What Law the Tribunal Applies, and How a Panel Decides
Chapter Thirty-Four
Syllabus topic 2.1, "The Arbitration and Conciliation Act, 1996"
Pages 170 to 174 of 377
In one line
A tribunal sitting in India must decide a domestic dispute by Indian substantive law, must respect the contract and trade usages, and where there are three arbitrators the majority decides.
In exam wording: section 28 of the Arbitration and Conciliation Act 1996 prescribes the rules applicable to the substance of the dispute, and section 29 provides that in proceedings with more than one arbitrator any decision shall be made by a majority of all its members.
Why an arbitrator is not free to do what he thinks is fair
Students often assume that arbitration means deciding by broad justice rather than by law. In India it does not, and section 28 is why.
The tribunal is not a court, but it is applying law, and an award that ignores the law can be attacked. Section 28 sets out which law, and it splits at the same fork as section 2(1)(f): domestic arbitration on one side, international commercial arbitration on the other.
Section 28(1)(a): domestic arbitration
Where the place of arbitration is in India, in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India.
Note the word shall. In a purely domestic arbitration the parties cannot choose a foreign law to govern the substance. Two Indian companies cannot agree that their contract is governed by Singapore law and have that applied by a tribunal sitting in India under this section.
And note what "substantive" excludes. Section 19(1) frees the tribunal from the procedural law, the Code of Civil Procedure, and from the Evidence Act. Section 28(1)(a) binds it to the substantive law: the Contract Act, the Sale of Goods Act, the law of limitation and the rest.
Section 28(1)(b): international commercial arbitration
Where the place of arbitration is in India and the arbitration is an international commercial arbitration:
- (i) the tribunal shall decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute;
- (ii) any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of laws rules; and
- (iii) failing any designation by the parties, the tribunal shall apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute.
Clause (ii) is a small provision that saves a great deal of trouble. Conflict of laws rules, sometimes called private international law, are the rules a legal system uses to decide which country's law applies. If a choice of "French law" were read as including France's conflict rules, those rules might point back to some third country, and so on. Clause (ii) cuts that off: choosing a country's law means its substantive law.
What Law the Tribunal Applies, and How a Panel Decides
A drafting oddity worth noticing: clause (iii) refers to "failing any designation of the law under clause (a) by the parties", although the designation provision is clause (b)(i). Read it as intended.
Section 28(2): deciding by fairness, only if authorised
The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do so.
Ex aequo et bono means according to what is equitable and good, that is, by broad fairness rather than by strict law. An amiable compositeur is an arbitrator empowered to decide in that way.
The rule is: not unless expressly authorised. So the student's assumption that arbitrators decide by fairness is exactly backwards; they decide by law unless the parties have expressly said otherwise.
Section 28(3): the contract and trade usages
While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction.
This sub-section was substituted by the 2015 amendment. Before it, the text said the tribunal "shall decide in accordance with the terms of the contract", and that phrasing had been used to attack awards on the footing that the tribunal had misread a clause. The present words, "shall take into account", are deliberately softer.
Section 28(3) is the provision that matters most at the setting aside stage, and chapter 400 returns to it. The short version: an award that ignores the terms of the contract or the trade usages is vulnerable, because that failure is the commonest form of what section 34(2A) calls patent illegality. But a tribunal that has taken the contract into account and read a clause in a way a court might not is exercising its function, and the 2015 wording is meant to protect that.
"Trade usages applicable to the transaction" are the settled practices of the trade concerned. They matter in commodity, shipping and construction disputes, where much is understood between people in the business and never written down.
Section 29: decision making by a panel
Section 29(1): unless otherwise agreed, in proceedings with more than one arbitrator, any decision shall be made by a majority of all its members.
Two points. It is a majority of all the members, not of those present. And it applies to any decision, not only the final award, which is why section 10(1) forbids an even number: a two-member tribunal cannot produce a majority.
What Law the Tribunal Applies, and How a Panel Decides
Section 29(2): notwithstanding sub-section (1), if authorised by the parties or all the members of the arbitral tribunal, questions of procedure may be decided by the presiding arbitrator.
A sensible practical provision. It would be absurd to convene all three arbitrators to decide whether to grant a week's extension for filing a document, so procedure can be delegated to the presiding arbitrator, either by the parties or by the tribunal itself.
Note the limit: questions of procedure only. The presiding arbitrator cannot decide the substance alone.
What of a dissent? The Act does not require unanimity, and a minority arbitrator may write a dissenting opinion. The award is the majority's; the dissent is not an award and cannot be enforced. Section 31(2) requires the signatures of the majority and a statement of the reason for any omitted signature, which chapter 380 works through.
A worked example
A tribunal of three sits in Hyderabad in a dispute between an Indian buyer and an Indian seller of cotton. The contract says it is governed by English law and that the arbitrators may decide "as they think just".
Can the tribunal apply English law? No. This is not an international commercial arbitration, because both parties are Indian, so section 28(1)(a) applies: the tribunal shall decide in accordance with the substantive law for the time being in force in India. The choice of English law cannot displace that.
Can it decide by what it thinks just? Only if the parties have expressly authorised it to decide ex aequo et bono or as amiable compositeur under section 28(2). A loose phrase like "as they think just" is unlikely to be the express authorisation the section requires; and even then the tribunal would still be subject to section 28(1)(a) in a domestic arbitration, so the safer view is that the clause changes nothing.
Must it follow the contract? Under section 28(3) it shall in all cases take into account the terms of the contract and trade usages applicable to the transaction, and in a cotton dispute the trade usages may be substantial.
Two arbitrators agree, one dissents. Section 29(1): the decision is that of the majority of all its members, so the award stands. The dissent is not an award.
The presiding arbitrator alone extends time for filing evidence. Valid if the parties or all the members authorised it, under section 29(2), because that is a question of procedure.
Change the parties. Make the buyer a company incorporated in Dubai. Now it is an international commercial arbitration under section 2(1)(f)(ii), and section 28(1)(b)(i) applies: the tribunal decides in accordance with the rules of law designated by the parties, so English law governs the substance, and under clause (ii) that means English substantive law, not English conflict rules.
What Law the Tribunal Applies, and How a Panel Decides
What beginners get wrong
Arbitrators do not decide by fairness. Section 28(2) requires express authorisation to decide ex aequo et bono.
Parties to a purely domestic arbitration cannot choose a foreign substantive law under section 28(1)(a).
Section 19 and section 28 are different. Freedom from the Code and the Evidence Act is procedural; the substantive law still binds.
Section 28(3) says "take into account", not "decide in accordance with". The change was made in 2015 and matters at the section 34 stage.
Section 29(1) requires a majority of all members, not of those present, and it applies to any decision.
Quick revision
- 28(1)(a): place in India, not international commercial arbitration, the tribunal shall decide in accordance with the substantive law for the time being in force in India.
- 28(1)(b): international commercial arbitration, (i) the rules of law designated by the parties; (ii) a designation of a country's law means its substantive law, not its conflict of laws rules; (iii) failing designation, the rules of law the tribunal considers appropriate.
- 28(2): ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it.
- 28(3): the tribunal shall in all cases take into account the terms of the contract and trade usages applicable to the transaction. Substituted in 2015.
- 29(1): with more than one arbitrator, any decision is by a majority of all its members, unless otherwise agreed. 29(2): questions of procedure may be decided by the presiding arbitrator if authorised by the parties or all the members.
Test yourself
1. Two Indian companies choose Singapore law in their contract and arbitrate in Delhi. Which law governs the substance? Indian law. Section 28(1)(a) requires a tribunal, where the place of arbitration is in India and the arbitration is not an international commercial arbitration, to decide in accordance with the substantive law for the time being in force in India.
2. What does section 28(1)(b)(ii) prevent? It prevents a choice of a country's law being read as a choice of that country's conflict of laws rules. Unless otherwise expressed, a designation of the law or legal system of a given country refers directly to its substantive law.
3. May an arbitrator decide simply by what seems fair? Only if the parties have expressly authorised the tribunal to decide ex aequo et bono or as amiable compositeur, under section 28(2). Otherwise it decides by law.
4. What is the significance of the 2015 change to section 28(3)? The sub-section now requires the tribunal to "take into account" the terms of the contract and trade usages, rather than to decide "in accordance with" the contract. The change was made to stop awards being set aside merely because a court would have read a clause differently, while leaving an award that ignores the contract vulnerable as patently illegal.
What Law the Tribunal Applies, and How a Panel Decides
5. One of three arbitrators refuses to agree. Is there an award? Yes. Under section 29(1) any decision of a tribunal with more than one arbitrator is made by a majority of all its members, unless the parties have agreed otherwise. The dissenting opinion is not an award and cannot be enforced.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself for the same subject.