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Hong Kong – Determining The Lex Arbitri.

12 June, 2015

 

 
The English High Court case of Shagang South-Asia (Hong Kong) Trading Co. Ltd v Daewoo Logistics [2015] EWHC 194 (Comm) (“Shagang”) is another illustration in a long line of cases of how the courts will determine the law of the arbitration where the parties have left it silent.
 
However, Shagang goes one step further than previous case law with the suggestion that the express seat of arbitration is a very strong presumption that the law of arbitration will follow the law of the seat of arbitration, even if the arbitration agreement provides for the arbitration legislation of another country to apply.
 
Background Facts
 
Daewoo agreed to charter a vessel pursuant to a Fixture Note dated 17 April 2008. The arbitration agreement in Clauses 23 – 25 of the Fixture Note (“Arbitration Agreement”) reads:
 
“23. ARBITRATION: ARBITRATION TO BE HELD IN HONGKONG [sic]. ENGLISH LAW TO BE APPLIED.
 
24. OTHER TERMS/CONDITIONS AND CHARTER PARTY DETAILS BASE ON GENCON 1994 CHARTER PARTY
 
25. THIS CHARTERPARTY TO APPLY ENGLISH VERSION.”
 
The GENCON 1994 Charterparty (“GENCON Form”) consists of a series of numbered boxes. In particular, Box 25 sets out three arbitration options involving different combinations of the law of the arbitration agreement, the seat of arbitration, the arbitral institute etc…, for the Parties to choose from. If no option was chosen, then the default option of arbitration in London in accordance with the English Arbitration Act will apply. The Parties did not fill in Box 25.
 
A dispute arose between the head owners and head charterers, which was ultimately litigated between Shagang (charterer) and Daewoo (owner). Daewoo commenced arbitration in London against Shagang by way of Notice of Arbitration on February 2014. As Shagang did not respond to the Notice of Arbitration, Daewoo appointed Mr Timothy Rayment as sole arbitrator.
 
Shagang subsequently appointed solicitors, who complained that Mr Rayment had no jurisdiction because the arbitration was subject to the Hong Kong Arbitration Ordinance, given that the seat of the arbitration was Hong Kong.
 
The jurisdictional dispute over the identity of the seat of the arbitration and the law of the arbitration agreement was submitted to Mr Rayment, who ruled in an interim award that the arbitration was subject to the English Arbitration Act.
 
Shagang then applied to set aside Mr Rayment’s interim award under Section 67 of the English Arbitration Act, which was heard by Justice Hamblen.
 
Shagang’s position was that Clause 23 of the Fixture Note contradicted the GENCON Form, so the default arbitration option under the GENCON Form was either not incorporated or made inapplicable. Mr Rayment therefore had no jurisdiction pursuant to either the GENCON Form or the English Arbitration Act. Daewoo’s position was that Clause 23 of the Fixture Note had to be read consistently with the GENCON Form. This meant that the Parties had only intended Hong Kong to be the hearing venue, whereas the seat of arbitration and law of the arbitration was to be London and English law respectively.
 
The Decision
 
Hamblen J started with the obvious observation that Clause 23 consists of two limbs:
 
a. where the arbitration “is to be held”; and
 
b. what law is “to be applied”.
 
He then referred to common commercial practice, English case law and held as follows.
 
a. An agreement for an arbitration ‘to be held’ in a particular country suggests that all aspects of the arbitration (including supervisory courtproceedings) are to take place in that country. There is no “meaningful distinction to be drawn between choosing a place as a ‘venue’ or ‘place’ for the arbitration and choosing it as the place where the arbitration ‘is to be held’”.
 
b. An agreement for a law ‘to be applied’ typically refers to the governing law of the underlying contract because it is “far less usual” for parties to specify the law governing the arbitration agreement.
 
c. It is very uncommon for the law of the arbitration agreement to be different from the law of the seat of the arbitration, even though this is legally possible. This is because such a bifurcation “invites jurisdictional complications and issues as to the relative roles of the local court and the chosen foreign court in relation to the arbitration.” Hamblen J noted that a bifurcation would cause problems in the present case because there was evidence that the Hong Kong Arbitration Ordinance was mandatorily applicable to arbitrations taking place in Hong Kong.
 
d. In reaching his conclusions, Hamblen J drew heavily on the dicta of Cooke J in Shahoua v Sharma [2009] 2 Lloyd’s Rep 376 where the parties provided for ICC arbitration and that ‘the venue of arbitration shall be London, United Kingdom.’ The issue was whether London was to be the seat of arbitration. Cooke J held, inter alia, that:
 
“If a venue was named but there was to be a different juridical seat, it would be expected that the seat would also be specifically named. Notwithstanding the authorities cited by the defendant, I consider that there is great force in this… The parties have not simply provided for the location of hearings to be in London for the sake of convenience and there is indeed no suggestion that London would be convenient in itself…’London arbitration’ is a well known phenomenon which is often chosen by foreign nationals with a different law…because of the legislative framework and supervisory powers of the courts here which many parties are keen to adopt. When therefore there is an express designation of the arbitration venue as London and no designation of any alternative place as the seat, combined with a supranational body of rules governing the arbitration and no other significant contrary indicia, the inexorable conclusion is, to my mind, that London is the juridical seat and English law the curial law.”
 
e. The above observations in Shahoua v Sharma apply with great force here because:
 
“Nor do I consider that the inconvenience of London was a determining factor in either Shahoua v Sharma…It was relevant, but no more than that. Moreover, whilst Hong Kong is no doubt geographically convenient, it is also a well known and respected arbitration forum with a reputation for neutrality, not least because of its supervising courts.”
 
f. Given the close link between the seat of arbitration and the procedure governing the arbitration, this is why choosing the seat of arbitration generally implies the choice of the governing procedure. In fact, the connection is so strong that even an express provision that arbitration legislation from a country other than the seat of arbitration is not sufficient to displace this implication, which was the case in Enercon GmbH v Enercon (India) Ltd [2012] 1 Lloyd’s Rep 519 (i.e. the arbitration agreement provided that ‘[t]he venue of the arbitration proceedings shall be London’ and that ‘[t]he provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply’.
 
g. Accordingly, Hamblen J held:
 
“An agreement that the arbitration ‘to be held in Hong Kong’ would ordinarily carry with it an implied choice of Hong Kong as the seat of the arbitration and of the application of Hong Kong law as the curial law. Clear words or ‘significant contrary indicia’ are necessary to establish that some other seat or curial law has been agreed.”
 
h. Hamblen J considered the ‘contrary indicia’ and found that they were not sufficient to displace the strong implication that the law of the arbitration agreement would follow the law of the seat of arbitration
 
i. Although Clause 23 is headed “ARBITRATION”, the reference to ‘English law to be applied’ can naturally be read as referring to the law governing the Fixture Note, not the law of the arbitration. This was also the practice in other standard charterparty forms. The reason behind such a practice is because the choice of forum would normally imply the choice of governing law of the contract, which is why contract draftsman would normally deal with these two subjects together.
 
ii. The GENCON Form providing for London arbitration with English law as the default option is not a contrary indicia because the Parties here have chosen something different from the GENCON scheme. This means that the default arbitration option under the GENCON Form was either not incorporated or made inapplicable.
 
i. As far as Hamblen J was aware, the only reported example of where the parties have successfully chosen a law of the arbitration that is different from the seat of arbitration was in Braes of Doune Wind Farm v Alfred McAlpine Business Services [2008] 1 Lloyd’s Rep 608, where the arbitration clause reads: “The arbitration agreement is subject to English Law and the seat of the arbitration shall be Glasgow, Scotland. Any such reference to arbitration shall be deemed to be a reference to arbitration within the meaning of the Arbitration Act 1996 or any statutory re-enactment.”
 
j. Braes of Doune Wind Farm v Alfred McAlpine Business Services was an exceptional case where the parties had expressly specified the seat of the arbitration and the law of the arbitration agreement. This was not the case here.
 
Comments
 
The arbitration community will no doubt recall the spate of case law from England, Singapore, India and Hong Kong which caused great confusion on how the law of the arbitration agreement will be determined if the parties did not expressly provide for it. Some courts held that the law of the arbitration agreement would follow the governing law of the contract whilst others held that it would follow the seat of arbitration.
 
With this background in mind, Shagang is another voice in the crowd and another example of the appalling waste of time and costs if parties’ (or their lawyers) leave the law of the arbitration agreement silent. Nevertheless, there are three take-away points from Shagang.
a. If a place of arbitration is specified, it is very likely that the courts will take that to mean the seat of arbitration. If parties wish to specify a hearing venue, they should also specify the seat of arbitration.
 
b. It is not advisable to specify a law of the arbitration agreement that is different from the seat of the arbitration. Even if one does exactly that by specifying the application of an arbitration statute that is different from the seat of the arbitration, the courts may just disregard it following Shagang.
 
c. It is comforting to the arbitration community that the status of Hong Kong as a leading arbitration centre has been immortalised in an English judgment and noted as one of the reasons why the Parties in this case must have taken the words ‘ARBITRATION TO BE HELD IN HONGKONG [sic]’ to mean Hong Kong as the seat of arbitration, and not just a mere venue for hearings.
 
Notwithstanding Shagang, parties can easily avoid such difficulties by specifying the law of the arbitration. The HKIAC has led the way by amending its model clause to set out the law of the arbitration agreement, which was sound practice that has won for the HKIAC the accolade of ‘Best Innovation by an Individual or Organisation’ in the Global Arbitration Review 2014 awards. There is no reason to risk litigation where a few strokes of the pen will eliminate the problem.
 
This article was supplied by Andrew Chin, Baker & McKenzie 

 

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