Cross-border transactions invariably bring together parties from different legal systems, making arbitration the preferred mode of dispute resolution due to its flexibility, neutrality, and finality. Yet, one of the thorniest issues in such contracts is determining which law governs the arbitration agreement (“Agreement”) itself, a question that has sparked complex judicial debates worldwide. The recent Supreme Court of India decision in Disortho S.A.S. v. Meril Life Sciences Pvt. Ltd.[1] (“Disortho case”) offers fresh clarity on this matter, especially when parties choose different laws for the contract, arbitration procedure, and seat of arbitration.
In Disortho case, the Supreme Court faced a contract governed by Indian law, an arbitration seat in Bogotá (Colombia), and Colombian law designated as the procedural law. The Court emphatically ruled that the seat of arbitration does not automatically determine the governing law of the agreement. Instead, applying the internationally recognized “closestconnection test,” it found Indian law to be the proper law of the agreement given its strongest ties to the parties’ contractual relationship. under Section 11[2] of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).
Understanding the Layered Nature of Arbitration Law
International arbitration operates across multiple legal dimensions simultaneously, and understanding these layers is key to navigating disputes:
- Lex Contractus- The substantive law governing the main contract and parties’ commercial rights and obligations.
- Lex Arbitri- The law of the arbitration seat, which governs procedural matters such as arbitrator appointment and challenge, conduct of proceedings, and judicial supervision.
- Proper Law of the Agreement- The law governing the arbitration clause itself, considered independent and autonomous from the main contract.
The Supreme Court’s ruling in Sasan Power Ltd. v. North American Coal Corporation India Pvt. Ltd.[3] firmly endorsed this principle of separability, allowing parties to choose different laws for each layer. This flexibility is vital for commercial certainty but demands precision in drafting to avoid ambiguity.
The Indian Approach: Balancing Party Autonomy and Legal Clarity
Indian courts have actively shaped how the governing law of agreements is determined, especially when the contract, arbitration clause, and seat point to different legal systems.
The Disortho case crystallizes the current approach. The Court rejected the automatic application of the law of the seat to the agreement. Instead, it applied the “closest connection test”, looking at all relevant factors, including the substantive contract’s governing law, to identify the law most intimately linked to the agreement. This principle builds on the Supreme Court’s earlier judgment in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (BALCO)[4], where it was held that Part I of the Arbitration Act, does not extend to arbitrations seated outside India. Consequently, Indian courts do not generally have jurisdiction over foreign-seated arbitrations, except where Indian law governs the agreement itself.
In cases where the agreement does not expressly specify the applicable law, Indian courts continue to rely on the “closest connection test.” For instance, in Enercon (India) Ltd. v. Enercon GmbH[5], the Court applied Indian law to the agreement despite a foreign seat, given that the main contract was governed by Indian law and the clause was silent. Similarly, Mankastu Impex Pvt. Ltd. v. Airvisual Ltd.[6] emphasized the parties’ intention expressed in the contract and arbitration clausemas the primary guide for determining the applicable law.
Importantly, Indian courts caution against unclear or conflicting arbitration clauses. In National Thermal Power Corporation v. Singer Company[7], the Court stressed the need for clear intent to avoid unnecessary litigation. The Disortho ruling reinforced this warning, advising parties to avoid mixing different laws for the contract, agreement, and seat unless the language is unequivocal and there is a strong commercial rationale.
The International Perspective: Comparative Approaches
The question of governing law over agreements is equally significant globally, with courts across jurisdictions developing nuanced frameworks. The UK Supreme Court in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb[8] (“Enka v. chubb”) established a clear three-step test. Courts first look for an express choice by parties; absent that, they apply the contract’s governing law; and if still unclear, default to the law of the arbitration seat, the law with the “closest and most real connection.”
This approach is celebrated for its clarity and practical efficacy. Likewise,the Singapore Court of Appeal in BCY v. BCZ[9] largely aligns with the UK’s framework, applying the contract’s governing law to the agreement unless the parties indicate otherwise. The law of the seat may apply if it bears a closer connection. Further,French courts adopt a more arbitration-friendly stance. In Dalico v. Khoms El Mergeb[10], the Court of Cassation recognized the agreement as fully independent, enforceable under any law closely connected to it, regardless of the contracts or seat’s law. These global standards reflect a shared respect for party autonomy, tempered by practical default rules to resolve ambiguities and promote certainty.
Seat vs. Law: Why the Distinction Matters
A widespread misconception is that the seat of arbitration governs all aspects of arbitration law. However, as clarified in Union of India v. Hardy Exploration and Production (India) Inc[11]. and reiterated in BALCO[12], the seat (lex arbitri) governs procedural matters but does not necessarily govern the agreement’s proper law.
This distinction has practical consequences:
- When arbitration is seated outside India, Part I of the Arbitration Act does not apply. Therefore, Indian courts generally cannot entertain challenges under Section 34 of the Arbitration Act against foreign awards.
- Yet, if Indian law governs the agreement itself, Indian courts may exercise limited powers, such as appointing arbitrators under Section 11, as recognized in Disortho.
This duality requires careful planning, particularly in multi-jurisdictional contracts.
When the Clause Is Silent: Applying the “Closest Connection” Doctrine
In many contracts, the arbitration clause does not specify the governing law, leaving courts to infer the applicable regime.
The “closest connection test” serves as the guiding principle here, as endorsed by the UK Supreme Court in Enka v. Chubb[13] and consistently applied by Indian courts. Judges analyze the governing law of the main contract, the arbitration seat, place of performance, and other contextual elements to determine which legal system has the strongest link to the agreement. While flexible, this doctrine underscores the critical importance of expressly specifying the governing law in arbitration clauses to avoid uncertainty and potential litigation.
Practical Lessons and Drafting Guidance
Arbitration clauses in cross-border contracts are not mere formalities they are critical legal instruments that demand meticulous drafting. It is essential to clearly specify the law governing the agreement to avoid interpretive ambiguity. Equally important is aligning the seat of arbitration with the procedural law to ensure coherent judicial supervision and minimize jurisdictional conflicts.
Parties should avoid blending different legal systems for the contract, agreement, and seat unless there is a compelling and logically consistent reason to do so. Moreover, it is prudent to anticipate potential enforcement and challenge issues both in India and abroad, particularly since Indian courts may invoke public policy exceptions at the enforcement stage. In essence, precision and clarity in arbitration clauses are not merely matters of legal hygiene, they are strategic tools that safeguard the parties’ rights, ensure enforceability, and support the overall efficacy of the dispute resolution process.
Conclusion: The Road Ahead
Indian courts have significantly advanced the jurisprudence on agreements in cross-border contracts, aligning domestic law with international best practices through landmark decisions like BALCO, Sasan Power, Hardy Exploration, and Disortho case. These rulings respect party autonomy while equipping courts to resolve complex conflicts and ambiguities.
As India positions itself as a global arbitration hub, the onus now falls on legal practitioners, businesses, and contract drafters to embrace precision and foresight in drafting arbitration clauses. The days of boilerplate arbitration language are behind us. Instead, well-crafted agreements are essential safeguards, enabling efficient dispute resolution and protecting commercial interests in an increasingly interconnected world. Whether you advise clients, negotiate cross-border deals, or teach arbitration law, understanding these evolving legal standards empowers you to navigate agreements with confidence and clarity.
[1] Disortho S.A.S. v. Meril Life Sciences Pvt. Ltd 2025 INSC 352
[2] Arbitration and Conciliation Act 1996 (India), Act No 26 of 1996, https://www.indiacode.nic.in/bitstream/123456789/1978/3/a1996-26.pdf accessed 30 May 2025.
[3] Sasan Power Ltd. v. North American Coal Corporation India Pvt. Ltd, (2016)10SCC813.
[4] Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc. (BALCO) (2012) 9 SCC 552.
[5] Enercon (India) Ltd. v Enercon GmbH (2014) 5 SCC 1.
[6] Mankastu Impex Pvt. Ltd. v Airvisual Ltd. (2020) 5 SCC 399.
[7] National Thermal Power Corporation v. Singer Company (1992) 3 SCC 551.
[8] Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb (2020) UKSC 38.
[9] BCY v BCZ [2016] SGHC 249.
[10] Dalico v. Khoms El Mergeb, Rev Arb 1994, 116 (Fr).
[11] Union of India v. Hardy Exploration and Production (India) Inc (2019)13SCC472.
[12] Supra note 5.
[13] Supra note 9.
Authors: Anushka Bansal and Nawvi Kamalanathan are fourth-year law students pursuing BBA LL.B. (Hons.) and BA LL.B. (Hons.), respectively, at Alliance University, Bangalore.
