Drafting Arbitration Clauses - Part III: Choice of Laws and Procedural Rules

Introduction 

When entering into a contract and drafting an arbitration clause there are a number of choice of law issues that parties must consider. Parties commonly include a clause that sets out the substantive law of the agreement, known as the governing law clause. Often the governing law of the contract is not the same law as where the contract is performed or where an arbitration takes place (the seat of the arbitration). This article will outline a number of key considerations related to the selection of law and procedural rules that should be taken into account when entering into a contract.

Governing law 

The governing law refers to the applicable law governing the contract. This is the main choice of law; it will govern the contract and be the law governing the substantive merits of any dispute arising from the contract. Commonly, parties will select a governing law that does not have any connection with the dispute or the parties entering into the contract. For example, parties entering into cross-border contracts frequently select the law of England and Wales as the law governing the contract as the law of England and Wales is perceived as a certain, stable law with reputable and independent courts.

It should also be mentioned that it is not common for parties to agree to a separate choice of law to apply to an arbitration clause which is different from the governing law of the contract. Having a law the governs the arbitration clause that is separate from the main contact is inadvisable as it would only add an unnecessary layer of complexity to an agreement.

Law of seat of the arbitration 

The seat of the arbitration is the physical place, or in other words juridical place, of the arbitration. Often the law of the seat is different from the governing law of the contract. This is noteworthy in a number of respects. First, the law governing the seat of the arbitration will be the procedural law governing the arbitration. Second, the award will be rendered at the seat of the arbitration and therefore the award will have to comply with legal requirements of that jurisdiction. Third and most importantly, if the award needs to be enforced in a foreign country, the country of the seat of the arbitration should be a signatory to the New York Convention (or other applicable convention) to ensure that it can be enforced. Therefore it is critical that the seat of the arbitration is located in a country that is signatory to the New York Convention to ensure that a potential award can be enforced in a multitude of foreign countries.

Applicable arbitral rules (forum selection) 

The applicable arbitration rules are the set of rules that will govern the dispute and the forum in which the dispute resolution procedure will take place. While this is not a choice of law per say, it is extremely important to select an appropriate set of arbitration rules. Typically parties select an institution to administer an arbitration, and each institution will apply its set of rules to the dispute. Therefore, when selecting an institution, parties must be clear as to the forum that they are selecting. In terms of the relationship between any applicable law and applicable rules, the applicable law will take precedence over any conflict with the rules; however, it is unlikely that a conflict between the law and rules will arise.

Practical drafting considerations 

Most of the time when parties choose multiple laws in a contract, for example, a substantive law that differs from the law of the seat, there are no conflict of law issues that arise. When problems do arise that relate to the selection of applicable laws and procedural rules, this occurs because the choices are not clear or contain errors. One common error is when parties select the “law of the United Kingdom” to govern their agreement: there are in fact four separate systems of law in the United Kingdom. Another common problem is parties naming the rules of a non-existent arbitration center to govern the procedure of a dispute. One last pitfall that seems to reoccur when drafting which is worth briefly mentioning is when parties give courts and an arbitration center overlapping concurrent jurisdiction. This is inadvisable as it creates the possibility of parallel proceedings being litigated at the same time. It is preferable to include a single forum when drafting an arbitration clause to avoid overlapping and parallel proceedings.

The types of errors highlighted above lead to unnecessary fighting, wasted time and unnecessary costs, all which can be avoided by clear drafting. When drafting an arbitration clause, always ensure that the clause is clear and carefully worded. When parties are endeavoring to draft a contract which includes an arbitration clause where there is the potential that multiple laws may conflict with one another, the parties should always seek legal advice before entering into the contract.

Click here to read Drafting Arbitration Clauses - Part I
Click here to read Drafting Arbitration Clauses - Part II