Ascertaining Substantive Law Governing Arbitration Clause: An Enigma Between Lex Contractus & Seat Law

The substantive law regulating the arbitration agreement (“governing law”) is crucial as it discovers the legitimacy, existence, and interpretation of the arbitration agreement. Nonetheless, the parties hardly settle on an express decision in regard to governing law. Accordingly, it is for the arbitral tribunal to decide if the governing law ought to stick to the law of matrix contract (“lex contractus”) or the substantive law of seat (“seat law”). To settle such problem, the court, in the matter of Sulamérica Cia Nacional de Seguros S.A. et al. v. Enesa Engenharia S.A., strongly concluded that in the event that the parties have no express agreement on governing law, it will be decided by an implicit choice of the parties. Further, if there is no implicit choice then the law having the closest and most real nexus with arbitration agreement will be the governing law. This article attempts to determine the current enigma by dissecting both lex contractus and seat law as the governing law.

Substantive Law Of Seat As Governing Law

The one position to decide the governing law is that the governing law ought to be the same as the seat law. As held by the House of Lords in the matter of Hamlyn and Co. v Talisker Distillery, the parties implicitly plan that the governing law ought to keep the law of the seat and not the law of the principal contract. Furthermore, in the case of C v. D, the court accepted that it would be uncommon for the law of the arbitration agreement to be not the same as the law of the seat of the arbitration. The arbitration agreement has a nearer and all the real nexus with the seat of arbitration than the law of the matrix contract, as it is the dominion or jurisdiction under which the parties have liked to arbitrate. The High Court of Singapore in the matter of First Link Investments Corp. Ltd. v GT Payment Pte Ltd. and Others has performed extensive scrutiny to decide the governing law. The Court held that when there is an option of seat law and an option of the law of the matrix contract, the arbitration agreement ought to implicitly adhere to the law of the seat, regardless of whether such law is different from the law of the matrix contract.

The matrix contract and the arbitration agreement administer diverse legal relations for example substantive execution of the contract and the dispute resolution in case of failure of substantive execution respectively. Further, in case of frustration of substantive legal relationship, the parties pine for neutrality. Consequently, in such instances, the procedural law of arbitration takes power over substantive law. Accordingly, the governing law should adhere to the law of the seat since it deals in legal relationships after the breakdown of substantive contract. Also, the reliefs against the award including the competency of the court to manage the tribunal’s jurisdiction are controlled via seat of arbitration. Subsequently, the parties would prudently hope for compatibility between the procedural law and substantive law to maintain the legitimacy of the arbitration agreement. Aside from this, the significance of seat is recognized universally, precisely in Article 36(1)(a)(i) and 34(2)(a)(i) of the Model Law and Article V (1)(a) of the New York Convention. The seat is considered as a judicial center of gravity by which the understanding of arbitration gets effectuated and derives its life. According to Article V(1)(a) of the New York Convention, in case the parties have not expressly or impliedly chosen the governing law, at that point, the law of seat will regulate the arbitration arrangement. Such a methodology ensures consistent treatment of arbitration agreements and ensures the goals of compatibility and enforcement of the Convention.

Lex Contractus As The governing Law

Contrary to the substantive law of seat, another position to decide the governing law can be the lex contractus. Without express agreement, the courts on account of BCY v. BCZ and Arsanovia Ltd and others v. Cruz City Mauritius Holdings held that it ought to be the presumptive situation to hold that the governing law keeps the law of matrix contract and not the seat law. Moreover, there are various grounds to hold that that the lex contractus clings better that the seat law to be viewed as the governing law. One of such grounds is that in common sense, the parties scarcely hold standalone negotiation for an arbitration agreement, and consequently it is viewed as “midnight clause”. Along these lines, while perceiving the law of matrix contract, the parties infrequently haggle for the governing law since they proposed to govern the entire contract by the single decision of law clause. In this way, the law of matrix contract stretches out to the arbitration agreement. Besides, the idea of law of matrix contract and governing law is same as the two of them govern the substantive validity and understanding of matrix contract and arbitration agreement respectively. Conversely, the governing law ought not to adhere to the law of seat since seat governs the procedural matter in arbitration and it no place identifies with the validity, translation, termination, and so forth of arbitration agreement. This stand become more established in situations where the decision of seat is assigned. In such a case, the law of matrix contract should apply on the grounds that the law of matrix contract is the just a single most closely-connected to arbitral agreement.

Furthermore, it is contended that the governing law ought not to trail the law of matrix contract since the doctrine of separability embedded under Article 16(1) of UNCITRAL Model Law (“Model Law”). Nevertheless, the doctrine of separability is certainly not intended for the determination of governing law. Specifically, Article 16(1) of Model Law states that:

“The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

Article 16(1) of the Model Law, enumerates the phrase “for that purpose”. Such phrase confines the space of doctrine of separability. Accordingly, the only purpose of such doctrine is to offer competence to the arbitral tribunal to rule on its own jurisdiction, when the scenario invalidates the principle contract. In this manner, for the purposes of choice of law examination, the arbitration agreement remains to be an integral part of the main contract. Hence, for the said reasons, the governing law had better destined to track the law of matrix contract instead of seat law.

Settling The Enigma

There are countless cases where the law of matrix contract is different from the seat law. The authors are of the view that on the off chance that the parties have not consented to the governing law, the law of seat ought to govern the arbitration agreement. The seat decides the procedural law of arbitration for example lex arbitri, which endorses procedural power of the tribunal. In the event that the lex arbitri doesn’t permit the tribunal to practice certain power, any power to do as such under governing law will be inadequate and invalid since it won’t be authorized in purview where the arbitration is seated. Along these lines, the governing law should be in consonance with the lex arbitri. The best substantive law which is in the unification of lex arbitri should be the substantive law of seat. Moreover, if certain power is given under the seat law yet not recommended under the subsequent lex arbitri, at that point the power under the lex arbitri would be implied and enforceable since they are of same purview. Consequently, to keep up the enforceability and consistency of grant the seat law ought to govern the arbitration agreement. Moreover, in cases where the lex contractus is of the home state of the parties, however the arbitration agreement provided for arbitration in a neutral seat, the seat law ought to be the governing law since the parties objectively expect to resolve their debate in a neutral, productive and unsurprising way. However, such an approach doesn’t have any significant bearing where the seat law invalidates the arbitration agreement since the parties mean the utilization of such law which gives impact to their agreement to parley. This will do the trick pro-enforcement objectives of New York Conventions and give impact to party autonomy.

This article has been written by  Jaskaran Singh Saluja, and Tanuj Agarwal, 4th-Year B.Com. LL.B. (Corporate Hons.) students, both at the Institute of Law, Nirma University.

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