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Hong Kong – What If My Contract Is Silent On The Law Applicable To An Arbitration Agreement It Contains?

30 April, 2013

 

The Commercial Court's decision in Arsanovia Ltd v Cruz City 1 Mauritius Holdings, handed down in December 2012, reaffirms the three-stage test for ascertaining the law applicable to an arbitration agreement where none has been expressly chosen in the underlying contract.

 

The test was clarified by the English Court of Appeal earlier in 2012 in Sulamerica CIA Nacional de Seguros SA v Enesa Engenharia SA, which established that the order for determining the proper law of an arbitration agreement should be determined by looking at the express choice of the parties, followed by the implied choice of the parties, and then the law which has the closest and most real connection with the arbitration agreement.

 

Where the arbitration agreement forms part of a substantive contract, an express choice of law governing the substantive contract is an important factor when determining the law which should govern the arbitration agreement. Moore-Bick LJ went on to say that, where no contrary express provision has been made, "the natural inference is that [the parties] intended the proper law chosen to govern the substantive contract also to govern the agreement to arbitrate". In essence, the law of the underlying contract will usually also govern the arbitration agreement, unless there are factors that point a different way. Such factors may include the terms of the arbitration agreement itself or the consequences for its effectiveness of choosing the law of the substantive contract. In Sulamerica, application of the law governing the substantive contract (Brazilian law) would have significantly undermined the effectiveness of the arbitration agreement, so it was determined that the law applicable to the arbitration agreement was that of the seat of arbitration, rather than that of the underlying contract.

 

The Arsanovia case arose out of a joint venture between Arsanovia Ltd, Burley Holdings Ltd, Unitech Ltd and Cruz City 1 Mauritius Holdings. Arsanovia and Cruz City formed a new company for the purpose of redeveloping slum areas in Mumbai and entered into a shareholders' agreement, governed by Indian law. Burley subscribed only to certain provisions of the shareholders' agreement. Arsanovia, Burley and Cruz City entered into a keepwell agreement, also governed by Indian law, under which Unitech agreed to put Burley in funds so that it could make payments due under the shareholders' agreement. Both agreements contained arbitration clauses providing for arbitration in London.

 

In 2010, Arsanovia served termination and buy-out notices on Cruz City and two months later Cruz City responded by giving notice of the exercise of its put option under the shareholders' agreement. A dispute arose over which notice was valid and Cruz City referred this dispute to arbitration. The tribunal determined that Cruz City had validly exercised the put option. Arsanovia disputed the jurisdiction of the tribunal, arguing that Burley had not agreed to be bound by the arbitration agreement in the shareholders' agreement and that, under Indian law, where an arbitration is brought against two respondents, only one of whom is a party to the arbitration agreement, the arbitration could not be maintained against either respondent. Therefore, as the tribunal did not have jurisdiction over Burley, it did not have the jurisdiction to decide the claims against Arsanovia either. Arsanovia maintained that the parties' express choice of Indian law to govern the substantive contracts meant that they had impliedly chosen Indian law to govern the arbitration agreements. In contrast, Cruz City argued that the choice of a London seat undermined any suggestion that the parties might have impliedly selected Indian law. Its counsel submitted that, by choosing English law as the law governing the procedure of the arbitral tribunal (known also as the curial law, lex curia or lex arbitri), the parties had indicated that they wanted English law to regulate all aspects of the arbitration.

 

The judge followed the three-stage enquiry set out by Moore-Bick LJ in Sulamerica. He found that the ordinary and natural meaning of the parties' express wording in the shareholders' agreement and the keepwell agreement, namely that "this agreement shall be governed by…the laws of India", meant that Indian law should govern all clauses in the two agreements, including the arbitration agreements. He went on to state that it was unimportant whether the choice was express or implied but that, in his judgment, the parties had intended the arbitration agreements to be governed by the law of India.

 

It was significant that the arbitration agreement in the shareholders' agreement included a specific agreement not to seek interim relief under the Indian Arbitration and Conciliation Act 1996 and that the provisions of Part 1 of that Act were expressly excluded. The judge stated that "where parties have expressly excluded specific statutory provisions of a law, the natural inference is that they understood and intended that otherwise that law would apply. Therefore…the reference to [the Act] in the arbitration agreement supports the claimants' contention that the parties' intention was that the arbitration agreement should be governed by Indian law (except in so far as they agreed otherwise)". As in Sulamerica, the Court accepted that "the governing law clause is, at the least, a strong pointer to [the parties’] intention about the law governing the arbitration agreement" and could find no contrary indication other than the choice of a London seat. On this basis, it found that the law applicable to the arbitration agreements was Indian law.

 

The judge also said obiter that, had he needed to decide which system of law had the closest and most real connection with the arbitration agreement (the third limb of Moore-Bick LJ's three-stage enquiry), he would have concluded that it was English law. The choice of London as the seat of the arbitration should be taken as a choice of forum and an indication that the parties had agreed that proceedings on the award should be only those permitted by English law.

 

Points to remember when drafting arbitration agreements

 

This decision indicates that the English courts are getting closer to establishing a consistent approach for ascertaining the law applicable to an arbitration agreement in the absence of an express provision. That said, the only way to achieve certainty is to make express provision for the governing law of the arbitration agreement. One way to achieve this would be for parties to adopt wording similar to the following:

 

"This agreement, including the arbitration agreement contained within it, and any dispute or claim arising out of or in connection with it or its subject matter or formation (including all non-contractual disputes or claims) shall be governed by and construed in accordance with the law of [England and Wales]."

 

If it is not possible to agree such wording, then the following factors should be considered by those drafting arbitration agreements:

 

  • express exclusions of particular statutory provisions of a country's arbitration laws may demonstrate an intention that, save as expressly excluded, that country's arbitration laws shall apply;
  • the governing law clause of the substantive contract will, at the very least, be a strong indicator of the law that the parties intended would govern the arbitration agreement; and
  • in cases where neither an express or implied choice has been made as to the law applicable to the arbitration agreement, the court is more likely to determine that the law governing the procedure of the arbitral tribunal is the appropriate law.

 

 

For further information, please contact:

 

Timothy Hill, Partner, Hogan Lovells
 
Damon So, Partner, Hogan Lovells

 

Hogan Lovells Dispute Resolution Practice Profile in Hong Kong

 

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