The parties to the contract generally are well experienced professionals and are capable of determining the law governing the arbitration agreement. Unlike domestic arbitration, an international arbitration involves complexity of laws governing it due to its transnational nature of dispute resolution. In Redfern & Hunter, the following laws are identified to have significance over an international arbitration:1.“the law governing the arbitration agreement and the performance of that agreement;2. the law governing the existence and proceedings of the arbitral tribunal (the lex arbitri);3. the law, or the relevant legal rules, governing the substantive issues in dispute (generally described as the ‘applicable law’, the ‘governing law’, ‘the proper law of the contract’, or ‘the substantive law’);4. other applicable rules and non-binding guidelines and recommendations;3 and5. the law governing recognition and enforcement of the award (which may, in practice, prove to be not one law, but two or more, if recognition and enforcement is sought in more than one country in which the losing party has, or is thought to have, assets).”[1]As emphasized by Prof. K. P. Berger, in order to determine the power to adapt the contract, reference must be made simultaneously to the arbitration agreement and the underlying contract and the law governing the arbitration agreement.[2] The law governing the arbitration agreement need not necessarily be same as the law governing the underlying contract in which the arbitration agreement is contained. In this regard, not in all international commercial transactions do parties determine the law applicable to the arbitration agreement. In cases where the parties have agreed to a specific national law to be applicable to the arbitration agreement, then the arbitration agreement is governed by the pre-determined law as per the legal necessity mandated by the principle of party autonomy. The general ‘applicable law clause’ contained in a contract refers to the law applicable to the substance of the dispute arising out of the contract[3] and does not necessarily govern the arbitration agreement. It is in this regard advised that the parties specifically determine a ‘governing law clause’ applicable to the arbitration agreement even if it contained in the same contract. In case the parties fail to determine the law governing the arbitration agreement the international law has a solution in this context and the choice of the law rest on the following three facets – law of the contract or the law of the seat of the arbitration or determining the applicable law based on the intention of the parties.The test for determining the law governing the arbitration agreement has been explained in detail by the England and Wales Court of Appeal in the case of Sulamérica.[4]Wherein the Master of the Rolls, Lord Justice Moore-Bick emphasized as follows:“The first is that, even if the agreement forms part of a substantive contract (as is commonly the case), its proper law may not be the same as that of the substantive contract. The second is that the proper law is to be determined by undertaking a three-stage enquiry into (i) express choice, (ii) implied choice and (iii) closest and most real connection. As a matter of principle, those three stages ought to be embarked on separately and in that order…”[5]A. Law Applicable to the Underlying ContractIn the absence of an express choice of law governing the arbitration agreement, the generally accepted principle is to apply the law that governs the rest of the contract.[6] The rationale behind this is that, since the arbitration agreement is one of the multiple provisions contained in the contract, the law that generally applies to the contract, as chosen by the parties, is to be made applicable to the arbitration agreement. However, the doctrine of separability of the contract has been identified as a general impediment in considering the notion that the law governing the underlying contract should also govern the arbitration agreement. According to the doctrine of severability of the arbitration agreement, the arbitration agreement though contained in the same contract is a separate agreement which can stand alone in the event of challenge to the validity of the underlying contract. The primary consequence of the doctrine of severability of the arbitration agreement from the underlying contract, is the possibility of a different law governing the arbitration agreement as against the law governing the underlying contract.[7] However, the position with regards to this is unsettled, which leads us to consider the next limb of the test.
B. Law of the Seat of the Arbitration
The parties to the contract generally identify the seat of the arbitration and this seat of the arbitration has a legal significance. The seat of the arbitration is not a mere geographical location, but is a legal construct and has material influence over the choice-of-law.[8] The seat of the arbitration plays a pivotal role in determining the law governing the arbitration agreement in the absence of any express choice by the parties to the contract. In this regard the English Court of Appeal[9] has held that the choice of seat of arbitration by the parties implied means the acceptance of the law of the seat to the conduct and supervision of the arbitration proceedings.[10] This position of determining the law governing the arbitration agreement is widely accepted in multiple jurisdictions – the Swedish Supreme Court in Bulbank case[11], the Brussels Tribunal in Matermaco case[12] and the Singapore High Court in BCY v. BCZ[13] has expressed similar opinions. Moreover, the New York Convention[14] and the Model Law[15] indicate the above-mentioned conclusion, that the award made must be valid under the law agreed by the parties and in the absence of the same, it must be valid under the law of the country where the award was made. More importantly, United States of America, which is an important consideration under this dissertation, has earmarked the significance attached to the seat in the Federal Arbitration Act, 1925 as determinative factor for identifying the law governing the arbitration agreement.[16]
C. Closest and Most Real Connection TestThe last limb of the test determined by the Court in the seminal case of Sulamérica is applying the law of the country with which the arbitration agreement has the closest and most real connection. Thus, in the absence of an express or implied choice of law being determined by the parties, the arbitration agreement is governed by the law with which the agreement has the closest connection with.[17] In the United States of America, the test was first established in Imperial Life Assurance Co. of Canada v. Colmenares,[18] relying on an English case law and in the case of Lilydale Cooperative Ltd. v. Meyn Canada Inc.,[19]the Ontario Court of Appeal referencing Prof. Cheshire[20] laid down the criteria for determining the closest and most real connection. More commonly, the closest connection is determined to be with the country in which the arbitration is seated, amongst other factors.[21]In this regard, for the purpose of determining the law governing the arbitration agreement, the arbitral tribunal has to first respect the express choice of the parties, if any predetermined by the parties. In the absence of an express choice, the law applicable to the underlying contract can be extended to the arbitration agreement, unless a contrary intention is expressed by the parties or the law of the seat of the arbitration can be necessarily implied by virtue of legal significance attached to it. Lastly, when everything else fails, the law of the country with which the arbitration agreement has the closest and most real connection will govern the arbitration agreement. Accordingly, by applying the above-mentioned test, the arbitral tribunals first needs to identify the law governing the arbitration agreement in order to establish its power to adapt the contract. It is pertinent to note that not all legal systems allow the arbitrator to adapt the contract, only an insignificant number of legal systems allows for adaptation of contract in the view of changed circumstances.________________________________________[1] Nigel supra note 66, at 157 ¶3.07.[2] Berger, supra note 11, at 8.[3] Nigel supra note 66, at 158 ¶3.10.[4] Sulamérica Cia Nacional de Seguros SA and Ors. v Enesa Engenharia SA and Ors. [2012] E. W. C. A.Civ. 638 (United Kingdom). See Habas Sinai Ve Tibbi Gazlar Istihsal Andustrisi AS v. V. S. C. Steel Company Ltd., [2013] E. W. H. C. 4071 (Comm.) (United Kingdom); Arsanovia Ltd. v. Cruz Ciy Mauritius Holdings [2013] 2 All. E. R. 1 (United Kingdom); BCY v. BCZ, [2016] S. G. H. C. 249 (Singapore).[5] Id., Sulamérica, ¶24.[6] Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd [1993] A. C. 334 (United Kingdom).[7] Nigel supra note 66, at 159 ¶3.13.[8] Gary B. Born, International Commercial Arbitration, Vol. 1 1684 (2009).[9] See C v. D, [2007] E. W. C. A. Civ. 1282 (United Kingdom); XL Insurance Ltd. v. Owens Corning, [2001] All. E. R. (Comm.) 530 (United Kingdom).[10] Nigel supra note 66, at 161 ¶3.23.[11] Bulgarian Foreign Trade Bank Ltd v Al Trade Finance Inc., Case No. T1881–99, Swedish Supreme Court, 27 October 2000, (2001) XXVI Y. B. C. A. 291 (Sweden).[12] Matermaco SA v PPM Cranes Inc., Brussels Tribunal de Commerce, 20 September 1999, (2000) XXV Y. B. C. A. 673 (Belgium).[13] BCY v. BCZ, [2016] S. G. H. C. 249 (Singapore).[14] New York Convention, 1958 Art. V (1) (a).[15] UNICTRAL Model Law, 1985 Art. 34 (2) (a).[16] Pedcor Mgt Co. Inc. Welfare Benefit Plan v North American Indemnity, 343 F. 3d 355 (5th Cir. 2003) (United States of America); AT&T Mobility LLC v Concepcion, 131 S. Ct. 1740, 1753 (2011) (United States of America).[17] Michael Mustill and Stewart Boyd, Commercial Arbitration, 63 (2nd ed., 1989).[18] Imperial Life Assurance Co. of Canada v. Colmenares, [1967] S. C. R. 443 (United States of America).[19] Lilydale Cooperative Ltd. v. Meyn Canada Inc., 2015 O. N. C. A. 281 (Canada).[20] G. C. Cheshire, Private International Law, 190 (7th ed., 1965).[21] Lilydale, supra note 94, at ¶15.
The parties to the contract generally are well experienced professionals and are capable of determining the law governing the arbitration agreement. Unlike domestic arbitration, an international arbitration involves complexity of laws governing it due to its transnational nature of dispute resolution. In Redfern & Hunter, the following laws are identified to have significance over an international arbitration:
1.“the law governing the arbitration agreement and the performance of that agreement;
2. the law governing the existence and proceedings of the arbitral tribunal (the lex arbitri);
3. the law, or the relevant legal rules, governing the substantive issues in dispute (generally described as the ‘applicable law’, the ‘governing law’, ‘the proper law of the contract’, or ‘the substantive law’);
4. other applicable rules and non-binding guidelines and recommendations;3 and
5. the law governing recognition and enforcement of the award (which may, in practice, prove to be not one law, but two or more, if recognition and enforcement is sought in more than one country in which the losing party has, or is thought to have, assets).”[1]
As emphasized by Prof. K. P. Berger, in order to determine the power to adapt the contract, reference must be made simultaneously to the arbitration agreement and the underlying contract and the law governing the arbitration agreement.[2] The law governing the arbitration agreement need not necessarily be same as the law governing the underlying contract in which the arbitration agreement is contained. In this regard, not in all international commercial transactions do parties determine the law applicable to the arbitration agreement. In cases where the parties have agreed to a specific national law to be applicable to the arbitration agreement, then the arbitration agreement is governed by the pre-determined law as per the legal necessity mandated by the principle of party autonomy. The general ‘applicable law clause’ contained in a contract refers to the law applicable to the substance of the dispute arising out of the contract[3] and does not necessarily govern the arbitration agreement. It is in this regard advised that the parties specifically determine a ‘governing law clause’ applicable to the arbitration agreement even if it contained in the same contract. In case the parties fail to determine the law governing the arbitration agreement the international law has a solution in this context and the choice of the law rest on the following three facets – law of the contract or the law of the seat of the arbitration or determining the applicable law based on the intention of the parties.
The test for determining the law governing the arbitration agreement has been explained in detail by the England and Wales Court of Appeal in the case of Sulamérica.[4]Wherein the Master of the Rolls, Lord Justice Moore-Bick emphasized as follows:
“The first is that, even if the agreement forms part of a substantive contract (as is commonly the case), its proper law may not be the same as that of the substantive contract. The second is that the proper law is to be determined by undertaking a three-stage enquiry into (i) express choice, (ii) implied choice and (iii) closest and most real connection. As a matter of principle, those three stages ought to be embarked on separately and in that order…”[5]
A. Law Applicable to the Underlying Contract
In the absence of an express choice of law governing the arbitration agreement, the generally accepted principle is to apply the law that governs the rest of the contract.[6] The rationale behind this is that, since the arbitration agreement is one of the multiple provisions contained in the contract, the law that generally applies to the contract, as chosen by the parties, is to be made applicable to the arbitration agreement. However, the doctrine of separability of the contract has been identified as a general impediment in considering the notion that the law governing the underlying contract should also govern the arbitration agreement. According to the doctrine of severability of the arbitration agreement, the arbitration agreement though contained in the same contract is a separate agreement which can stand alone in the event of challenge to the validity of the underlying contract. The primary consequence of the doctrine of severability of the arbitration agreement from the underlying contract, is the possibility of a different law governing the arbitration agreement as against the law governing the underlying contract.[7] However, the position with regards to this is unsettled, which leads us to consider the next limb of the test.
B. Law of the Seat of the Arbitration
The parties to the contract generally identify the seat of the arbitration and this seat of the arbitration has a legal significance. The seat of the arbitration is not a mere geographical location, but is a legal construct and has material influence over the choice-of-law.[8] The seat of the arbitration plays a pivotal role in determining the law governing the arbitration agreement in the absence of any express choice by the parties to the contract. In this regard the English Court of Appeal[9] has held that the choice of seat of arbitration by the parties implied means the acceptance of the law of the seat to the conduct and supervision of the arbitration proceedings.[10] This position of determining the law governing the arbitration agreement is widely accepted in multiple jurisdictions – the Swedish Supreme Court in Bulbank case[11], the Brussels Tribunal in Matermaco case[12] and the Singapore High Court in BCY v. BCZ[13] has expressed similar opinions. Moreover, the New York Convention[14] and the Model Law[15] indicate the above-mentioned conclusion, that the award made must be valid under the law agreed by the parties and in the absence of the same, it must be valid under the law of the country where the award was made. More importantly, United States of America, which is an important consideration under this dissertation, has earmarked the significance attached to the seat in the Federal Arbitration Act, 1925 as determinative factor for identifying the law governing the arbitration agreement.[16]
C. Closest and Most Real Connection Test
The last limb of the test determined by the Court in the seminal case of Sulamérica is applying the law of the country with which the arbitration agreement has the closest and most real connection. Thus, in the absence of an express or implied choice of law being determined by the parties, the arbitration agreement is governed by the law with which the agreement has the closest connection with.[17] In the United States of America, the test was first established in Imperial Life Assurance Co. of Canada v. Colmenares,[18] relying on an English case law and in the case of Lilydale Cooperative Ltd. v. Meyn Canada Inc.,[19]the Ontario Court of Appeal referencing Prof. Cheshire[20] laid down the criteria for determining the closest and most real connection. More commonly, the closest connection is determined to be with the country in which the arbitration is seated, amongst other factors.[21]
In this regard, for the purpose of determining the law governing the arbitration agreement, the arbitral tribunal has to first respect the express choice of the parties, if any predetermined by the parties. In the absence of an express choice, the law applicable to the underlying contract can be extended to the arbitration agreement, unless a contrary intention is expressed by the parties or the law of the seat of the arbitration can be necessarily implied by virtue of legal significance attached to it. Lastly, when everything else fails, the law of the country with which the arbitration agreement has the closest and most real connection will govern the arbitration agreement. Accordingly, by applying the above-mentioned test, the arbitral tribunals first needs to identify the law governing the arbitration agreement in order to establish its power to adapt the contract. It is pertinent to note that not all legal systems allow the arbitrator to adapt the contract, only an insignificant number of legal systems allows for adaptation of contract in the view of changed circumstances.
________________________________________
[1] Nigel supra note 66, at 157 ¶3.07.
[2] Berger, supra note 11, at 8.
[3] Nigel supra note 66, at 158 ¶3.10.
[4] Sulamérica Cia Nacional de Seguros SA and Ors. v Enesa Engenharia SA and Ors. [2012] E. W. C. A.
Civ. 638 (United Kingdom). See Habas Sinai Ve Tibbi Gazlar Istihsal Andustrisi AS v. V. S. C. Steel Company Ltd., [2013] E. W. H. C. 4071 (Comm.) (United Kingdom); Arsanovia Ltd. v. Cruz Ciy Mauritius Holdings [2013] 2 All. E. R. 1 (United Kingdom); BCY v. BCZ, [2016] S. G. H. C. 249 (Singapore).
[5] Id., Sulamérica, ¶24.
[6] Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd [1993] A. C. 334 (United Kingdom).
[7] Nigel supra note 66, at 159 ¶3.13.
[8] Gary B. Born, International Commercial Arbitration, Vol. 1 1684 (2009).
[9] See C v. D, [2007] E. W. C. A. Civ. 1282 (United Kingdom); XL Insurance Ltd. v. Owens Corning, [2001] All. E. R. (Comm.) 530 (United Kingdom).
[10] Nigel supra note 66, at 161 ¶3.23.
[11] Bulgarian Foreign Trade Bank Ltd v Al Trade Finance Inc., Case No. T1881–99, Swedish Supreme Court, 27 October 2000, (2001) XXVI Y. B. C. A. 291 (Sweden).
[12] Matermaco SA v PPM Cranes Inc., Brussels Tribunal de Commerce, 20 September 1999, (2000) XXV Y. B. C. A. 673 (Belgium).
[13] BCY v. BCZ, [2016] S. G. H. C. 249 (Singapore).
[14] New York Convention, 1958 Art. V (1) (a).
[15] UNICTRAL Model Law, 1985 Art. 34 (2) (a).
[16] Pedcor Mgt Co. Inc. Welfare Benefit Plan v North American Indemnity, 343 F. 3d 355 (5th Cir. 2003) (United States of America); AT&T Mobility LLC v Concepcion, 131 S. Ct. 1740, 1753 (2011) (United States of America).
[17] Michael Mustill and Stewart Boyd, Commercial Arbitration, 63 (2nd ed., 1989).
[18] Imperial Life Assurance Co. of Canada v. Colmenares, [1967] S. C. R. 443 (United States of America).
[19] Lilydale Cooperative Ltd. v. Meyn Canada Inc., 2015 O. N. C. A. 281 (Canada).
[20] G. C. Cheshire, Private International Law, 190 (7th ed., 1965).
[21] Lilydale, supra note 94, at ¶15.