It is very common for an international commercial arbitration to involve parties from two (or more) different nationalities choosing to arbitrate their dispute in a third (neutral) country. Enforcing the resulting arbitral award could entail taking it before the courts of a fourth country.

Even in closely negotiated contracts, parties might not have paid sufficient attention to the drafting of the arbitration clause. Problems arise when parties dispute the proper law governing the arbitration agreement or even the arbitration process as well as which country’s courts have jurisdiction over such disputes. From a commercial perspective, such disputes obviate the major benefits of arbitration which are the confidentiality of its proceedings, its lower costs and greater speed as compared to litigation.

Systems of Law

In Law and Practice of International Commercial Arbitration, the learned authors of the text identified “at least five different systems of law which in practice may have a bearing on international commercial arbitration” (Redfern and Hunter, Law and Practice of International Commercial Arbitration, 4ed., 2004 at [2-04]). These are:

1. the law governing the capacity of the parties to enter into an arbitration agreement;
2. the law governing the arbitration agreement and the performance of that agreement;
3. the law governing the existence and proceedings of the arbitral tribunal – the lex arbitri;
4. the substantive law or the proper law of the contract; and
5. the law governing recognition and enforcement of the arbitral award.

These distinctions arise out of (i) the fact that the parties to the dispute may not have any connection to the law they have chosen to govern their contract and (ii) a further recognition that the arbitration agreement is a separate and distinct agreement from the underlying contract to which the arbitration agreement is commonly one of the clauses.

Where Disputes Arise

Laws 1 and 5 are rarely in dispute. The law governing the capacity of the parties to enter into an arbitration agreement is generally that of the law governing the place of incorporation of the corporate entity or the domicile of a natural person. The law governing recognition and enforcement of the arbitral award is the law of the place in which the award is sought to be set aside, recognised and/or enforced.

However, disputes often revolve around laws 2, 3 and 4. These are often governed by one and the same law i.e. the substantive law of the contract is often the same law which governs the arbitration agreement and the arbitration process.

Nevertheless, there may be exceptions as in the recent English Court of Appeal case of Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others, [2012] EWCA Civ 638. An earlier post sets out the facts and legal reasoning of the case. But in brief, the relevant contracts contained a London arbitration clause. However those same contracts also contained an express choice of Brazilian law as the governing law of the contracts as well as an exclusive jurisdiction clause in favour of the Brazilian courts. The Court of Appeal held that the arbitration agreement was governed by a law (English law) that was different from that chosen to govern the substantive obligations of the underlying contract (Brazilian law).

Why Lex Arbitri Matters

The lex arbitri matters as it primarily governs the procedural aspects of the arbitration and determines what assistance the national courts in which the arbitration is seat may lend to the aggrieved party. Steyn J (as he was then) explained that the lex arbitri was “a body of rules which sets a standard external to the arbitration agreement, and the wishes of the parties, for the conduct of the arbitration. The law governing the arbitration comprises the rules governing interim measures (e.g. Court orders for the preservation or storage of goods), the rules empowering the exercise by the Court of supportive measures to assist an arbitration which has run into difficulties (e.g. filling a vacancy in the composition of the arbitral tribunal if there is no other mechanism) and the rules providing for the exercise by the Court of its supervisory jurisdiction over arbitrations (e.g. removing an arbitrator for misconduct)” (See Smith Ltd v H&S International [1991] 2 Lloyd’s Rep 127 at 130).

The lex arbitri also includes a substantive (as opposed to procedural) component in the form of determining whether a dispute can be referred to arbitration. Often criminal, matrimonial and regulatory disputes cannot be arbitrated.

The lex arbitri / proper law of the arbitration also matters in determining whether a valid arbitration has arisen. In Sulamerica CIA Nacional v Enesa Engenharia, it was asserted by the appellants who were seeking to avoid arbitration in London that under Brazilian law, the party against whom arbitration is initiated must consent to the initiation of arbitration. Under English law, there is no such requirement and an arbitration agreement can be enforced against an unwilling party if that agreement is valid. If Brazilian law had been deemed to be the proper law of the arbitration agreement then the London arbitration could not have continued. .

A further complication arises. As noted by the English High Court in C v D [2007] EWHC 1541, the law governing category 2 and 3 are likely to be the same law (see paragraph [26]). However, practical difficulties aside, this need not necessarily be the case. The English Court of Appeal had the opportunity to consider the effect of parties’ choice of a foreign procedural law in the case of Naviera Amazonia Peruma SA v Compania International de Seguros de Peru [1988] 1 Lloyd’s Rep 116 (“Peruvian Insurance case“).

In that case, parties had provided for an arbitration to be located in Peru but subject to English procedural law. The English Court of Appeal held while it was conceptually possible, the mere reference that the arbitration was to be governed by English procedure is insufficient for the English courts to take jurisdiction over disputes relating to the arbitration.

The Court of Appeal held that “t]here is…no reason in theory which precludes parties to agree that an arbitration shall be held at a place or in country X but subject to the procedural laws of Y. The limits and implications of any such agreement have been much discussed in the literature, but apart from the decision in the instant case there appears to be no reported case where this has happened. This is not surprising when one considers the complexities and inconveniences which such an agreement would involve. Thus, at any rate under the principles of English law, which rest upon the territorially limited jurisdictions of our courts, an agreement to arbitrate in X subject to English procedural law would not empower our courts to exercise jurisdiction over the arbitration in X” (see Kerr LJ’s judgment at page 120).

Contrast should be made to the case of Braes of Doune Wind Farm v Alfred McAlpine [2008] EWHC 426 (TCC), where the English High Court was faced with nearly the opposite situation. Under an EPC contract, the arbitration agreement was expressly stated to be subject to English law but the seat of the arbitration was to be Glasgow, Scotland. Furthermore, the arbitration clause expressed that any reference to arbitration shall be deemed to be a reference to arbitration within the meaning of the English Arbitration Act 1996.

After considering both the Peruvian Insurance case as well as C v D, the English High Court took the view that what parties meant was for the arbitration to be seated (in the legal sense of the word) in England (and Wales) and that the reference to Glasgow, Scotland as the seat of the arbitration was really a reference to having the hearings take place in the geographically convenient location of Glasgow, Scotland.

Conclusion

The takeaway points are as follows:

1. You can prevent disputes about the proper law governing the arbitration at the drafting stage. Disputes often arise because insufficient attention is paid to the fact that arbitration clauses are not simply a dispute resolution mechanism, but jurisdictional clauses in their own right.
2. An arbitration clause is an agreement that is separate and distinct from the underlying contract and can be subject to a system of law that is different from the substantive law of the underlying contract.
3. There is a distinction between the seat/place of an arbitration and a geographically convenient venue in which the hearings are to be located. The proper law of the arbitration generally follows that of the seat of the arbitration.
4. Parties should consider which court, singular, should have supervisory jurisdiction over the arbitration process. The place where that court is located should then be the seat of the arbitration. For good measure, the law governing the arbitration agreement should be expressly stated to be the law of that place of arbitration.