The laws applicable to arbitration can be broadly divided into the following five categories:
- Law governing the arbitration agreement and performance of that agreement.
- Law governing the existence and proceedings of the arbitral tribunal. Also known as lex arbitri.
- Law governing the substantive issues in dispute. Also known as applicable law, governing law, proper law of the contract or the substantive law.
- Law governing recognition and enforcement of award.
- Other applicable rules, non-binding guidelines and recommendations.
LAW GOVERNING THE ARBITRATION AGREEMENT
Agreement to arbitrate may either be in the form of an arbitration clause or as a separate agreement made to submit a dispute for arbitration.
An ‘applicable law clause’ generally refers to the substantive law that would apply to the substantive issues in dispute. It does not usually cover the disputes which may arise in relation to the arbitration agreement itself. Thus, while drafting an arbitration agreement, one should make it clear as to what law shall apply to the agreement.
Where no express choice has been made in the agreement regarding this, the choice generally lies between the law that governs the contract and the law of the seat of the arbitration.
- Law of the contract
An arbitration clause is just one of many clauses in a contract. One might assume that it implies that the law chosen by the parties to govern the contract shall also govern the arbitration agreement. However, one must keep in mind that the doctrine of separability, which gives rise to the autonomy of the arbitration clause, separating it from other clauses of the agreement would defeat such an assumption.
The arbitration clause, being a stand-alone clause, gives birth to the possibility of it being governed by a law different from the law which governs the contract.
Article V(1)(a) of the New York Convention indicates this by touching upon both scenarios, where on the one hand, the arbitration agreement is scrutinised under the law to which the parties have subjected it. On the other hand, it states that in case the parties have failed to indicate the law governing the agreement, it shall be scrutinised under the law of the country where the award was made.
- Law of the seat of the arbitration
Applying the doctrine of separability, courts and tribunals in various jurisdictions have considered the law of the seat of arbitration to be the appropriate law to govern the arbitration agreement.
Article 16(4) of the London Court of International Arbitration (LCIA) Rules provides that,
“The law applicable to the arbitration agreement and the arbitration shall be the law at the seat of the arbitration, unless and to the extent that the parties have agreed in writing on the application of other laws or rule of laws and such agreement is not prohibited by the law applicable at the arbitral seat.”
In Sulamerica Cia Nacional de Seguros SA and others v. Enesa Engenharia SA and others [1], the English Court of Appeal determined the law applicable to the arbitration agreement by applying the three-stage enquiry established under common law.
The facts of the case were that Sulamerica, an insurance company, entered into a contract with Enesa, a construction company, to cover the risks which may arise in the construction of a hydroelectric generating plant in Brazil. As per the contract, Brazilian law was the governing law, and Brazilian courts had exclusive jurisdiction in relation to any dispute under the contract. The contract also provided that London shall be the seat of arbitration.
A dispute over Sulamerica's liability for certain claims arose. Sulamerica gave notice of arbitration to Enesa. Enesa obtained an anti-suit injunction in Brazilian courts restraining Sulamerica from pursuing the arbitration. Thereafter, Sulamerica obtained an anti-suit injunction in the English commercial court, restraining Enesa from pursuing proceedings in Brazilian courts.
Enesa filed an appeal before the English Court of Appeal, where it submitted that it was not under an obligation to participate in arbitration since the arbitration agreement was governed by Brazilian laws, which provide that an arbitration agreement can be invoked only with the other party’s consent.
The three-stage enquiry applied by the English Court of Appeal provides that,
- Where the parties have made an express choice of law to govern the arbitration agreement, that would be the law which would govern the agreement irrespective of the law applicable to the contract as a whole.
- Where the parties have failed to make an express choice of law to govern the arbitration agreement, it becomes necessary to consider and apply the implied choice of law.
- Where it is impossible to find out the implied choice of law, it becomes necessary to determine which law has the ‘closest and most real connection’ with the arbitration agreement.
The English Court of Appeal observed that in such cases, the ‘natural inference’ would be that the chosen substantive law would govern the arbitration agreement as well. There has been a string of authorities which have recognised the substantive law of the contract and the law of the arbitration agreement to typically be the same, whereas lex arbitri usually is the law of the seat.
However, in the present case, the Court noted that two factors indicated that the parties did not intend to apply substantive law to the arbitration agreement. Firstly, under Brazilian Law, the other party’s consent is necessary to commence arbitration. In the absence of any such indication in the contract, assuming Brazilian Law to be the law governing arbitration agreement would seriously undermine the arbitration agreement. Secondly, the choice of London as the seat of arbitration indicates the parties’ acceptance that English law would apply to the conduct and supervision of the arbitration, which indicates the intent to apply English law to all the aspects of the arbitration agreement. Therefore, the English Court of Appeal held that in the present case, the law of the seat of arbitration had the closest and most real connection with the arbitration agreement.
To simplify the process of ascertaining the implied choice of law or the law having the closest and most real connection, the Supreme Court of the UK laid down certain guidelines in the landmark decision titled Enka v. Chubb[2]. In this case, Chubb brought proceedings against Enka in the Russian Courts. To restrain Chubb from pursuing the claim before the Russian Courts, Enka requested an anti-suit injunction from the English Courts, submitting that the claims were within the scope of the arbitration agreement which is governed by English law. Whereas, Chubb submitted that Russian law governs the arbitration agreement, which restricts the scope of the arbitration agreement, and thereby, the claims fell outside the scope of the agreement.
The Supreme Court held that where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract, i.e. the substantive law, will generally apply to an arbitration agreement. The apex court further held that the choice of a different country as the seat of the arbitration is not sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.
However, in the present case, there was no choice of law at all in the main contract. Therefore, the UK Supreme Court held that the law of the seat would apply to the arbitration agreement.
Internationally, there is still no uniformity with respect to the ascertainment of law governing the arbitration agreement in the absence of express choice. For instance, in the Bulbank case[3], the arbitration took place in Sweden, and thereafter, the validity of the arbitration agreement was challenged before the Swedish Courts. Although the parties had chosen Austrian law to govern the contract, the Supreme Court of Sweden ignored that choice, considering that the arbitration clause ought to be treated as a separate agreement which shall be subject to a separate law. The Supreme Court adjudged that arbitration agreement to be valid by applying the law of the seat of arbitration to the agreement.
French ‘third way’
The methods considered so far involved the question as to which national law shall apply to the arbitration agreement. The French Court came up with a third method according to which the law applicable to the arbitration agreement was to be determined by reference to the parties' discernible common intentions.
The conclusion that can be drawn from several decisions by the Paris Cour d’Appel is that the effectiveness and the existence of the arbitration agreement are to be assessed subject to the mandatory rules of French law, international public policy and based on parties’ common intention. Under the French approach, there is no need to refer to any national law.
Swiss Model
The Swiss model is a pro-arbitration approach which accords maximum opportunity to uphold the validity of the arbitration agreement.
The Swiss approach uses a combination of several approaches to determine the law applicable to the arbitration agreement. It provides that an arbitration agreement shall be valid if it conforms either to the law chosen by the parties or to the governing law of the main contract or if it conforms to Swiss law.
LAW GOVERNING THE ARBITRATION- LEX ARBITRI
International arbitration generally takes place in a neutral country in which none of the parties to the arbitration have a place of business or residence. Usually, the law that governs the substantive issues in the dispute is different from the law of the country in which the arbitration takes place, i.e., the seat of arbitration. The law of the seat is generally the law that governs the arbitration procedure, and it is known as lex arbitri.
Article 18(1) of the UNCITRAL Arbitration Rules states, “If the parties have not previously agreed on the place of arbitration the place of arbitration shall be determined by the arbitral tribunal having regard do the circumstances of the case.”
Article 18(1) of the ICC rules provides that the place of arbitration shall be fixed by the ICC courts unless agreed upon by the parties.
The meaning of the term lex arbitri was discussed in the case titled Smith Ltd v. H International in the following words,
“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 (example court orders for 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 (Example 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 (example removing an arbitrator for misconduct).”
Each country is free to decide what kind of laws and rules it wishes to lay down to govern and assist in arbitrations taking place within its territory. Here’s a list of examples of matters which are generally dealt with the lex arbitri:
- Form of an arbitration agreement
- Arbitrability of a dispute
- Constitution of the arbitral tribunal and grounds of challenge
- Freedom to agree upon rules of procedure
- Statements of claim and defence and hearings
- Interim measures
- Matters in which Court assistance can be sought
- Form of an arbitral award
- Grounds to challenge the award
Legal provisions of the place of arbitration may have direct unintended consequences. Thus, the choice of place of arbitration plays a major role in the effective conduct of international arbitration.
Lex arbitri deals with general matters only rather than detailed procedures concerning matters like written statements, hearing, witness statements, cross-examination, etc. It is advisable to agree upon such rules before the arbitration starts. This can be done either by agreement of the parties or by order of the tribunal.
The laws of England and Switzerland have a particularly clear link between the lex arbitri and the seat of law. Certain provisions of the English Arbitration Act of 1996 apply only when the seat of arbitration is in England, Wales or North Ireland. Section 3 of the English Arbitration Act defines the seat of arbitration as the juridical seat of the arbitration designated by the parties or by an arbitral institution or the arbitrators themselves.
The seat of arbitration is often said to be the legal centre of gravity. However, it does not mean that each and every proceeding of arbitration has to take place at the seat, although some proceedings should take place there.
Article 18 of the ICC rules permits hearings to be held at places other than the seat of the arbitration. The Article reads as follows,
- The place of arbitration shall be fixed by the court unless agreed upon by the parties.
- The arbitral tribunal may, after consultation with the parties, conduct hearings and meetings at any location it considers appropriate unless otherwise agreed by the parties.
- The arbitral tribunal may deliberate at any location it considers appropriate.
LCIA Rules have a similar provision under Article 16(3), which allows the arbitral tribunal to hold hearings at any convenient geographical place in consultation with the parties. If such place is other than the seat of arbitration, it shall nonetheless be treated as arbitration conducted had the seat, and even if any order or award were passed at this place, it would be deemed to have been made at the seat.
Each move of the tribunal does not mean that with every move the seat of arbitration changes. But if an arbitral tribunal visits another country, it must respect the laws of that country.
One might say that in the domain of international arbitration, it would be of great convenience to have a universal lex arbitri. It would increase the efficiency of the mechanism as the tribunal will no longer be required to enquire about the special provisions governing arbitration in a particular country. Practically, however, implementing the idea of universal lex arbitri is almost impossible as each country has its own characteristics, interests and procedural nuances regarding how arbitrations should be conducted. The Model Law was the attempt made in the right direction to bring uniformity in the practice of international arbitration.
Delocalization Theory
Another development in the field of international arbitration is the delocalization theory. The idea behind it is to detach an arbitration from the control of the law of the seat, otherwise, it would be under the control of two legal systems, firstly, the lex arbitri and, secondly, the law of the place of enforcement of the award.
In Société PT Putrabali Adyamulia v. Société Rena Holding [2007], a French court enforced an arbitral award set aside by an English Court, holding that “An international arbitral award, which does not belong to any state legal system, is an international decision of justice and its validity must be examined according to the applicable rules of the country where its recognition and enforcement are sought.”
At ground level, delocalization of arbitrations, other than those directly governed by international law, such as investment disputes, is possible only if the lex arbitri allows it.
LAW APPLICABLE TO THE SUBSTANCE
After settling the questions of procedure, the tribunal commences its principal task of establishing material facts of the dispute by various ways like examining the contract between the parties, considering relevant documents like minutes of meetings, emails, etc., and hearing the witnesses if required.
Thereafter, the tribunal makes its award by applying the substantive law chosen by the parties or, if authorised by the parties, on the basis of what is fair and reasonable in those circumstances.
Generally, the tribunal does not need to go outside the contract between the parties, which created the legal relations between the parties to the dispute. The law that governs the interpretation of this contract is known as the substantive law, applicable law or the governing law of the contract.
Changes in the substantive law applicable to the contract lead to changes in the contract itself. Thus, knowing what the agreement says is not enough. It is essential to read its clauses in the light of its governing law.
It is widely accepted that the parties to an international arbitration have the autonomy to choose the law applicable to the agreement. Several international conventions and rules confirm this. For example, Article 42 of the ICSID Convention states, “the tribunal shall decide a dispute with accordance with such rules of law as may be agreed by the parties.” The UNCITRAL Rules under Article 35(1) provide that “the arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the disputes.”
Parties have the freedom to choose the applicable law not only at the time of making their contract but also at the time of the dispute.
Choices of governing law of the contract available to the parties include the following:
- National law
- Public international law
- Concurrent laws or combined laws
- Transnational law, including lex mercatoria, trade usages
- Equity and good conscience
Restrictions on Party Autonomy
Party autonomy is a fundamental principle of arbitration. It confers freedom to the parties to choose the applicable laws for every facet of arbitration except certain mandatory rules of the law of the seat of arbitration.
Parties are free to exercise their autonomy to choose:
- Substantive Law
- Law governing the Arbitration Agreement
- Law of the Seat of Arbitration
- Lex Arbitri (subject to mandatory rules of the law of the seat)
However, there are certain restrictions on the autonomy of the parties to choose the governing law to ensure that their choice is bona fide and not averse to public policy. This is done to curb the attempts made by some parties to bypass mandatory legal rules like competition regulations, taxation, revenue laws, and export regulations.
In a case titled Soleimany v. Soleimany (1999), the English Court of Appeal refused to enforce an award where, although the transaction was not illegal under the applicable law, it was illegal under the English law.
Rome I Regulation does not permit the parties to choose a foreign law with the intention to override the law of a country in which most of the contractual elements were to be performed.
[1] Sulamerica Cia Nacional de Seguros SA and others v. Enesa Engenharia SA and other [2012] EWCA Civ 638
[2] Enka Insaat Ve Sanayi A.S. (Respondent) v. OOO Insurance Company Chubb [2020] UKSC 38
[3] A.I. Trade Finance Inc. v. Bulgarian Foreign Trade Bank (2000)
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