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22nd February 2012

Shall we make it Hong Kong?

As an alternative to courts, arbitration is the usual adjudicative procedure for the resolution of disputes in international commercial contracts.

The process is confidential and generally an arbitral award can be enforced more widely than English court judgments under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention).

One of the general principles set out in section 1(b) of the Arbitration Act 1996 is that the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest.

This freedom of the parties is wide and includes the choice of the arbitrators (or the means by which the arbitrators are chosen), the procedural rules which will apply to the conduct of the arbitration, the law which is to be applied to determine the dispute and the place where the arbitration is to be heard.

Parties usually choose the rules that will apply to the arbitration by adopting the institutional rules of one of the arbitration organisations (eg the International Chamber of Commerce) or by agreeing on the application of the arbitration law of a state. These choices are best made during the process of concluding the commercial agreement, when the parties are mostly likely to be disposed to reach agreement, rather than after a dispute has arisen when cooperation can be expected to be in short supply.

The parties are faced with making two choices with regard to the law that is to apply to an arbitration: the procedural law (which will determine how the arbitration will be conducted) and the substantive law (which is applied to decide the outcome of the dispute itself). These need not be the same set of laws. For example, the parties may decide that the arbitration procedure will be governed by New York law and that French law will apply to the dispute itself.

The significance of the procedural law is that, as well as setting the procedural context in which the arbitration will be conducted, it determines the nature and extent to which the courts will supervise the arbitration. The approaches of states differ as to the extent to which their courts will interfere in or support arbitration proceedings (eg in providing mechanisms for the granting of interim relief).

The choice of procedural law is often inferred from the place of arbitration which the parties have chosen or from any expression in the contract of which arbitration law is to apply (eg the English Arbitration Act 1996). The place whose law is to govern the procedure is referred to as the “seat” of the arbitration. Based on the evidence before it, an English court has to decide where the “seat” of the arbitration is located where it is not expressly stated. The seat of the arbitration is not necessarily where hearings take place.

Difficulties can on occasions arise from the way in which parties express a choice with regard to the law that is to apply to their arbitration. One recent instance of this was the case of Shagang South-Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics [2015] EWHC 194 (Comm). The document setting out the terms agreed by the parties included the following wording in clause 19:

“ARBITRATION: ARBITRATION TO BE HELD IN HONGKONG. ENGLISH LAW TO BE APPLIED.”

The agreement (a charterparty) also purported to incorporate terms (the Grencon 1994 Form) determined by the parties completing boxes on the form. One box provided the following options with regard to arbitration:

  • Arbitration in London - English law as both procedural and substantive law;
  • Arbitration in New York – US law as procedural law and New York law as substantive law; or
  • Arbitration at the place named on the Form – law of that place as both procedural and substantive law.

When one party to the agreement purported to commence arbitration, a dispute arose as to whether English law or Hong Kong law was the procedural law of the arbitration. Where, as in this case, the parties do not make an express choice of procedural law, the court considers whether they have made an implied choice. If the parties have agreed a place for the arbitration, this generally carries an implied choice of governing procedure. Accordingly, the general position is that where the parties have chosen a place of arbitration, the law of that place will be the procedural law of the arbitration unless there are “significant contrary indicia”, that is clear evidence, that the parties have chosen the law of a different place to apply.

Any contrary indications need to be strong. In one case, even a reference to the Indian Arbitration and Conciliation Act 1996 was not sufficient to provide for Indian law to be the procedural law of an arbitration of which London was expressed to be the venue. As the judge in the Shagang case stated, this was essentially because “the association between the venue and seat/[procedural] law is so close that even an express reference to a different (foreign) arbitration regime may not be enough to break that association”.

In the Shagang case, the Court decided that the parties had agreed that Hong Kong law was to be the procedural law. It found that the options provided for in the Grencom 1994 Form did not fit with the scheme of clause 19 of the agreement as a whole. A choice of Hong Kong law as the procedural law was inconsistent with any of the alternatives under the Grencom 1994 Form listed above. The Court decided that the parties agreed to do something different to the options set out in the Grencom 1994 Form and that clause 19 could not be taken as a contrary indication or agreement to the law of the place of arbitration (Hong Kong) being the applicable procedural law.

To date, there is only one reported English case in which the parties were found to have chosen a procedural law different to that of the place of arbitration. Such a split can cause practical issues (eg difficulties in effective court supervision of the arbitration if required) where the arbitration is to proceed in one country in accordance with the procedural law of another. This means that parties in the vast majority of cases are likely to agree to have the procedure governed by the place of arbitration. But if this is not what is desired, a clear expression of the choice of procedural law needs to be included in the agreement because otherwise, in the absence of strong indications to the contrary, an English court will decide that the law of the place of arbitration will govern the procedure of the process.

For more information please contact Stephen Cole on 01604 233233 or click here to email Stephen.

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