Applicable Laws

[3.01] Many disputes that are referred to arbitration are determined by arbitral tribunals with no more than a passing reference to the law. They turn on matters of fact: what was said and what was not said; what was promised and what was not promised; what was done and what was not done. A plant for the manufacture of glass pharmaceutical bottles is erected and put into operation on a turnkey basis, but fails to produce bottles of the right quality and quantity, and the plant operates at a loss: was this because of some defect in the plant, for which the supplier is responsible, or was it the result of mismanagement by the owner in the operation of the plant? A major bank is involved in a financial scandal and the bank’s institutional shareholders agree to compensate depositors for their loss: are these payments recoverable under a policy of insurance, or reinsurance, or are they not covered?

[3.02] In such cases, the arbitral tribunal first needs to resolve the issues of fact, as best it can, before moving on to interpret the contract and, if need be, to refer to any underlying system of law. Just as an arbitral tribunal frequently reaches its decision on the merits of a dispute without detailed reference to the law applicable to those merits, so an arbitral tribunal may well pay little, or no, attention to the law that governs its own existence and proceedings as an arbitral tribunal. Indeed, it may even give no more than fleeting recognition to the fact that such a law exists—any more than the average purchaser of a motor car gives, at best, fleeting recognition to the law of contract that underpins the transaction.

[3.03] It would be wrong to deduce from this, however, that international arbitration exists in a legal vacuum. That would be like suggesting that there is no need for a law of contract, since parties to a contract make their own law. Millions of contracts—most of them made orally, rather than in writing—are made every day throughout the world. They may be as simple as the purchase of a bus ticket or the hire of a taxi, or they may be as complex as the purchase of a car on credit terms. Most are made, performed—and forgotten. Disputes are rare; the involvement of lawyers, rarer still. Yet law governs each of these situations. The apparent simplicity of the purchase of a bus ticket or the hire of a taxi is deceptive. They are transactions that involve a contractual relationship and such relationships are underpinned by complex rules of law. These may not be referred to expressly, but they exist nonetheless:

It is often said that the parties to a contract make their own law, and it is, of course, true that, subject to the rules of public policy and ordre public, the parties are free to agree upon such terms as they may choose. Nevertheless, agreements that are intended to have a legal operation (as opposed to a merely social operation) create legal rights and duties, and legal rights and duties cannot exist in a vacuum but must have a place within a legal system which is available for dealing with such questions as the validity, application and interpretation of contracts, and, generally, for supplementing their express provisions.¹

[3.04] Like a contract, an arbitration does not exist in a legal vacuum. It is regulated, first, by the rules of procedure that have been agreed or adopted by the parties and the arbitral tribunal; secondly, it is regulated by the law of the place of arbitration. It is important to recognise at the outset—as even distinguished judges and commentators sometimes fail to do—that this dualism exists.

[3.05] For the most part, modern laws of arbitration are content to leave parties and arbitrators free to decide upon their own particular, detailed rules of procedure, so long as the parties are treated equally. Under these modern laws, it is accepted that the courts of law should be slow to intervene in an arbitration, if they intervene at all.² Nevertheless, rules need the sanction of law if they are to be effective and, in this context, the relevant law is the law of the place or seat of the arbitration. This is referred to as the lex arbitri.

[3.06] This is an important—and frequently misunderstood—topic, to which it will be necessary to return later in this chapter.

[3.07] International arbitration, unlike its domestic counterpart, usually involves more than one system of law or of legal rules. Indeed, it is possible, without undue sophistication, to identify at least five different systems of law that, in practice, may have a bearing on an international arbitration:

[3.08] This chapter deals with: the law governing the agreement to arbitrate; the law governing the arbitration itself (the lex arbitri); the law governing the substantive matters in dispute (the substantive law); the law or rules governing conflicts of law; and certain non-national guidelines and rules that are increasingly relied upon in international arbitration. The law governing the parties’ capacity to enter into an arbitration agreement has been dealt with in Chapter 2, and issues relating to the laws governing the arbitral award (including challenge, recognition, and enforcement) are dealt with in Chapters 10 and 11.

[3.09] An agreement to arbitrate, as discussed in Chapter 2, may be set out in a purpose- made submission agreement or—as is the case much more frequently—in an arbitration clause. Both submission agreements and arbitration clauses have been considered in detail in the previous chapter. It is appropriate, however, to consider the law governing arbitration agreements here.

[3.10] It might be assumed that this is the same law as that which the parties chose to govern the substantive issues in dispute—but this is not necessarily a safe assumption. An ‘applicable law clause’ will usually refer only to the ‘substantive issues in dispute’. It will not usually refer in terms to disputes that might arise in relation to the arbitration agreement itself. It would therefore be sensible, in drafting an arbitration agreement, also to make clear what law is to apply to that agreement.

[3.11] If no such express designation has been made and it becomes necessary to determine the law applicable to the agreement to arbitrate, what are the choices?⁵ There are other possibilities, but the principal choice—in the absence of any express or implied choice by the parties—lies between the law of the seat of the arbitration and the law that governs the contract as a whole.

[3.12] Since the arbitration clause is only one of many clauses in a contract, it might seem reasonable to assume that the law chosen by the parties to govern the contract will also govern the arbitration clause.⁶ If the parties expressly choose a particular law to govern their agreement, why should some other law—which the parties have not chosen—be applied to only one of the clauses in the agreement, simply because it happens to be the arbitration clause? It seems reasonable to say, as has Professor Lew, that:

There is a very strong presumption in favour of the law governing the substantive agreement which contains the arbitration clause also governing the arbitration agreement. This principle has been followed in many cases. This could even be implied as an agreement of the parties as to the law applicable to the arbitration clause.⁷

[3.13] A French commentator has offered a similar view:

The autonomy of the arbitration clause and of the principal contract does not mean that they are totally independent one from the other, as evidenced by the fact that acceptance of the contract entails acceptance of the clause, without any other formality.⁸

This supports the view that the arbitration clause is generally governed by the same law as the rest of the contract. However, the reference here to the ‘autonomy’ of the arbitration clause points towards the problem that may arise. An arbitration clause is taken to be autonomous and to be separable from other clauses in the agreement.⁹ If necessary, it may stand alone. In this respect, it is comparable to a submission agreement. It is this separability of an arbitration clause that opens the way for the possibility that it may be governed by a different law from that which governs the main agreement.

[3.14] The New York Convention points towards this conclusion.¹⁰ In the provisions relating to enforcement, the Convention stipulates that the agreement under which the award is made must be valid ‘under the law to which the parties have subjected it’, or, failing any indication thereon, ‘under the law of the country where the award was made’ (which will be the law of the seat of the arbitration).

[3.15] Taking as their point of departure the separability of the arbitration clause, there are cases in different jurisdictions in which a court or arbitral tribunal has taken the law of the seat of the arbitration to be the appropriate law to govern the parties’ arbitration agreement. This approach has been adopted in the London Court of International Arbitration (LCIA) Rules, which provide at Article 16(4) that:

The law applicable to the Arbitration Agreement and the arbitration shall be the law applicable at the seat of the arbitration, unless and to the extent that the parties have agreed in writing on the application of other laws or rules of law and such agreement is not prohibited by the law applicable at the arbitral seat.

The following examples illustrate this approach.

[3.16] In Sulamérica Cia Nacional de Seguros SA and ors v Enesa Engenharia SA and ors,¹¹ the English Court of Appeal held that English law was the governing law of an arbitration agreement, even though it appeared in a contract that was governed by Brazilian law and which also reserved exclusive jurisdiction in relation to any disputes under the contract to the Brazilian courts. In addition to the Brazilian governing law and jurisdiction clause, the contract separately provided for arbitration seated in London under the Aida Reinsurance and Insurance Arbitration Society (ARIAS) Arbitration Rules.

[3.17] The case concerned two insurance policies covering various risks arising in connection with the construction of a hydroelectric generating plant in Brazil. A dispute had arisen between the parties over Sulamérica’s liability for certain claims made by Enesa under the policies and Sulamérica gave notice of arbitration to Enesa. In response, Enesa commenced proceedings in the Brazilian courts, where it obtained an anti-suit injunction restraining Sulamérica from pursuing the arbitration. Sulamérica, in turn, obtained an anti-suit injunction in the English Commercial Court, restraining Enesa from pursuing the action in the Brazilian courts. Enesa appealed to the English Court of Appeal, arguing (among other things) that it was not bound to arbitrate because the arbitration agreement was governed by the law of Brazil, under which the arbitration agreement could be invoked only with Enesa’s consent.

[3.18] The English Court of Appeal upheld Sulamérica’s anti-suit injunction, finding (among other things) that the proper law of the arbitration agreement was English law. The central question concerned the relative importance to be attached to the parties’ express choice of proper law and their choice of London as the seat of arbitration.

[3.19] The English Court of Appeal held that the law of the arbitration agreement was to be determined by application of the three-stage enquiry established at common law.

[3.20] Where the parties had not made an express choice of law, the English Court of Appeal accepted that it was fair to start from the assumption that, in the absence of any contrary indication, the parties intended the whole of their relationship to be governed by the same system of law. Starting from that assumption, the ‘natural inference’ was that the parties intended that law chosen to govern the substantive contract also to govern the agreement to arbitrate. Such an approach accorded with previous authority recognising that the proper law of the arbitration agreement would typically be the same as the substantive law of the contract, whereas the lex arbitri would usually be the law of the seat of the arbitration.¹²

[3.21] However, the English Court of Appeal held that, in the present case, two specific factors indicated that the parties did not intend that Brazilian law should govern the arbitration agreement.

[3.22] First, it was argued that, under Brazilian law, the arbitration agreement was enforceable only with Enesa’s consent. The English Court of Appeal recognised that there was no indication that the parties intended the arbitration agreement to be enforceable by only one party and, accordingly, there was a serious risk that a choice of Brazilian law would entirely undermine the arbitration agreement. Such a risk militated against an implied choice of Brazilian law as the proper law of the arbitration agreement.

[3.23] Secondly, the choice of London as the seat of arbitration entailed acceptance by the parties that English law would apply to the conduct and supervision of the arbitration, which suggested that the parties intended English law to govern all aspects of the arbitration agreement. The English Court of Appeal was fortified on this point by two prior decisions, C v D¹³ and XL Insurance Ltd v Owens Corning.¹⁴ Both cases concerned insurance contracts containing a New York applicable law clause, along with a clause providing for arbitration in London under the English Arbitration Act 1996. In both cases, the relevant court recognised that the choice of London as the seat of the arbitration implied a choice of English law as the law governing the arbitration agreement.

[3.24] Accordingly, turning to the third stage of the enquiry, the English Court of Appeal held that, in the circumstances of the case, the arbitration agreement had its closest and most real connection with the law of the place where the arbitration was to be held, which would exercise the supporting and supervisory jurisdiction necessary to ensure the effectiveness of the arbitral procedure. In arriving at its decision, however, the Court conceded that prior authority on establishing the proper law of the arbitration agreement was ‘not … entirely consistent’.¹⁵

[3.25] In the Bulbank case, the Bulgarian Foreign Trade Bank (Bulbank) concluded a contract with an Austrian bank.¹⁶ The contract containing the arbitration clause expressed a choice of Austrian law. A dispute arose between the two parties and arbitral proceedings were initiated in Stockholm. Bulbank challenged the award in the Swedish courts on the basis that the arbitration agreement was void for breach of an allegedly implied term of confidentiality. The Supreme Court of Sweden held that the arbitration agreement was valid under the law of the seat of arbitration, Swedish law, stating that:

… no particular provision concerning the applicable law for the arbitration agreement itself was indicated [by the parties]. In such circumstances the issue of the validity of the arbitration clause should be determined in accordance with the law of the state in which the arbitration proceedings have taken place, that is to say, Swedish law.¹⁷

The Supreme Court thus ignored the parties’ choice of Austrian law to govern the underlying contract, considering that the arbitration clause ought to be treated as a separate agreement subject to a separate law.

[3.26] In a Belgian case, Matermaco v PPM Cranes,¹⁸ the law of the place of arbitration, Belgium, was applied to questions of arbitrability despite the fact that the laws of the State of Wisconsin had been chosen by the parties to apply to the underlying contract. The Brussels Tribunal de Commerce considered Articles II(1) and V(2)(a) of the New York Convention, stating that their similarity:

… and a consistent interpretation of the Convention require that the arbitrable nature of the dispute be determined, under the said Articles II and V, under the same law, that is, the lex fori. Hence it is according to Belgian law that the arbitrable nature of the present dispute must be determined.¹⁹

[3.27] In all of these cases, it is plain that the effect of the decision (and perhaps one of the driving forces behind it) was to validate the arbitration agreement. The parties had agreed to arbitrate disputes, but when the time came to do so, one party sought to renege on that agreement.

[3.28] The importance of the law of the seat of arbitration is particularly marked in the United States. The Federal Arbitration Act of 1925 (FAA) controls arbitrations involving interstate or foreign commerce and maritime transactions, and it also implements the New York Convention. One commentator has written: ‘The FAA creates a body of federal substantive law of arbitrability and pre-empts contrary state law policies. Hence, once the dispute is covered by the FAA, federal law applies to all questions of interpretation, construction, validity, revocability and enforceability.’²⁰

[3.29] The scope of the FAA is therefore such that it appears, of itself, to constitute the law governing the arbitration agreement. This analysis is confirmed by recent US cases focusing on the relationship between the FAA and state (or even foreign) law, which emphasise the former’s pre-eminence as the law governing the arbitration where there is an express choice of state (or foreign law) in relation to the arbitration clause or agreement itself that is inconsistent with the FAA’s policies.

[3.30] In Pedcor Mgt Co. Inc. Welfare Benefit Plan v North American Indemnity,²¹ which concerned a class arbitration and in which the arbitration agreement expressed a choice of Texan law, the court stated: ‘[I]‌t is well established that the FAA pre-empts state laws that contradict the purpose of the FAA by “requiring a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.” ’²²

[3.31] In AT&T Mobility LLC v Concepcion,²³ the US Supreme Court held that a rule under California law, which deemed class arbitration waivers in consumer contracts of adhesion unconscionable, was ‘an obstacle to the accomplishment and execution of the full purposes and objectives of Congress’ and was therefore preempted by the FAA. In particular, the Court determined that ‘[a]‌lthough § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state law rules that stand as an obstacle to the accomplishment of the FAA’s objectives’.²⁴

[3.32] Similarly, in County of Nassau v Chase,²⁵ it was held that, in the absence of inconsistency, federal law did not pre-empt New York state law and that the relevant standard for determining whether an arbitrator has so far exceeded the scope of authority that the award should be overturned was that specified by state law.²⁶

[3.33] The solutions considered so far have focused on establishing the law governing the arbitration agreement by reference to a national law, be it the law of the contract or the law of the seat of arbitration. The French courts, however, have adopted a different method whereby the existence and scope of the arbitration agreement is determined exclusively by reference to the parties’ discernible common intentions. In this way, the arbitration agreement remains independent of the various national laws that might, in other jurisdictions, be deemed to apply to it. This approach avoids the difficulties of categorising the arbitration agreement for conflict-of-laws purposes, as well as the particularities of private international law regimes.

[3.34] This French ‘third way’ came about as a result of a number of decisions by the Paris Cour d’Appel from the early 1970s through to the early 1990s, which culminated in the Cour de Cassation’s decision in Dalico in 1993:²⁷

[B]‌y virtue of a substantive rule of international arbitration, the arbitration agreement is legally independent of the main contract containing or referring to it, and the existence and effectiveness of the arbitration agreement are to be assessed, subject to the mandatory rules of French law and international public policy, on the basis of the parties’ common intention, there being no need to refer to any national law.²⁸

References in this context to the independence of the arbitration agreement are to its autonomy from the national laws that otherwise might apply to it, as opposed to autonomy from the main contract in terms of its existence.²⁹ The French Supreme Court thus stopped short of a complete delocalisation of the arbitration agreement, by subjecting it to the mandatory provisions of French law.³⁰ Moreover, it does remain open to the parties, if such is their common intention, to expressly designate a national legal system or set of conflict laws, as the French Supreme Court clarified in the Uni-Kod decision.³¹

[3.35] The French approach was examined by the UK Supreme Court in its decision of 3 November 2010 in Dallah Real Estate and Tourism Holding Co. v Ministry of Religious Affairs, Government of Pakistan.³² The decision related to an agreement between Dallah Real Estate and a Pakistani government trust dated 10 September 1996, relating to commercial services for pilgrimages to Saudi Arabia, including an International Chamber of Commerce (ICC) arbitration clause, seated in Paris. Dallah initiated arbitration proceedings against the Pakistani government and against the trust, despite the latter being only a contractual counterparty. An arbitral tribunal seated in Paris accepted jurisdiction over the Pakistani government and rendered an award in favour of Dallah. The award was challenged in Paris, the seat of the arbitration, and its enforcement was challenged in the United Kingdom on the basis (among other things) that the tribunal had no jurisdiction over the non-signatory Pakistani government. The Supreme Court of England and Wales, applying French law, accepted that, as a starting point, French law (the law of the seat) refers to supranational law:

[Under French law,] arbitration agreements derive their existence, validity and effect from supra-national law, without it being necessary to refer to any national law. If so, that would not avoid the need to have regard to French law ‘as the law of the country where the award was made’ under Article V(1)(a) of the Convention and s. 103(2)(b) of the 1996 Act. The Cour de Cassation is, however, a national court, giving a French legal view of international arbitration; and Dallah and the Government agree that the true analysis is that French law recognises transnational principles as potentially applicable to determine the existence, validity and effectiveness of an international arbitration agreement, such principles being part of French law.³³

[3.36] The final approach in determining the law or rules applicable to an arbitration agreement is to combine several approaches, as is the case in Switzerland. Section 178(2) of the Swiss Federal Statute of Private International Law (Swiss PIL) provides:

As regards its substance, the arbitration agreement shall be valid if it conforms either to the law chosen by the parties, or to the law governing the subject-matter of the dispute, in particular the law governing the main contract, or if it conforms to Swiss law.

This formulation allows Swiss courts maximum opportunity to uphold the validity of the arbitration agreement.