"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Saturday, May 21, 2011

Choice of Law of Arbitration Agreement: Corrections and Clarifications

One of our readers has commented on a recent post in this blog on Choice of Law in International Commercial Arbitration. The comments are pointed and raise several issues. Owing to the interesting issues raised in the comment, this blawgger has thought it fit to devote an entire post on the issues raised therein. Also, the comment points out a few errors in the said post. We’ll take this opportunity to correct or/and clarify. Each comment is dealt with under a separate heading.
Image from here.

Choice of five regimes: Whether a Choice or Whether a Matter of Applicability
The comment is probably correct in stating that it is not that parties could choose five regimes. It may so happen that five or even more regimes could apply to an international commercial arbitration. This is what even Redfern et al meant.

Choice of Law Governing Enforcement of Award:
As regards the comment that law governing enforcement cannot be chosen, it is not that parties have no choice. There exists an indirect choice- they can approach the jurisdiction of their choice (the choice is somewhat restricted by the relative advantage of choosing one jurisdiction over another, the existence of assets etc). But once a jurisdiction is chosen, there cannot be any law other than the law of that jurisdiction that would apply.

Choice of Law Governing the Capacity of Parties to the Arbitration Agreement:
As regards choice of the law governing capacity of the parties to enter into the arbitration agreement,there is a choice for the parties and the choice is through the choice of law of arbitration agreement itself. Even the Indian case of NTPC v Singer (link to the case in the post) itself states that “The substantive law governing arbitration, which concerns questions like capacity, validity, effect and interpretation of the contract etc."]. Several authorities also agree on this. Therefore, parties could have a choice on issues regarding validity of arbitration agreement. (It might probably be right to argue that parties cannot choose to apply two different laws for capacity and for validity of the arbitration agreement)  If the parties have expressly chosen the law of the arbitration agreement, issues pertaining to capacity of the parties to enter into the arbitration agreement would be governed by that law and not the seat. Readers are requested to cite an Indian or a foreign case that states otherwise. As regards incapacity, Article 34 of the Model Law refers to incapacity of “a party to the arbitration agreement”. The said ground, as confirmed by the report of the UNCITRAL in its 18th session, is not different from the ground in the New York Convention. The relevant New York Convention ground (for refusing enforcement) is quoted in the original post and seems to suggest that incapacity is to be judged from the perspective of the law applicable to the arbitration agreement.

Law of Arbitration Agreement in the Absence of Express Choice by the Parties:
We had discussed the existence of two opinions on this issue in detail. NTPC v Singer states that in the absence of an express choice, the substantive law of arbitration would be the same as that of the contract. If so, then a choice of substantive law of contract would be deemed to be an indication of the law of the arbitration agreement and therefore the issues pertaining to incapacity, validity, etc of the arbitration agreement would be governed by the substantive law of contract.
On the English approach, the comment suggests that in the absence of an express choice of law of arbitration agreement, the recent trend is to take the law of the seat as the law of arbitration agreement. In Dallah Real Estate v Pakistan, the arbitration clause read:
"23. Any dispute or difference of any kind whatsoever between the Trust and Dallah arising out of or in connection with this Agreement shall be settled by arbitration held under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, by three arbitrators appointed under such Rules."
 There was no express choice of law of arbitration agreement in the arbitration clause. Pakistan resisted enforcement of the arbitral award on the ground that the arbitration agreement was not valid under the law of the country where the award was made, in accordance with Section 103(2)(b) of the English Arbitration Act, 1996. The law where the award was made was French law. According to the English Courts, there was no arbitration agreement with Pakistan as per the French law and therefore, the English Courts refused enforcement for the reason that it was not valid in the law of the place where the award was made.This is in consonance with the New York Convention.Now, it could be argued that both approaches are different. On close analysis, they do not appear to be so. Sonatrach deals with the case where there was an express choice of substantive law of contract. It appears that the English Law is that where there is no express choice of substantive law, either of contract or arbitration agreement, the substantive law for both purposes is the law of the seat. Dallah adopts this approach. In Sonatrach, there was an express choice of the substantive law of contract. In such a case, the approach seems to be that the substantive law of arbitration agreement follows the substantive law of contract. This is a prudent approach. Therefore, the correct position in international arbitration appears to be that in case the substantive law of contract is provided, then the law of arbitration agreement follows the substantive law of contract. In case the substantive law of contract is not provided, then the substantive law of contract is, according to authorities, presumed to be the law of the seat. Even in this case, the substantive law of arbitration agreement follows the substantive law of contract, which is nothing but the law of the seat of arbitration.

As regards the implications of Bhatia, the judgement has made choice of law rules in India more out-of-sync with regard to international arbitration and therefore requires an independent treatment. We'll deal with this in subsequent posts on the topic.


Sumit Rai said...

Thanks for taking note of the comments and for dealing with the issues in detail.

I agree that Indian courts are most likely to apply law governing arbitration agreement to the question of incapacity, but that is not necessarily the correct position. The opinion of most authors is that New York Convention and Model Law suggest that it is not so. If you read those provisions carefully, it seems to suggest that incapacity is governed by "law applicable to them". Many commentators suggest this should be the law of domicile of the party. Model Law does not suggest anything. You may want to check Gary Born's casebook on commercial arbitration released this year at p 408, where this question is discussed with excerpts from authority.

On the law of arbitration agreement, probably you are correct that in most cases substantive law of contract governs, if provided for. There is some confusion in this field as civil law jurisdictions seem to suggest otherwise. Also the Swiss principle of validity bias allows any of 3 types of law which may affirm validity.

I would like to know what suggests that in absence of indication substantive law of contract will be that of the seat. In my understanding, substantive law of contract has to be independently determined as per conflict of laws principle - the proper law. This seems to be the unanimous opinion in Model Law and all arbitration rules.

Anonymous said...

Yeah the distinction in V(1)(a) was noted in the first post. Born himself seems to argue both ways. However, we could give Born the benefit of doubt as at p. 424 (noted in the first post on the topic) Born uses the term "potentially". Subsequently, he has dealt with this issue in detail. Perhaps, this issue needs harmonisation considering the variety of choice of law rules applied by different jurisdictions. The validation principle does not, on the face of it, seem convincing. Will do a detailed post on this. Thanks for the comments. Looking forward to more comments (and guest posts) from you. Will deal with the substantive law of contract issue once we are done with this issue.- Badrinath Srinivasan