Conflicts of law

INTRODUCTION

One of the most important aspects in Conflict of Laws mostly regarding contractual agreements and arbitration agreements is Party Autonomy. Party Autonomy is a choice of law doctrine that allows parties to choose the law of a particular country to govern their contract or agreement that involves two or more jurisdictions.

As it gives emphasis to the intention of the parties to choose an applicable law, party autonomy is often favoured by many practitioners in international business transaction. They believe that allowing the contracting parties to determine the laws applicable to the disposal of their rights and obligations will facilitate certainty, efficiency, predictability and protection of the parties’ expectations, which are crucial conflict of law values in today’s global economy.

However, Scholars seem to have difficulty in reaching a consensus on the applicability of party autonomy. They frequently question the theoretical basis of the doctrine as well as the practicality of its application. Moreover, the non-uniformity in judicial practices over the world make the application of the party autonomy doctrine far from uniform.

Parties often choose a particular law for two reasons: One, they prefer a legal system which they are familiar with and in which they have a fair amount of confidence. Two, they inflexibly opt for the system where they reside or do business. Hence, the choice of law is usually chosen upon a “vaguely felt preference for dealing with what appears to be familiar rather than the unfamiliar” , rather than a deep understanding or knowledge of the laws applicable to the issues.

CHAPTER 1: EVOLUTION OF DOCTRINE OF PARTY AUTONOMY

The doctrine of Party Autonomy is in no way a new doctrine. It is said to have originated from the writings of a 16th century French scholar, Charles Dumoulin, who is also acclaimed as “the father of party autonomy.” It was Dumoulin’s belief that with respect to contracts, “the will of the parties is sovereign.” Thus, the will of the parties is the main factor in determining the law governing agreements and contracts. Further, Dumoulin also advocated that under party autonomy, in absence of express choice, the law was to be sought in accordance with the tacit and probable intentions of parties. Hence if the will of the parties is not expressed, it must be “sought in the surrounding circumstances.”

Historically, the party autonomy doctrine was introduced against the then-prevailing approach of lexi loci contractus, i.e. the law of the place of contracting. Based on this notion, Italian statist Bartolous A Assaoferrato subjected a contract to the law of the place where it was made as he believed that the place of contract governs all questions concerning the form and substance of the contract. The doctrine of party autonomy distinguishes itself from the lex loci approach by giving more importance to the parties’ power over choice of law. Dumoulin realised that there were elements that did not fit the mould of an analysis within the reach of local laws, he advanced the idea that those who enter into an agreement may stipulate the law that governs their bargain. Because of his influence, parties’ intention became the governing principle of choice of law and as a result, lex loci was soon replaced with party intention.

During the time of Dumoulin, the doctrine of party autonomy had two distinctions. One, the intention of the parties could be expressed or implied. The “tacit agreement” was basically an extension of party autonomy to encompass situations in which the parties had failed to designate the law applicable. Two, the intention of the parties governed the effect and validity of a contract and the law intended to be applied to the whole contract.

However, the general acceptance of the party autonomy doctrine was due to the scholarly work of conflict of laws authors after Dumoulin, especially the great German jurist Friedrich Carl von Savigny. He suggested that every legal relationship should be governed by the law of the state or nation in which it has its seat. Savigny said that in finding this “seat”. The primary factor should be the parties’ intention and if such intention was not clearly manifested, it has to be inferred from the circumstances that led to the rise of the obligation.

In modern conflict of laws theory, party autonomy doctrine is similar to the Dumoulin’s conception with regard to the fundamental idea that the intention of the parties has the effect of determining the legal system that should govern the agreement and how it should be selected. However, beyond this similarity there are clear differences in the substance of the doctrine. These differences exist because some of the current conflict of laws issues could not be envisioned during Dumoulin’s time.

The first difference is regarding the scope of the doctrine. During Dumoulin’s time, party autonomy was introduced as a rule of validation, i.e. the intention of the parties determined the laws that govern the validity of the contract. In the modern era, party autonomy doctrine focuses on the rights and obligations of the parties to a contract or on the contents of the contract, rather than just the validity of the contract. Presently, choice of law clauses are usually phrased to cover “any dispute arising from or out of the contract” or “all rights and obligations of the parties” in respect to the contract.

Another change related to the scope of party autonomy is the emergence of the doctrine “Dépeçage” or “splitting” which allows different aspects of a contract to be governed by different systems of law. Under this doctrine, the parties have the choice to agree to split their contract so that different parts are subject to different laws, thus each issue or a set of issues may be governed by different jurisdictions. It is believed that the use of Dépeçage originated with Savigny’s “seat” theory. According to Savigny, every type of legal relationship had a set. Hence, in bilateral contracts where each party is to perform his obligation in a different country, the application of the law of the place of performance can lead to application of two different laws. Today, Dépeçage is frequently employed by the court and is also widely adopted by the parties in determination of the applicable law.

CHAPTER 2: CURRENT SCOPE AND LIMITATION OF THE PARTY AUTONOMY DOCTRINE

Party Autonomy has been explicitly been provided for in various international conventions and treaties. More prominently, Article 19(1) of the UNCITRAL Model Law on International Commercial Arbitration provides:

“Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.”

I. SCOPE OF THE DOCTRINE

An important issue related to the scope of party autonomy is the identification of what choosing foreign law actually means. Parties have the right to choose the “whole law” of a particular country or choose only its substantive law. The whole law of a country would include its conflict of laws rules as well. If the whole law is chosen, the problem or remission (referring back) or transmission (referring away), collectively known as Renvoi, would arise. Renvoi often complicates the choice of law matter by forcing the determination within an endless circle. The problem of Renvoi has been debated widely by scholars. Some scholars are of the opinion that Renvoi should be rejected simply by ignoring the choice of law rules of the other country or that Renvoi should be completely avoided by substituting choice of law with an alternative interest analysis scheme. Others, however, argue in favour of Renvoi beleiveing that application of foreign choice of laws rules in many cases would be simple and recognition of these rules would not necessarily lead to an endless chain of reference. They argue that courts should accept Renvoi because the rights that would be provided by another state are by definition the same rights that would be provided by the courts in that state. Today, many countries adopt a measured approach towards the problem of Renvoi. When drafting an international contract or agreement, lawyers usually prefer to add to the clauses of choice of law phrases like, “excluding the choice of law rules”, to detract the problem of Renvoi in advance.

The change in the scope of the doctrine of party autonomy can also be observed in its application of international treaties or customs. Party autonomy is now extended to parties to choose international treaties or customs on civil or commercial matters. For example, the most cited international treaty on international contracts is the Convention on International Sale of Goods (CISG). Though its application is generally conditioned on country membership, a choice of treaty provision included in the contract by the parties may be upheld by the court if such application is not barred under the law of the forum even if the country is not party to the Convention.

CHOICE OF FORUM

Party autonomy also includes choice of forum. The most recent international effort to uphold a choice of forum is the adoption of the Convention on Choice of Court Agreements by the member states of the Hague Conference on Private International Law in 2005. Under this Convention, the parties may enter into an “exclusive choice of court agreement” and if it meets the requirements of the Convention, the agreement will be recognized and enforced in all member states.

II. LIMITATIONS OF PARTY AUTONOMY

Party autonomy also imposes certain limits on the freedom of the parties to choose the law governing their contracts. It can be further divided into two categories – limitation on formality and limitation on content.

The first limitation deals with the issue of formality. In many countries the intention of the parties can be exercised impliedly or expressly, but there are still some countries where the contractual choice of law of law is limited to choices expressly made by the parties. In countries where the tacit choice is accepted, basis of this tacit choice of law should be “rebuttable presumption in favour of the law that will validate the contract.” When the intention of the parties is implied, it is normally the court’s function to determine the intention of the parties.

The limitation on the contents of choice of law concerns the law that the parties agreed to in the contract. It is undisputed that party autonomy gives the parties the freedom to choose the applicable law, but this freedom is not absolute. The scope of intention of parties concerns the boundary the parties’ choice is subjected to. These boundaries have evolved into three major areas – the exception of Public Policy, the mandatory rule mandate and the requirement of reasonable connection.

PUBLIC POLICY:

Public Policy is a common course that courts apply to prevent the application of the foreign law that the parties agreed to in the contract. Usually, the forum country invokes this exception when the forum considers the applicable foreign law to be incompatible with the public policy of the forum. In Conflict of Laws, public policy is generally understood to include principles of justice, fundamental social and moral values and public welfare. Public Policy enables the forum to disregard the parties’ choice of law and apply lex fori. Even though Public Policies differ from state to state, it is a common understanding that public policies should not be applied to every case; it becomes relevant only when the choice of law leads to profound violation of the policies and interest of the state where the forum is. Thus, a choice of law by the parties can be set aside if it was made with an evasive intent.

THE MANDATORY RULE:

If the forum state refuses to apply the chosen law because of public policy, then the “mandatory rule” effectively restricts or excludes the parties’ initial power to make the choice. If the application of the law of the forum state to which one of the parties is a citizen is mandatory, the parties might not have a choice but to apply the law as such. There are different forms of the mandatory rule limiting the autonomy of the parties –

i). Restricting the parties choice of law to certain specific legal issues – This type of mandatory rule is governed by the personal law of the contracting party’s domicile or their nationality. Thus, if parties to a contract make a choice of law governing their contractual capacity, the parties must also choose the personal law of their domicile or country, or their choice will be rendered invalid.

ii). Directly Applicable Rule – This form of mandatory rules specify certain types of transaction or contracts that prohibit parties from choosing the applicable law. Generally, a contract will not be enforceable if it violates the laws of the country where it is to be performed.

REASONABLE CONNECTION REQUIREMENT:

The reasonable connection requirement limits the parties’ choice of law till the parties can show that the law chosen by them is in some way connected to either the parties or the transaction itself. The theoretical basis behind the reasonable connection requirement is that “parties, and their contracts are creatures of the state wherein they reside and act, and that they cannot avoid the consequences of the local law by stipulating for foreign law.” However, there are no clear-cut standards for determining the reasonability of the connection.

CHAPTER 4: STATUS OF PARTY AUTONOMY IN INDIA

In India, party autonomy is greatly exercised during Arbitral Proceedings. Under the Arbitration and Conciliation Act, 1996 and the UNCITRAL Model Law, on which the former in modelled, have many provisions that grant party autonomy. Parties are free to agree on:

i). Procedure for appointing arbitrator.

ii). Procedure for challenging arbitrator.

iii). Procedure to be followed by the arbitral tribunal in conducting the proceedings.

iv). Place of Arbitration.

v). Language to be used in arbitral proceeding.

vi). Number of arbitrators.

However, like in the international fora, these rights are also not absolute. All the previously discussed limitations to Party Autonomy in general is applicable under the Arbitration and Conciliation Act as well.

JUDICIAL TREND IN INTERPRETING THE DOCTRINE

The Apex Court and the High Courts have tried to interpret the scope of application of the party autonomy doctrine through various cases. Some of the most important ones are discussed below.

BHATIA INTERNATIONAL V. BULK TRADING S.A. AND ANR.

This is one of the very important judgements relating to party autonomy in arbitration. Subsequently it was overruled by Balco case. The facts can be summarized as follows: two parties signed an international arbitration agreement. The rules to be applied were supposed to be of International Chamber of Commerce (ICC). The arbitration was to be held in Paris. The foreign party to the agreement applied for interim measure in the Indian court to recover the claim from the other party, which was from India. The Indian party contended that the interim measure cannot be granted to the other party, as the seat of arbitration is in Paris. The main issue was whether the Indian Courts have power to grant interim relief under section 9 of the Arbitration & Conciliation Act 1996.

The Supreme Court in the present matter upheld that interim measure can be granted in such cases and Part I of the Arbitration and Conciliation Act 1996 will apply. The court stated that Part I gives power to the courts in the country to grant interim measure to a party even if the seat of arbitration is situated outside India. It is based on UNCITRAL model. Supreme Court provided its reasoning for the judgement.

i) Section 2(2) of the Act cannot be given literal meaning. The section states that Part I of the Act when the place of arbitration is in India and not outside.

ii) The entire Act applies to the whole country. Also, Part I does not specify that it won’t apply to the agreements which have their seat outside India. So the omission in that regard implies that Part I also applies to the agreements which have their seat of arbitration outside and India and hence, interim measure can be provided by Indian courts in such cases.

iii) It was also observed that if Part I of the Act is given literal meaning, then it would imply that it is applicable in only Jammu & Kashmir and not in rest of India. That would be inconsistent with the purpose of the Part I.

In relation to the autonomy of parties, the court concluded that The Court confined the use of Part I to arbitrations held in India alone thus no party to the arbitration contract could approach an Indian court. The purpose of the party is to get protection by an interim measure under Section 9 of the Act subsequent to there is no comparing security in Part II of the 1996 Arbitration and Conciliation Act. In such an occasion, a party to an arbitration contract (agreement) held outside India would have no methods of guaranteeing that the other party did not sidestep execution of its commitments under the normal grant by distancing resources arranged in India. Leaving a gathering without such plan of action would undermine the believability of arbitration agreements held outside India to which one of the party is Indian also, would undermine the certainty of parties and particularly parties situated outside in the Indian arbitral process.

BHARAT ALUMINIUM CO. V. KAISER ALUMINIUM TECHNICAL SERVICE, INC.

In 2012, the Supreme Court of India overruled its own debatable decision in Bhatia International v. Bulk Trading S.A. and Anr in its leading decision, Balco v. Kaiser Technical Services. In Balco, the parties BALCO and Kaiser had entered into an agreement on 22 April 1933 in relation to the supply of equipment pertaining to installation of a computer operate methodology at the former’s premises and reconstruction and upgradation of production facilities. The agreement contained the arbitration clause under which the dispute, if any arises in future, will be settled in accordance with the Arbitration Laws of England and the seat of the proceedings in relation to the dispute would be London. Further, the law governing the agreement was chosen by the parties was Indian law.

After the dispute arose between the contracting parties, the matter was referred to the Arbitration seated in England and arbitral awards were passed against the Appellant. Subsequently, the appellant challenged the arbitral awards in India pursuant to section 34 of the act in the District court and the Chattisgarh High Court. Both the courts rejected the challenge of the appellants. Consequently, the BALCO, the appellants, approached the Supreme Court. In the Balco, the case Bharti Shipyard Ltd. v. Ferrostaal AG & Anr was also joined along with the petition for the hearings because the Bharti case also revolved around the applicability of Section 9 of the Arbitration and Conciliation Act during the the pendency of foreign arbitral awards. Before the supreme court, the case was first addressed by a three judge bench as opposed to a division bench as one of the judges in the division bench held that the judgment in Bhatia case was not in conformity with the correct application of law and the other judge of the division bench did not agree with the judge’s conclusion. As a result, on January 12, 2012 the case was pu tforth before the constitution bench of the Supreme Court. The Supreme Court held that the it was not in a position to accept the findings made by it in its own judgment in Bhatia and Venture Global v. Satyam Computer Services Ltd.

The court held that in the previous cases it indisputably accepted the territorial principle embodied in UNCITRAL Model Law. Such approach results in narrowing down the applicability of Part I relating to arbitrariness which are taking place in India and excludes the arbitration seated in foreign from its purview irrespective of the clause in the agreement which allows the governing law of the arbitration proceedings to be the Act. Out of various legal issues before the court, one of them pertained to the “party autonomy” in the arbitration agreements. As per section 20, the court held that the parties enjoy freedom to choose the place for arbitration in India provided the seat of arbitration is in India.

The Court held that if the parties to the agreement have failed to provide the law which is supposed to govern the arbitration proceedings then the proceedings will be conducted as per the laws of the nation in which such proceedings are held. The country should be the one having nearest ties and link with the dispute. On the issue of choice of law, the court turned to section 28 of the Act which was interpreted in include even those matters not as international commercial arbitration would be under the scope of the substantive laws of India. This interpretation was made in order to prevent the parties belonging to India in case of transnational commercial arbitration as per section 2(1) of the act to refer to arbitration governed according foreign laws where no such obligation was mandated upon the parties.

INDIABULLS FINANCIAL SERVICES LIMITED (INDIA) V. AMAPROP LIMITED (CAYMAN ISLANDS) & ANR

This case is another judgement discussing party autonomy in arbitral awards. The facts of the case are as follows: A share agreement was entered in between the two companies, in which Amarnath LLC Company acquired 47.5% of shares in Indiabulls Finance Company. The agreement was of such nature that it gave certain rights to Amaroop company such as it could purchase the above-mentioned stake of Indiabulls company in consonance with Indian Laws. A dispute happened and IFSL filed a suit in the High Court of Bombay. They were seeking an injunction on arbitral proceedings. Consequently, Amaroop filed a suit in New York. The court there granted them an injunction. The tribunal held that in the present matter, the foreign exchange laws of India will apply, and hence they accepted the plea made by Indiabulls Financial Service Limited.

On the topic of party autonomy, the court observed that the parties have complete sovereignty in relation to the arbitration contract. But it can only be allowed within the limit of national laws. It means it should not contravene national laws. It was mentioned by the court that arbitration laws and proceedings are influenced by two factors in today’s scenario. The party autonomy has a wider ambit under the first factor, in which they exercise greater autonomy to choose their forum and other procedures under international commercial arbitration. Secondly, the seat of arbitration comes into picture, stating that under the rule 57(2), it is the main law which governs the arbitration contracts and proceedings. The 1996 Act imposes a restriction on this law and indirectly it has the effect on party autonomy. It is inferred that the Act only allows the party autonomy to be exercised in a limited manner, so that there is no conflict between the law of seat of arbitration and the provisions of 1996 Act.

It should still be noted that party autonomy does not fade away due to these reasons, as international institutions also give due importance to law of the seat. These international institutions exercise their autonomy in arbitration procedures but they maintain a balance between the two. The law of seat perform vital functions in the arbitral proceedings, such as when the rules are incomplete in the procedure adopted by the parties, it supplements and help parties out in the matter. Also, it provides a platform to parties where they can challenge the arbitral awards which went against them in the process, and particularly where they are said to surpass the purview vouchsafed to the arbitrators by the parties under the contract or agreement, or where there has been a genuine inconsistency in the arbitral methodology. Lastly, under the New York Convention, the arbitral award won by the party under the law of seat can be enforced.

KONKOLA COPPER MINES (PLC) V. STEWARTS AND LLOYDS OF INDIA LIMITED

The appellants in the present case were a company dealing in copper mining. It was incorporated under laws of Zambia. The agreement between the two parties in the present matter mentioned that New Delhi will be place of arbitration in case of a dispute. But when the dispute arose, the appellants wanted Mumbai to be the place of arbitration. Also, the 1996 Act was to be applicable in the present case according to the appellants. No conflict arose between the parties in this regard. After the arbitral proceedings, the court awarded a partial award. Also, the court held that the Part I of 1996 Act was not intended to be included by the parties in the arbitration agreement, and even if the parties have agreed Bombay to be the place of arbitration, jurisdiction cannot be conferred upon that court just for the sake of convenience.

The main issue raised in the present matter are as follows: Whether the courts situated in the place of arbitration have jurisdiction to entertain a Section 9 application notwithstanding that the cause of action may have accrued elsewhere; and

The High Court overruled the decision of Single Judge and held that Part I of the 1996 Act will be applicable in the present arbitration contract. The court also held that BALCO case is applicable only prospectively, and the provisions of Part I of the 1996 Act will be applicable to the contracts or agreements where the place of arbitration is in India. The decision of this case hold a significant value in the light of the fact that the place of arbitration for an agreement can be at two places.

The party autonomy prospect is also discussed in the present matter as it has been stated by the court that the place of arbitration can be at two places. While elaborating on this issue, the court mentioned in the present case that the lawmaking body has purposefully offered purview to two courts. One is where the cause of action arises. Second is the court where the arbitration takes place in the actual sense. This factor has to be fundamental as on numerous events the understanding might accommodate a seat of arbitration at a place which would be nonpartisan to both the parties. Consequently, the courts where the discretion happens would be required to work out supervisory control over the arbitral procedure.

CONCLUSION

Party autonomy is one of the most important doctrines in conflict of laws especially in relation to international commercial contracts and international commercial arbitration agreements. It allows parties to an agreement to decide on the law of the country that would govern the contract or the agreement. It includes choice of law, place of arbitration, choice of arbitrator etc. In India, the Arbitration and Conciliation Act, 1996 provides for explicit sections relating to party autonomy. Several international conventions such as the UNCITRAL Model Law on International Commercial Arbitration and The Hague Conference on Private International Law also explicitly provide for party autonomy.

Since its inception in the 16th century, the doctrine has evolved with the change in time to accommodate emerging issues relating to it. However, issues like the problem of Renvoi still make the applicability of the doctrine difficult in certain situations. Moreover, party autonomy is not absolute. Certain limitations are imposed by different jurisdictions on the exercise of party autonomy. Exception of Public Policy, Mandatory rules and reasonable connection rules applied by the forum jurisdiction greatly restrict the power of the parties to choose the applicable law.

The doctrine of party autonomy is a fairly recent adoption to the Indian domestic law. Though it’s position is fairly clear with reference to Arbitral proceedings in India, through the case studies done in this project, it can safely concluded that there still is scope for further interpretation.

Source: Essay UK - http://www.essay.uk.com/essays/law/conflicts-of-law/


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