Author: Jorge Luis Manrique de Lara Seminario*
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An important discussion has arisen regarding the choice of applicable law to the arbitration agreement when parties didn’t make an express election of that law. This issue arose from the doctrine of separability, according to which the contract and the arbitration agreement are different instruments. In this sense, some proponents argue that there must be one applicable law to the contract and another applicable law to the arbitration agreement.
The governing law, or lex contractus, of the contract is the substantive law which applies to the merits of the parties’ dispute. In this sense, this law governs the existence, validity and interpretation of the main contract. In addition, this law also regulates any non-contractual claims related to the contract (e.g. tort claims). Regarding the law governing the arbitration agreement, this law is relevant as it governs the existence, validity and interpretation of the arbitration agreement itself. Finally, the law governing the arbitration, or lex arbitri, sets a group of procedural rules for the conduct of the international arbitration.
According to Article 21.1 of the ICC Arbitration Rules and Article 35.1 of the UNCITRAL Arbitration Rules, parties have the right to decide the applicable law to the dispute. And in most cases, the parties do. However, if they fail to designate that law, the arbitral tribunal will choose the appropriate law. Only in rare cases will the arbitral tribunal rule based on a body of a non-State law or, with the parties’ assent, ex aequo et bono.
In regard to procedural matters, the arbitral tribunal must respect the decision of the parties, the lex arbitri. However, if parties don’t agree on the applicable law for procedural matters, the arbitral tribunal may opt to extend the application of the applicable substantive law to procedural matters. This only occurs in the context of an arbitration proceeding. In the case of court proceedings, judges apply the lex fori as the applicable law for procedural matters. In both arbitration and judicial proceedings, the arbitral tribunal and judge, respectively, decide what constitutes a procedural matter and resolve procedural issues based on the applicable law to the procedural aspects. However, extending the applicable law of the contract to procedural aspects may be difficult in light of Article 21.1 of the ICC Arbitration Rules and Article 35.1 of the UNCITRAL Arbitration Rules, which establish that the chosen law should be applicable to the substance of the dispute.
Applying the law “giving rise to the cause of action” or the law of the contract to the arbitration agreement
There are various options that can be used to determine the applicable law governing arbitration agreements. One possibility is the use of the law “giving rise to the cause of action”. This can be optimal for those situations where the tribunal faces non-contractual claims. This type of understanding was followed by the Supreme Court of the United States in the case Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth (1985). In this case, the Supreme Court identified that the law of the contract was Swiss law, but a question had arisen concerning the applicable law for a non-contractual claim. The Supreme Court held that the antitrust claim should be governed by the law “giving rise to the cause of action,” which in this case was U.S. law. However, this option gives a lot of power to the courts, and more importantly, this creates a lack of predictability in arbitration as parties will have to rely on the criteria of judges.
This criterion is very close to the “center of gravity” theory of private international law, which is well-recognized by U.S. courts in multi-states disputes. According to this theory, the applicable law should be the one that is more connected with the specific point in dispute between the parties. For this purpose, courts may rely on the place of execution of the obligation or the nationality of the parties, among other factors. In the case Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait) (2021), the Supreme Court of the United Kingdom decided to apply the applicable law of the contract to the arbitration agreement. The franchise agreements between Kabab-Ji SAL and Al Homaizi Foodstuff Company were expressly governed by English law. Al Homaizi Foodstuff Company later entered into a restructuring process. A new holding company called Kout Food Group (“KFG”) was established and Al Homaizi became a subsidiary of KFG. Kabab-Ji SAL initiated arbitration proceedings against KFG. KFG contested its inclusion in the arbitration proceeding. The arbitral tribunal applied French law (the law of the seat of arbitration) to decide whether KFG was bound by the arbitration agreement, and by English law, to decide whether KFG had assumed rights and obligations under the franchise agreements. KFG brought an annulment proceeding in French courts. In parallel, Kabab-Ji SAL started an enforcement proceeding in England.
The Supreme Court of the United Kingdom applied the New York Convention to define the applicable law to the arbitration agreement. Referring to Article V(1)(a) of the New York Convention, the Supreme Court concluded that an express agreement on the applicable law was not required and that any form of agreement will suffice. Thus, any form of general choice of law clause in a written contract would be a sufficient “indication” of the law to which the parties subjected the arbitration agreement. The Supreme Court ruled that the applicable law to the contract (i.e. English law) set in clause 15 of the Franchise Agreements was also applicable to clause 14, which contained the arbitration agreement. Thus, English law was applicable to the arbitration agreement and was used to determine whether KFG had become a party to the arbitration agreement. On the other hand, the French Cour de Cassation ruled that the arbitration agreement is a different instrument than the main contract. The Cour de Cassation confirmed the decision of the Cour d’appel to apply French law to the arbitration agreement, as it was the law of the seat of arbitration. The Cour de Cassation based its decision on the fact that KFG didn’t provide any proof to demonstrate that the parties agreed on applying English law to the arbitration agreement.
Applying the “law of the seat” to the arbitration agreement
Another option is to use the “law of the seat”, or lex arbitri, to define the applicable law to the arbitration agreement. The law of the seat refers to the procedural law applied by the domestic courts of the seat. This law regulates matters such as the procedure for the annulment of arbitration awards, the allocation of competence to decide jurisdictional challenges between domestic courts and arbitral tribunals, and judicial assistance in ordering evidence-taking, among others.
The Supreme Court of the United Kingdom followed this approach in the case Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb Russia (2020), a construction contract dispute. The parties agreed that the seat of arbitration was London.
In May 2019, Chubb Russia filed a claim in the Moscow Arbitrazh (i.e. commercial) Court against Enka and ten other defendants whom it claimed were jointly liable for the damage caused by the fire. In September 2019, Enka brought an arbitration claim in the Commercial Court in London seeking an anti-suit injunction against Chubb Russia. Enka argued that Chubb Russia’s proceedings in Russia breached the arbitration agreement in article 50.1 of the construction contract. After an initial negative decision, Enka obtained an anti-suit injunction from the Court of Appeal restraining Chubb Russia from continuing the Russian proceedings. In May 2020, Chubb Russia appealed this decision to the Supreme Court of the United Kingdom.
In this case, the Supreme Court of the United Kingdom ruled that the Rome I Regulation didn’t apply to arbitration agreements and agreements on the choice of the court based on article 1(2)(e). The Supreme Court decided to apply common law rules. According to the common law rules, the applicable law must be the one expressly or impliedly chosen by the parties, or in the absence of that law, the law with which it is most closely connected. Finally, the Supreme Court considered that the most adequate law that should be applied to the arbitration agreement was the law of the seat of arbitration (in this case, London). This law may (i) create certainty to the parties as they will know what law applies to the arbitration agreement, (ii) ensure consistency, as the same system applies to parties’ rights and obligations, (iii) avoid complexities and uncertainties by applying different laws to one single contract, (iv) avoid artificiality, as parties don’t understand how the separability of the contract and the arbitration agreement works, and (v) ensure coherence as some clauses could be insulated by challenges to the contract.
Applying the law of the place of enforcement and the choice-of-law rule to the arbitration agreement
A third option is to use the “law of the place of probable enforcement of an eventual award”, in case this could be predicted. The law of the place of enforcement is connected with some causes for denial of enforcement such as arbitrability and public policy under Articles V(2)(a) and V(2)(b) of the New York Convention. However, this might not be the most adequate criterion to define the applicable law to the arbitration agreement, as the losing party could have assets in different jurisdictions. In this sense, this criterion could create some problems to define a single applicable law. Besides, the losing party could move its assets to different countries, something that would change the application of this criterion.
Finally, the law designated by the relevant choice-of-law methodology could be used to define the applicable law for the arbitration agreement. Choice-of-law clauses are applied to determine the applicable law governing the merits. However, a domestic court could also use that clause to define the applicable law for the arbitration agreement. One problem courts may face is that conflict-of-law rules applicable to contracts only regulate contractual obligations, so courts will need to interpret that the conflict-of-law rule applicable to the contract could be applied to the arbitration agreement; something that could conflict with the idea of separability of the contract and the arbitration agreement. In this scenario, courts may rely on some general conflict-of-law criteria, such as the closest connection, the most significant interest, or the center of gravity. This could help give more clarity about the use of choice-of-law methodologies. However, the use of this general criteria also creates uncertainty to the parties.
Conclusion
Some national courts have chosen an applicable law for the arbitration agreement that differs from the applicable law for the contract. This has caused many problems, as domestic courts have relied on different criteria to determine the applicable law for the arbitration agreement. To avoid further issues, parties should mention the applicable law not only for the contract, but also for the arbitration agreement. This would guide both arbitral tribunals and domestic courts in determining the applicable law for the arbitration agreement.
States could also contribute to clarity by including provisions on this matter in their domestic legislation. For example, under Article 178.2 of the Swiss Federal Act on Private International Law, an arbitration agreement is valid if it complies with either the law chosen by the parties, the law governing the subject-matter of the dispute, or Swiss law. This approach is favorable to the validity of the arbitration agreement. Parties usually don’t establish the applicable law to the arbitration agreement. Therefore, these types of domestic provisions could provide some predictability to the disputing parties on the validity of the arbitration agreement and guarantee the enforcement of the arbitral award.
*Jorge Luis Manrique de Lara Seminario is an LL.M. candidate at Columbia University. He is a Peruvian lawyer with a Master’s in Advanced Studies in International Law and Economics from the World Trade Institute (University of Bern). Jorge is also a former negotiator of the dispute settlement chapters in Peru’s Free Trade Agreements and former professor of international law at PUCP and UPC universities.