By Jeremy Hernandez-Lum Tong

In 2020 and 2021, the Supreme Court of the United Kingdom (“UKSC”) made two seminal decisions on the law governing arbitration agreements, namely Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb and Kabab-Ji SAL v Kout Food Group. The latter, Kabab-Ji UKSC, recapitulated the reasoning in Enka, but differed by the fact that the parties in Kabab-Ji UKSC expressly chose a law to govern the main contract. This one factual difference ultimately led the Court to arrive at a different result from its Enka decision, and more interestingly, a different result from Paris Cour D’Appel’s 2020 ruling on the very same case (Kabab-Ji PCA). This divergence reflects what might be a truism in international commercial arbitration that in the absence of an express choice of law to govern the arbitration agreement, the governing law is far from a settled subject.

The designation of an Arbitral Seat in international contracts is a deliberate and significant decision. The chosen Seat’s law governs the arbitration’s proceedings in numerous ways. Due to this importance, it is unlikely that the parties would select an Arbitral Seat accidentally, or at least without first considering the legal implications of their choice. This is the case, particularly in contracts where the Seat’s law and the container contract’s law are different. The Seat’s scope of jurisdiction includes: (a) the local legislation applicable to the arbitration; (b) the procedural law of the arbitration, including the law governing the relationship between the arbitration and local courts;and (c) the law governing internal arbitration procedures, like requirements for equality of treatment and due process.Therefore, the choice of a Seat is an intentional action the parties undertook. There arises, then, an argument that the parties generally would have intended for the chosen Seat’s Law to govern the arbitration agreement.

However, in addition to these considerations, parties may select a Seat for various strategic reasons. One of the most common reasons is to ensure neutrality and avoid giving an advantage to the home jurisdiction of one of the parties. In the Enka and Kabab-Ji cases, the UKSC’s reasoning implies that, prima facie, in cases where parties have chosen a Seat but have not expressly selected a governing law for the arbitration agreement, they intended for the agreement to be governed by a different law from the arbitration proceedings. Some scholars like Gary Born and Peter Ashford argue that this is improbable. They would not deny the same law may govern both the arbitration agreement and its container contract, even if the Seat’s law and container contract’s law are different. However, if we are trying to ascertain the parties’ intentions in the absence of an expressly stated choice of the law governing the arbitration agreement, then Born and Ashford would agree that the Seat’s law should take precedence. Ashford even states that it would be bizarre and anachronistic for one law to govern challenges on an arbitral award, the Arbitral Tribunal’s ability to determine its own jurisdiction, and the grounds of that challenge, while a separate law governs the tribunal’s jurisdiction itself. This position is supported by the Swiss Federal Tribunal, which held that the scope of an arbitration clause should be determined by reference to the law of the Seat to ensure consistency with the New York Convention.

Arguments favoring the application of the Seat’s law often highlight that parties to international contracts are generally businessmen and not lawyers. It is improbable that businessmen would opt for a Seat Law different from their expressly chosen container contract law and then limit the scope of the Seat’s Law to the entire arbitration except the agreement submitting the parties to it. The Paris Cour d’Appel in Kabab-Ji emphasized the premise of party autonomy over reference to national law in concluding that the Seat’s law governed the arbitration agreement. The ruling of the Cour d’Appel suggests that when parties fail to state which country’s law will govern their arbitration agreement, they intend for the law of the named Seat to govern all aspects of the arbitration, including the agreement submitting the parties there.

However, the argument on what businessmen would likely intend is unpersuasive because it leads to a similar problem as the argument that it aims to refute: the existence of two applicable laws in either the contract or the arbitration proceedings. The UKSC’s approach is sounder and more persuasive because their approach is commercially reasonable. Parties generally see themselves as agreeing to only one contract, not both a contract and an arbitration agreement; more broadly, they see themselves as agreeing to not two, but one contract.

On one hand, if the container contract’s governing law extends to the arbitration agreement, then one may argue that two laws govern the arbitration proceedings. One law – the container contract’s law – would govern the agreement to arbitrate, the very source of the arbitral Tribunal’s jurisdiction. Another law – the Seat’s law – would govern the other aspects of the arbitration. This would create the bizarre and anachronistic situation discussed by Ashford.

On the other hand, if the Seat’s law governs the arbitration agreement, then indeed only one law governs both the arbitration agreement and proceedings. However, the container contract may then have different laws applying to its constituent terms. Thus, the concern remains that different laws are applying to what should be one entity. Consequently, in the absence of clear evidence about the parties’ intentions, one cannot rely simply on the notion that parties would prefer to avoid two governing laws. To assess which direction decisionmakers ought to go would involve a determination of the appropriate applicable Rule of Separability, which is beyond the scope of this blog.

Nevertheless, if the governing law of the container contract does not contain a rule of separability, then the main contract’s governing law should still extend to the arbitration agreement because of the latter’s closer alignment to the main contract. The question of whether parties agreed to arbitrate is primarily a contractual question. The motivations behind selecting a governing law for a contract are distinct from those behind choosing a Seat. All of the reasons put forth by Born, Ashford, and others emphasize that the Seat primarily governs arbitration as a procedural mechanism rather than addressing the substantive question of contractual intent.

“The designation of an Arbitral Seat in international contracts is a deliberate and significant decision.”

Jeremy Hernandez-Lum Tong

One may object that the Seat’s Law does govern substantive questions relating to the validity of the arbitration agreement, like whether or not something is arbitrable. While this may be the case, substantive questions are not necessarily contractual. The question of whether parties agreed to arbitrate is a question of contract formation. Formation, however, is fundamentally distinct from validity. Contrary to the motivations for selecting a Seat, the law governing the main contract was chosen to address fundamental contractual issues, such as whether the parties reached an agreement and what its terms entail. Even those who argue in favor of applying the Seat’s law to the arbitration agreement acknowledge that the main contract’s law governs all other contractual matters. Thus, absent an express choice of governing law over the arbitration agreement and an applicable rule of separability, the default rule should favor the main contract’s governing law, as it is the primary mechanism for determining contractual intent, whereas the Seat’s law primarily governs arbitration procedure.