How can you determine the governing law towards an arbitration agreement?
The law of the agreement will depend on the decision maker’s applied approach, which does
tend to create uncertainty in arbitration. But this still determines the answer to various
questions such as the validity of the agreement.
One issue will be the party asking which law is to be applied, between the national court and
the tribunal. The national court may ask where the tribunal was not yet formed, or one party
started proceedings in domestic courts and the other party is seeking to refer the same dispute
to arbitration. National courts can determine such law where parties are seeking interim
measures of relief or protection. Unlike the tribunal, the national courts will be concerned
with upholding and applying its law and provide its perceived protection. Whereas the
tribunal will have a basic predisposition to uphold the parties’ agreement instead 1. The law to
be applied by the national court can vary between the conflict of law rules or local laws.
The conflict of law rules can include private international law rules. These govern the
substantive validity, rather than the formal validity. The courts may apply such rules
depending on the applicability of other laws. These can include the laws of the parties, the
law governing the substantive contract, or the law of the seat of arbitration.
The law governing the substantive contract is rarely applied by the parties
expressly, although it can still be interpreted to apply to the agreement frequently 2. Yet such
laws will be of little help in determining the applicable law to the agreement.
Whereas the law of the seat of arbitration can be helpful to settle the specific legal
relationship3. It can be advantageous in terms of its consistency with the New York
Convention, which suggests that the agreement’s validity will be assessed under the seat’s
law. For instance, although Article V(1)(a) deals with the exceptions for enforcement of the
arbitral award rather than the applicable law to the agreement, the lack of a valid agreement
can constitute a defence against setting aside the arbitral award. Thus if the agreement was
not valid under the law subjected by the parties or the law of the country where the award
was made, the award is not enforceable. UNCITRAL’s Model Law also includes similar
provisions. Although it only addresses such issue from the perspective of an
annulment/enforcement judge, there is still a strong argument in favour of applying the same
criteria at the pre-award stages4. A majority of cases will rely on their own local laws,
1
Bernardini, Piero: 'Arbitration Clauses: Achieving Effectiveness in the Law Applicable to the Arbitration
Clause', in van den Berg (ed.): Improving the Efficiency of Arbitration Agreements and Awards, ICCA
Congress series no. 9 (Kluwer Law International, The Hague, 1999) 197, page 8.
2
See from the arbitration practice NOFOTA award, 5 September 1977, IV YBCA 218 (1979) 219; ICC case no
2626, 105 Clunet 980 (1978) 981; ICC case no 6840, 119 Clunet 1030 (1992) 1032; ICC case no 6379, XVII
YBCA 212 (1992) 215; see also for Germany: Bundesgerichtshof, 28 November 1963, 40 BGHZ 320, 323;
Bundesgerichtshof 12 December 1976, RIW 449 (1976); Oberlandesgericht Hamburg, 22 September 1978, V
YBCA 262 (1980) 264; for English cases see Russell on Arbitration, para 2-094; Merkin, Arbitration Act, 180
and ABB Lummus Global Ltd v Keppel Fels Ltd [1999] 2 Lloyd's Rep 24; Sonatrach Petroleum Corp v Ferrell
International Ltd [2002] 1 All ER (Comm) 627.
3
For such an approach see ICC case no 4604, X YBCA 973 (1985) 975, French original in
Jarvin Derains Arnaldez, ICC Awards 1986-1990, 545 et seq; see also Corte di Appello, Genoa, 7 May 1994,
Fincantieri - Cantieri Navali Italiani SpA and Oto Melara SpA v Ministry of Defence, Armament and Supply
Directorate of Iraq, Republic of Iraq, XXI YBCA 594 (1996). The case relates to embargo legislation and
arbitrability and the Italian court applied lex fori to determine the arbitrability question.
4
Corte d'Appello Genoa, 3 February 1990, Delia Sanara Kustvaart - Bevrachting & Overslagbedrijf BV v
Fallimento Cap Giovanni Coppola srl, XVII YBCA 542 (1992) 543.
, especially at the pre-award stages567. This is frequently done without any conflict of laws
analyses8. For example, the European Convention9 (and New York Convention10) provides
that courts may refuse recognition of arbitration agreements if under the law of their country,
the dispute is not capable of settlement by arbitration. Ultimately, because arbitrability is
often a question of jurisdiction, the applicable law should be governed exclusively by the
local law11.
The UK’s approach towards determining the law applicable to the validity of the arbitration
agreement was inspired by the case of Sulamérica12. A British company entered into two
insurance policies with a British insurer for a construction plant in Brazil. The policy
contained an arbitration clause providing for London as the seat of arbitration, Brazilian law
as the choice of law, and the Brazilian courts as the exclusive jurisdiction. The insurer gave
notice of arbitration by relying on the arbitration clause, but the insured started court
proceedings in Brazil by relying on the exclusive jurisdiction clause, because it was not
bound by the arbitration clause. Instead, it argued the agreement was not valid due to lack of
consent under the Brazilian law. As a result, the English court came up with a test to
determine which law should be applied. Moore-Brick LJ ruled that: (a) if the parties made an
express choice of law, that law should apply; (b) if the parties did not make an express choice
of law, an implied choice could be made based on the merits of the case; (c) if there is no
implied choice, the law with the ‘closest connection’ to the arbitration shall apply. Here, the
parties did not expressly choose which law will apply to the arbitration agreement. Courts
could have applied the substantive law (Brazil). However, Brazilian law requires the parties’
consent to the agreement in order to validate it. But because one of the parties did not
consent, the agreement will be void under this law. Hence Cooke J ruled that the law of the
seat of arbitration (England) should apply because England’s supervisory jurisdiction has a
closer connection to the arbitration agreement than the law of the insurance policy, whose
purpose is not related to the dispute. ENKA v Chubb13 also applied a similar test. The case
concerned a fire breaking out at a power plant in Russia. Enka, the Turkish subcontractor,
began arbitration proceedings in the UK because the arbitration agreement stated that the seat
of arbitration was in London. But the courts turned to English common law rules, like in
Sulamérica, in which either the parties’ expressly chosen law or the law of the state ‘closely
connected’ to the arbitration agreement would apply. Although the courts did mention the
possibility of applying the seat of arbitration’s law if any provision of the seat’s law indicates
arbitration will be treated as governed by the seat’s law, they ultimately applied Russian law,
the substantive law. Russia was voted the country with the ‘closest connection’ as the
relevant contract was to be performed in Russia, the primary language is Russian, and its
contractual price was in Russian currency. Ultimately, the law towards the validity of the
arbitration clause is distinct from the law towards validating the contract itself 14. Yet there is
5
Belgium, Tribunal de Commerce, Brussels, 20 September 1999, Matermaco SA v PPM Cranes Inc et al, XXV
YBCA 673 (2000) 675; Switzerland, Tribunal Fédéral, 28 April 1992, XVIII YBCA 143 (1993) 146.
6
Arfazadeh, “Arbitrability under the New York Convention: The Lex Fori Revisited”, 17 Arb Int 73 (2001) 80.
7
Corte di Appello Genoa, 7 May 1994, Fincantieri - Cantieri Navali Italiani SpA and Oto Melara SpA v
Ministry of Defence, Armament and Supply Directorate of Iraq, Republic
of Iraq, 4 Riv Arb 505 (1994), XXI YBCA 594 (1996).
8
Born, International Commercial Arbitration, 244.
9
European Convention, Article VI(2).
10
New York Convention, Article V.
11
Reithmann Martiny, Internationales Vertragsrecht (5th ed, Schmidt 1996), para 2380; see also Arfazadeh,
“Arbitrability under the New York Convention: The Lex Fori Revisited”, 17 Arb Int 73 (2001)76 et seq.
12
Sulamérica Cia Nacional de Seguros SA v Enesa Engenharia [2012] EWCA Civ 638.
13
Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38.
14
Fiona Trust and Holding Corporation and Others v Yuri Privalov and Others [2007] UKHL 40.
