Source: Supreme Court 

Why in News? 

A bench of Justice Sanjay Kumar, Chief Justice Sanjiv Khanna and Justice KV Viswanathan held that a three-step test must be adopted to determine the law governing the arbitration agreement. 

• The Supreme Court held this in the case of Disortho S.A.S v. Meril Life Sciences Private Limited (2025). 

What was the Background of Disortho S.A.S v. Meril Life Sciences Private Limited (2025) Case?   

• Disortho S.A.S is a company incorporated in Bogota, Colombia, and is the petitioner in the present facts. 
• Meril Life Science Private Limited is a company incorporated in Gujarat, India, and is the respondent. 
• The two companies executed an International Exclusive Distributor Agreement on May 16, 2016, for distribution of medical products in Colombia. 
• Disputes later emerged between the parties. 
• Disortho has filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitral panel based on Clauses 16.5 and 18 of the Distributor Agreement. 
• Meril opposes the petition on jurisdictional grounds, arguing that these clauses do not grant Indian Courts jurisdiction to appoint arbitrators. 
• Clause 16.5 states that the Agreement is governed by Indian law and subject to jurisdiction of courts in Gujarat, India. 
• Clause 18 provides that disputes shall be submitted to conciliation under the Rules of the Chamber of Commerce of Bogota, and if not resolved, to arbitration at the Arbitration and Conciliation Center of the Chamber of Commerce of Bogota. 
• The case is complicated by divergence of opinion on determining jurisdiction in trans-border arbitration, involving interaction between three legal systems: lex-contractus (substantive contract law), lex arbitri (law governing arbitration agreement), and lex-fori (procedural arbitration law). 
• The conflict between contractual clauses 16.5 and 18 is creating a complex legal situation that is addressed by the three- judge bench in this case. 

What were the Court’s Observations? 

• The Court in this case cited the case of Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb (2020) where the UK Supreme Court discussed the law governing the arbitration. 
• In this case the Court followed the principles stipulated in Sulamérica Cia Nacional De Seguros S.A. and Others v. Enesa Engenharia S.A. and Others (2012), wherein the Court held that the law governing the contract may differ from the law of the contract. 
• The Court in the above case held that there is a distinction between a stand alone arbitration clause and one embedded within the contract. In the former the choice of seat of arbitration becomes significant and the law of the seat would likely govern the arbitration agreement. 
• However, when the arbitration agreement forms part of the contract the express choice of lex contractus will strongly indicate the intention of the parties. In such a case it would generally be inferred that the arbitration is governed by the same law as the substantive contract. 
• The Court thus must adopt a three-step inquiry:  
  • First, looking at the express choice of law. 
  • Second, considering any implied choice. 
  • Third, determining the 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. 
• The Court held that according to Melford Capital Partners (Holdings) LLP and Others v. Frederick John Wingfield Digby (2021) when resolving conflicting clauses in a contract, courts should read the contract as a whole and attempt to give effect to all provisions. 
• Clauses should not be rejected unless clearly inconsistent or repugnant to the rest of the agreement. 
• The Court applied the three-step test in the present facts as follows: 
  • In this case, Clause 16.5 clearly states that Indian law governs the agreement and Gujarat courts have jurisdiction over disputes. 
  • While Clause 18 designates Bogota as the venue for arbitration and conciliation, this does not diminish the supervisory powers of Indian courts as outlined in Clause 16.5. 
  • Applying the three-step test from Sulamérica Cia, the court determined that Indian law governs the arbitration agreement since no explicit law was stated for the arbitration agreement. 
  • The choice of Bogota as a place for arbitration is not sufficient to override the presumption favoring the lex contractus (Indian law). 
  • The specification that the award shall conform to Colombian law pertains only to arbitration proceedings and does not override Clause 16.5. 
• The court affirmed the applicability of the Arbitration and Conciliation Act under Section 11(6). 
• During the hearing, both parties agreed that if the application under Section 11(6) is allowed, they are willing to hold the arbitration in India. 
• Both parties have consented to the appointment of a sole arbitrator to decide the disputes.

What is Law Governing Arbitration Agreement? 

• Martin Hunter and Alan Redfern, International Commercial Arbitration, p. 53, trenchantly explain, a body of rules which sets a standard external to the arbitration agreement, and the wishes of the parties, for the conduct of the arbitration. 
• The law governing the arbitration comprises the following: 
  • Rules governing interim measures (e.g. Court orders for the preservation or storage of goods),  
  • Rules empowering the exercise by the Court of supportive measures to assist an arbitration which has run into difficulties (e.g. filling a vacancy in the composition of the arbitral tribunal if there is no other mechanism)  
  • Rules providing for the exercise by the Court of its supervisory jurisdiction over arbitrations (e.g. removing an, arbitrator for misconduct). 
• There are four choices of law: 
  • the law governing the arbitration, 
  • the proper law of arbitration agreement 
  • the proper law of contract, and 
  • the procedural rules which apply in the arbitration

How is Law Governing Arbitration can be Determined? 

• For the purpose of determining laws governing arbitration the test was laid down in following case laws: 
  • Sulamérica Cia Nacional De Seguros S.A. and Others v. Enesa Engenharia S.A. and Others (2012): 
    • In order to determine the law governing arbitration the court must conduct a three-step inquiry:  
      • First, looking at the express choice of law. 
      • Second, considering any implied choice.  
      • Third, determining the 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. 
  • Arif Azim Co. Ltd v. M/s Micromax Informatics Fze (2024): 
    • The following position of law emerges: (i) Part I of the Act, 1996 and the provisions thereunder only applies where the arbitration takes place in India i.e., where either (I) the seat of arbitration is in India OR (II) the law governing the arbitration agreement are the laws of India. 
    • The moment ‘seat’ is determined, it would be akin to an exclusive jurisdiction clause whereby only the jurisdictional courts of that seat alone will have the jurisdiction to regulate the arbitral proceedings. 
    • The more appropriate criterion for determining the seat of arbitration in view of the subsequent decisions of this Court is that where in an arbitration agreement there is an express designation of a place of arbitration anchoring the arbitral proceedings to such place, and there being no other significant contrary indicia to show otherwise, such place would be the ‘seat’ of arbitration even if it is designated in the nomenclature of ‘venue’ in the arbitration agreement.