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Hong Kong – Determining The Law Applicable To The Arbitration Agreement: Judicial Approaches And HKIAC’S Response.

6 November, 2014

 


There are at least three systems of law relevant to an international commercial arbitration, namely (a) the law governing the substantive contract (lex causae), (b) the law governing the arbitration proceedings (lex fori or lex arbitri), and (c) the law governing the agreement to arbitrate. Established principles generally exist under national laws and as a matter of arbitral practice in determining (a) and (b) above. However, as this article will illustrate by reference to a recent Singapore decision and English authorities such as Sulamérica Cia. Nacional de Seguros S.A. & Ors v Enesa Engenharia S.A. & Ors [2012] 1 Lloyd’s Rep 671 (“Sulamérica”), there is no international consensus about how to determine what is the law applicable to the arbitration agreement.

 
The law of the arbitration agreement is rarely expressed in the contract, and so, when issues arise about the formation, existence, scope, validity, interpretation etc of the arbitration agreement, there is potential for disputes, resulting in the need for the arbitral tribunal or court to make an initial decision on what is the law governing the arbitration agreement.

 
This can be avoided however if care is taken in the drafting of the arbitration agreement. In this regard, the HKIAC has attempted to make it easy for parties. It recently revised its model arbitration clause to enable the parties to make an express choice of law.

 
The Singapore Approach

 
On 19 June 2014, the Singapore High Court issued a judgment in the case FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12 (“FirstLink”) setting out the approach of the Singapore Court in determining the question of the law applicable to an arbitration agreement in circumstances where there is no express choice of law.

 
FirstLink is a company publicly-listed in Singapore, and GT Payment is a Singapore company operating an online payment business. The parties contracted with each other, and FirstLink registered itself on GT Payment’s website as a member using its services. Having deposited a sum of money into its online payment account, FirstLink was then suspended by GT Payment having allegedly breached the terms of the agreement by using the service to make a personal payment to its own managing director. FirstLink commenced proceedings in the Singapore High Court against GT Payment and its affiliates to recover the balance in the online account.

 
GT Payment applied for a stay of the court proceedings in favour of arbitration under section 6 of the International Arbitration Act (Cap. 143A) relying on the terms of the following arbitration clause in the contract:

 

“Any claim will be adjudicated by Arbitration Institute of the Stockholm Chamber of Commerce. You and [GT Payment] agree to submit to the jurisdiction of the Arbitration Institute of the Stockholm Chamber of Commerce. Both parties expressly agree not to bring the disputes to any other court jurisdictions, except as agreed here to the Arbitration Institute of the Stockholm Chamber of Commerce.”

 

 

Opposing the stay application, FirstLink contended that the arbitration agreement was null and void, inoperative or incapable of being performed because of an invalid choice of law in respect of the substantive contract between the parties. That contract provided that the contract was to be “governed by and interpreted under the laws of Arbitration Institute of the Stockholm Chamber of Commerce”. FirstLink argued that applying the same choice of law to the arbitration agreement as that applicable to the substantive contract made the arbitration agreement invalid and unenforceable as it did “not make sense” for an arbitration agreement to be governed by the “laws” of an international arbitral institution such as the SCC.

 
GT Payment contended that the choice of law clause governed only the substantive contract and not the arbitration agreement, and submitted that that agreement should be governed by the law of the seat of arbitration, i.e. Swedish law.

 
Departing from recent English authorities (discussed below), and without applying the traditional conflict of laws analysis under common law, the Singapore court considered that the law applicable to an arbitration agreement would ordinarily be that of the seat of the arbitration. It stated emphatically that, in the province of international arbitration, the arbitral seat is the “juridical centre of gravity”, which gives “life and effect” to an arbitration agreement. The reasoning of the Singapore Court was as follows:

 
(a) It cannot always be assumed that commercial parties want the same system of law to govern the relationship under which they perform their substantive contractual obligations, and the quite separate (and often unhappy) relationship under which disputes are resolved when problems arise. The more commercial view is that the latter relationship often comes into play when the former relationship has already broken down irretrievably. (Paragraph 13)

 
(b) In the realm of dispute resolution, parties’ desire for neutrality comes to the fore and the law governing the performance of substantive contractual obligations prior to the breakdown of the relationship takes a backseat except for its role in determining the merits of the dispute. (Paragraph 13)

 
(c) By reference to Article V(1)(a) of the New York Convention and Articles 34(2)(a)(i) and 36(1)(a)(i) of the UNCITRAL Model Law, which allow an arbitral award to be set aside, or its enforcement to be refused, where an arbitration agreement is considered invalid under the law of the place in which the award was made, the focus would primarily be on the law of the seat. (Paragraph 14)

 
(d) The parties would not have intended a specific place to be the arbitral seat if there was a serious risk that the law of the seat would invalidate the arbitration agreement, or if they had not intended that the law of that seat was to give life to the agreement in the first place. (Paragraph 14)

 
(e) Further, the parties would normally demand to have the law of the seat to govern the arbitration agreement so as to ensure consistency between the “law” and the “procedure” determining the validity of the arbitration agreement, including the role and power of the supervising court of the seat in determining a jurisdictional dispute under the lex arbitri. (Paragraph 15)

 
While the Singapore Court recognized that the determination of the proper law applicable to the arbitration agreement ultimately remains a question of the construction of the contract as a whole, taking into account the background facts, it was held that, all things being equal, the mere fact of an express substantive law in the main contract would not in and of itself be sufficient to displace the parties’ presumed intention that the law of the seat would be the proper law of the arbitration agreement. The Court therefore held that the arbitration agreement was governed by Swedish law and was valid. The proceedings were consequently stayed in favour of arbitration.

 
The conclusion reached by the Singapore Court in FirstLink is strikingly similar to that reached in an earlier English judgment in C v D [2007] EWCA Civ 1282. In that case the Court of Appeal was of the view that it would be “rare” for the proper law of the arbitration agreement to be different from that of the seat. This was because an arbitration agreement has a “closer and more real connection” with the place where the parties have chosen to arbitrate than with the place of the law of the main contract. Thisdecision was, however, not followed in a trilogy of subsequent English judgments.

 
The English Approach

 
In Sulamérica, the English Court of Appeal held that the proper law of the arbitration agreement was to be determined by undertaking a three-stage enquiry, namely (i) whether there is an express choice, (ii) whether any choice can be implied, and (iii) which system of law has the closest and most real connection. It was stated that the three stages should be embarked on separately and in that order.

 
This approach was endorsed by two subsequent English cases in Arsanovia Ltd & Ors v Cruz City 1 Mauritius Holdings [2013] 2 All ER 1 (“Arsanovia”) and Habas Sinai Ve Tibbi Gazlar Istihsal Endustrisi AS v VSC Steel Company Ltd [2014] 1 Lloyd’s Rep 479 (“Habas”). The essence of the English approach adopted in these cases is that there is a rebuttable presumption that an express choice of law in the substantive contract would apply equally to the arbitration agreement in the absence of any sufficient indication to the contrary.

 
Although Arsanovia and Habas adopt the test laid out in Sulamérica, the conclusions reached by these decisions were not in fact uniform, i.e. in Arsanoviathe law applicable to the arbitration agreement was held to be the law of the substantive contract, whereas the law of the seat was adopted in Sulamérica and Habas.

 
The applicable principles were set out succinctly in Habas as follows:

 
(a) Even if an arbitration agreement forms part of the substantive contract (as is commonly the case), its proper law may not be the same as that of the substantive contract.

 
(b) The proper law is to be determined by undertaking a three-stage enquiry into (i) express choice, (ii) implied choice and (iii) the system of law with which the arbitration agreement has the closest and most real connection.

 
(c) Where the substantive contract does not contain an express governing law clause, the significance of the choice of seat of the arbitration is likely to be “overwhelming”. That is because the system of law of the country of the seat will usually be that with which the arbitration agreement has its closest and most real connection.

 
(d) Where the substantive contract contains an express choice of law, this is a strong indication or pointer in relation to the parties’ intention as to the governing law of the agreement to arbitrate, in the absence of any indication to the contrary.

 
(e) The choice of a different country for the seat of the arbitration is a factor pointing the other way. However, it may not in itself be sufficient to displace the choice implicit in the express choice of the law to govern the substantive contract.

 
(f) Where there are sufficient factors pointing the other way, i.e. to negate the implied choice derived from the express choice of law in the substantive contract, the arbitration agreement will be governed by the law with which it has the closest and most real connection. That is likely to be the law of the country of the seat, being the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective.

 
Revised HKIAC Model Arbitration Clause

 
In light of the uncertainties created by the different approaches adopted by courts in common law jurisdictions, the HKIAC has recently revised its model arbitration clause to eliminate any uncertainties in this regard. In the hope of assisting the parties to reach agreement on the law governing the arbitration agreement, the HKIAC recommends the following clause for parties agreeing to arbitration under the HKIAC Administered Arbitration Rules:

 

“We, the undersigned, agree to refer to arbitration administered by the Hong Kong International Arbitration Centre (HKIAC) under the HKIAC Administered Arbitration Rules any dispute, controversy, difference or claim (including any dispute regarding non-contractual obligations) arising out of or relating to:


(Brief description of contract under which disputes, controversies, differences or claims have arisen or may arise).


The law of this arbitration agreement shall be …(Hong Kong law).


The seat of arbitration shall be … (Hong Kong).


The number of arbitrators shall be … (one or three). The arbitration proceedings shall be conducted in … (insert language).”

 
There is no international consistency in the approach of arbitral tribunals and courts to the determination of the law applicable to the arbitration agreement. However, an express choice of the law to govern the arbitration agreement should be sufficient to avoid any potential dispute in this regard. The approach of the HKIAC has much to commend it because it gives the parties an unfettered choice without at the same time prescribing a default position, whether or not the seat of arbitration is Hong Kong. This approach is clearly consistent with the principle of party autonomy in international arbitration.

 

This article was supplied by  Alan Tsang, Sidley Austin

 

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For further information, please contact:

 

Hong Kong International Arbitration Centre

adr@hkiac.org

 
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