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Section 28 of the Arbitration and Conciliation Act, 1996: Rules Applicable to Substance of Dispute

Section 28 of the Arbitration and Conciliation Act, 1996 determines the rules of law that an arbitral tribunal must apply to the substance of a dispute where the place of arbitration is in India. It distinguishes between domestic arbitration and international commercial arbitration and also requires the tribunal to consider the terms of the contract and applicable trade usages.

What is Section 28 of the Arbitration and Conciliation Act, 1996?

Section 28 governs the substantive law applicable to an arbitral dispute. It tells the arbitral tribunal which legal rules must be used when deciding the rights and liabilities of the parties.

In simple terms: for an arbitration seated in India, Section 28 tells the tribunal what substantive law to apply. In a domestic arbitration, Indian substantive law applies. In an international commercial arbitration, the parties may choose the applicable rules of law, subject to the framework in Section 28(1)(b).

Text of Section 28 - Rules Applicable to Substance of Dispute

28. Rules applicable to substance of dispute.

(1) Where the place of arbitration is situate in India,-

(a) in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;

(b) in international commercial arbitration,-

(i) the arbitral tribunal shall decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute;

(ii) any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of laws rules;

(iii) failing any designation of the law under clause (a) by the parties, the arbitral tribunal shall apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute.

(2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do so.

(3) While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction.

Official text: Arbitration and Conciliation Act, 1996 - India Code

Section 28(1)(a): Domestic Arbitration in India

Where the arbitration is not an international commercial arbitration and the place of arbitration is in India, Section 28(1)(a) requires the tribunal to decide the dispute in accordance with the substantive law for the time being in force in India.

The expression substantive law refers to the body of law that determines the legal rights, duties and liabilities of the parties, as distinguished from procedural rules governing how the arbitration itself is conducted.

Section 28(1)(b): International Commercial Arbitration

In an international commercial arbitration seated in India, the parties are permitted to designate the rules of law applicable to the substance of their dispute.

Party Choice of Applicable Law

Under Section 28(1)(b)(i), the arbitral tribunal must decide the dispute according to the rules of law chosen by the parties.

Reference to a Country's Legal System

Section 28(1)(b)(ii) clarifies that, unless the parties state otherwise, a reference to the law or legal system of a country means its substantive law and not its conflict-of-laws rules.

No Express Choice by the Parties

If the parties do not designate the applicable rules of law, Section 28(1)(b)(iii) authorises the arbitral tribunal to apply the rules of law it considers appropriate in light of all the circumstances surrounding the dispute.

Meaning of Ex Aequo et Bono

The expression ex aequo et bono means deciding a dispute according to what is fair and equitable rather than strictly applying ordinary legal rules. Section 28(2) allows the tribunal to decide on this basis only when the parties have expressly authorised it to do so.

Meaning of Amiable Compositeur

An amiable compositeur is an arbitrator authorised by the parties to decide with a degree of equitable flexibility rather than being confined strictly to ordinary legal rules. Under Section 28(2), this authority must be expressly granted by the parties.

Section 28(3): Contract Terms and Trade Usages

Section 28(3) requires the arbitral tribunal, while deciding the dispute and making the award, to take into account the terms of the contract and trade usages applicable to the transaction.

The present wording of Section 28(3) was substituted by the Arbitration and Conciliation (Amendment) Act, 2015 with effect from 23 October 2015. The provision now applies in all cases, emphasising that the tribunal must consider both contractual terms and applicable trade usages while making its decision.

What are Trade Usages?

Trade usages are established practices, customs or commercial norms commonly observed in a particular trade, industry or type of transaction. Section 28(3) requires the tribunal to consider such usages where they are applicable to the transaction in dispute.

Key Features of Section 28

Relationship with Other Arbitration Provisions

Section 27 deals with court assistance in taking evidence, while Section 29 addresses decision-making by a panel of arbitrators. Section 28 sits between these provisions and governs the substantive legal framework the tribunal must use when deciding the dispute and making the award.

Statutory text checked against the current India Code publication of the Arbitration and Conciliation Act, 1996.