It’s midnight and you’re in the final stages of negotiation in a complex international transaction.  It’s probably a safe bet that the last thing on your mind is dispute resolution and whether the arbitration clauses in the agreements specify a governing law.  In the unlikely event that this has crossed your mind, it’s not something that is keeping you awake.  The governing law of an arbitration clause – why does it matter? - won’t it just be the same as the governing law of the underlying contract?

This post addresses both of those questions and recommends a couple of simple steps that will allow you to avoid costly and time consuming disputes over the law governing the arbitration agreement.

The governing law of an arbitration clause – why it matters

The governing law of an arbitration agreement is the law that will be applied to determine any dispute that may arise as to the validity, scope or interpretation of the agreement to arbitrate.  It matters because if, for example, there is a dispute as to whether a claim falls within the scope of an arbitration clause, that dispute will be resolved by applying the law governing the arbitration agreement.

Won’t the governing law of the arbitration clause be the same as the governing law of the underlying contract?

The answer to this is yes, sometimes it is, - but not always.

Where parties to an international transaction have agreed to arbitrate, the legal framework for resolving disputes may result in the application of a number of different laws.  Those laws will include the law governing the substantive rights and obligations of the parties – usually expressly chosen and set out in a governing law clause – and the curial law of the arbitration proceedings themselves – which is determined by the choice of a seat or legal place of arbitration.

In international contracts, it is not unusual for the governing law of the underlying contract to differ from the law of the place which is chosen as the seat of arbitration.  A common example of this is where parties to an international contract governed by English law have chosen to resolve disputes by ICC arbitration seated in Paris.

What parties may not appreciate is that, in this scenario, a failure to specify the governing law of the arbitration clause could give rise to a dispute as to which law (English law or French law) should apply to any issues relating to the validity, scope or interpretation of the arbitration clause.

In other words,  where the governing law of the underlying contract and the system of law at the seat of the arbitration are different it’s best to specify what law governs the arbitration clause.

What happens if I don’t specify a governing law for the arbitration clause?

There is no internationally accepted approach to determining what the governing law should be in cases where the governing law of the underlying contract differs from the system of law at the seat of arbitration.  

The courts in some jurisdictions have held that, in the absence of an agreement to the contrary, the law of the seat of the arbitration will also apply as the governing law of the arbitration clause. Courts in other jurisdictions have held that the governing law of the arbitration clause should be the same as the governing law of the underlying contract.

This can result in costly litigation, which would have been unnecessary had the parties specified a governing law in the arbitration clause. This will not only delay the resolution of the substantive issues in dispute but may also result in an unintended (and perhaps unwelcome) choice of law being imposed on the parties by the courts. It also introduces a huge element of uncertainty into the dispute resolution procedures that the parties negotiated and agreed at the outset of the transaction.

Isn’t this addressed in model arbitration clauses ?

Perhaps surprisingly, no.  Very few model arbitration clauses include a governing law provision.

One exception is the HKIAC model arbitration clause which includes optional choice of law provisions reminding parties to specify the governing law of the arbitration agreement, as well as specifying the seat and the number of arbitrators. There is also a note specifically reminding parties of 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 are different.

Isn’t this addressed in arbitration rules?

Some arbitration rules do include a default provision specifying a governing law for the arbitration agreement.  For example,  the Article 16.4 of the LCIA Rules provides that, unless the parties have agreed otherwise, the governing law of the arbitration agreement will be the same as the law of the seat. 

However, the fact that Article 16.4 gives precedence to the law of the seat, as opposed to law governing the underlying contract, could come as unwelcome surprise to parties who have not actively considered this  issue at the drafting stage.

According precedence to the law of the seat is also the approach that has been adopted by the English courts when they are called upon to determine this question.

Approach of the English courts

The English courts apply a  three stage test for determining the law governing an arbitration clause, which was formulated by the Court of Appeal in Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] EWCA Civ 638.

The Three Stage Test

Stage 1             Is there an express choice of law?          If not.

Stage 2             Is there an implied choice of law?          If not.

Stage 3             With what system of law does the arbitration agreement have its closest and most real connection?

The line between each of the three stages of enquiry is a fine one and the relative significance that should be attached to the choice of law of the underlying contract on the one hand and the choice of the seat of arbitration on the other is something that has been blurred in the English case law. 

The lack of clear guidance on this issue is something that the Court of Appeal recognised in Enka Insaat VE Sanayi A.S v Chubb [2020] EWCA Civ 574. 

The Court of Appeal set out the following principles that should be applied to determining the governing law of an arbitration agreement.

• Where there is an express choice of law in the main contract (governing law clause) it may amount to an express choice of the law governing the arbitration agreement.
•  Whether it does so will be a matter of construction of the whole contract, including the arbitration agreement, applying the principles of construction of the main contract law if different from English law.
• Where parties have chosen a different seat of arbitration it will be relatively rare to find that, as a matter of construction, an express choice of the law governing the underlying contract was also intended as an express choice of the law governing the arbitration agreement. 

• In all other cases, there is a strong presumption that the parties have impliedly chosen the law of the seat of the arbitration as the law governing the arbitration agreement.
•  This is the general rule, but may yield to another system of law governing the arbitration agreement where there are powerful countervailing factors in the relationship between the parties or the circumstances of the case.

 However, the English law position remains far from settled as there is a pending appeal to the UK Supreme Court.  The Supreme Court’s judgment, when it comes, will become the leading English law authority on the governing law of an arbitration agreement.

 2 step guide to avoid uncertainty

 In the meantime there are 2 simple steps you can take to avoid costly uncertainty and over the law governing an arbitration agreement. 

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