Arbitration agreements – a clause for concern

If a party challenges the validity of the arbitration clause, a national court (or tribunal) must generally apply a conflict of laws analysis and determine whether the applicable law to that arbitration clause is (i) the law governing the contract; or (ii) the procedural law of the seat. The outcome of this decision will affect whether or not the arbitration proceeds.

As illustrated by a number of recent cases from different jurisdictions, national courts have been inconsistent in their approach to this issue, which has led to confusion as to how the applicable law of the arbitration clause will be determined if the parties have not specified their choice in the arbitration clause itself (or reached a subsequent agreement).

In the Singapore High Court case of Firstlink Investments Corp Ltd v GT Payment Pte Ltd [2014] SGHCR 12, the Court did not accept that the law governing the contract should automatically govern the arbitration clause. The Court found that it would be “rare” for the law of the arbitration clause to be different from the law of the seat of the arbitration because an arbitration clause has a closer and more real connection with the place where the parties have chosen to arbitrate than with the law governing their obligations under the contract.

In the case of Klöckner Pentaplast GmbH v. Advance Technology (HK) Company Limited HCA 1526/2010, the Hong Kong Court of First Instance emphasised the need to examine the surrounding circumstances to the parties entering into the contract. The substantive law of the contract in question was German law and the arbitration clause provided for any disputes to be submitted to arbitration in Shanghai pursuant to the ICC Rules. In that particular case, the Court found that the substantive law of the contract governed the arbitration clause based on its review of the circumstances.

The Indian Supreme Court was faced with a different challenge in Enercon India v Enercon GMBH Civil Appeal No. 2086 of 2014 (14 February 2014) in which the arbitration clause specified its governing law and the venue of the arbitration, but failed to specify the seat. Applying a test of the “closest and most intimate connection”, the Supreme Court held that, as the parties had specified that Indian law governed the arbitration clause, India was intended to be the seat of the arbitration and the procedural laws of India applied to the proceedings.

For arbitrations seated in the UAE (outside of the Dubai International Financial Centre (the “DIFC”)), the Civil Procedure Code, which applies to such arbitrations, is silent as to the law applicable to the arbitration clause. In Dubai Cassation Petition 293/1991, the governing law of the contract was deemed to apply to the arbitration clause; however, in the absence of any system of binding precedent and a lack of reported cases, it is uncertain whether the principle is applied consistently.

For arbitrations seated in the DIFC, which is a separate common law jurisdiction within the UAE, in the absence of an express agreement between the parties, the position adopted by the DIFC Courts when determining the parties’ choice of seat is likely to follow the approach adopted by the English Courts, however the DIFC-LCIA announced the possibility of amending its rules to be consistent with the position set out under Article 16.4 of the LCIA Rules 2014 which provides that, unless the parties agree otherwise, the law of the arbitration clause will be the law of the designated seat.

The announcement by the DIFC-LCIA follows an emerging trend amongst arbitral institutions to address this issue. Recently, the HKIAC amended its model clause to require parties to specify the applicable law within the arbitration clause itself. Therefore, rather than specifying the “default” law that shall apply to the arbitration clause in the absence of the parties’ agreement – as provided in the LCIA Rules 2014 (and as will likely be adopted in the DIFC-LCIA Rules) – the HKIAC’s approach is to encourage the parties themselves to make that decision.

These moves have all likely been prompted by the inconsistent jurisprudence emerging from national courts and are considered a positive step towards limiting the scope of disputes arising as to the applicable law of the arbitration clause.