Section 28 of Arbitration and Conciliation Act, 1996 addresses the provisions relating to the law applicable to the merits of the dispute in arbitration proceedings. This section provides for what laws the arbitral tribunal has to apply while determining a dispute based on whether the arbitration is domestic or international commercial arbitration.
It also empowers parties to select applicable law and offers rules in the absence of the application of a specific law. Furthermore, it authorises tribunals to determine matters based on equity (ex aequo et bono), which is explicitly given by the parties.
Understanding Section 28
Section 28 defines how arbitral tribunals determine the law governing the dispute in domestic and international arbitrations. It is divided into three key provisions:
Sub-section (1): Law Applicable to the Substance of the Dispute
This sub-section outlines which legal framework should be applied depending on the type of arbitration.
Clause (a): Domestic Arbitration (Non-International)
Explanation:
If arbitration is domestic (i.e., not involving a foreign party), the tribunal must apply Indian substantive law.
The tribunal cannot apply foreign laws unless specified under an international arbitration framework.
This ensures consistency in arbitration awards within India.
Example:
A contract between two Indian companies has an arbitration clause. The arbitration is held in Delhi.
The tribunal must apply Indian contract law, even if one party prefers a foreign law.
Clause (b): International Commercial Arbitration
Under Section 2(1)(f), arbitration is "international" if at least one party is foreign (i.e., not Indian).
(i) Law Designated by the Parties
If parties in an international arbitration specify a particular law, the tribunal must apply that law.
This honours party autonomy, a fundamental principle in arbitration.
Example:
A contract between an Indian and a UK company includes arbitration in Singapore under English law.
The tribunal must decide the dispute based on English contract law (as chosen by the parties).
(ii) Designation of Law Refers to Substantive Law (Not Conflict of Laws Rules)
This prevents confusion regarding conflict of laws principles (i.e., rules that determine which country's laws apply).
If a contract states, "English law applies", it means English contract law and not English conflict of laws rules.
Example:
A contract says "US law applies" in case of disputes.
This means US contract law will apply, not US rules on deciding jurisdiction or applicable law.
(iii) When No Law is Designated, Tribunal Decides
If the parties do not specify a governing law, the tribunal has the discretion to select an appropriate legal system.
The tribunal must consider all circumstances, such as:
Place of arbitration
Nature of the contract
Nationalities of the parties
Trade practices
Example:
A contract between an Indian and a German company does not specify a governing law.
The arbitration is in Switzerland, and the tribunal decides to apply Swiss contract law, considering the arbitration location.
Sub-section (2): Ex Aequo et Bono or Amiable Compositeur Decision-Making
Explanation:
"Ex aequo et bono" means "according to what is fair and good."
"Amiable compositeur" means the tribunal can decide based on fairness rather than strict legal rules.
However, this can only happen if both parties explicitly agree.
Example:
In a construction dispute, the arbitrators decide based on fairness rather than strict contract law—only if the parties agree.
If there is no such agreement, the tribunal must follow the applicable legal system.
Sub-section (3): Contract Terms and Trade Usages Must Be Considered
Explanation:
The tribunal must consider:
Contract terms – The tribunal cannot ignore the written contract.
Trade customs and industry practices – Helps interpret ambiguous terms and ensure fairness.
Example:
A maritime trade contract contains standard industry practices.
The tribunal must apply those trade customs while deciding the case.
Key Features of Section 28
Section 28 keeps arbitration legally robust, weighing party autonomy against pre-existing legal maxims.
1. Enforcement of Indian Law in Domestic Arbitration
Indian law should be applied by arbitral tribunals if the seat of arbitration is India.
This disallows parties from evading Indian legal enactments by private arbitration.
2. Role of Contractual Conditions and Trade Practices
Arbitrators need to interpret contracts equitably and take into account trade practices when settling disputes.
This brings arbitration into line with business standards and commercial expectations.
3. Flexibility of International Arbitration
Parties are free to select any applicable law for international commercial arbitration.
Where no option is exercised, the tribunal will apply the most suitable law pursuant to conflict of law rules.
4. Ensures Equitable and Pragmatic Making of Decisions
By looking at trade practices and contract provisions, Section 28 ensures practical and equitable settlement of disputes.
Judicial Interpretations of Section 28
Indian courts have upheld the principles of party autonomy, fairness, and legal consistency under Section 28.
1: TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd. (2008 SCC OnLine SC 1334)
Facts: Two Indian companies had an arbitration agreement but referred to foreign law.
Issue: Can two Indian companies opt for foreign law in domestic arbitration?
Judgment: The Supreme Court ruled that for domestic arbitration, only Indian law can apply under Section 28(1)(a).
Significance: Ensured that Indian law is mandatory for domestic arbitration.
2: Reliance Industries Ltd. v. Union of India (2014) 7 SCC 603
Facts: A contract had an arbitration clause referring to English law, but the dispute involved Indian public policy issues.
Issue: Can an arbitral tribunal ignore Indian public policy if foreign law applies?
Judgment: The tribunal must respect Indian public policy, even if the contract specifies a foreign law.
Significance: Ensured that foreign arbitration cannot override Indian legal principles in key public policy matters.
Also, Checkout How to Draft Arbitration Clauses?
Conclusion
Section 28 of Arbitration and Conciliation Act 1996 is the key to determining the law governing arbitration. It makes sure that disputes are settled on the basis of just, legally valid, and commercially sound principles. This provision keeps a balance between statutory compliance and party autonomy and thereby makes arbitration a reliable mechanism for resolving disputes in India and around the world.
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FAQs on Section 28 of Arbitration and Conciliation Act, 1996
Q1. What is Section 28 of Arbitration and Conciliation Act?
Section 28 prescribes the law governing the content of disputes, such that domestic arbitrations are governed by Indian law, and international arbitrations may follow a selected foreign law.
Q2. How does Section 28 operate in domestic arbitration?
In domestic arbitration, tribunals are required to resolve disputes according to Indian substantive law, taking into account contractual terms and applicable trade practices.
Q3. Can parties select their governing law in arbitration?
Yes, in commercial international arbitration, parties may agree on any law of governance. If no law is indicated, the governing law is ascertained by the tribunal, which relies on conflicting law rules.
Q4. What if an award is made in contravention of Indian law?
If an arbitral award violates Indian substantive law, it is challengeable under the ground of public policy in a court of law.
Q5. Does Section 28 permit arbitrators to consider trade practices?
Tribunals must indeed interpret agreements in good faith and refer to trade usages to produce commercial and fair awards.
