Governing Law Clauses

1. Meaning of Governing Law Clause

A Governing Law Clause (also called a “choice of law clause”) specifies the legal system that will regulate:

Interpretation of the contract

Rights and obligations of parties

Validity and performance

Remedies for breach

It is distinct from:

Jurisdiction clause (which court will hear disputes)

Arbitration clause (whether disputes go to arbitration)

Seat of arbitration (procedural law governing arbitration)

2. Legal Framework in India

Recognition of governing law clauses flows from:

Indian Contract Act, 1872

Code of Civil Procedure, 1908

Arbitration and Conciliation Act, 1996

Private International Law principles recognized by courts

Indian law generally respects party autonomy, subject to public policy and statutory restrictions.

3. Party Autonomy Principle

Indian courts uphold that:

Parties are free to choose the governing law of their contract, even if it is foreign law, provided the choice is bona fide and not contrary to Indian public policy.

4. Distinction Between Governing Law and Jurisdiction

A contract may have:

Governing law: English law

Jurisdiction: Mumbai courts

Seat of arbitration: Singapore

Each has independent legal consequences.

5. Important Case Laws

1. National Thermal Power Corporation v. Singer Company

Landmark case on governing law and arbitration.

Held:

Parties can expressly choose governing law.

In absence of express choice, law with closest connection applies.

Distinguished between proper law of contract and procedural law.

2. Sumitomo Heavy Industries Ltd. v. ONGC Ltd.

Clarified distinction between:

Proper law of contract

Proper law of arbitration agreement

Curial law (law of seat)

Held that governing law must be ascertained from intention of parties.

3. Bhatia International v. Bulk Trading S.A.

Held that Indian arbitration law could apply to foreign-seated arbitrations unless expressly excluded (later overruled partially).

Important for understanding earlier approach to governing law vs seat.

4. Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.

(BALCO case)

Overruled Bhatia to extent applicable prospectively.

Held:

Seat of arbitration determines supervisory jurisdiction.

Recognized party autonomy in choosing foreign governing law and seat.

5. Enercon (India) Ltd. v. Enercon GmbH

Court interpreted ambiguous arbitration clause.

Held:

Intention of parties paramount.

Distinguished between substantive governing law and arbitration law.

6. Hardy Exploration and Production (India) Inc. v. Union of India

Discussed seat vs venue distinction and impact on governing procedural law.

7. Mankastu Impex Pvt. Ltd. v. Airvisual Ltd.

Reaffirmed importance of determining seat for jurisdiction and governing arbitration law.

8. Atlas Export Industries v. Kotak & Co.

Upheld validity of foreign jurisdiction and governing law clause in commercial contracts.

6. Governing Law in International Contracts

When foreign law is chosen:

Indian courts may apply foreign law if proved as fact.

If not proved, court may presume similarity with Indian law.

Choice of foreign law invalid if:

Intended to evade Indian mandatory law.

Contrary to Indian public policy.

7. Governing Law vs Public Policy

Even if foreign law is chosen:

Indian courts may refuse enforcement if:

Contrary to fundamental policy of Indian law.

Violates statutory provisions.

Offends morality or justice.

This is especially relevant in enforcement of foreign arbitral awards.

8. Governing Law and Arbitration

Three potentially different laws may apply:

Proper law of contract

Law governing arbitration agreement

Law of seat (curial law)

Indian Supreme Court has clarified that these can be different but must be interpreted harmoniously.

9. Mandatory Indian Law Override

Certain statutes cannot be contracted out of:

FEMA regulations

Competition law

Insolvency law

Consumer protection laws

Even if foreign law governs contract, Indian mandatory statutes may apply.

10. Drafting Considerations

A well-drafted clause should:

✔ Clearly state governing law
✔ Distinguish from jurisdiction clause
✔ Clarify arbitration seat
✔ Avoid conflicting provisions
✔ Consider enforceability issues

Example:

“This Agreement shall be governed by and construed in accordance with the laws of India.”

11. Conflict of Laws Test (If No Clause)

If no governing law clause exists, courts apply:

Closest connection test

Place of performance

Place of contracting

Subject matter location

12. Corporate & Shareholder Agreements Context

In cross-border investments:

Often English or Singapore law chosen.

Must ensure compatibility with Companies Act and FEMA.

Articles of Association must not contradict mandatory Indian law.

13. Comparative Position

14. Conclusion

Indian law strongly recognizes the validity of governing law clauses based on party autonomy. Courts:

Respect express choice of law

Distinguish between substantive and procedural law

Protect mandatory statutory provisions

Apply public policy safeguard

The jurisprudence developed through landmark cases like NTPC, BALCO, Enercon, and Sumitomo ensures clarity in cross-border commercial contracting.