In selecting a choice of law, any 'Tom, Dick or Harry' will not do. When negotiating an agreement much focus is spent on price, performance and timeframe. However, much heartache and expense could be saved by also spending time to focus on choice of law. When including an arbitration clause in an agreement, parties may not be aware of how many laws will impact potentially any future dispute.
A careful consideration of the options and a considered express choice of applicable laws may help to manage the parties' expectations. The imposition of a choice of law by a tribunal or court may frustrate the parties’ legitimate expectations about the conduct of their dispute and provide unpleasant surprises. Given that parties may not have a choice about where the need to enforce an arbitral award, parties should be eager to exercise all of their available autonomy by making deliberate choices where possible.
What then are the aspects of choice of law and convention, which the parties should consider when drafting an arbitration clause? The two key choices the parties may make whilst drafting their agreement include:
- the substantive law governing the contract and the dispute: will govern the interpretation of the agreement and the determination of the performance, rights and obligations of the contract, and
- the procedural law of the arbitration: will govern the arbitrability of the dispute and any procedural issues e.g. may include validity.
Substantive Law
Substantive law is a reference to the proper law of the contract, which is ‘the system of law which the parties expressly or impliedly choose as the law governing their contract’[1]. When parties enter into a contract, their rights and obligations will be set forth in the agreement, but these rights and obligations exist within the context of the substantive law[2].
This principle is based on an understanding of the expectations of the parties. As Lord Diplock affirmed ‘when parties enter into an agreement which they intend to give rise to legally enforceable rights and liabilities, they must ex necessitate contemplate that there will be some system of law by reference to which their mutual rights and liabilities will be determined’[3]. In addition to the national laws of nation states, substantive law may also be a choice for a transnational law such as the UNIDROIT Principles[4] or lex mercatoria.
In selecting a substantive law, parties may have regard to the location of the performance of the contract or may select a well-established and understood system of law, such as English law. English law is used as the proper law of the contract in many international transactions due to its long history, precedents and certainty. For example, ISDA contracts are typically governed by either English or New York law as market participants perceive that these jurisdictions have the sophistication and level of certainty, which they require for their transactions[5].
In relation to the exercise of party autonomy in choice of law, there are some limitations on the exercise of that autonomy, for example, a choice of law should be bona fide and should not be contrary to public policy[6]. In relation to public policy examples usually focus on illegality, ‘the English court would not recognise an agreement between the highwaymen to arbitrate their differences any more than it would recognise the original agreement to split the proceeds’[7].
Article 28 provides a fall back in the event that the parties fail to chose a substantive law, and empowers the arbitral tribunal to determine the appropriate law based on the ‘the conflict of laws rules which it considers applicable’[8].
Under the UNCITRAL Model Law, the tribunal has a choice as to which conflict laws it considers applicable, but in their considerations for the applicable law they may be guided by whether there is a tacit choice of law, or failing that the tribunal may determine that the substantive law should be the law of the country with which the contract is most closely connected[9].
The Rome Convention refers to factors such as the country where the party who is to effect the characteristic performance of the contract has his habitual residence or for companies, its central administration[10]. Alternatively the tribunal may consider the choice of forum as a choice a law as expressed by qui indicem forum elegit jus i.e. a choice of forum is a choice of law[11]. Although Redfern and Hunter, point out that this may be more appropriate when litigating and less appropriate when the parties are arbitrating their dispute[12].
Procedural Law
Procedural law or the lex arbitri, is a ‘body of rules which sets a standard external to the arbitration agreement, and the wishes of the parties, for the conduct of the arbitration’[13]. When considering the appropriate basis for this, the UNCITRAL Model Law is taken to be the ‘baseline for any State wishing to modernise its law of arbitration’[14].
In the absence of an express choice by the parties, typically the procedural law is accepted to be the law of the seat of the arbitration i.e. the arbitration will be subject to the law of the place where it is held[15]. The lex arbitri will govern, amongst other things, arbitrability, entitlement of the tribunal to rule on its own jurisdiction or what court assistance is available to the tribunal[16].
In relation to the procedural law, in international commercial arbitrations this may represent a different system of law from the substantive law. There is a presumption that if the parties have chosen the seat of the arbitration then they are also making a choice as to the procedural laws, which will govern their arbitration[17]. The UNCITRAL Model Law utilises this linkage to allow tribunals to rely on the assistance of the courts in the place of the arbitration in helping with interim measures[18].
Again the parties are able to make an express choice as to the lex arbitri although the law must be an appropriate choice possibly subject to the supervisory jurisdiction of the courts[19]. However, if the parties fail to expressly identify the place of the arbitration, the tribunal is empowered to make such a determination ‘having regard to the circumstances of the case, including the convenience of the parties’[20]. Redfern and Hunter advise that the procedural law of the arbitration is the law of the place of the arbitration ‘and to the extent that it contains mandatory provisions, is binding on the parties’[21].
Whilst many agreements include a substantive choice of law, it is easy to overlook a choice of procedural law for the arbitration. However, the procedural law is of critical importance. In the absence of an express choice of law to govern the arbitration agreement, the validity of the arbitration agreement will be determined by reference to the procedural law. Although the parties may choose a substantive law, they may be unprepared for the importance of the procedural law in relation to validity of the arbitration agreement itself.
The potential for conflict also exists between the substantive law and the lex arbitri. For example, the parties may agree that the law of Country A governs their contract i.e. will be the substantive law. They may also have an expectation that the arbitration agreement will be governed by the same law, however, unless the parties have expressly provided that the laws of Country A will govern the arbitration agreement, any questions about the validity of the arbitration agreement will be governed by the law of the seat of the arbitration as a procedural matter i.e. the lex arbitri (Country B). If the substantive law and the procedural law conflict then this may have unexpected results for the parties.
In Fiona Trust, the English House of Lords held that the allegations of bribery did not invalidate the arbitration clause and that the potential invalidity of the agreement did not impact the arbitration agreement[22]. The appellants had argued that the bribery meant that they could invalidate the entire contract, including the arbitration agreement[23]. However, the House of Lords made clear that the arbitration clause had the benefit of the principle of separability under the procedural law and therefore the arbitration agreement was separable from the main agreement[24]. In this case, the procedural law trumped the substantive law as argued by the appellants.
The procedural law will also provide the basis for such support and assistance, as the tribunal may need including interim measures. Further, the procedural law has a key importance to play in relation to recognition and enforcement. The UNCITRAL Model Law and the New York Convention both provide grounds for refusing recognition and enforcement, which refer to the law of the seat.
Tom, Harry or Dick?
Given the importance of both the procedural law and the substantive law, parties would be wise to exercise some discretion at the time of contract formation to consider whether they want Tom, Dick or Harry.
[1] Brooke Adele Marshall, Reconsidering the Proper Law of the Contract, Vol. 13 Melbourne Journal of International Law, 2 (2012)
[2] Nigel Blackaby et al., Redfern and Hunter on International Arbitration (Oxford University Press 5th ed.), 194 (2009)
[3] per Lord Diplock, Compagnie d’Armement Maritime S.A. v Compagnie Tunisienne de Navigation S.A. [1970] 3 WLR 389, at 603
[4] Blackaby et al., supra note 2 at 217
[5] ISDA, Schedule to the 2002 Master Agreement (available at www2.isda.org)
[6] Blackaby et al., supra note 2, at 197
[7] per Lord Justice Waller, Abner Soleimany v Sion Soleimany [1983] 3 WLR 811, at para 4.
[8] UNCITRAL, UNCITRAL Model Law, Article 28
[9] Blackaby et al., supra note 2, at 231
[10] Rome Convention, Article 4 (2)
[11] Blackaby et al., supra note 2, at 232
[12] Id., at 232
[13] per Justice Steyn, Paul Smith Ltd. v H&S International Holding Inc., [1991] 2 Lloyd’s Rep. 127, at 130
[14] Blackaby et al., supra note 2, at 176
[15] Id., at 180
[16] Id., at 176
[17] per Lord Diplock, supra note 3, at 604
[18] UNCITRAL, supra note 8, Article 27
[19] Blackaby et al., supra note 2, at 192
[20] UNCITRAL, supra note 8, at Article 20
[21] Blackaby et al., supra note 2, at 180
[22] per Lord Hoffman, Premium Nafta Products Limited (20th Defendant) and others v Fili Shipping Company Limited (14th Claimant) and others, [2007] UKHL 40, para. 19
[23] Id.
[24] Id.