration should be carefully chosen by the parties themselves as it has a bearing on
lex arbitri, which further has a bearing on the award itself. However, no general rule should exist
as to whether the law of the arbitration agreement or substantive law should govern the
arbitration proceedings. It should be determined, in each case upon its facts, after considering
which of the two is likely to deliver the most consistent result on enforcement. Lastly, the
approach of the English courts is bent in favour of expansion of their own jurisdiction and their
54
[2008] EWHC 426

14
position changes in case the seat is not England, therefore, their approach should not be regarded
as standard.

15