Determining Governing Law Of Arbitration Agreement
Determining Governing Law of an Arbitration Agreement
1. Introduction
In international commercial arbitration, an arbitration agreement is often contained within a broader commercial contract. A common legal issue arises when different legal systems may apply to different aspects of the contract, particularly when the parties are from different countries.
One crucial question is which law governs the arbitration agreement itself. The determination of governing law affects issues such as:
validity of the arbitration clause
interpretation of the clause
scope of arbitration
enforceability of the agreement.
In India, arbitration law is primarily governed by the Arbitration and Conciliation Act, 1996, which is based on the UNCITRAL Model Law on International Commercial Arbitration.
2. Meaning of Governing Law of Arbitration Agreement
The governing law of an arbitration agreement refers to the legal system that determines:
the validity of the arbitration clause
the interpretation of the arbitration agreement
the rights and obligations arising from the arbitration clause.
This law may be different from the law governing the main contract.
3. Three Relevant Laws in Arbitration
In international arbitration, three different laws may apply:
1. Law Governing the Main Contract
This law governs the commercial terms and obligations of the contract.
2. Law Governing the Arbitration Agreement
This law governs the validity and interpretation of the arbitration clause.
3. Law of the Seat of Arbitration (Lex Arbitri)
This law governs the procedure of arbitration.
Example:
Contract governed by Indian law
Arbitration seated in Singapore
Arbitration agreement governed by Singapore law
4. Methods to Determine Governing Law
Courts usually apply the following steps:
Step 1: Express Choice by Parties
If the contract clearly states which law governs the arbitration agreement, courts respect that choice.
Step 2: Implied Choice of Law
If no express choice exists, courts determine whether the parties impliedly intended a particular law.
Step 3: Closest and Most Real Connection
If neither express nor implied choice is clear, courts apply the law that has the closest connection with the arbitration agreement, usually the law of the seat.
5. Importance of Determining Governing Law
Determining the governing law is important because it affects:
Validity of arbitration clause
Scope of disputes covered
Interpretation of contractual terms
Enforcement of arbitral awards
Different legal systems may treat arbitration clauses differently.
6. Important Case Laws
1. Sulamérica Cia Nacional de Seguros SA v Enesa Engenharia SA (2012)
Facts
The contract was governed by Brazilian law, but the seat of arbitration was London.
Issue
Which law governed the arbitration agreement.
Judgment
The English Court of Appeal held that:
The governing law of the main contract does not automatically apply to the arbitration agreement.
In absence of clear intention, the law of the seat may apply.
Principle
Courts apply a three-stage test:
express choice
implied choice
closest connection.
2. BCY v BCZ (2016)
Facts
The contract did not expressly specify the governing law of the arbitration clause.
Judgment
The Singapore High Court held that:
the governing law of the contract may be presumed to apply to the arbitration clause unless there is contrary intention.
Principle
Courts examine the relationship between the main contract law and the seat of arbitration.
3. Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb (2020)
Facts
The dispute involved a construction contract without a clear governing law clause for the arbitration agreement.
Judgment
The UK Supreme Court held that:
if the contract specifies governing law, it generally applies to the arbitration agreement.
if no such law is specified, the law of the seat of arbitration applies.
Principle
The seat of arbitration often determines the governing law where no choice exists.
4. National Thermal Power Corporation v Singer Company (1992)
Facts
The dispute concerned interpretation of an arbitration clause in an international commercial contract.
Judgment
The Supreme Court of India recognized that different laws may govern different aspects of arbitration.
Principle
The Court acknowledged the concept of separate governing laws for contract and arbitration agreement.
5. Enercon India Ltd v Enercon GmbH (2014)
Facts
The arbitration clause contained conflicting provisions regarding governing law and seat of arbitration.
Judgment
The Supreme Court interpreted the clause to determine the true intention of the parties.
Principle
Courts prioritize party intention and harmonious interpretation of arbitration clauses.
6. BGS SGS Soma JV v NHPC Ltd (2019)
Facts
The dispute involved determining the seat of arbitration and its legal consequences.
Judgment
The Supreme Court clarified the distinction between seat and venue of arbitration.
Principle
The seat of arbitration determines the procedural law and supervisory jurisdiction, which often influences the governing law of the arbitration agreement.
7. Judicial Tests Used by Courts
Courts usually apply several tests:
1. Express Choice Test
Whether parties clearly specified governing law.
2. Implied Intention Test
Whether contractual terms indicate an implied choice.
3. Closest Connection Test
Which legal system has the strongest connection with the arbitration clause.
8. Challenges in Determining Governing Law
1. Ambiguous Contract Clauses
Contracts may not clearly specify governing law.
2. Multiple Jurisdictions
International contracts involve several legal systems.
3. Conflict Between Seat and Contract Law
Sometimes the law governing the contract differs from the seat of arbitration.
4. Drafting Errors
Poorly drafted arbitration clauses create interpretation disputes.
9. Practical Guidelines for Drafting Arbitration Clauses
To avoid disputes, contracts should clearly specify:
Seat of arbitration
Governing law of the contract
Governing law of the arbitration agreement
Arbitration institution and rules
Example clause:
“This contract shall be governed by Indian law, and the arbitration agreement shall be governed by Singapore law, with arbitration seated in Singapore.”
10. Conclusion
Determining the governing law of an arbitration agreement is a crucial issue in international arbitration. Courts generally follow a structured approach that considers express choice, implied choice, and the closest connection between the arbitration agreement and the legal system.
Judicial decisions such as Sulamérica Cia Nacional de Seguros SA v Enesa Engenharia SA, Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb, and Enercon India Ltd v Enercon GmbH have significantly shaped the legal principles governing this issue.
Clear drafting and careful selection of governing law can help parties avoid jurisdictional conflicts and ensure effective arbitration proceedings.
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