Untangling the knots: a discussion on the governing law of arbitration agreement
09 September 2022
Arbitration is becoming one of the most preferred modes of dispute resolution to cater the needs of parties, especially in international transactions. Gaining popularity in the international realm, the arbitral jurisprudence has evolved by leaps and bounds in recent times. One such recent development is the introduction of the governing law of arbitration agreement (hereinafter “AA”). Earlier, this was studied from the theoretical perspective and did not have much application in the practical regime. However, the recent developments have resulted in new intricacies, giving way to a new system of law to govern the AA.
In usual practice, the contracting parties mention the contract law and the procedural law of arbitration i.e. seat. However, they often fail to mention the governing law of AA. Such default to mention the governing law of AA gives rise to the bone of contention between the parties. To determine such law, the national court and the arbitral tribunal comes into picture. The question to determine the governing law of the AA arises only in international commercial arbitrations as laws of different countries are involved that govern the international contract.
Various jurisdictions have tried to hammer down the question of determining the governing law of AA according to their own domestically developed arbitral jurisprudence. Such an action has resulted in discrepancies among the decisions of various jurisdictions and there is no uniform formally recognized set of principles to determine the same. Some jurisdictions have developed their own set of rules and principles to determine this question.
The governing law of AA ponders upon the question of validity, existence, and interpretation of the AA. An arbitral tribunal is a creature of a valid AA between the parties. To uphold an AA and to enforce the arbitral award derived from such an arbitral tribunal, it is necessary that the AA should have a valid existence under the law to which it is subjected. Therefore, often the losing party or the party reluctant to arbitrate tries to subject the AA to laws which nullify the existence of the AA, resulting in no arbitration at all.
International contracts: a cocktail of different laws
Often the commercial parties enter certain international contracts with arbitration as the preferred mode of dispute resolution. However, while entering such cross-border and international contacts they fail to realise that such contracts are a cocktail of various laws and legal rules that govern their contractual relationship.
Broadly categorising, there are three different sets of laws that are applicable to such international contracts.[1] The parties usually mention two of these laws but often forget the third law which governs the AA.
The first system of law that governs the international contracts is the substantive law of the underlying contract. This system of law applies to the whole contract, including each clause in the contract, unless agreed otherwise. Rights and obligations of the parties, sending notice, governing the subject matter of the contract, etc. are certain aspects that are covered under the substantive law of the contract.
The second is the procedural law of the AA which is derived from the seat of arbitration. Also referred to as the curial law, this system of law decides upon the procedure for conducting the arbitration. The seat of arbitration confers the jurisdiction upon the courts to decide any interim measure or challenge prayed by the parties to the contract. For instance, in an international arbitration having one party from India and the other from Singapore, the seat of arbitration is in India. This would imply that the Indian procedural law will govern the arbitration proceeding i.e. Arbitration and Conciliation Act, 1996. Also, the Indian courts will have the appropriate jurisdiction to decide upon any interim relief or challenge to the award.
Lastly, the third system of law which comes into play in such international contracts is the law governing the AA. This particular set of law has stirred great debate within various jurisdictions and no common consensus exists. The AA is a complete agreement in itself and has a separate governing law to decide upon the issues of existence, validity, interpretation and conclusion.
All these three systems of laws come together to create an international commercial contract, whereby, each set of laws play an important role within its own sphere. However, often the parties fail to mention the governing law of the AA. This creates a bone of contention between the parties as there is no well settled position of law to determine the governing law of AA. Each jurisdiction has adopted a different approach based on their interpretation of law. But before analysing the position across various jurisdictions on this aspect, it is important to untangle the knots on the subject matter of this article and to understand what is actually meant by governing law of the AA.
Decoding the governing law of AA
The law governing the AA is relatively a recent development and is still concretizing through various authorities and judgments. The purpose of any AA is to bind the parties for arbitration, and to serve the same, it is necessary that such AA should have a valid existence under the law which governs it. Just like any other contract or agreement, an AA also delves into the question of validity, existence, interpretation, and conclusion.[2] Such questions are primarily decided by the governing law of AA.
A question to determine the governing law of AA may arise before the national courts as well as before the tribunal constituted. Any objection or dispute regarding the governing law of the AA is determined in the initial stages itself because such objection or dispute decides whether the AA has been validly concluded or not, thus deciding upon the existence of such AA. The arbitral tribunal is a creature of the AA and draws its power from the AA itself. Therefore, the jurisdiction of the arbitral tribunal depends upon the validity of the AA and such validity of the AA is decided by the law governing the AA.
Referring to our previous example, let us assume that, in an international arbitration one party is from India and the other from Singapore. The seat of arbitration is in India and the law of the underlying contract is Singapore law. However, the governing law of the AA is not mentioned. The award came in the favour of the Indian party and the Singaporean party challenged the award stating that the AA was not validly concluded between the parties and thus, did not even exist in the first place.
The Singaporean party argued that the law of contract, i.e. Singaporean law will apply to govern the conclusion of the AA. Under the Singaporean law the AA is not validly concluded and therefore, it does not exist and the whole award is null and void ab initio.
The Indian party took a stance that the governing law of the AA will be the law of seat, i.e. Indian law. Under the Indian law the AA has been validly concluded and is biding upon the parties. Therefore, the award issued should be upheld.
Now this becomes a moot point between the parties, and the national courts usually determine this question based on their interpretation of various international instruments, treaties, doctrines, and principles.
Raising the curtain: determining the governing law of the AA
Doctrine of Separability
The ‘doctrine of separability’ is one of the foremost pillars of arbitration.[3] The doctrine of separability provides for upholding the AA even in the case of invalidity of the main contract.[4] Thus, the invalidity of a contract does not affect the AA, even though it is a part and parcel of the same contract.[5]
The genesis of the question to determine the governing law of AA derives from the ‘doctrine of separability’. The separability doctrine is often given a wider scope to engulf the determination of AA law as well. This results in the presumptive separability of the AA from the underlying contract for all purposes, including the determination of law governing the AA.
The separability presumption gives way for the AA to be governed by a different set of laws from that of the underlying contract.[6] The separability doctrine does not draw a conclusion that the law of the AA is always separate from the law of the underlying contract. However, the doctrine enunciates that there may be different laws that govern the AA and the underlying contract.
The AA is an independent contract autonomous of the main contract[7] even when contained inside it. The notion of separability has a closely related consequence on the issue of governing law of AA.[8] The AA must be separated[9]from the main contract to determine its governing law.[10]
By making the AA separate from the main contract by using the separability doctrine, some jurisdictions have arrived at the conclusion that the law of seat should extend to the governing law of the AA.[11] This means that the system of laws at the seat of arbitration will extend to govern the AA as well.
New York Convention
The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (hereinafter “New York Convention”) plays an important role in determining the law governing the AA. The purpose of the New York Convention is to facilitate the enforcement of the award passed by the Tribunal. If the award is not valid as per the New York Convention, then no enforcement is granted for the award passed, and the whole process of arbitration is rendered futile. To avoid any anomaly at a later stage, a reference is made to the New York Convention for determining the law governing the AA. Where the parties have not mentioned the law governing the AA, the New York Convention relies on the importance of the seat of arbitration while deciding the law of the AA.
Art. V (1)(a) of the New York Convention provides that an arbitral award may be refused recognition where the AA is not valid under the country’s law where the award was made. This prima facie gives the right to parties to choose a particular law to govern their AA. In cases where the parties have not specified a particular law to govern their AA, that agreement will be governed by “the law of the country where the award was made” i.e., the seat of AA.[12] The award is made in the country where the arbitration is seated. Therefore, in cases where the law governing the AA is not stated, the laws at the seat of arbitration will be adopted as the governing law of the AA. As per Art. V (1)(a) of the New York Convention, the law governing the AA should be in consonance and harmony with the law of the seat of arbitration.
UNCITRAL Model Law
In the absence of the law governing the AA, the UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006 (hereinafter “Model Law”) draws reference to the law of seat to determine the law governing the AA. The Model Law provides a reference framework for the national arbitration act of a country. Around 85 jurisdictions have adopted the Model Law and have developed their national arbitration act based on the Model Law framework.
Art. 34 (2)(a)(i) and Art. 36 (1)(a)(i) of the Model Law permit the annulment or non-recognition of an arbitral award based on the country where the award is made, i.e., the seat of arbitration. This makes it clear that the award may not be recognized if the AA is not valid under the laws of the seat. The seat of arbitration has great importance attached to it while deciding the governing law of the AA.[13] Reading Art. V(1)(a) of the New York Convention and Art. 34 (2)(a)(i) and Art. 36 (1)(a)(i) of the Model Law, the same conclusion is drawn that the system of laws at the seat of arbitration will also extend as the governing law of the AA.
The judicial authorities in Model Law jurisdictions have uniformly recognized that international AA(s) are governed by a different law[14], other than the substantive law of the underlying contract.[15] Therefore, the system of laws at the seat of arbitration will extend to govern the AA as well.[16]
Limited purpose of the Separability Doctrine
The separability doctrine has a very limited purpose which is to determine validity of the AA in case of invalidity of the main contract. Art. 16 of the Model Law, which recognizes the separability of an AA from the main contract, limits the purpose of this doctrine to safeguard an arbitral tribunal’s jurisdiction from an invalid main contract. The usage of words “for that purpose” in Art. 16 of Model Law[17] makes the purpose and intent of the separability doctrine clear which is to save the AA from a null and void contract by treating such AA as a separate agreement from the main contract.
The AA is separate but not severable from the main contract. The AA is considered to be separate from the contract for a very limited purpose, which is to avoid the invalidity of the AA resulting from the invalidity of the main contract. Applying the separability principle to determine the governing law of the AA goes against the foundation of arbitration i.e., party autonomy. The Singapore High Court in BCY v BCZ, iterated the limited purpose of the doctrine of separability and held that under this doctrine, a party cannot avoid the obligation to submit a dispute to arbitration by merely denying the existence of the underlying contract.[18] In Sulamerica v Enesa, the English court of appeal observed that, the only purpose of the doctrine of separability is to give legal effect to the parties’ intention of resolving disputes through arbitration and not to insulate the arbitration agreement from the substantive contract for all purposes.[19]
Considering AA as a part and parcel of the same contract
Whenever the parties submit to any law to govern their contract, their intention is to submit the entire contract to be governed by such law, inclusive of the AA. When the contract’s underlying law is stated, it presumptively extends to the parties’ AA.[20] The arbitration clause is merely one of several provisions in a contract and should be governed by the law of the main contract itself.[21] The parties to the contract are commercial in nature and usually do not intend that their contractual relationship should be governed by more than one system of law. In absence of an express choice of governing law of the AA, the same contract law should govern every aspect of their contract, inclusive of the AA.[22]
Considering the AA as a part and parcel of the Sales Contract itself, the AA will also be governed by the MCL. In Casaceli v. Natuzzi, the Australian Federal Court was faced with a similar situation to determine the governing law of AA between the parties. The court upheld the contention that, both, the governing law of the contract and AA would be same i.e. Italian law. An express choice of law in the main contract implies that the same contract law would be used for the purpose of construing all the clauses contained in the main contract.[23] When parties make an express choice of law with respect to the substantive contract but not for the AA, the latter agreement is also governed by the same system of laws expressly designated to govern the substantive contract.[24] As the AA is a clause within the main contract itself, the governing law of the AA will be the same as the law of the contract.[25]
In the absence of an explicit mention of law governing the AA, it is the law of the contract that extends to the AA. The parties to a contract are usually commercial in nature and their intention is to choose a single system of law to govern their whole contract. Therefore, when the parties expressly choose a law to govern their underlying contract, they intend to apply the chosen law to the whole contract, including the AA.[26]
Where the main contract contains an express choice of law and the law governing the AA is absent, then in such cases, the main contract law is a strong indication of the parties’ intention to govern the AA by the same law as the underlying contract.[27] In the absence of an express choice of the governing law of the AA, the intention of the Parties is important to be determined. The underlying contract law strongly indicates the parties’ intention to make the same contract law apply to the AA as well. When the parties have not chosen the law governing the AA, then the law governing the underlying contract will automatically extend to the AA.[28]
Position in different jurisdictions
Australia
In Recyclers of Australia Pty Ltd v Hettinga Equipment Inc[29], the Federal Court of Australia considered an agreement governed by Iowa law. The Court determined that:
“[t]he question arising under s 7(2) [of the IAA] is whether the proceeding involves the determination of a “matter” that, under the arbitration clause, is capable of settlement by arbitration. As the arbitration clause and the sale agreement are to be governed, construed and interpreted “under the law of the State of Iowa’”, the issue of whether any of the matters involved in the proceeding are arbitrable under the clause is to be determined in accordance with the law of Iowa” (at para 10).
The abovementioned reasoning was cited by the Federal Court subsequently in Casaceli v Natuzzi SpA[30] regarding a contract and arbitration agreement governed by Italian law. In that case, the Court rejected the Applicant’s argument that the question of arbitrability ought to be determined by reference to Australian, not Italian, law.
However, in a more recent decision of the Federal Court of Australia in WDR Delaware Corp v Hydrox Holdings Pty Ltd[31], the Court stated: “the question of whether a dispute is arbitrable is to be determined by the application of the national domestic law alone.” While the Joint Venture Agreement in issue was governed by New South Wales law, the Court opined that:
“[t]he issue of arbitrability goes beyond the scope of an arbitration agreement. It involves a consideration of the inherent power of a national legal system to determine what issues are capable of being resolved through arbitration. The issue goes beyond the will or the agreement of the parties. The parties cannot agree to submit to arbitration disputes that are not arbitrable.”
Given that the three decisions cited above were all made by the same court, there is no clear precedent as a matter of Australian law as to what law a national court should apply in determining the validity of an arbitration agreement.
India
Under the Indian Law, the law of the AA will coincide with the law of the seat.[32] The governing law of the AA has its closest and most real connection with the law of the seat which will lay down the guiding principle necessary to ensure that the procedure is effective. When parties choose a seat of arbitration, they tend to suggest that the parties intend for the law of the seat to govern all aspects of the AA, including matters touching on the validity of the AA. The validity of AA is the part and parcel of the law governing the AA. Moreover, the overlap between the purview of the curial law and that of the governing law of the AA firmly suggests that they should be the same. The purview of the curial law is not bound to the exercise of purely procedural powers.
Singapore
There has been a divergence in Singapore authorities in this regard. The Court of Appeal has expressly endorsed the approach taken in the Sulamerica Presumption[33] that, in the absence of an express choice of the proper law of the arbitration agreement, the implied choice of law should presumptively be the proper law of the underlying contract.
However, the Assistant Registrar in FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others favoured the law of the seat as the presumed implied choice of the proper law of the AA, the High Court in BCY v BCZ preferred the proper law of the underlying contract. While recent High Court authorities appeared to have coalesced in support of the Sulamérica Presumption, this technically remained an open question in Singapore law, given that Singapore’s apex court had thus far not expressly opined on which approach should apply. It was a common ground in BNA v. BNB that the Sulamérica Presumption should apply. The fact remains that the Court of Appeal finally ruled conclusively in favour of the Sulamérica Presumption.
Sweden
The Swedish Supreme Court has made its stand clear that, in the absence of a specific provision specifying the relevant law for the AA, the applicable law shall be established in line with the laws of the state wherein the arbitration procedures took place, i.e., the law of the seat. It found that even where the parties expressly chose Austrian law to govern their underlying contract, an arbitration provision allowing for arbitration in Stockholm was amenable to the Swedish law on validity concerns.[34]
UK
The case of Enka v. Chubb is one of the recent landmark decisions passed by the English Court of Appeal. In this case, the court summarised a test for determining the governing law of the AA. The first factor to check for is an ‘express choice’ of law in the main contract. If such express choice is absent, then an ‘implied choice’ of law is considered. In absence of both express and implied choice, the ‘closest and most real connection test’ is applied. However, these tests have to be followed in the hierarchy laid down and the deciding authority should never mix or skip any step. Moreover, the court further iterated that, “Where there is an express choice of law in the main contract it may amount to an express choice of the AA law”.[35]
The ‘closest and most real connection test’ is adopted only when ‘express choice of law’ and ‘implied choice of law’ is absent. Furthermore, the ‘closest and most real connection test’ implies that, where the governing law of the AA is not stated expressly by the parties in the contract then it is relevant to see which system of law has the closest and most real connection to the AA.[36] The idea behind this test is to check the appropriate system of law that is closely related to the AA so that the same law can be adopted as the governing law of the AA. This facilitates the resolution of disputes in an efficient manner. The usual practice is that the law of the seat shall be deemed to have the closest and most real connection to the AA.[37]
USA
Under the U.S. Federal Arbitration Act, 1926,[38] the U.S. Courts have routinely held that international arbitration clauses are governed (governing law of AA) by the law of the seat of the AA.[39] To arrive at this conclusion, the U.S. Courts have referred to U.S. federal common law rules which have been derived from the New York Convention. The U.S. courts have adopted an analysis of the New York Convention which subjects international AA to a different set of laws other than the law applicable to the underlying contract.
Conclusion
The law of the seat should extend to govern the AA after scrutinising the various principles and international instruments to determine the law of the AA. Some jurisdictions have adopted the law of seat while some have extended the law of the underlying contract to the AA. In the international sphere there is no common consensus or a uniformly accepted test to determine this issue.
The formal inception of the Arbitration as a process can be traced back to the New York Convention and the UNCITRAL Model Law. Going by the text of these internationally recognized instruments, the law of the seat should extend to the AA. Even the Doctrine of separability supports this contention, whereby, it construes the AA separate from the main contract for the purpose of determining the governing law of AA.
When the parties select a seat for arbitration, they look for neutrality of the seat and a pro-arbitration approach. This facilitates the process of arbitration by upholding an unbiased and neutral outcome. In furtherance of such neutrality, the AA should also be governed by the same set of laws as the seat of arbitration to free the AA from shackles of the underlying contract.
When the AA is treated as a separate agreement from the underlying contract, then the same should also be followed while determining the governing law of the AA. The arbitration as a whole should have an independent sphere of operation, may it be for the determination of procedural law or for the governing law of AA.
Thus, it is necessary to achieve uniformity in the process of determining the governing law of the AA and the same should be done by extending the law of the seat to govern the AA.
Mohd Suboor
Author
References
[1] Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration ¶3.12 (Oxford, 2015).
[2] Gary B. Born, International Commercial Arbitration 510 (Kluwer Law International, 2nd edn, 2021).
[3] Buckeye Check Cashing, Inc. v. Cardegna et. al., US SC 440 (2006)
[4] Fili Shipping Co. Ltd. and others v. Premium Nafta Products Ltd. and Others, [2007] UKHL 40
[5] N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Others, 2021 SCC OnLine SC 13
[6] Sulamérica Cia Nacional de Seguros SA v. Enesa Engenharia SA [2012] EWCA Civ 638, ¶11 (English Ct. App.).
[7] Case No. 17818.
[8] Born, 2021, p.510.
[9] Egyptian Petroleum Case no.17/19850 (2019).
[10] Enka v. Chubb, ¶94 UKSC 38 (2020)
[11] BNA v. BNB, para. 27 Civil Appeal No 159, (2019)
[12] Born, 2021, p.513
[13] Born, 2021, p.514
[14] Recyclers v. Hettinga, ¶22 Federal Court of Australia (2000)
[15] BNA v. BNB, ¶17(e) Civil Appeal No 159, (2019)
[16] BCY v. BCZ, ¶44 Singapore High Court (2017)
[17] Art. 16, Model Law
[18] BCY v BCZ, ¶31 Singapore High Court (2017)
[19] Sulamerica v Enesa, ¶26 Court of Appeal (2012)
[20] Recyclers v. Hettinga, ¶63 Federal Court of Australia May, 2000
[21] Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration ¶3.12 (Oxford, 2015).
[22] Enka v Chubb, ¶¶ 95,99 UKSC 38 (2020)
[23] Casaceli v. Natuzzi, ¶38 [2012] FCA 691
[24] Sonatrach Petroleum Corp. v. Ferrell Int’l, ¶32 [2002] 1 All ER
[25] Kabab-Ji SAL v. Kout Food Group, ¶62 [2021] UKSC 48
[26] Sulamerica v. Enesa, ¶¶ 11,26 EWCA Civ 638 (2012)
[27] Habas Sinai v. VSC Steel, ¶101 (2013).
[28] Arsanovia Ltd v. Cruz City, ¶21 [2012] EWHC 3702 (Comm)
[29] (2000) 100 FCR 420
[30] (2012) 292 ALR 143
[31] (2016) FCA 1164
[32] Shashoua v. Sharma, ¶29 (2009) EWHC 957
[33] Cia Nacional de Seguros S.A. v. Enesa Engenharia S.A. [2012] EWCA Civ 638
[34] Bulgarian Foreign Trade case, p.4, ¶2 Swedish Supreme Court (2000)
[35] Enka v. Chubb, ¶105 UKSC 38 (2020)
[36] C v. D, ¶26 (2007) EWCA Civ 1282
[37] XL Insurance Ltd. v. Owens Corning, ¶31 Queen’s Bench Division, July, 2000
[38] U.S. Federal Arbitration Act, 1926
[39] Brennan v. Opus Bank United States Court of Appeals, August, 2015