Applicable Laws In Arbitration: A Comprehensive Guide

The law that applies in arbitration is a complex issue that has vexed courts and commentators for many years. In international arbitration, it is possible for several laws to apply, each from a different state. These include the law governing the arbitration, the law applicable to the merits of the dispute, the law applicable to the arbitration agreement, the law governing the parties' capacity to arbitrate, and the law of the place of enforcement of an arbitral award. The law governing the arbitration agreement is particularly important as it determines how disputes over the validity, scope, or interpretation of the agreement to arbitrate are resolved. While parties to an agreement often stipulate the governing law of the contract, they often fail to consider the law governing the arbitration agreement, which is separable from the underlying contract as a matter of law. This can lead to costly and time-consuming disputes. To avoid this, parties should carefully consider and specify the laws that apply to the constituent parts of the arbitral procedure and process.

The law governing the substantive contract

In international arbitration, parties generally have considerable freedom to choose the law they wish to govern their contract. This law does not necessarily have to be the official law of a state. For example, parties may empower arbitrators to take into account rules of law such as trade usages, the UNIDROIT Principles of International Commercial Contracts, the lex mercatoria, or Sharia law. It is also possible for arbitrators to decide a case "ex aequo et bono" or "amiable compositeur", meaning with the natural sense of justice, without needing to refer to any legal rules.

It is essential for parties in contracts with an international element to include a governing law to enhance predictability and avoid the cost and wasted time of arguing over the applicable law should a dispute arise. In recognition of this, the Hong Kong International Arbitration Centre (HKIAC) has added optional wording to its model arbitration clause that allows parties to expressly select the law governing the arbitration agreement. This wording is as follows: "The law of this arbitration clause shall be... (Hong Kong law)".

In the absence of a governing law clause, arbitrators (and courts) will be called upon to determine the most appropriate law to be applied, which will normally be the law with which the dispute has the closest connection. Notably, many lex arbitri, as well as applicable institutional rules, empower arbitrators to apply directly the law (or rules of law) they deem appropriate when determining the lex contractus.

The law governing the arbitration procedure

The arbitration agreement is a contract in its own right and can be separated from the main contract. This separability is a cornerstone of international arbitration, reflecting the parties' intention to keep their chosen dispute resolution procedure intact even if the substantive contract is found to be ineffective. Therefore, it is essential to specify the law governing the arbitration agreement to avoid uncertainty and potential conflicts with the law of the substantive contract.

In the absence of an express choice of law governing the arbitration procedure, different jurisdictions may apply varying approaches to determine the applicable law. For example, English courts follow a three-stage enquiry, considering express choice, implied choice, and the law with the closest and most real connection. On the other hand, Singapore courts take the approach that the law of the seat of arbitration governs the arbitration agreement.

To ensure clarity and avoid potential disputes, it is advisable to expressly state the law governing the arbitration procedure in the arbitration agreement. This can be achieved through careful drafting, such as including a simple statement like, "The law of this arbitration clause shall be [the chosen law]."

By expressly selecting the law governing the arbitration procedure, parties can maintain control over the legal framework that will govern their dispute resolution process and avoid the time-consuming and costly exercise of determining the applicable law through choice-of-law rules.

The law of the state where the award will be enforced

The law governing the enforcement of an arbitral award is of paramount importance, as it determines the legal framework within which the award will be executed. This law is particularly relevant when the arbitration involves parties from different jurisdictions or when the award needs to be recognised and enforced in a foreign country.

In international arbitration, it is not uncommon for the laws of multiple states to come into play. The law of the state where the award will be enforced dictates the procedures and requirements for executing the award within that specific jurisdiction. This includes the recognition and enforcement of the award by the local courts and the mechanisms available to challenge or appeal the award.

When determining the applicable law for enforcement, it is essential to consider the relevant treaties and conventions, such as the New York Convention of 1958, which facilitates the cross-border enforcement of arbitral awards among contracting states. The New York Convention provides a limited set of conditions for refusing enforcement, primarily focusing on serious defects in the arbitral procedure or the award itself.

Additionally, the law of the state of enforcement may outline specific requirements for the recognition and enforcement process. For example, in the United States, the Federal Arbitration Act (FAA) governs the enforcement of most foreign arbitral awards. The FAA allows for the modification or correction of an award under certain circumstances, and it provides for the setting aside of awards on specific statutory grounds.

Furthermore, the law of the state where the award will be enforced can also influence the procedures for challenging or appealing the award. Each jurisdiction may have its own set of rules and criteria for these processes, including time limits, applicable courts, and documentation requirements.

Moreover, the enforcement law can impact the types of assets that can be attached to satisfy the award. Different states have varying rules regarding the attachment of assets, including potential exemptions for certain types of property. Understanding the law of the state of enforcement is crucial for effective enforcement and ensuring compliance with local regulations.

In conclusion, the law of the state where the award will be enforced plays a pivotal role in arbitration proceedings. It shapes the legal framework for executing the award, determines the applicable treaties and conventions, influences the challenge and appeal processes, and outlines the rules for attaching assets to satisfy the award. Therefore, a comprehensive understanding of this law is essential for a successful arbitration outcome.

The law governing the arbitration agreement

In international arbitration, it is common for the laws of multiple states to apply. Therefore, it is essential to distinguish between the law governing the substantive contract, the law governing the arbitration procedure or legal seat, the law governing the arbitration agreement, and the law of the state(s) where the award will be enforced. The arbitration agreement, as a contract in its own right, can be governed by a different law than the substantive contract, emphasising the importance of specifying the governing law to avoid uncertainty and potential conflicts.

The determination of the governing law for the arbitration agreement can be challenging when it is not explicitly stated in the agreement. In such cases, English courts, for example, follow the Sulamérica v Enesa case, which established a three-stage inquiry: express choice, implied choice, and closest and most real connection. This inquiry considers factors such as the terms of the arbitration agreement, the consequences of choosing a particular law, and the intention of the parties.

To prevent disputes and ensure clarity, it is advisable to explicitly state the governing law of the arbitration agreement using straightforward wording, such as "the governing law of this arbitration agreement shall be the law of [England]." Additionally, parties should carefully consider the wider implications of their choice of law and seek appropriate advice to ensure a comprehensive and effective agreement.

By giving careful thought to the governing law of the arbitration agreement and drafting provisions accordingly, parties can reduce the potential for costly disputes and ensure a more efficient and effective resolution process.

The law governing the parties' capacity to arbitrate

In the context of corporate entities, which are commonly involved in international commercial arbitrations, the law governing their capacity to arbitrate is typically the law of the state where they are incorporated. This law determines the validity of the arbitration agreement and the authority of the signatories. For instance, under UAE law, Article 11 of the UAE Civil Code governs each party's capacity to agree to arbitration. It stipulates that the law of the state of an individual's nationality shall apply to their civil status and competence.

The issue of capacity to arbitrate can become contentious when the person signing the arbitration agreement on behalf of a company lacks the necessary authority. In such cases, the arbitration agreement may be deemed invalid, and any award made pursuant to it could be annulled. This situation was frequently raised as a defence to enforcement before the enactment of the UAE Arbitration Law. The new UAE Arbitration Law (UAE Arbitration Law 6 of 2018) now governs arbitration agreements signed after its introduction.

The previous arbitration provisions under the Civil Procedure Law required an express agreement to arbitrate, demonstrating the parties' intention to opt out of the court's jurisdiction. Any individual signing on behalf of a company needed to be authorised to do so. The new UAE Arbitration Law maintains this requirement, emphasising that only individuals with the capacity to dispose of rights or authorised representatives of legal entities can enter into valid arbitration agreements.

The interpretation of capacity to arbitrate varies across jurisdictions. Some courts apply the principle of good faith, presuming that a signature on an agreement indicates the signatory's authority to bind the company to arbitration. On the other hand, other courts uphold the requirement for special authorisation, particularly when individuals other than the general manager sign on behalf of a limited liability company.

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