Opening Pandora's Box: unpacking the principles relating to the law governing the arbitration agreement across various jurisdictions

Introduction

It is a well-established principle that an arbitration agreement is presumptively separable from the underlying contract. As such, it is possible (albeit not necessary) for an arbitration agreement to be governed by a law that is different from the law of the underlying contract. Identifying the law governing the arbitration agreement is important as it will govern certain issues such as the validity, formation, existence and scope of an arbitration agreement as well as its interpretation.

This article will briefly analyse the current positions in England, Singapore and Hong Kong, so that parties who intend to commence arbitration in these three jurisdictions will have a better understanding of how the courts and/or the arbitral tribunals will decide when ascertaining the proper law of the arbitration agreement.

Approach in England

In the landmark U.K. Supreme Court (“UKSC”) decision of Enka Insaat ve Sanayi A.S. v OOO Insurance Company Chubb (“Enka”)⁽¹⁾, the majority (in a 3-2 split decision) held that the English courts should undertake the following three-stage enquiry to determine the law governing the arbitration agreement:

• Stage 1: The court will first look at whether there is an express choice of law governing the arbitration agreement. If parties expressly specify the law governing the arbitration agreement, that law will be regarded as the law governing the arbitration agreement.

• Stage 2: If an express choice is not found in Stage 1, the court will look at whether there is an implied choice of law governing the arbitration agreement. If there is an express choice of law governing the underlying contract, it will be implied that the parties intend for the law governing the arbitration agreement to be the same as the law governing the underlying contract, unless there are additional factors that may negate such an inference.

• Stage 3: If an express choice and an implied choice is not found in Stages 1 and 2, the court will have to decide which system of law the arbitration agreement has its closest and most real connection with. Thus, if the parties do not expressly specify the law governing the arbitration agreement and the underlying contract, the arbitration agreement will be governed by the law which it is most closely connected with. In most cases, the law which the arbitration agreement has the closest and most real connection with will be the law of the seat of the arbitration.

The majority further identified two factors that could negate the presumption that parties intended for the law governing the underlying contract to apply to the arbitration agreement:

• The existence of a serious risk that, if governed by the same law as the underlying contract, the arbitration agreement would be ineffective.⁽²⁾  This is because the court would seek to interpret the arbitration agreement in a way which would give effect to, rather than defeat, the aim or purpose which parties had in mind (i.e. for disputes to be referred to arbitration).⁽³⁾

• Any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration agreement would also be governed by that the law of the seat.⁽⁴⁾

It is pertinent to note that while the dissenting judges disagreed with the conclusion reached by the majority, there was no dispute that the three-stage enquiry should be used to determine the proper law of the arbitration agreement.

The UKSC’s majority judgment in Enka settles the uncertainty of the English approach in determining the law governing the arbitration agreement. The decision also clarifies that an arbitration agreement can be separated from the main contract only for the purpose of determining its validity, existence and enforceability. It cannot be separated from the underlying agreement for all purposes, including the purpose of determining the law governing the arbitration agreement.

Approach in Singapore

The Singapore courts also adopt a three-stage framework to determine the law governing the arbitration agreement. This three-stage framework was laid down in the Singapore High Court decision of BCY v BCZ⁽⁵⁾  (“BCY framework”), and mirrors the framework set out by the English Court of Appeal in Sulamérica Cia Nacional de Seguros SA and others v Engelharia SA and others (one of the leading English cases that was decided before Enka) (“Sulamérica”).⁽⁶⁾  The BCY framework was recently applied in the Singapore Court of Appeal (“SGCA”) case of BNA v BNB (“BNA”):⁽⁷⁾

• Stage 1: The court examines whether the parties had expressly chosen the proper law of the arbitration agreement. If they have, the inquiry ends there.

• Stage 2: In the absence of an express choice, the court examines if the parties had made an implied choice of the proper law to govern their arbitration agreement. The starting assumption is that the parties intended for the arbitration agreement to also be governed by the proper law of the underlying contract in which the arbitration agreement is found.

• Stage 3: If neither an express choice nor an implied choice of the proper law of the arbitration agreement can be ascertained, the system of law with which the arbitration agreement has its closest and most real connection will be the proper law.

While the BCY framework is similar to the three-stage enquiry in Enka, there are some slight differences:

• Unlike the UKSC in Enka, the SGCA stopped short of confirming that the enquiry at Stage 3 would normally point to the law of the seat of the arbitration. This is because in BNA, the SGCA’s analysis ended at Stage 2, and it was not necessary for the court to move on to Stage 3 of the BCY framework.

• The SGCA also seemed to suggest that the potential invalidating effect of an arbitration agreement would only form part of the consideration at Stage 2 of the BCY framework to negate the presumption of the parties’ implied choice, if there is evidence to show that parties were at least aware of that the choice of proper law of the arbitration agreement would have an impact on its validity.⁽⁸⁾  On the contrary, the UKSC in Enka did not require parties to show that they were aware that the choice of law would have an invalidating effect on the arbitration agreement.

Approach in Hong Kong

The Hong Kong courts have not laid down a structured framework similar to the three-stage enquiry of England and Singapore when determining the proper law of an arbitration agreement. Instead, in the case of Klöckner Pentaplast GMBH & Co KG v Advance Technology (HK) Co Ltd (“Klöckner”)⁽⁹⁾, the Hong Kong Court of First Instance (“CFI”) set out the following broad principles which are to be taken into consideration:⁽¹⁰⁾

• The starting point must be the terms of the arbitration agreement and the underlying contract in question. The court should examine the contract between the parties, including the arbitration clause, to see if there is any agreement, express or implied, by the parties as to (i) the proper law of the contract, or (ii) the law governing the arbitration agreement.

• If there is an express choice of law to govern the contract as a whole, the arbitration agreement will also normally be governed by that law. This is regardless of whether or not the seat of the arbitration is stipulated, and irrespective of the place of the seat.

• If there is no express or implied agreement as to the law governing the arbitration agreement, the court will imply that the law of the seat will be the law governing the arbitration agreement.

• To determine the law governing the arbitration agreement, it is not permissible to look at the arbitration agreement in isolation. Due consideration should be given to the surrounding circumstances, including the law governing the underlying contract.

The CFI’s decision was upheld by the Hong Kong Court of Appeal when it refused leave to appeal⁽¹¹⁾, and was also recently affirmed by the CFI in the case of OCBC Wing Hang Bank Ltd v Kai Sen Shipping Co Ltd (“OCBC”)⁽¹²⁾. It is interesting to note that the judge in OCBC did not take into consideration the line of authorities in England (such as Sulamérica) and in Singapore that were decided after Klöckner.

Although the Hong Kong courts have not expressly adopted the three-stage enquiry as laid down by its English and Singaporean counterparts, the principles espoused by the CFI is essentially similar. In particular, the Hong Kong courts seem to have endorsed the presumption that the arbitration agreement will normally be governed by the law of the underlying contract (if specified). It remains to be seen whether Hong Kong’s appellate courts will adopt a more structured framework similar to that in England and in Singapore, should the opportunity arise.

Conclusion

Prior to the UKSC’s decision in Enka, the English approach differed from the approach adopted in Singapore and Hong Kong. However, in light of the UKSC’s decision in Enka, the approach adopted by three of the world’s most popular seats of arbitration, i.e., England, Singapore and Hong Kong, are now largely aligned.

Nonetheless, there are still certain nuances in respect of the approach adopted by each jurisdiction. Thus, it is important for commercial parties to expressly specify the law governing the arbitration agreement. This would give parties a greater degree of certainty, and would also prevent parties from incurring additional time and costs of having to dispute procedural matters which do not even relate to the substantive dispute. In this connection, in the hopes of avoiding unnecessary disputes on which law to apply, the Hong Kong International Arbitration Centre has paved the way by updating its model clause to prompt parties to designate an appropriate law to govern the arbitration agreement. This is a concrete, positive step forward and hopefully, other leading arbitral institutions will follow suit in the near future.