This article is written by Mr. Chiranjeev Saboo. He is a disputes lawyer with three years of practice. He has advised and represented clients in domestic and international arbitrations, both ad-hoc and institutional, before High Courts, City Civil Courts, Consumer Forums and Trademark Registry. This article presents the current position in the United Kingdom, Singapore and India on the law which would govern the arbitration agreement in absence of an express choice of law.
This issue has vexed the courts and authorities, globally, for many years. On one hand, there are authorities which say the law chosen to govern the main contract should govern the arbitration agreement. On the other hand, there are authorities that say it should be the law of the chosen seat of arbitration.
This question recently garnered attention because of the landmark judgment passed by the English Supreme Court in the case of Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb (“Enka v. Chubb”), settling this important issue in the law of arbitration.
The purpose of this article is to present the position of law in the United Kingdom and compare it with the law in India and Singapore.
Where the contract between the parties provide for arbitration and contain a foreign element, three different laws may have potential involvement, namely:
- The law governing the contract – this law would govern the substantive rights and obligations of the parties;
- The law governing the arbitration – this law determines the validity, effect and interpretation of the arbitration agreement; and
- The law governing the conduct of the arbitration – this would govern the procedural powers and duties of the arbitrators, such as, whether they must hear oral evidence, whether the evidence of one party should be recorded necessarily in the presence of the other party, whether there is a right of cross-examination of witnesses etc.
Parties are free to choose three different laws i.e. for governing the contract, for governing the arbitration agreement and for governing the conduct of the arbitration.
The ideal arbitration clause will specify each of the above. However, usually, it is not the case. It is seen that parties mention the law to govern the contract and the law of seat but do not mention the law governing arbitration agreement. In such cases, the law which will govern the arbitration will depend on facts and circumstances and the country before whose court this issue is posed.
Position in UK
The Supreme Court of United Kingdom in a recent judgment Enka v. Chubb has clarified and set out the principles to be followed for determination of the law governing the arbitration agreement, which are as follows:
(a). The arbitration agreement would be governed by, i) the law expressly or impliedly chosen by the parties and ii) in the absence of such choice, the law with which the arbitration agreement is most closely connected.
(b). The first stage of enquiry therefore when posed with a question ‘which law governs the arbitration agreement?’ is to check if the parties expressly chose any law to govern their arbitration agreement. If they did, then that law would govern the arbitration agreement.
(c). If, however, the parties have not expressly chosen any law to govern their arbitration agreement, but have chosen the law to govern the contract, there is an inference that the implied choice of law to govern the arbitration agreement, which forms part of the contract, would be the law governing the contract, unless there are other factors present which point to a different conclusion.
The reasoning of the UK Supreme Court to conclude this is that when the commercial parties while entering into a contract choose a law to govern their contract, there is a presumption that they have chosen that law to govern all the clauses of the contract including the clause providing for arbitration; and are not aware of any artificial legal doctrines which allows different law to govern the contract and the arbitration agreement.
It further noted that this assumption brings in a degree of certainty, consistency and avoids complexities.
(d). This implied choice of law i.e. the law governing contract being the law which would govern the arbitration agreement, would not be negated merely with the presence of a different law of seat.
(e). The situations in which the law governing the contract would not be applied to govern the arbitration are: i) if the arbitration agreement would become null and void if the law governing the contract is applied or there is a risk that the choice of law would seriously undermine the arbitration agreement; or ii) if there are provisions at the law of the seat of arbitration which prescribes that where an arbitration is subject to that law, the arbitration agreement will also be treated as governed by that country’s law.
By this the UK Supreme Court has reiterated the validation principle i.e. an interpretation which upholds the validity of a transaction is to be preferred to one which would render it invalid or ineffective.
It noted that it would be absurd to come to the conclusion that the parties consented to resolve their dispute by arbitration and in the same breath defeat it by the choice of law to govern it.
(f). If there is no choice of the law to govern the arbitration agreement, both expressly or implied, the arbitration agreement is governed by the law with which it is most closely connected.
(g). If the parties have chosen a seat of arbitration, then the law of the seat is considered to have the closest connection with the arbitration agreement and thus it will govern the arbitration agreement.
Position in India
The position in India is similar to that of United Kingdom, as has been set out by the Supreme Court in National Thermal Power v. Singer Company And Ors.
The Supreme Court in this case held that:
- Where there is no choice of law governing the arbitration agreement, however, parties have expressly agreed on the law to govern the contract, this choice of the proper law will govern the arbitration agreement;
- In “exceptional cases”, the expressly chosen law to govern the contract may not be the law governing the arbitration agreement; and
- Where, there is no express choice of the law governing the contract or the arbitration agreement, a presumption may arise that the law of the chosen seat would be the law governing the arbitration agreement. However, this is a rebuttable presumption.
While the Supreme Court noted that the law governing the contract may not govern the arbitration agreement in exceptional cases, it did not elaborate on what the exceptional circumstances were.
Position in Singapore
The position in Singapore is slightly different from the United Kingdom. The Singapore Court of Appeal recently in BNA v. BNB, clarified the position in Singapore.
While the steps to check which law would govern the arbitration in absence of a choice of law is similar as that at United Kingdom, however, the Singapore Court of Appeal did not agree that the presumptive implied choice i.e. the law of the contract being the law governing the arbitration agreement, would seize to apply merely because of the potential invalidating effect it has on the arbitration agreement.
It noted that to consider applying the validation principle, the parties must show that they were at the very least, aware that the choice of proper law of the arbitration agreement could have an impact upon the validity of the arbitration agreement.
It further noted that the parties’ intention to arbitrate is not to be given effect at all costs, as the parties did not only choose to arbitrate but to arbitrate in a certain way, at a certain place, under the rules of a certain arbitral institution etc. Hence while interpreting the arbitration agreement all of this needs to be given their natural conclusion and if the result of this process of construction is that the arbitration agreement is unworkable, then the parties must live with the consequences of their decision.
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