Which Law Prevails When There Is A Conflict Between The Curial Law And Substantive Law?
When entering into an arbitration agreement, parties have the freedom to choose the law that governs the procedure of the arbitration (also known as the curial law or the lex arbitri) and the law that governs the underlying disputes (also known as the substantive law or the applicable law of the contract). The concepts of lex arbitri and substantive law can be summarised as follows:
(a)Lex arbitri determines the “seat” of the arbitration. It effectively confers the national court of the seat with the sole jurisdiction to supervise the arbitration proceedings including enforcing and setting aside the arbitral award.
(b)Substantive law governs the rights and obligations of the parties under the underlying contract and the substantive issues in dispute.
It is common for parties in international arbitration to adopt different laws for lex arbitri and the substantive law. For instance, when a Malaysian company enters into a contract with a foreign company to perform the contract in Malaysia, the parties usually agree to adopt Malaysian law as the substantive law governing disputes arising from the contract and would choose a neutral country as the seat of the arbitration (lex arbitri) to ensure fairness and impartiality to both parties.
The question then arises, what happens if there is a conflict between lex arbitri and the substantive law in the arbitration? Which law should apply in such circumstances?
Hindustan Oil Exploration Company Limited v Hardy Exploration & Production (India) Inc (W-02(NCC)(A)336-02/2022)
In the recent decision of Hindustan Oil Exploration Company Limited v Hardy Exploration & Production (India) Inc, the Court of Appeal resolved this issue when it determined that the Malaysian limitation law (being the lex arbitri) shall apply and not the Indian limitation law (being the substantive law).
In this case, Hindustan Oil Exploration Company Limited (Hindustan Oil), Hardy Exploration & Production (India) Inc (Hardy) and two other companies (collectively known as the Parties) entered into a Joint Operating Agreement (JOA) dated 5.12.1995.
The salient terms of the JOA are as follows:
“Article 17.12 Venue
The venue of sole expert, conciliation or arbitration proceedings pursuant to this Article, unless the Parties otherwise agree, shall be Kuala Lumpur, Malaysia, and shall be conducted in the English language. Insofar as practicable, the Parties shall continue to implement the terms of this Agreement notwithstanding the initiation of arbitral proceedings and any pending claim or dispute. Notwithstanding the provisions of Article 18, the arbitration agreement contained in this Article 17 shall be governed by the laws of England.”
“Article 18.1 Indian Law to Govern
Subject to Article 17, this Agreement shall be governed by and interpreted in accordance with the Laws of India.”
A dispute arose between the Parties, where Hardy submitted the unresolved disputes against Hindustan Oil to international arbitration before a tribunal which comprised three arbitrators.
Article 17.12 of the JOA provided that the venue of the arbitration shall be Kuala Lumpur and that the laws of England shall govern the arbitration agreement. Further, Article 18.1 of the JOA stipulated that the JOA shall be governed by and interpreted in accordance with the laws of India. It is crucial to note that the parties have agreed that Malaysian law shall be the law of the seat of arbitration (lex arbitri).
Under Section 3 of the Indian Limitation Act 1963, Hardy’s claims ought to be time-barred as they were for the expenses incurred more than 3 years before the commencement of the arbitration. However, under Section 6 of the Malaysian Limitation Act 1953, Hardy’s claims were still within the limitation period of 6 years.
Although Article 18 of the JOA provided that the laws of India shall govern the JOA, the majority of the tribunal decided that the Malaysian limitation law applied as the seat of arbitration was in Kuala Lumpur. Thus, Hardy’s claims were not time-barred and the majority of the tribunal issued the majority award in favour of Hardy.
Hindustan Oil applied to the High Court to set aside the majority award under Section 37 of the Arbitration Act 2005. However, Hindustan Oil’s application to set aside the majority award was dismissed by the High Court. Dissatisfied with the High Court’s decision, Hindustan Oil appealed to the Court of Appeal. Upon hearing the parties, the Court of Appeal dismissed the appeal and affirmed the High Court’s decision.
The core issue before the Court of Appeal was whether the majority of the tribunal was correct in applying the Malaysian limitation law instead of the Indian limitation law.
The Court of Appeal held that limitation period is a matter of curial or procedural law (lex arbitri) and not substantive law. This is because if the defence of limitation period was allowed, it will prevent the parties from proceeding with the merits of the case. Even if civil wrong can be proven on merits, limitation period shall prevail if the complaint was not raised within the prescribed limitation period. Therefore, the applicable law governing the limitation period should be the procedural law (lex arbitri) of the seat of arbitration (Malaysian law) and not the substantive law (Indian law).
Since the tribunal had correctly applied the Malaysian limitation law, the Court of Appeal held that the tribunal’s decision-making process was legally sound. Any complaint of civil wrong beyond the limitation period was encroaching into the merits of the case and should not be disturbed by the court.
The Court of Appeal’s decision emphasises the importance of meticulously analysing the conflicts of law in international arbitration and accurately ascertaining the applicable lex arbitri and substantive law.
It is worth highlighting that a similar issue was considered by the Federal Court in The Government of India v Cairn Energy India Pty Ltd & Anor  6 MLJ 441. In this case, the parties chose Indian law as the substantive law and English law as the law governing the arbitration agreement. Parties further agreed that the seat of the arbitration proceedings (lex arbitri) was to be in Kuala Lumpur. The Government of India dissatisfied with the arbitral award and applied to the Malaysian High Court to set aside the award pursuant to Section 24(2) of the Malaysian Arbitration Act 1952.
The Federal Court considered whether Malaysian law (lex arbitri) or English Law (the law governing the arbitration agreement) should apply in this setting aside application. One of the questions posed to the Federal Court was whether it was proper for the Malaysian court to apply Malaysian law exclusively in determining the scope of intervention in arbitration award despite the parties agreeing for the laws of India to govern the contract and the laws of England to govern the arbitration agreement.
The Federal Court answered the question in the affirmative. It held that parties had to comply with the mandatory procedural law of the seat of arbitration (lex arbitri), since they were subject to the jurisdiction and control of the courts of the seat. The lex arbitri of the seat shall also apply when considering applications to set aside arbitral awards.
Therefore, when there is a conflict between lex arbitri and substantive law, it is crucial to determine whether the conflicting law is a matter of procedural (lex arbitri) or substantive law.
If the particular issue remains unaffected by the merits of a
case, then it is a matter of procedural law where lex arbitri ought to apply. However, if the particular issue affects the substantive rights and obligations of the parties, then it is a matter of substantive law where the parties’ chosen/agreed substantive law ought to apply.
This determination of the applicable law will help preserve fairness and impartiality in arbitration. This further ensures that the arbitral award is valid and enforceable and that conflict of laws would not become a ground for setting aside the arbitral award.
17 May 2023