What law governs your arbitration clause? You decide.

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Summary: The outcomes of recent cases in Singapore and England have shown that different approaches are being taken by courts to the question of which law governs an arbitration agreement where the parties have not addressed the point at the drafting stage and where the law of the underlying contract and the law of the seat are different.

The outcomes of recent cases in Singapore and England have shown that different approaches are being taken by courts to the question of which law governs an arbitration agreement where the parties have not addressed the point at the drafting stage and where the law of the underlying contract and the law of the seat are different. Two leading arbitral institutions have also introduced changes in order to avoid the uncertainty which arises if the parties do not specify the law of the arbitration agreement.

The Hong Kong International Arbitration Centre (“HKIAC”) has amended its model arbitration clauses to include optional choice of law provisions reminding parties to specify the governing law of the arbitration agreement.  The London Court of International Arbitration (“LCIA”) has also adopted new rules providing that, unless otherwise agreed, the governing law of the arbitration agreement will be the same as the law of the seat.

Introduction


There are three laws which may apply in arbitration: (1) the law of the underlying contract; (2) the law of the seat of the arbitration; and (3) the law of the arbitration agreement.  The law of the arbitration agreement governs, amongst other things, the validity and scope of the arbitration agreement.  Ideally, an arbitration clause should specify the seat of the arbitration and the governing law of the arbitration agreement but, in practice, parties often fail to specify the governing law of the arbitration agreement. This can give rise to problems, particularly where the law governing the underlying contract is different from the law of the seat of the arbitration and a dispute arises concerning the validity of the arbitration agreement.

What has happened?


Courts in different jurisdictions have adopted a variety of approaches to determining the governing law of an arbitration agreement in the absence of an agreement between the parties.  For example:

Singapore:  The Singapore High Court in FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others  held that, in the absence of an agreement to the contrary, the law of the seat of the arbitration would also apply as the governing law of the arbitration agreement.

England:  The English Court of Appeal in Sulamerica Cia Nacional de Seguros SA and others v Enesa Engeharia SA and others established a three stage test.  (1) Have the parties made an express choice of the governing law of an arbitration agreement? (2) In the absence of an express choice, have the parties made an implied choice?  (3) In the absence of an express or implied choice, which system of law has the closest and most real connection with the arbitration agreement?

The best way to avoid uncertainty as to which law will apply is to expressly identify the governing law of an arbitration agreement.  This is particularly important in situations where the law governing the underlying contract is different from the law of the seat of arbitration.

What are the key points?


The HKIAC’s new model clause reminds parties of the importance of this by including an optional provision requiring the parties to specify the governing law of the arbitration clause as well as specifying the seat of the arbitration and the number of arbitrators.  A note to the provision reminds parties that the law of the arbitration agreement will govern issues relating to the validity of the arbitration clause and it does not replace the law governing the underlying contract.  The note also emphasises the importance of specifying a governing law for the arbitration agreement in circumstances where the law of the underlying contract and the law of the seat of the arbitration are different.

The HKIAC is the first major arbitral institution to specifically address this issue in its model clauses.  The approach adopted by the HKIAC can be contrasted with the approach adopted by the LCIA in its amended rules which come into effect on 1 October 2014.  Article 16.4 of the new LCIA rules provides that, unless the parties have agreed otherwise in writing, the law of the seat of the arbitration will also apply as the law governing the arbitration agreement.

How will this affect me?


In international commercial agreements it is important to ensure this issue is addressed by specifying the governing law of an arbitration agreement to avoid disputes about which law should apply.  Such disputes will add unnecessary cost for the parties and cause a delay in resolving the substantive issues between them.

BLP Perspective


Parties often fail to appreciate the importance of specifying the governing law of an arbitration agreement.  The recent cases from Singapore and England remind parties of the importance of choosing which law will govern the arbitration agreement, that the courts will decide if the parties do not and that the courts in different countries approach the question in different ways. Parties should deal with the question themselves at the drafting stage. The two arbitral institutions which have addressed this issue have also adopted contrasting approaches, but both achieve certainty. Whichever approach is taken, the changes adopted by the HKIAC and LCIA should help parties to avoid future unnecessary disputes over which law governs an arbitration agreement and it is an open question which other institutions will follow suit.

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