In this article, I intend to dive into the complexity of applicable laws in international arbitration. It is complex not least because commercial parties can, and often do, agree on different laws and rules to govern different aspects of their potential arbitration. In my last article, I briefly touched on an arbitration agreement, which essentially allows the parties to refer their dispute to arbitration. An example of a water-tight arbitration agreement can be seen below:
“Any dispute, controversy, difference or claim arising out of or relating to this contract, including the performance, breach, termination or invalidity thereof, as well as any non-contractual claims, shall be finally determined by arbitration, administered by the AIAC, in accordance with the AIAC Arbitration Rules in force at the time of the commencement of the arbitration.
The seat of arbitration shall be Malaysia.
The law governing the arbitration agreement shall be the law of Singapore.
The governing law of the contract shall be the CISG.
The number of arbitrators shall be three (3).
The language to be used in the arbitral proceedings shall be English.”
It would immediately be apparent that there is more than one system of law that governs the arbitration. In fact, in the above example, there are 4 “laws”. Each of these “laws” and its purpose will be discussed in turn.
Arbitration Rules
Starting with the elephant in the room - arbitration rules are not, strictly speaking, laws themselves. These are rules that regulate the arbitral proceedings, or the conduct of the proceedings. They provide for things like how to commence an arbitration (generally, by way of a Notice of Arbitration), the time within which a Notice of Arbitration must be responded to, the time frame and procedure for the appointment of arbitrator(s), etc. There are many arbitration rules provided by leading arbitral institutions around the world. To name a few, the Singapore International Arbitration Centre (SIAC), the Hong Kong International Arbitration Centre (HKIAC), and the Asian International Arbitration Centre (AIAC) have their own set of arbitration rules: the SIAC Rules 2016, the 2018 HKIAC Administered Arbitration Rules, the AIAC Rules 2021, respectively.
Commercial parties are free to adopt any one of these rules in their arbitration agreement; an arbitration conducted pursuant thereto is called an administered arbitration. Nevertheless, the parties are also free to not select any rules, and the ensuing arbitration will be conducted on an ad hoc basis (ad hoc arbitration).
There are pros and cons to either approach. Suffice to say, nonetheless, that arbitration rules lend the parties a great deal of certainty and convenience for most of the rudimentary procedures are already in place, allowing them to focus on the dispute at hand. Equally important is the availability of special procedures which the parties may never have foreseen would come in handy. For example, the newly-launched AIAC Rules 2021 has introduced a summary determination procedure, allowing for a quick disposal of a claim or a counterclaim.
Law of the Seat
This is perhaps the most confusing system of law. The law of the seat is sometimes termed as the juridical law of the seat, the curial law or lex arbitri. The first step to understanding it is to appreciate what a seat is and its role. The seat of arbitration is typically understood to be the place in which the arbitration hearings take place, although it need not be. That is to say, it is entirely possible to hold the hearings of a Malaysia-seated arbitration in Australia.
This alludes to the role and function of the seat, which really refers to the body of arbitration law(s) that governs the arbitration. As the Federal Court explains in Government of India v Petrocon India Ltd [2016] 3 MLJ 435 (“Petrocon”), the seat of arbitration will determine the curial law that will govern the arbitration proceeding. The Federal Court further expands this narrative in Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd [2021] MLJU 1656, by stating that the identification of the seat has the consequential effect of ascertaining the court that enjoys exclusive jurisdiction to regulate and supervise the arbitration. In other words, by choosing a seat of arbitration parties are choosing to submit themselves to the supervisory and supporting jurisdiction of the courts of that seat over the arbitration (Enka v Chubb [2020] UKSC 38).
Taken collectively, all this means is first that, when an arbitration is seated in Malaysia, the arbitration law, i.e. the Arbitration Act 2005 (“AA 2005”), will apply to the arbitration. This is in addition to the arbitration rules discussed earlier.
Secondly, the seat court, i.e. the Malaysian Courts, will have jurisdiction, for instance, to entertain an application for injunction arising from an arbitration as seen in Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & Ors [2019] 5 MLJ 1. Similarly, the Malaysian Courts will have jurisdiction to enforce or set aside an award pursuant to ss. 38 and 37 AA 2005.
Law Governing the Arbitration Agreement
This is the law that governs the interpretation of the arbitration agreement. The law governing the arbitration agreement has been the subject of a decades-old debate. This arises from the failure of parties to expressly stipulate it in their contract. In such a circumstance, the arbitration agreement will be deemed to be governed by some other law that the parties have agreed on, with the principal choices between the law of the seat and the law of the substantive contract.
The importance of this law cannot be overstated. It determines, among other things, the validity and scope of the arbitration agreement, i.e. whether the parties have got a valid arbitration agreement, and whether the underlying dispute between the parties can be resolved by arbitration.
Take Sulamérica Cia Nacional De Seguros SA and Others v Enesa Engenharia SA [2012] EWCA Civ 638 (“Sulamerica”) as an example. There, the law governing the arbitration agreement was not spelt out in the contract between the parties. Party A argued for English law; Party B Brazilian law, being the law of the seat and the law of the contract, respectively. The former would result in a validly commenced arbitration; the latter would arguably render the arbitration null and void. The Court, despite remarking that the law of the contract would generally apply to the arbitration agreement in such a circumstance, ruled for English law as it had the “closest and most real connection” to the arbitration agreement.
In Malaysia, a similar ruling can be found in Thai-Lao Lignite Co Ltd & Anor v. Government of Laos [2017] 9 CLJ 273 (“Thai-Lao Lignite”). The law governing the arbitration agreement therein had a bearing on the participation as parties of certain non-signatories in the arbitration. The Federal Court held that the arbitration agreement was governed by Malaysian law as the seat of arbitration was Malaysia. In a separate article, I shall endeavour to analyze why I think this decision is not one that is indefensible.
In short, the determination of this law has not enjoyed a uniform approach. There are conflicting decisions across different jurisdictions, and recently, even within the same jurisdiction. There shall come a time, nevertheless, that this will be history, as commercial parties become more aware of the need of having a properly drafted arbitration agreement. To that end, arbitral institutions worldwide have also recommended the adoption of the model arbitration clauses in their arbitration rules.
Law of the Substantive Contract
Generally referred to as the law of the contract, or “the proper law”, this law governs the substantive part of the contract. In other words, this law will govern the parties’ contractual relationship, determining issues such as conformity of goods, passing of risks, remedies for breach of contract, etc.
In international commercial contracts, parties often adopt the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). This is understandable. While parties can in theory agree on any contract law of any country to govern their contractual obligations, it makes commercial sense to adopt the CISG for neutrality. This is more so when one considers the Civil-Common law divide whereby the parties, by virtue of their domiciles, could be more familiar with one system of law over the other.
Conclusion
Applicable laws are a sword and a shield. On one hand, they are important in regulating the parties’ contractual relationship, and when things go sour, the dispute resolution process. On the other hand, they open up rooms for disputes not intended or foreseen by the parties themselves when they entered into the contract. The law of the seat and the law of the arbitration agreement are the main culprits. It is therefore vital to consider the potential issues arising from agreeing to multiple laws and rules in the contract, and perhaps more importantly, to draft an arbitration agreement that leaves no room for any sort of ambiguity - if that is at all possible!
References:
SIAC Rules 2016
2018 HKIAC Administered Arbitration Rules
AIAC Rules 2021
Government of India v Petrocon India Ltd [2016] 3 MLJ 435
Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd [2021] MLJU 1656
Enka v Chubb [2020] UKSC 38
Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & Ors [2019] 5 MLJ 1
Thai-Lao Lignite Co Ltd & Anor v. Government of Laos [2017] 9 CLJ 273
Sulamérica CIA Nacional De Seguros SA and Others v. Enesa Engenharia SA and Others [2012] EWCA Civ 638
United Nations Convention on Contracts for the International Sale of Goods
Sutton D and others, Russell on Arbitration (24th Edn, Sweet & Maxwell, 2015)
Blackaby and others, Redfern and Hunter on International Arbitration (6th edn, Oxford University Press, 2015 )
Sundra Rajoo, Law, Practice and Procedure of Arbitration (2nd Edn, Lexis Nexis, 2011)
Gary Born, International Commercial Arbitration (3rd Edn, Kluwer Law International, 2021)
Comments