5/11/22, 12:22 AM The law governing the arbitration agreement: Why we need it and how to deal with it | International

it and how to deal with it | International Bar Association

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The law governing the arbitration agreement: Why

we need it and how to deal with it
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Amanda Nunes Sampaio

Demarest Advogados, Sao Paulo, Brazil

ansampaio@demarest.com.br

The problem
International arbitration constantly relies on choice-of-law rules to determine which law should apply
to which aspect of the dispute. There are usually more than one national system of law bearing upon
an arbitration proceeding and sometimes tribunals invest too much time determining which one is to
apply to a precise matter.

Article II of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(the ‘Convention’) allows the courts to decline a request to refer parties to arbitration if the agreement
to arbitrate is ‘null and void, inoperative or incapable of being performed’. However, the provision
does not indicate which law determines so, nor does it appoint a choice of law rule to be followed.

The theory and practice of arbitration created the fiction of separability (or ‘severability’) to preserve1
and insulate2 the arbitration agreement from its underlying contract. Coupled with party autonomy
and consent, it is one of the cornerstones of international arbitration.3 Although not absolute,4 such
presumption leads to the autonomy of the arbitration agreement5 and the idea that the law
applicable to the underlying contract does not automatically apply to the arbitration clause – although
parties may agree upon a choice-of-law clause that expressly applies to both. All jurisdictions
favourable to arbitration accept the separability presumption to some extent, whether from common
or civil law.6

But what is the law that governs the arbitration agreement? Is this inquiry important at all?

Since parties frequently fail to agree upon the law governing their agreements to arbitrate, courts and
tribunals apply different choice of law rules to find the applicable law to the agreement, and multiple
options might be considered – that is, the law governing the underlying contract, the law of the seat,
the law with the closest connection with the arbitration, principles and rules internationally accepted
and a validation principle that gives effect to the agreement to arbitrate. This exercise is time
consuming and costly, and hence directly impacts on the efficiency of the arbitral proceeding.

This article focuses on the importance of agreeing upon an applicable law to the arbitration
agreement at the outset and finding the most suited approach to determining which law applies in
the absence of parties’ choice.

Why is it important? Practical matters controlled by the law

governing the arbitration agreement
The law governing the arbitration agreement will decide matters of formal and substantive validity,
formation, termination, interpretation, assignment and waiver of the arbitration agreement. If it is not
specified, a choice-of law rule will be applied to find it.

Besides being costly and time consuming, such process may ensue the application of a law that parties
attempted to avoid in the first place, because discussions about the validity of the arbitration
agreement regularly wind up in national courts when one of the parties moves to prevent the other to

commence arbitration – for example, one party argues that it has not given its consent to arbitrate or
holds
 that the issue under dispute is not arbitrable considering the scope of the clause, among other
examples. When national courts, instead of arbitral tribunals, must decide on the validity of an

arbitration agreement, they are likely to apply their lex fori – which usually relates only to the moving
party – especially when the court is not arbitration-friendly.
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Laws potentially applicable to the arbitration agreement

Since international arbitral tribunals are not bound by any sort of lex fori, when arbitrators face a
challenge to the arbitration agreement they tend to apply a body of law that connects somehow with
the arbitration because it was chosen by the parties to govern some other aspect of their

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arrangements.

The first solution that comes into mind is to extend the law applicable to the underlying contract
where the arbitration clause rests.7 It is an interpretation of parties’ choice, assuming they have
impliedly chosen the law to govern their arbitration agreement. This approach is seen in the
Sulamerica case.8 Here, the main agreement – an insurance policy – was governed exclusively by
Brazilian law. London was chosen as the seat of arbitration. The insurers commenced arbitration
without respecting a multi-tiered dispute resolution clause and consequently the insured companies
filed court proceedings in Brazil. Thereafter, the insurer obtained an anti-suit injunction by the English
High Court to suspend proceedings in Brazil. The insured companies appealed the injunction, arguing
that under Brazilian law the arbitration clause could not be invoked against them without their
consent. This issue of whether the arbitration clause could be invoked was to be determined by the
law governing the arbitration agreement. The English High Court firstly understood that, in the
absence of an express choice of law for the arbitration agreement, parties are assumed to have
intended the whole of their relationship to be governed by the same system of law, that is, the choice
of law for the underlying agreement. However, because the Court concluded that Brazilian law –
which governed the main agreement – would invalidate the arbitration agreement, it concluded that
parties could not have impliedly chosen Brazilian law since they had indeed agreed to arbitrate. Thus,
the Court ended up applying the law with the closest connection with the arbitration agreement,
which was the law of the seat. In other words, the English High Court decided that there is a
rebuttable presumption that, in absence of an express choice of law for the arbitration agreement, the
choice made for the underlying agreement applies.

However, in light of the severability principle, it seems like moving backwards to assume that parties
have impliedly decided that their agreement to arbitrate was not exactly severable, since it is governed
by the same law that governs the main contract. This proposition undermines two cornerstones of
international arbitration: party autonomy and separability.

The second most common option is to apply the law of the arbitral seat. One may argue, however,
that implied choice might not work properly for this proposition. Since the seat is frequently chosen,
among other reasons, because of its arbitration laws – laws of procedure – it is difficult to defend that
when parties elect the seat they impliedly define that the substantive law of the seat would govern
matters related to their arbitration agreement, such as validity, formation, etc. Likewise, the law of the
seat is not always chosen by the parties – for example, agreements in which parties fail to appoint a
seat and the arbitral institution or even arbitrators must do so. Hence, it may be unreasonable to
consider that the validity of the agreement depends upon a choice made ex post by a third party –
institution or tribunal – who would be basically picking a law to govern the agreement to arbitrate
without considering parties’ intention. On the other hand, the ex post choice only takes place because
parties had impliedly delegated such choice to the third party, therefore, one could argue that, by
force of law, the third party’s decision reflects the contractual parties’ own will.

The application of the law of the seat is reflected in the Firstlink case.9 In this case, one party moved to
compel arbitration based on an arbitration clause providing for the proceeding before the Arbitration
Institute of the Stockholm Chamber of Commerce seated in Sweden. The choice of law clause for the
underlying agreement provided that it was ‘governed by and interpreted under the laws of Arbitration
Institute of the Stockholm Chamber of Commerce’. Hence, the other party resisted to the action to
compel arbitration by arguing the invalidity of the arbitration agreement. The Singapore High Court
expressly disagreed to the rebuttable presumption created in SulAmérica, stating that ‘it cannot
always be assumed that commercial parties want the same system of law to govern their relationship
of performing the substantive obligations under the contract, and the quite separate (and often
unhappy) relationship of resolving disputes when problems arise’. The Court decided that in absence
of an express choice of law, the assumption should be that parties have impliedly chosen the law of
the seat of arbitration to govern their arbitration agreement.

To assume that parties in arbitration implied anything is not ideal, but this proposition trumps the
previous one simply because it does not undermine separability. Either way, and putting the ‘implied
choice’
 aside, the law of the seat seems to be the one that generally has the closest connection with
the arbitration. A persuasive argument in favour of the law of the seat can be found in the

Convention, by application of the choice of law rule contained in article V(1)(a): if the law of the seat
is to be considered for the arbitration agreement after the award was rendered, why should such law

not be considered for the same agreement before the award is made, in an article II(3) context? The
approach is convincing since ‘[t]he fact that no reference to these conflict rules was made in Article II
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is not to be interpreted e contrario, but may rather be considered another omission due to the last-
minute insertion of provisions relating to arbitration agreements in the Convention’.10

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Following this analogous application, one might say that when facing a challenge to the arbitration
agreement, an adjudicator should advance and apply the public policy and arbitrability laws of the
judicial forum where the resulting award may be enforced, considering article V(2) of the Convention.
This argument might seem reasonable from the perspective that the arbitrators have the duty to
render an award that is enforceable, but rules of arbitrability and public policy rarely give answers to
all possible challenges to arbitration agreements. Generally, this formula cannot be transposed to the
primary stage of enforcement of agreements and has been rejected by courts that considered it.11

However, an analogous application of article V(2) of the Convention has been considered from a
different perspective: applying the public policy and arbitrability rules of the place where enforcement
of the arbitration agreement is sought. Since the arbitration agreement will constantly be enforced in
the place of the seat, there is no reason to overthink this proposition.

Another approach is the traditional locus regit actum, leading us to the law of the place where the
agreement was made. However, because in the context of international arbitration the relevance of
the situs shifts from the place where the arbitration agreement is concluded to the place where the
arbitration will be held or the award will be rendered, this rule is not relevant for our purposes – the
law of the seat will eventually be applied.12

Notions and principles of law internationally applied are also an influential approach. A good example
is the interpretation of the article II(3) of the Convention performed by the US Third Circuit in the
Rhone v Lauro case.13 Two Italian parties executed an agreement which contained an arbitration
clause providing for arbitration in Naples, Italy. Rhone claimed the award was null and void since
Italian laws required the tribunal to be formed by an odd number of arbitrators. The Third Circuit
concluded that the most consistent meaning of article II(3) is that an agreement to arbitrate is ‘null
and void’ only: (1) when it is subject to an internationally recognised defence such as duress, mistake,
fraud, or waiver; or (2) when it contravenes fundamental policies of the forum state. Thus, the ‘null
and void’ language must be read narrowly given a presumption of enforceability of agreements to
arbitrate. The conclusion is reasonable since it recognises the true international character of the
Convention and foster jurisdictions to get rid of their parochial practice.

Another largely seen and highly convincing approach is to apply the law of the place with the closest
connection with the arbitration. This goes on a case-by-case basis and can be seen in judgments
without being expressly considered, as in the Firstlink case.

The final approach is the validation principle under which all potentially applicable laws will be tested
to apply the one that gives effect to the parties’ agreement to arbitrate. We can also see a tendency to
this approach in judgments that do not expressly say so, such as the SulAmérica and Lauro cases. It is
already adopted by Swiss national arbitration law14 and establishes ‘a pro-arbitration enforcement
regime, consistent with the objectives of the New York Convention, that overcomes the complexities
and uncertainties of traditional choice-of-law analysis’.15

Conclusion: adjudicators should favor the arbitration agreement

Among all approaches, none is individually perfect for determining what is the law applicable to the
arbitration agreement in case parties fail to previously do so. However, there is a good recipe behind
most of the propositions altogether.

All cases considered, two easy conclusions are: (1) the law of the seat tends to be applied; and (2)
tribunals attempt to uphold the agreement.

Thus, since the lex arbitri – generally reflected in the arbitration laws of the seat – tends to have the
closest connection with the arbitral proceeding, the substantive law of the seat tends to be the best
suited to govern the arbitration agreement when parties fail to choose one. This conclusion matches
the rationale behind the Convention when article V(1)(a) was drafted. However, this interpretation
should depend on such law being favourable to arbitration to the extent that if parties undoubtedly
agreed to arbitrate, such law will not be applied to invalidate it and submit the dispute to national
courts. In other words, in the absence of parties’ choice, when the law of the seat governs the arbitral

proceeding (lex arbitri), there is a rebuttable presumption that such law is the one to govern the
arbitration
 agreement, but such presumption is rebuttable by consideration of the validation principle
to always give deference to the parties’ expressed intention to submit their dispute to arbitration.

Therefore, the validation principle should be a modus operandi that guides the analysis despite the
presumption. Such consideration is in line with the civil law approach of venire contra factum
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proprium and the common law approach of collateral estoppel.

In other words, if parties had chosen to arbitrate a given dispute, adjudicators should exercise their
best to uphold such a choice – and parties should comply with it.

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Notes

1. Preservation entails that the jurisdiction of the arbitral tribunal is generally preserved to
adjudicate a challenge to the main contract.

2. Insulation entails that if one seeks to challenge the agreement to arbitrate, one has to address
that challenge directly to such agreement. See, generally, Emmanuel Gaillard & John Savage
(Eds), Fouchard Gaillard Goldman On International Commercial Arbitration 197-240 (Kluwer
Law International, 1999).

3. Gary B Born, International Commercial Arbitration (Kluwer Law International, 2nd Edn, 2014),
Section 3.02.

4. Preliminary Award in ICC Case No 6401, 7(1) Mealey’s International Arbitration Report, B-13-B-
14, 19-20 (1992).

5. See, generally, Nigel Blackaby & Constantine Partasides QC, Redfern and Hunter on
International Arbitration 103-107 (Oxford University Press, 6th Edn, 2015).

6. See, generally, Born, n 3 above.

7. Yves Derains, ‘The ICC Arbitral Process, Choice of Law Applicable to the Contract and
International Arbitration’, 6, 16-17 ICC Court of Arbitration Bulletin (1995, No 1).

8. Sulamérica Cia Nacional De Seguros SA and Others v Enesa Engenharia SA[2012] EWCA Civ
638.

9. FirstLink Investments Corp Ltd v GT Payment Pte Ltd and Others[2014] SGHCR 12.

10. Reinmar Wolf, New York Convention on the Recognition and Enforcement of Foreign Arbitral
Awards 163 (CH Beck – Hart – Nomos 2012).

11. Born, n 3 above, at 598.

12. Julian D M Lew, ‘The Law Applicable to the Form and Substance of the Arbitration Clause’ in
Improving the Efficiency of Arbitration Agreements and Awards: 40 Years of Application Of
The New York Convention, ICCA Congress Series No 9, Paris 1998, 114, 141 (Albert Jan van
den Berg with the assistance of the Permanent Court of Arbitration The Hague; Kluwer Law
International 1999).

13. US Court of Appeals, Third Circuit, 712 F2d 50, 6 July 1983.

14. ‘Article. 178(2): As regards its substance, an arbitration agreement is valid if it conforms either
to the law chosen by the parties, or to the law governing the subject-matter of the dispute, in
particular the main contract, or to Swiss law.’

15. Born, n 3 above, at 541.

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