SUPREME COURT DETERMINES LAW THAT GOVERNS ARBITRATION AGREEMENTS
A Three Judge Bench of The Hon’ble Supreme Court of India comprising of Chief Justice Sanjiv Khanna, Justice Sanjay Kumar and Justice K.V. Viswanathan passed a judgement dated 18.03.2025 in the matter of Disortho S.A.S. v. Meril Life Sciences Private Limited(ARB. P. No. 48 of 2023), addressing critical issues concerning the jurisdiction and procedural aspects of international arbitration agreements. The Court’s decision provides clarity on the interplay between the substantive law governing the contract and the procedural law applicable to arbitration proceedings.
Facts
In 2016, Disortho S.A.S., a company incorporated in Bogota, Colombia, entered into an International Exclusive Distributor Agreement with Meril Life Sciences Private Limited, a Gujarat-based company, for the distribution of medical products in Colombia. Disputes subsequently arose between the parties, leading Disortho to file a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Supreme Court, seeking the appointment of an arbitral tribunal as per the agreement’s arbitration clauses(16.5 & 18). Meril opposed the petition on jurisdictional grounds, arguing that the clauses did not confer jurisdiction upon Indian courts to appoint arbitrators.
Arbitration Agreement Clauses
The Distributor Agreement contained two pertinent clauses:
- Clause 16.5: Stipulated that the agreement would be governed by and construed in accordance with Indian laws, with all matters arising from the agreement subject to the jurisdiction of courts in Gujarat, India.
- Clause 18: Outlined the dispute resolution mechanism, including conciliation and arbitration processes. If disputes remained unresolved through conciliation, they were to be submitted to arbitration administered by the Arbitration and Conciliation Centre at the Chambers of Commerce in Bogota, Colombia. The arbitration was to take place in Bogota, and the award was to conform to Colombian law.
Issues
The core issues for determination were:
- Jurisdiction: Whether Indian courts had the authority to appoint arbitrators given the agreement’s stipulations.
- Governing Law of the Arbitration Agreement: Whether the law governing the main contract (Indian law) also governed the arbitration agreement, or if Colombian law applied due to the arbitration’s location and procedural rules.
Supreme Court’s Analysis and Findings
The Supreme Court undertook a comprehensive examination of the agreement’s clauses and the parties’ intentions:
- Primacy of Lex Contractus: The Court emphasized that the law governing the main contract (lex contractus) is a strong indicator of the law governing the arbitration agreement, especially when the arbitration agreement is part of the main contract. This presumption holds unless there are clear indications to the contrary. In this case, Clause 16.5 explicitly stated that Indian law governs the agreement, reinforcing the presumption that Indian law also governs the arbitration agreement.
- Role of Lex Arbitri: While the law of the seat (lex arbitri) governs the arbitration’s procedural aspects, it does not automatically govern the arbitration agreement’s formation or validity. The Court noted that the mere designation of Bogota as the venue for arbitration, without explicit choice of Colombian law as the governing law of the arbitration agreement, does not displace the presumption in favor of Indian law.
- Interpretation of Conflicting Clauses: The Court observed that while Clause 18 specified that the award should conform to Colombian law, this pertained to the arbitration proceedings and the award’s substance, not the arbitration agreement’s governing law. Clause 16.5’s clear stipulation of Indian law governing the agreement prevailed, aligning with the presumption that the law governing the main contract also governs the arbitration agreement.
- Agreement to Arbitrate in India: Despite the agreement’s procedural stipulations for arbitration in Bogota, both parties consented during proceedings to have the arbitration held in India. This mutual agreement facilitated the appointment of a sole arbitrator and the adoption of procedural rules from the Delhi International Arbitration Centre, further reinforcing the applicability of Indian law.
Court’s Decision
The Supreme Court allowed the arbitration petition, appointing Justice S.P. Garg, a retired Judge of the Delhi High Court, as the sole arbitrator. The arbitration was to be governed by the rules of the Delhi International Arbitration Centre, with the venue to be mutually decided by the parties and the arbitrator. This arrangement ensured that the arbitration proceedings were conducted under Indian law, consistent with the parties’ contractual agreement and mutual consent.
Conclusion
The Supreme Court’s judgment in Disortho S.A.S. v. Meril Life Sciences Private Limited underscores the importance of clarity in drafting arbitration clauses, particularly regarding the governing law and procedural aspects. It reaffirms the principle that the law governing the main contract is a strong indicator of the law governing the arbitration agreement, unless explicitly stated otherwise. This decision provides valuable guidance for parties engaged in international commercial agreements, emphasizing the need for precise and consistent contractual provisions to avoid jurisdictional disputes and ensure the enforceability of arbitration agreements.
KAUSTUBH PUNJ
SENIOR LEGAL ASSOCIATE
THE INDIAN LAWYER AND ALLIED SERVICES
Editor’s Comments
In this important judgment passed by a Special Bench the Court’s decision on arbitration jurisdiction dealt with key legal principles regarding the enforceability of arbitration clauses, the applicability of the Indian Law, and the determination of the seat of arbitration. The Court upheld the Competence-Competence Principle that allows an arbitral tribunal to decide on its own jurisdiction, including challenges to the validity or existence of the arbitration agreement. It also reinforced party autonomy in deciding choice of arbitration. The Court also observed seat of arbitration determines the legal framework that governs the arbitration while venue is about physical location where arbitration takes place.
SUSHILA RAM
Advocate and Chief Consultant
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