Rules applicable to the substance of the Dispute in Arbitration
Rules Applicable to the Substance of the Dispute in Arbitration
1. Introduction
In arbitration, the substance of the dispute refers to the merits and core issues that the parties are contesting. One critical question in arbitration is: Which laws or rules should govern the substance of the dispute?
This involves the principle of “Rules Applicable to the Substance of the Dispute”, often referred to as the “lex causae” or the “governing law” of the contract or dispute.
2. Legal Basis
The rules applicable to the substance of the dispute in arbitration are governed by:
The Arbitration and Conciliation Act, 1996 (especially Sections 28 and 29),
The parties’ arbitration agreement (choice of law clause),
International principles of arbitration law,
Judicial precedents.
3. Key Principles
3.1 Party Autonomy and Choice of Law
The parties are generally free to agree upon the law applicable to the substance of their dispute.
This is called the “lex causae” or the governing law.
The law chosen by the parties applies to:
The contract interpretation,
The rights and obligations,
The substantive issues.
Section 28(1) of the Arbitration and Conciliation Act, 1996 states:
“The arbitral tribunal shall decide the dispute in accordance with the substantive law chosen by the parties as applicable to the contract.”
3.2 Absence of Choice of Law
If the parties have not chosen any law, the tribunal applies the law determined by the conflict of laws rules which it considers applicable.
The tribunal can apply:
The law of the place of contracting,
The law of the place of performance,
The law with the closest connection.
3.3 Arbitral Tribunal’s Duty
The tribunal must decide the dispute based on the substantive law and not on procedural or technical grounds.
It cannot decide on purely equitable grounds unless empowered by the parties.
3.4 Distinction Between Procedural and Substantive Law
Substantive law governs the rights and duties of the parties (contractual rights, liabilities, remedies).
Procedural law governs the conduct of arbitration proceedings (which is generally the law of the seat of arbitration).
4. Relevant Sections of the Arbitration and Conciliation Act, 1996
| Section | Description |
|---|---|
| Section 28 | Governs the law applicable to the substance of the dispute |
| Section 29 | Deals with the form and contents of arbitral awards, which must be consistent with substantive law |
| Section 31 | Deals with binding nature and enforcement of awards based on substantive law |
5. Leading Case Laws
a) Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (BALCO Case) (2012) 9 SCC 552
The Supreme Court held that:
The law of the seat of arbitration governs the procedural aspects.
The law chosen by parties governs the substantive law applicable to the dispute.
The court clarified the distinction between procedural law and substantive law in arbitration.
b) Sundaram Finance Ltd. v. NEPC India Ltd. (1999) 2 SCC 479
The Court ruled that in absence of choice of law, the arbitral tribunal can decide the substantive law based on its discretion.
The tribunal must apply the law it deems appropriate based on the closest connection.
c) ONGC Ltd. v. Western Geco International Ltd. (2014) 9 SCC 263
The Court reiterated that the arbitral tribunal must decide disputes according to the substantive law chosen by the parties or otherwise applicable.
d) Cairn Energy PLC v. Government of India (2019) SCC OnLine SC 1605
Emphasized that arbitration awards must respect the rules of substantive law chosen by parties.
Courts should not interfere with arbitrators' decisions on substantive issues unless there is a jurisdictional defect or fraud.
6. Application of Foreign Law
When parties choose foreign law as substantive law, the arbitral tribunal applies that foreign law to resolve the dispute.
Courts in India may not re-examine the correctness of foreign law unless there is a challenge on jurisdiction or public policy.
7. Implications
The tribunal’s decision must be consistent with the governing substantive law.
Awards inconsistent with the substantive law can be challenged on grounds of violation of public policy.
The finality and enforceability of the arbitral award depend on adherence to the substantive law.
8. Conclusion
The rules applicable to the substance of the dispute in arbitration primarily depend on:
The parties’ agreement on choice of law (lex causae),
The applicable substantive law determined by conflict rules,
The distinction between procedural and substantive law (seat law vs governing law),
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