Introduction

Interpreting an arbitration agreement, defining its existence, and asserting its validity all depend upon the law governed by it. Once the arbitration agreement is executed between two parties, it deploys an arbitral tribunal whose prerequisite is the formulation of a legally valid arbitration agreement. Hence, when we speak about the enforcement and execution of an arbitral award, we must ensure the validity of the law applied to the arbitration agreement.^[1] This makes it necessary to achieve clarity over the law behind the arbitration agreement.

International Arbitration is regulated by various doctrines and international legal instruments. These instruments guide national courts and quasi-judicial tribunals in deciding which set of laws should govern the arbitration agreement. However, it is pertinent to note that neither national courts nor tribunals are obligated to follow any specific instrument or set of laws. Moreover, it is evident through the ut res magis valeat quam pereat [“it may rather become operative than null”] principle, that the general interpretation of any contract must be sought along the lines of validity rather than ineffectiveness. To check the authenticity of the arbitration agreement, courts deploy a positivist approach by considering the intention of the parties.

Hitherto, the governing law of arbitration agreements has given rise to considerable legal debates, especially when they lack an express choice for the same within the arbitration clause. In the recent case of China Railway (Hong Kong) Holdings Limited v. Chung Kin Holdings Company Limited, the Hong Kong Court of First Instance has reaffirmed the principle that the presence of an express choice of law clause in the main contract will typically apply to the arbitration agreement as well. This decision was commendable for being in consonance with existing Hong Kong jurisprudence and some of the leading precedents in various other jurisdictions.

China Railway (Hong Kong) Holdings Limited v. Chung Kin Holdings Company Limited

The case arose from a loan agreement dispute between two Hong Kong companies—China Railway (hereinafter “Plaintiff”) and Chung King (hereinafter “Defendant”). The loan agreement was documented through several agreements spanning a period of fifteen years and executed inter-jurisdictionally—in both Hong Kong and mainland China. After disputes arose between the parties, Plaintiff sought to recover debt from Defendant by initiating proceedings in Hong Kong. However, Defendant applied for a stay in the Hong Kong courts and argued that the dispute should be resolved in a court in Wuhan, China, where the mortgaged property collateral to one of the agreements was located, based on a dispute resolution clause that stated disputes should be resolved in accordance with local laws.

The plaintiff argued that Hong Kong law should apply since both parties were Hong Kong companies, that the initial agreement was closely linked to and effectively modified by subsequent debt repayment agreements, and that consequently, the same governing law should apply. The Court agreed with Plaintiff’s reasoning and found that Hong Kong law governed the dispute resolution clause, noting that all these agreements merged into a single debt agreement. The Court also found that the clause was non-exclusive—Defendant bore the burden to show that mainland Chinese courts would be the more appropriate forum, which Defendant failed to meet.

The legal issue behind the case is how to ascertain the governing law of the dispute resolution clause when it is silent on the express choice of governing law. Here, the Hong Kong Court of First Instance followed the stance of the United Kingdom Supreme Court delivered in the landmark judgment of Enka v. Chubb, which ruled that the express choice of law maintained in the main contract would extend to the jurisdiction clause. Following the same logic, the Hong Kong court maintained that the governing law should not be conceived through the limited parts of the agreement but apply to the entirety of the set of agreements. Furthermore, the Court established that the single debt agreement was not superseded by any subsequent agreement—express or implied—stipulated in the arbitration agreement on the governing law (thereby clarifying the parties’ intention pertaining to which law should govern). Therefore, the Court pronounced that Hong Kong law would govern the dispute resolution clause. The verdict in the China Railway case is the most recent legal authority in determining the governing law arbitration agreements for matters concerning Hong Kong law.

Arbitration Agreement Considered as Part of the Underlying Contract

Generally, contractual parties have the autonomy to choose between the substantive law governing the arbitration agreement and the curial law which governs the conduct of arbitration, either expressly or through implication. When the parties choose a governing law for their contract, it is presumed to extend to the arbitration agreement as well, unless explicitly stated otherwise. Moreover, unless mentioned expressly or through the parties’ implied choice, courts have the liberty to assume that the various stipulations of the contract come under the ambit of the same law in order to avoid inconsistency. Hence, the arbitration clause is effectively just a part of the contract and is regulated by the same law as the main contract.

In commercial contracts, parties usually intend to have a single system of law to govern their entire relationship. Where the parties fail to make a clear choice, the courts can choose the governing law applicable to the contract and interpret the settlement agreement based on how the parties would intend to protect their mutual rights and obligations.

As stated earlier, where the law governing the underlying contract is explicitly stated in a dispute, it is presumed to apply to the arbitration agreement as well and would be used to interpret all clauses in the contract. Similarly, when the parties do not designate a choice of law for the arbitration agreement, the law used for the underlying contract would apply to it. Hence, absent explicitly stated intention to the contrary, the arbitration agreement remains part of the contract even though it may appear collateral or ancillary to the main contract.

In summary, the intention of the parties and the law governing the underlying contract are the primary factors to determine the governing law of the arbitration agreement clause.

Position in Favor of the United Kingdom and Singapore

United Kingdom

The Enka v. Chubb case is a recent important decision from the United Kingdom Supreme Court revolving around the governing law of an arbitration agreement. The Court established a three-step test to determine the governing law: 1) look for an express choice of law in the main contract, 2) in the absence of an express choice, consider an implied choice, and 3) absent an implied choice, apply “closest and most real connection test” by examining factors like the parties’ domicile and residence, a corporation’s national character and principal place of business, the place of contract formation and performance, validity under different laws, and so on.

The Enka court further clarified that if there is an express choice of law in the main contract, it could also serve as an express choice for the governing law of the arbitration agreement.

In Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait), the English Court of Appeal pronounced that a contract must be considered as a whole and the general choice of law must extend to the agreement for the place of arbitration. Hence, English courts cannot split the contract without a good reason, since contractual parties usually expect a single law to govern the whole contract. This ruling prevents inconsistent outcomes before domestic courts.

Singapore

The Court of Appeal of Singapore has endorsed the approach taken in the English case of Sulamérica Cia Nacional de Seguros S.A. v. Enesa Engenharia S.A., which presumes that the implied choice of law for the arbitration agreement should be the proper law of the underlying contract when there is no certainty on the express choice of law. The Sulamérica rulings are significant for establishing the three-step test (which has also been referred to in Enka). Here, the court has propounded that the governing law of the whole contract will “presumptively” apply to the arbitration agreement per se. The reasoning so taken has since been referred to as the “Sulamérica Presumption.” Similarly, the High Court of Singapore in BCY v. BCZ preferred the proper law of the underlying contract. It was also established in BNA v. BNB that the Sulamérica Presumption should apply, and the Court of Appeal ruled conclusively in favor of this presumption. In conclusion, the Sulamérica Presumption seems to be the prevailing approach in Singapore.

Validating the Arbitration Agreement: An Addition to the Three-Step Test

An express choice made by the parties to be governed by the law of the contract will only extend to the arbitration clause if the stipulated law does not negate the agreement. To secure the enforceability of the agreement, courts sometimes apply the doctrine of separability and subject the arbitration clause to a different law from the rest of the contract. Courts’ interpretation of the contract while determining the governing law must render it valid rather than ineffective. Hence, if the law chosen by the contract would render the arbitration process void, it will not be taken into consideration as the parties may not have intended to do so.

Along this train of thought, in its Enka decision the United Kingdom Supreme Court added an additional factor to the three-step test. The Court observed that in situations where the law of the main contract would render the arbitration agreement ineffective, the law of the seat of arbitration will be adopted, insofar as it has the closest and most real connection to the agreement.

Conclusion

The Court of First Instance in Hong Kong’s decision in China Railway (Hong Kong) Holdings Limited v. Chung Kin Holdings Company Limited is consistent with the same court’s 2011 case of Klöckner Pentaplast GMBH & Co KG v. Advance Technology (H.K.) Company Limited, where the main contract was governed by German law and disputes were to be resolved by arbitration in Shanghai. In the latter, the Court endorsed the view that, where the parties have made an express choice of law to govern the entire contract, the same law will also extend to the arbitration agreement. Specifically, the parties had made an implied choice to be governed by German Law as the law of the main contract despite picking Shanghai as the seat of the arbitration. The Hong Kong Court of Appeal agreed with the position that the substantive law of contract will govern the arbitration agreement as well.

Similarly, the position under English law and Singaporean law also supports the extension of contract law to the arbitration agreement. However, the British Courts consider the validity of the law applied to the arbitration agreement as imperative in addition to the three-step test.

Thus, we believe that it is necessary to achieve uniformity across various jurisdictions[2] in the process of determining the governing law of arbitration agreement and the equivalent can be achieved by extending the law of contract to govern the arbitration agreement. Promoting consistency and preventing confusion, the presumption of a single system of law governing both the contract and the arbitration agreement is commercially advantageous . To ensure coherence and certainty, prospective contractual parties are advised to wisely deal with the choice of law at the contract drafting stage.

* Mohd Suboor is a final-year student at the Faculty of Law, Jamia Millia Islamia with a keen interest in the domain of dispute resolution, particularly arbitration.

** Isra Mukhtar is a second-year law student at Jamia Millia Islamia.

[1] Alan Redfern & Martin Hunter, Law And Practice Of International Commercial Arbitration 12 (6th Ed. 2015).

[2] Aside from jurisdictions discussed above Australia (Recyclers of Australia Pty Ltd v Hettinga Equipment Inc (2000) 100 FCR 420; Casaceli v Natuzzi SpA (2012) 292 ALR 143; WDR Delaware Corp v Hydrox Holdings Pty Ltd [2016] FCA 1164) and India (Shashoua v. Sharma (2017)) have still not come up with any concrete legal authority to determine the same as there are conflicting decisions.