What are the laws applicable to the arbitration agreement and how are they determined?
The Laws of Arbitration Agreement
Dispute resolution clauses in commercial agreements are never enchanting and, therefore, it is not astonishing that they are frequently termed as “midnight clauses,” that is, the last clauses to be considered during commercial negotiations, often late at night. In most cases, dispute resolution clauses often comprise provisions for mediation, negotiations, as well as arbitration or litigation. It is imperative to give careful thought to drafting the said provision, every step be lucidly delineated, and time limits be established for every step. In cases where arbitration is selected as the favored means of dispute resolution, the laws that are applicable to the various aspects of the arbitration process must be carefully considered.
It is uncontested that while parties to an agreement often specify the laws that govern the contract, on most occasions, they often fail to take into account the law governing agreement arbitration, which is legally dissociable from the substantive contract. In other words, arbitration clauses are independent of, and legally severable from, the substantive contract and, therefore, the contract and the arbitration clause are not always governed by the same law. The increased internationalization of arbitration, coupled with the different and often conflicting approaches espoused by various jurisdictions regarding the laws that govern arbitration agreements, may lead to protracted and costly legal proceedings, often to the detriment of dispute resolution between contracting parties.
The Importance of Laws Governing Arbitration Agreements
The law that regulates the arbitration, often known as the procedural law of the arbitration, curial law, or “lex arbitri,” constitutes a distinctive set of contractual obligations and will often deal with procedural issues. A number of legal issue may arise may arise in the course of arbitration since the considerations pertinent in determining the appropriate law for the underlying contract differ from those involved in electing the law that governs the arbitration agreement. It is imperative to discriminate between the substantive contract and the arbitration agreement between contracting entities in the agreement (contract) to settle a dispute emanating from such a contract through arbitration. Put differently, the law treats the arbitration agreement and the substantive contracts as separate agreements and, therefore, rendering a contract invalid because the precedent conditions were not executed does not necessarily annul the arbitration agreement.
The question concerning which law governs an arbitration agreement is an important one. International arbitration is common in business transactions all over the world. Such arbitration is usually conducted against divergent cultural and legal backgrounds and may offer a speedy, pragmatic, and economical means of settling disputes. Different laws will govern the various aspects of arbitration. For instance, the arbitration agreement may sometimes be governed by laws other than those from the national laws of the contracting parties. In addition, different systems of law can sometimes apply to the arbitration procedure, the substantive dispute, as well as the award – including matters relating to validity and enforceability. In other words, the procedural law of arbitration is important in the sense that it determines the extent to which the local courts are involved in the process, including the extent to which the court jurisdiction is excluded or included from the arbitration agreement, and any procedures to be adhered to.
The procedural law also determines the extent of autonomy and discretion of the parties in selecting the arbitral procedure, whether the said procedure may be appealed, and the duration within which such an appeal may be launched, as well as whether the award is enforceable. It is imperative to note that the involvement of local courts in the arbitration process is contingent on the quality and speed of the courts in the jurisdiction in question. It should also be emphasized that assigning the seat of arbitration constitutes an important aspect of an effectual arbitration agreement and, therefore, parties should ensure that the jurisdiction has well-developed arbitration laws, that traditions exist that support and respect international arbitration agreements, and that the courts are adequately experienced with respect to arbitration issues.
The Laws Governing Arbitration Agreements
Various approaches may be employed by the courts in determining the laws governing arbitration agreements in instances where the parties have failed to address the issue at the drafting phase, as well as in cases where the law of the substantive contract and that of the seat are different. It should be noted from the outset that a distinction between “civil law perspective” and “common law perspective” in deciding the law that governs international arbitration agreements lack in reality and substance (Born 815). Such a distinction only serves to foster an erroneous notion that the goals of the arbitral process are different and, therefore, singular approaches to achieving these objectives should be deployed in common and civil law jurisdictions. The said approach is not only at odds with the goals of the arbitrational process that aims to offer a standard for the resolution of international contractual disputes that go beyond the intricacies of domestic law, but is in conflict with the instruments of the New York Convention that establishes standardized international legal criteria enforcing arbitration agreements.
A dispute will not be arbitrable in the event it is not appropriate to settlement through arbitration under the arbitration seat law or the law regulating the arbitration agreement. Issues that are arbitrable or otherwise differ from jurisdiction to jurisdiction. However, issues of a public nature, including consumer protection, family relations, labor relations, as well as employment standards are generally not arbitrable. Some jurisdictions may also considers disputes involving intellectual property as incapable of being arbitrated while others bar the use of future-dispute clauses contained in arbitration agreements to preclude class action. The arbitration agreement must address the law governing it and parties should state overtly and unambiguously the law that will govern the understanding and interpretation of the contract. It is important to mention that the law of the seat, which refers to the jurisdiction where the arbitration is heard, determines the procedure and has a bearing on how the arbitration agreement is interpreted.
As noted previously, the legislation or treaty that regulates the arbitration ought to be stipulated in the arbitration agreement. The New York Convention and the UNCITRAL Model Law are often referenced, together with domestic legislation in the jurisdiction of arbitration that enforces the UNCITRAL Model Law. Nevertheless, parties may agree to have the arbitration determined through domestic legislation not related to UNCITRAL Model Law whenever such legislation is available. Some widely cited domestic legislation include Singapore International Arbitration Act 1994 section 2(1) (with express provisions for bills of lading), France Articles 1442 et seq., Germany section 1031, Netherlands Article 1021, Switzerland Article 178(1), and Spain Article 9.
Approaches to Law Governing the Arbitration Agreement
Various jurisdictions have espoused their own approach as regards the rules that determine the governing law that may be applied in legal matters of international concern. Three independent areas often relate to the determination of the relevant law (counting the prospects of applying the doctrine of lex arbitri) with regard to arbitration. These include the determination of the substantive law, the determination of the procedural rules and law pertinent to the procedure, as well as the choice of rules that govern conflict of laws in determining the relevant law. From a legal and practical perspective, it is possible that lex arbitri will be the law that governs the arbitration agreement as well, particularly in consideration of the fact that parties seldom agree on the precise laws to govern the arbitration agreement.
Some scholars have argued in favor of applying national laws, primarily the law regulating the arbitration agreement, contending that arbitral proceedings do not take place in a vacuum but remain contingent on one or several legal systems. These authors have often argued that the significance of the seat of arbitration is moot since national laws exist that regulate international arbitration. Overall, approaches to the law governing arbitration agreements vary, and some commentators have noted that the arbitral case law often reflects a number of possible approaches to determining the laws that regulate the arbitration agreement. The first approach is the “validation principle,” or in favorem validatis rule. It is usually accepted in most jurisdictions that the validation principle must regulate arbitration agreements, and that such agreements should be undertaken in good faith and in a manner that maintains their validity.
Under the in favorem validatis approach, the legality of the arbitration article is often presumed and, therefore, the tribunal must find solutions that support the validity of the agreement in determining the law that applies to the arbitration agreement. The goal of this approach is to enforce the original intent of the contracting entities to settle the dispute through an international arbitral tribunal. However, it is important to stress that notwithstanding its apparent validity from the perspective of international arbitration, an ‘in favorem validatis’ approach is still questionable, particularly in view of the portrayal of ‘extension to third parties’ as a procedural matter under Article V(1)(a) of the New York Convention. This makes it extremely difficult to validate the application of the lex causae that regulates the merit of any dispute. A nationalist approach may also be employed in determining the law that regulates an arbitration agreement.
National laws may provide the law that will govern the arbitration clause. The nationalist approach, however, becomes problematic to the degree that it seems inconsistent with Article V(1)(a) of the New York Convention that provides for a selection of law rule regulating both the existence and legality of the arbitration agreement, and which occasions the application of the law elected by the disputing entities to regulate the agreement. In sum, courts and tribunals may also apply the same law regulating the substantive/underlying contract or they may apply the seat of the arbitration law. While the courts may choose to apply the same law regulating the substantive contract, it is worth noting that the agreement to arbitrate frequently assumes the form of a clause that constitutes part of the broader contract. The implication of this is that the arbitration agreement becomes a separate contract severable from the underlying/substantive contract. The implication of the doctrine of separability is that a different law from the one regulating the substantive/underlying contract can also regulate the arbitration agreement. Therefore, it is always prudent to specify in an explicit manner the law regulating the arbitration agreement if uncertainties are to be avoided.
Kompetenz-Kompetenz and the Validity of Arbitration Jurisdictions
Kompetenz-kompetenz, also known as competence-competence, refers to a doctrine of the law where a tribunal or a court may have the jurisdiction to entertain and rule with regard to the extent of its competence on the issue before it. Kompetenz-kompetenz is an important aspect of international arbitration, with the implication that if the parties opted directly for arbitration and raised issues of jurisdictional competence there, then the arbiters have the autonomy and power to decide whether they have the competence and jurisdiction to hear the arbitration proceedings. According to Article 16(1) of the UNCITRAL Model Law, the tribunal has the power to “rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement”.
From a practical perspective, the arbiters will also effectively apply the doctrine of severability because their decision annulling the substantive contract will not invalidate their jurisdiction and competence to make such a ruling. In other words, where the existence and legality of party autonomy has been challenged, the kompetenz-kompetenz doctrine dictates that the arbiter presumes, at the outset, that a valid consent exists, and assumes jurisdiction based on this presumption. If upon taking jurisdiction, it is determined that the arbitration agreement is invalid, the arbiter will refuse jurisdiction in entertaining the essence or substance of the dispute. Nevertheless, this decision cannot impinge on the fact that the jurisdiction had already been taken in deciding the legality of the arbitration agreement clause.
It is imperative to note that the kompetenz-kompetenz doctrine is important and intrinsic to civil procedure in all jurisdictions and without it, no court or tribunal can decide jurisdiction and declare a dispute. However, the doctrine cannot prevent jurisdictional conflicts, concurrent proceedings, or conflicting and contradictory decisions. In some cases, parties may arrive at arbitration by virtue of an order issued by a national court. Two issues arise in such cases, with the first being whether an order obliging arbitration prevents the arbiters from independently determining the question of arbitral jurisdiction. Another issue is whether either parties have waived their rights to challenge jurisdiction by failing to raise jurisdictional challenges before the national court compelling arbitration.
Standard arbitration agreements seldom make provisions the law that governs the arbitration agreement. Therefore, problems may sometimes arise if this is not sorted out during the engagement. As noted before, a number of approaches may be employed in determining the law governing the arbitration agreement. Courts and tribunals may apply the same law regulating the substantive contract, or in the alternative, they may apply the seat of the arbitration law. National laws may also provide the law will regulate the arbitration clause. The increased internationalization of arbitration, coupled with the different and often conflicting approaches espoused by various jurisdictions regarding the laws that govern arbitration agreements, may lead to protracted and costly legal proceedings, often to the detriment of dispute resolution between contracting parties. Therefore, it is prudent to spell out the law regulating the arbitration agreement if uncertainties are to be avoided.
Bantekas, Ilias. An Introduction to International Arbitration. Cambridge, UK: Cambridge University Press, 2015. Print.
Born, Gary B. “The Law Governing International Arbitration Agreements: an International Perspective.” Singapore Academy of Law Journal. 26 (2014): 815-848. Print.
Carter, James H, and John Fellas. International Commercial Arbitration in New York. New York: Oxford University Press, 2010. Print.
Cook, Trevor M, and Alejandro I. Garcia. International Intellectual Property Arbitration. Alphen aan den Rijn, The Netherlands, NL: Kluwer Law International, 2010. Print.
Dewar, John. International Project Finance: Law and Practice. Oxford, UK: Oxford University Press, 2011. Print.
Ferrari, Franco, and Stefan Kröll. Conflict of Laws in International Arbitration. Munich, DE: Sellier, 2011. Print.
Legum, Barton, Theodore Edelman, and Ethan A. Berghoff. International Litigation Strategies and Practice. Chicago, IL: ABA, Section of International Law, 2014. Print.
Lew, Julian D. M. Contemporary Problems in International Arbitration. Dordrecht, DE: M. Nijhoff, 2013. Print.
Loots, Philip, and Donald Charrett. Practical Guide to Engineering and Construction Contracts. Sydney, AU: CCH Australia, 2009. Print.
Morrissey, Joseph F, and Jack M. Graves. International Sales Law and Arbitration: Problems, Cases and Commentary. Alphen Aan Den Rijn: Kluwer Law International, 2008. Print.
Rubino-Sammartano, Mauro. International Arbitration: Law and Practice. The Hague, NL: Kluwer Law International, 2014. Print.
Tang, Zheng S. Jurisdiction and Arbitration Agreements in International Commercial Law. New York, NY: Routledge, 2014. Print.
Weigand, Frank-Bernd. Practitioner’s Handbook on International Commercial Arbitration. Oxford: Oxford University Press, 2009. Print.
Wilshusen, Fred D, Eric A. Berg, and Terrence L. Brookie. Construction Checklists: A Guide to Frequently Encountered Construction Issues. Chicago: American Bar Association, Forum on the Construction Industry, 2008. Print.
Get a verified expert to help you with any urgent paper!Hire a Writer
from $10 per-page