Rules Applicable to the Substance of the Dispute: Section 28

Section 28 answers the question by what law the tribunal is to decide. The answer differs according to whether the arbitration is domestic or international commercial. In a domestic reference the substantive law in force in India applies and the parties cannot choose otherwise. In an international commercial arbitration the parties choose, and their choice binds the tribunal. In both, a decision on grounds of fairness rather than law requires the express authority of the parties, and in both the tribunal must take into account the terms of the contract and the usages of the trade.

1. The Provision

The section applies where the place of arbitration is in India, so it is part of the machinery of Part I. For an arbitration seated abroad the substantive law is determined by the law of that seat and by the parties' agreement, and Indian law enters only at the stage of enforcement under Part II.

The division made by Section 28(1), and the rules that apply to every reference

2. Domestic Arbitration

Clause (a) is mandatory in form: the tribunal shall decide in accordance with the substantive law for the time being in force in India. Two Indian parties arbitrating in India cannot confer on the tribunal authority to decide their dispute by the law of another country, and a clause purporting to do so is ineffective to that extent. The reason is that the freedom to choose a foreign law is a feature of international transactions; where the transaction has no foreign element, a choice of foreign law would be a device to escape the Indian law the parties are subject to, and Section 28(1)(a) forecloses it.

The substantive law in force in India includes not only the Indian Contract Act, 1872 and the law of the particular transaction, but the whole body of statutory and general law applicable to it, including mandatory provisions which the parties could not have contracted out of. A tribunal that gives effect to a term which the law forbids decides contrary to Section 28(1)(a), and the award is open to challenge as patently illegal under Section 34(2A).

3. International Commercial Arbitration

Clause (b) rests on party autonomy. The tribunal applies the rules of law designated by the parties, and three refinements are built into the text.

1. Rules of law, not merely law. The expression is wider than the law of a country. It permits the parties to choose a body of rules which is not the law of any State, such as the UNIDROIT Principles of International Commercial Contracts, or a combination of a national law with such rules.
2. Renvoi is excluded. A designation of the law or legal system of a given country is construed as directly referring to the substantive law of that country and not to its conflict of laws rules. Without this, a choice of the law of a country could be deflected by that country's own rules pointing elsewhere.
3. Direct choice where the parties are silent. Failing designation, the tribunal applies the rules of law it considers appropriate given all the circumstances. It is not required to identify a conflict of laws rule and then apply the law that rule points to, which is the method Article 28(2) of the UNCITRAL Model Law prescribes. India adopted the more direct approach, and the tribunal must still give reasons for the choice it makes.

Party autonomy under clause (b) is not unlimited in its practical effect. However the substance is decided, the award remains subject to Section 34, and an award that offends the public policy of India may be set aside under Section 34(2)(b)(ii) even though the foreign law chosen by the parties permitted the result. The chosen law governs the rights of the parties; it does not displace the standards by which an Indian court examines the award.

4. The Four Laws in an Arbitration

The distinct questions each law answers, and why they may differ

Section 28 deals with only one of the laws that bear on an arbitration, and a common error is to treat a choice of law clause as answering all of them. The proper law of the contract governs the substance and is the subject of Section 28. The law governing the arbitration agreement governs the validity, scope and effect of the clause itself, including who is bound by it; parties rarely specify it, and in the absence of a specification it is generally inferred from the proper law of the contract or from the law of the seat. The curial law, or lex arbitri, governs the conduct of the reference and the supervisory jurisdiction, and is fixed by the seat under Section 2(2) read with Section 20. The law of the place of enforcement governs execution and supplies the public policy that may defeat the award.

5. Ex Aequo et Bono and Amiable Compositeur

The two expressions describe a tribunal deciding otherwise than by the strict application of law. To decide ex aequo et bono is to decide according to what the tribunal considers fair and good, setting aside the legal rules that would otherwise govern. An amiable compositeur, a concept drawn from the civil law, applies the law but is permitted to moderate its strict effects where they would produce an unjust result in the particular case. The distinction is one of degree, and Section 28(2) treats the two together.

• Express authorisation is required. Silence is not enough, and authority cannot be inferred from a widely drawn clause or from the parties' conduct. The authorisation should be recorded in the agreement or in a separate writing.
• The consequence of acting without authority. An arbitrator who decides on his own notion of fairness without being authorised decides otherwise than in accordance with Section 28, exceeds his mandate, and exposes the award to challenge under Section 34(2)(a)(iv) and, in a purely domestic reference, under Section 34(2A) as patently illegal.
• What it does not mean. A tribunal deciding according to law is not confined to a mechanical application of rules. It construes the contract, applies equitable principles which form part of the law, and exercises the discretions the law confers, for example as to interest and costs. None of that requires authority under Section 28(2).
• Rarity in India. The power is very seldom conferred in Indian practice, partly because parties value the predictability of a decision according to law, and partly because an award made ex aequo et bono is harder to defend against a challenge founded on the terms of the contract.

6. Terms of the Contract and Trade Usages: Section 28(3)

As originally enacted, Section 28(3) required the tribunal to decide in accordance with the terms of the contract and to take into account the usages of the trade applicable to the transaction. Read with the public policy ground as it was then understood, that language produced a line of cases in which awards were set aside because the court took a different view of the contract from the arbitrator. The Amendment Act of 2015 substituted the present words, under which the tribunal shall take into account the terms of the contract and trade usages, and the change was deliberate: the tribunal remains bound to have regard to the bargain, but its construction of the bargain is not to be replaced by the court's.

The position after the amendment was confirmed in Ssangyong Engineering and Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, where an award was set aside because the majority applied a formula which formed no part of the contract between the parties and which had been introduced without the other side being heard. The award was held to be in conflict with the most basic notions of justice and to amount to a unilateral rewriting of the contract. Two propositions may be drawn: a tribunal may construe the contract as it thinks right, but it may not substitute a different contract for the one the parties made.

7. Related Topics and Provisions