Originally from Dispute Resolution Journal

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Parties choose arbitration as their preferred means of dispute resolution because it allows them an opportunity to customize resolution of potential conflicts. In other words, parties are able to choose everything about their dispute resolution process from who hears their case to where it will take place to which laws will apply.  Sometimes, however, this freedom to customize gives way to confusing and pathological arbitration clauses, as was with the case in Union of India v. McDonnell Douglas Corp.  In this case, the parties chose two sets of procedural law, likely by accident. Instead of forcing the parties to choose one or the other, the Court arrived at a bizarre decision:  to create a distinction between “internal” and “external” procedural law. This distinction appears to be a stretch.  It is problematic for several reasons.  First, it creates a level of confusion in interpreting arbitration agreements.  Second, such a practice would create issues in compliance with arbitration laws in several countries. Third, making such a distinction renders arbitration agreements unnecessarily granular and theoretical, thus facilitating the creation of pathological arbitration clauses. As most disputes of this kind, McDonnell Douglas started with a dispute arising out of a contract containing a vague, confusing and arguably pathological arbitration clause.  The procedural law portion of this agreement read, “The arbitration shall be conducted in accordance with the procedure provided in the Indian Arbitration Act of 1940. . . . The seat of the arbitration proceedings shall be London, United Kingdom.” Once a conflict arose in connection with the container contract, the parties disputed whether English or Indian law would govern the procedure of their arbitration. The plaintiffs, bringing the claim to a court in the United Kingdom, contended that the applicable procedural law would be the Indian Arbitration Act of 1940, whereas the defendants argued that it was the law of London, since that had been stipulated to be the “seat.”The Court decided that both parties were correct. They held that the container contract and the law governing the arbitration agreement itself would be Indian law, whereas the law governing the “external” proceedings themselves would be the law of London, the seat.  This was because by electing London as the “seat,” they implicitly chose to follow English procedural laws (or “external” procedure), while simultaneously having the Indian Arbitration Act govern the “internal” procedure, governing the “internal conduct of their arbitration.” Thus, the Court held that it is possible to choose a procedural law that is distinct from the law governing the “seat.”  This is problematic when examining the distinction (or substantial lack thereof) between the definitions of “seat” and “procedural law.”