In arbitration, determining which legal rules apply to the substance of the dispute is often as crucial as resolving the dispute itself. Section 28 provides a framework to address this challenge by outlining the rules applicable to the substance of disputes in domestic and international arbitration. It strikes a balance between respecting the parties’ autonomy and ensuring adherence to legal principles. This article explores the legal framework of Section 28, its interplay with other provisions, significance in arbitration, challenges, and practical tips for parties.

 

Legal Framework of Section 28

Section 28 of the Arbitration and Conciliation Act, 1996, is a pivotal provision that outlines the rules governing how the arbitral tribunal determines the substantive aspects of a dispute. Its primary objective is to ensure fairness, consistency, and adherence to agreed-upon or legally applicable rules in resolving disputes. The section reflects the balance between party autonomy and the overarching need for procedural and substantive fairness.

Detailed Subsections of Section 28

1. Section 28(1)(a): Domestic Arbitration

For arbitrations conducted entirely within India, this provision mandates that disputes must be resolved in accordance with the substantive law of India. This ensures that arbitration proceedings in domestic cases align with Indian legal principles, fostering consistency and reducing the risk of awards being challenged under Indian law.

• Scope: Applies to arbitrations where both parties are Indian entities and the arbitration is seated in India.
• Impact: Restricts parties from deviating to foreign laws or alternative legal frameworks for resolving domestic disputes.

2. Section 28(1)(b): International Commercial Arbitration

In international commercial arbitration, where at least one party is foreign, Section 28(1)(b) grants greater flexibility. It allows parties to agree on the rules of law applicable to the substance of the dispute.

• Party Autonomy: This subsection upholds the principle of party autonomy, enabling parties to choose laws that suit their business and legal interests, such as laws of a neutral jurisdiction or internationally recognized rules like the UNIDROIT Principles or lex mercatoria (law of merchants).
• Default Rule: If parties fail to choose, the tribunal determines the applicable rules by considering the nature and circumstances of the case, ensuring fairness and practicality.

3. Section 28(2): Application of Trade Practices and Terms of Contract

This subsection requires the arbitral tribunal to take into account:

• Terms of the Contract: Disputes must be resolved in accordance with the explicit terms of the contract, ensuring that the tribunal respects the parties’ agreements.
• Trade Usages: Recognized practices and customs of the relevant trade or industry must be considered. This provision is particularly significant in commercial arbitration, as it integrates business realities into the resolution process.

4. Section 28(3): Ex Aequo et Bono and Amiable Compositeur

Section 28(3) provides a mechanism for resolving disputes on the principles of fairness and equity if expressly authorized by the parties.

• Ex Aequo et Bono: Allows the tribunal to decide disputes based on what is fair and good, rather than strictly adhering to legal norms.
• Amiable Compositeur: Permits the tribunal to act as a mediator to amicably settle disputes by considering broader fairness principles.
• Express Agreement Required: This discretionary power can only be invoked if the parties explicitly agree to it, ensuring that the tribunal does not unilaterally deviate from the legal framework.

 

Key Features of Section 28

1. Respect for Party Autonomy

Section 28 reinforces party autonomy by enabling parties to define the applicable laws. In international commercial arbitration, this ensures that parties from diverse legal systems can choose a neutral or mutually agreeable framework.

2. Balancing Flexibility and Structure

While offering flexibility in international arbitration, Section 28 provides structure in domestic arbitration by mandating the application of Indian substantive laws.

3. Integration of Trade Practices

By mandating the consideration of trade usages, the provision acknowledges the importance of industry-specific practices in resolving commercial disputes.

4. Protection of Public Policy

Implicitly, Section 28 ensures that decisions remain consistent with public policy, safeguarding the enforceability of awards and preventing outcomes that may violate fundamental legal principles.

 

Why Section 28 Matters in Arbitration

1. Protects Party Autonomy

Section 28 highlights the cornerstone principle of arbitration: party autonomy. It allows parties to select the governing law for their disputes, particularly in international commercial arbitration, ensuring that arbitration proceedings align with their preferences and commercial interests.

2. Promotes Predictability

By specifying the applicable rules of law, Section 28 fosters predictability in arbitration outcomes. Parties can assess their legal positions with greater clarity, which aids in strategic planning and decision-making.

3. Balances Flexibility and Rigor

The provision strikes a delicate balance by allowing parties to choose the rules while also providing default rules for domestic arbitration and cases where no choice is made. This ensures fairness and flexibility without undermining legal certainty.

4. Ensures Enforceability

Arbitral awards that adhere to Section 28’s provisions are less likely to be challenged on the grounds of procedural or substantive irregularities, ensuring smoother enforcement under the Arbitration Act and international conventions like the New York Convention.

 

Challenges and Criticism of Section 28

1. Lack of Clarity in Choosing Rules of Law

In international arbitration, disputes often arise regarding the scope of party autonomy to choose rules of law. Ambiguity about whether parties can select non-national legal systems, such as the UNIDROIT Principles, complicates proceedings.

2. Complexities in Multi Jurisdictional Disputes

When parties from different jurisdictions are involved, conflicting legal traditions and interpretations may arise, making it challenging to determine the applicable law.

3. Tension Between Fairness and Public Policy

The tribunal’s discretion to apply fairness under Section 28(3) can sometimes clash with public policy considerations. This creates uncertainty about the enforceability of awards based on equitable principles.

4. Limited Guidance on Application of Foreign Law

The Act provides little direction on how tribunals should apply foreign laws in international arbitration, leaving room for interpretational errors and inconsistent awards.

 

Significance in International Arbitration

Section 28 plays a pivotal role in international arbitration by bridging differences between diverse legal systems. It facilitates cross-border commerce by enabling parties to agree on the legal framework governing their disputes. Additionally, the provision’s flexibility to incorporate transnational principles like lex mercatoria (law of merchants) ensures adaptability in disputes involving global business practices. The ability to choose neutral laws reduces potential biases and enhances confidence in arbitration as a dispute resolution mechanism.

1. Promotes Party Autonomy

One of the cornerstones of international arbitration is the respect for party autonomy. Section 28 allows parties to choose the substantive law applicable to their dispute, which is particularly important in international arbitration where parties come from diverse legal systems.

• Flexibility in Choice: Parties can opt for laws of a neutral jurisdiction or internationally accepted rules such as the UNIDROIT Principles of International Commercial Contracts or lex mercatoria.
• Neutral Ground: This provision ensures fairness by allowing parties to avoid being confined to one jurisdiction’s laws, which may favor one party over the other.

 

2. Alignment with Global Standards

Section 28(1)(b) mirrors principles found in international instruments such as the UNCITRAL Model Law on International Commercial Arbitration, which forms the foundation for arbitration laws in many jurisdictions worldwide.

• Recognition and Enforcement: By adhering to these principles, awards rendered in India or involving Indian parties are more likely to be recognized and enforced abroad under conventions like the New York Convention.

 

3. Balancing National and International Interests

While providing flexibility in international commercial arbitration, Section 28 ensures that domestic arbitrations adhere to Indian substantive law. This distinction balances the interests of local and global stakeholders.

• Domestic Safeguards: Indian substantive law is mandated in domestic arbitrations, protecting Indian interests in disputes that do not have an international element.
• Global Relevance: For international arbitrations, Section 28 facilitates the application of foreign laws or international rules, enhancing India’s appeal as an arbitration hub.

 

4. Consideration of Trade Usages and Contractual Terms

Section 28(2) emphasizes the importance of contractual terms and recognized trade usages, which are crucial in international arbitration.

• Industry-Specific Standards: Trade usages help tribunals resolve disputes based on universally accepted commercial practices, particularly in industries like shipping, construction, and international trade.
• Contractual Integrity: Ensures that the terms agreed upon by parties are honored, fostering confidence in arbitration as a dispute resolution mechanism.

 

5. Equity and Fairness in Cross-Border Contexts

Section 28(3) allows parties to authorize the arbitral tribunal to decide disputes based on principles of equity (ex aequo et bono) or as an amiable compositeur. This flexibility is particularly valuable in international arbitration, where rigid adherence to legal norms may not always be practical.

• Cultural Sensitivity: In cross-border disputes, applying equitable principles allows tribunals to consider cultural and jurisdictional nuances, ensuring fair outcomes.

 

6. Impact on Cross-Border Dispute Resolution

International arbitrations often involve complex, multi-jurisdictional disputes. Section 28 provides the framework to address these complexities.

• Neutral Framework: By allowing parties to choose applicable laws or rely on international trade practices, Section 28 creates a neutral ground for resolving disputes.
• Streamlined Decision-Making: The emphasis on trade usages and contractual terms simplifies proceedings in disputes involving parties from different legal systems.

 

7. Significance in Enforcement of Awards

The choice of substantive law under Section 28 directly impacts the enforceability of arbitral awards.

• Minimizing Challenges: Proper adherence to the agreed-upon rules reduces the risk of awards being challenged under Section 34 or enforcement being denied under Section 48.
• Global Acceptance: By enabling the application of international rules, awards become more universally acceptable under the New York Convention.

 

8. Encourages India as a Global Arbitration Hub

By incorporating provisions that align with international arbitration principles, Section 28 boosts India’s reputation as an arbitration-friendly jurisdiction.

• Attracting Foreign Parties: Flexibility in choosing applicable laws encourages foreign investors and multinational corporations to resolve disputes through arbitration in India.
• Improving Credibility: The alignment with global norms enhances India’s credibility in the international arbitration community.

 

Interplay with Other Provisions

1. Section 20: Seat of Arbitration

The seat of arbitration significantly impacts the interpretation of Section 28, as it determines the procedural framework for arbitration and may influence the tribunal’s approach to substantive laws.

2. Section 34: Setting Aside Arbitral Awards

Challenges to arbitral awards under Section 34 often involve questions about the tribunal’s application of substantive law. Adherence to Section 28’s requirements minimizes the risk of awards being set aside for legal irregularities.

3. Section 48: Enforcement of Foreign Awards

Section 28’s emphasis on compliance with public policy safeguards foreign arbitral awards during enforcement. Awards that violate substantive legal principles or public policy risk being denied recognition under Section 48.

 

Practical Tips for Parties in Arbitration

1. Choose Governing Law Clearly
   Explicitly specify the governing law in your arbitration agreement to avoid jurisdictional conflicts and delays.
2. Understand the Implications of Chosen Laws
   If opting for non-national legal principles, ensure both parties understand their implications to avoid challenges later.
3. Use Expert Legal Advice
   Consult legal experts familiar with the laws of the chosen jurisdiction to draft claims and defences effectively.
4. Anticipate Public Policy Issues
   Ensure that the chosen rules and expected awards align with the public policy of relevant jurisdictions to minimize enforceability challenges.

 

Challenges in Cross-Border Arbitration

In cross-border disputes, Section 28’s effectiveness can be hindered by:

• Conflict of Laws: Differing interpretations of substantive laws between jurisdictions can create confusion.
• Translation Issues: Misinterpretations of legal texts and terminologies in multilingual arbitrations can cause procedural delays.
• Recognition of Non-National Rules: Some jurisdictions may refuse to enforce awards based on principles like lex mercatoria, complicating the enforcement process.

 

Conclusion

Section 28 of the Arbitration and Conciliation Act, 1996, is a cornerstone of substantive fairness in arbitration. By providing a robust framework for the application of substantive rules, it ensures that arbitration remains a flexible yet predictable mechanism for dispute resolution. Despite its challenges, the provision’s adaptability makes it integral to both domestic and international arbitration. Parties and tribunals must navigate its nuances carefully to maximize its potential for resolving disputes efficiently and equitably.

 

Frequently Asked Questions (FAQs)

• What is Section 28 of the Arbitration and Conciliation Act, 1996?

Section 28 specifies the rules applicable to the substance of disputes in arbitration, ensuring disputes are resolved in accordance with chosen laws or equitable principles when permitted.

• Can parties choose non-national laws under Section 28?

Yes, parties in international arbitration can choose non-national rules, such as the UNIDROIT Principles, but this must be explicitly stated in the arbitration agreement.

• What happens if parties don’t choose a governing law?

If no governing law is chosen, the tribunal decides the applicable rules based on the circumstances of the case.

• Does Section 28 apply to domestic arbitration?

Yes, for domestic arbitration, disputes must be resolved according to Indian substantive laws as per Section 28(1)(a).

• Can public policy impact awards under Section 28?

Yes, awards violating public policy may face challenges or refusal of enforcement under Section 34 and 48.

• How does Section 28 affect international arbitration?

It allows parties to adopt laws of neutral jurisdictions, promoting fairness and reducing potential bias in cross-border disputes.

• What role does Section 28(3) play in arbitration?

Section 28(3) permits the tribunal to decide disputes based on fairness and equity, provided the parties explicitly authorize it.

• How does Section 28 interplay with enforcement provisions?

Compliance with Section 28 ensures that awards are enforceable under international conventions like the New York Convention.