I. Introduction
I was privileged to moderate a panel at the Pax Moot Private International Law Conference held in Ljubljana, Slovenia, on April 26, 2024, and sponsored by the Centre for Private International Law at the University of Aberdeen Faculty of Law. My fellow panelists were Dr. Tsvetelina Dimitrova, a Partner at the law firm of Georgiev, Todorov & Co. in Sofia, Bulgaria, and Dr. Dora Zgrabljić Rotar, Assistant Professor at the University of Zagreb Faculty of Law. The comments here are mine but informed by their excellent presentations and contributions to the discussion.
Our panel focused on the application of rules of private international law to questions concerning the existence, effect, and extent of arbitration clauses in international commercial contracts. Arbitration agreements in international commercial contracts generally accompany choice of law clauses applicable to the substantive contract terms, leaving uncertain whether such a choice of law clause governs questions about the arbitration agreement. The choice of the seat of arbitration – a functional choice of law clause determining the applicable procedural law of arbitration – is sometimes found to choose the substantive law for the arbitration agreement as well. The interplay between various clauses and international and domestic doctrines often results in disparate legal decisions about the existence, effect, and extent of arbitration agreements.
A series of cases in the United Kingdom has resulted in rather detailed, and often complex, judicial framework for determining the law applicable to questions regarding arbitration agreements contained in international commercial contracts. This framework was recently rejected by the Law Commission in a process supporting amendment of the Arbitration Act 1996 to create a default rule that the choice of seat determines the substantive law applicable to the arbitration agreement. Our panel discussed the question of the law applicable to the arbitration agreement, offering thoughts about what is the proper law and just how the question should be dealt with on a global scale. What follows are my own thoughts on that matter.
II. The U.K. Judicial Framework: Enka v. Chubb
While a number of cases have built up to the current judicial approach in the U.K. Supreme Court to the question of the law governing the arbitration agreement when there is no express choice on that issue in the contract, that process culminated in the decision in Enka Insaat Ve Sanaya A.S. v. Insurance Company Chubb.[ii] The results of that case are best expressed in the words of the Court. This began with acknowledgment that:
[w]here an international commercial contract contains an agreement to resolve disputes by arbitration, at least three systems of national law are engaged when a dispute occurs. They are:
-the law governing the substance of the dispute;
-the law governing the agreement to arbitrate;
-and the law governing the arbitration process.[iii
The specific arbitration clause in the contract being addressed provided that
• the Dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce,
• the Dispute shall be settled by three arbitrators appointed in accordance with these Rules,
• the arbitration shall be conducted in the English language, and
• the place of arbitration shall be London, England
There was no clause choosing the substantive law applicable to the larger contract or to the arbitration clause. There was no question as to the agreement of the parties to go to arbitration, but there were questions presented on the validity and scope of the arbitration agreement.
When Enka brought suit in Russia, Chubb sued in England requesting an anti-suit injunction in order to force arbitration under the agreement. The ability to get such an injunction depended on whether the arbitration agreement was valid and whether the action in the Russian court was within the scope of the agreement, both of which first required a determination of what law governed the arbitration agreement.
The Supreme Court, building on its prior jurisprudence in the matter, stated its rule of analysis in an eight-point process:
i) Where a contract contains an agreement to resolve disputes arising from it by arbitration, the law applicable to the arbitration agreement may not be the same as the law applicable to the other parts of the contract and is to be determined by applying English common law rules for resolving conflicts of laws rather than the provisions of the Rome I Regulation.
ii) According to these rules, the law applicable to the arbitration agreement will be (a) the law chosen by the parties to govern it or (b) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected
iii) Whether the parties have agreed on a choice of law to govern the arbitration agreement is ascertained by construing the arbitration agreement and the contract containing it, as a whole, applying the rules of contractual interpretation of English law as the law of the forum.
iv) Where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract.
v) The choice of a different country as the seat of the arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.
vi) Additional factors which may, however, negate such an inference . .
vii) Where there is no express choice of law to govern the contract, a clause providing for arbitration in a particular place will not by itself justify an inference that the contract (or the arbitration agreement) is intended to be governed by the law of that place.
viii) In the absence of any choice of law to govern the arbitration agreement, the arbitration agreement is governed by the law with which it is most closely connected. Where the parties have chosen a seat of arbitration, this will generally be the law of the seat, even if this differs from the law applicable to the parties’ substantive contractual obligations.[iv]
III. The Law Commission Report and Resulting Proposed Amendment
In March of 2021, the UK Ministry of Justice asked the Law Commission to conduct a review of the Arbitration Act 1996, and to determine “whether any amendments to the Act were needed to ensure that it remains fit for purpose and continues to promote England and Wales as a leading destination for commercial arbitration.”[v] This resulted in two papers. The first Law Commission Consultation Paper (CP257) was issued in September 2022, and included proposed changes to the Arbitration Act 1996,[vi] but had no proposal for a rule concerning the law governing arbitration agreements. Comments on CP257 proposed that changes go further and include a rule of applicable law governing arbitration agreements when England and Wales are chosen as the seat of arbitration. In the second Consultation Paper (CP258), issued in March 2023,[vii] the Law Commission proposed “that a new rule be included in the Arbitration Act 1996 to the effect that the law of the arbitration agreement is the law of the seat, unless the parties expressly agree otherwise in the arbitration agreement itself.”[viii] This recommendation was included in the Final Report of the Law Commission of September 6, 2023, and the draft Bill that accompanied that Report was introduced in Parliament, and is now working towards implementation in the form of House of Lords Bill 59 (2024), Article 1 of which provides for the insertion of a new Article 6A:
Law applicable to arbitration agreement
(1)The law applicable to an arbitration agreement is-
(a) the law that the parties expressly agree applies to the arbitration agreement, or
(b) where no such agreement is made, the law of the seat of the arbitration in question.
(2) For the purposes of subsection (1), agreement between the parties that a particular law applies to an agreement of which the arbitration agreement forms a part does not constitute express agreement that that law also applies to the arbitration agreement.
IV. Our Panel Review of the Question of the Law Applicable to the Arbitration Agreement
Our panel focused on the following hypothetical in order to consider just how the amendment to the Arbitration Act would work:
On January 2, 2024, Penn Widgets (PW), incorporated and having its principal place of business in Pittsburgh, Pennsylvania, USA, entered into a contract to provide 1,000 widgets per month over the course of the next five years to Ljubljana Enterprises (LE), which has its corporate domicile in Slovenia.
LE will pay PW 500 Euros per widget, with each payment due by wire transfer to the PW bank account in Pittsburgh upon notice that the goods have been shipped by air freight from Pittsburgh.
The first shipment was scheduled to be shipped on January 15, 2024, with subsequent shipments shipped on the 15th of each month during the term of the contract.
The contract contains the following clause:
Any and all disputes arising out of or related to this contract shall be settled by arbitration under the London Court of International Arbitration (LCIA) Rules.
-The number of arbitrators shall be one.
-The seat of arbitration shall be London.
-The language to be used in the arbitral proceedings shall be English.
The governing law of the contract shall be the substantive law of Slovenia.
PW shipped the requisite number of widgets on the 15th of each of January, and February, 2024.
LE paid by wire transfer for each shipment.
PW also shipped as provided by the contract on March 15, 2024, but LE refused to pay, claiming that the widgets were non-conforming to the requirements of the contract.
PW instituted proceedings with the LCIA on April 1, 2024. LE filed a reply claiming
1) that it never consented to the arbitration agreement;
2) that the arbitration agreement is formally invalid; and
3) that the arbitration agreement is substantively invalid
Primary question: What law governs each of the questions?
Secondary question: What body has competence to determine each of the questions?
Dr. Dimitrova focused on aspects of drafting arbitration agreements providing useful comments on practical issues. Professor Rotar suggested that the English experience indicated the value of a “validation rule” of private international law that provides a clear preference for applying the law of a state that will hold the party agreement to be valid. She explained that this normally comports most closely with the intent of the parties (especially if the question of the existence of the arbitration agreement – party consent – has already been clearly established). She discussed examples of such a rule in the law of other states.
I considered the hypothetical, and its lessons for drafting a legislative default rule such as that in the proposed amendment to the English Arbitration Act 1996, by noting that there is not simply one “law of the arbitration agreement,” but rather multiple “laws of the arbitration agreement,” a matter discussed in my keynote address that preceded the panel and in my blog post summarizing that address (link to be added).
Normally, a contract for the sale of goods between a party having its place of business in the United States and a party having its place of business in Slovenia would be the United Nations Convention on Contracts for the International Sale of Goods (CISG), under Article 1(1)(a) of that Convention.[ix] That Convention includes both rules governing the formation of such contracts (Articles 14-24) and rules for interpreting party intent (i.e., rules of contract interpretation - Articles 8 and 9). So, the question of whether the parties have agreed to an arbitration agreement would be governed by the CISG. But the UK is not a party to the CISG. Does this mean under the proposed new default rule that a party from Pittsburgh and a party from Ljubljana will have questions of contract formation governed by the English Sale of Goods Act? That is not clear under the proposal. There currently is a debate about the application of the CISG to the formation of an arbitration agreement that is within a sale of goods contract.[x] Moreover, courts, including the United States Supreme Court, have ruled (and have reiterated even after our panel presentation) that “Before referring a dispute to an arbitrator . . . the court determines whether a valid arbitration agreement exists.”[xi] Thus, questions of formation (i.e., whether the parties have consented to the arbitration agreement) not only may be subject to a law that must be determined before other questions (formal validity, substantive validity, scope, exclusivity) may be considered, but before the matter can even reach an arbitral tribunal.
Questions of formal validity are governed by both treaty and statute in every state that is party to the New York Convention. Article II of the Convention requires an “agreement in writing” that is “signed by the parties” or other exchange of writings between the parties. That is a treaty obligation common to all of the more than 170 state parties to the Convention, and cannot be changed by domestic law. Thus, there are questions about just how the proposed amendment to the Arbitration Act 1996 deals with this issue.
Questions of substantive validity are questions of sovereign authority, expressed in numerous sources, including laws regarding consumer protection, distributorship agreements, franchise contracts, insurance contracts, and employment contracts, among others. This raises the question of whether substantive limitations on (or prohibitions of) pre-dispute agreements to arbitrate found in UK law should be applicable to the validity of arbitration agreements between parties, all of which have their places of business in other states.
The panel did not come to clear conclusions on legislative drafting, but provided grist for thinking further about how a simple statutory rule, in response to an obviously complex rule created through judicial consideration, should be established and can hope to work successfully in all cases. We did agree that the clear lesson for contract drafters is to always provide clear provisions on the law governing the existence, formal validity, substantive validity, and interpretation of an arbitration agreement contained in an international commercial contract.
[i] Chancellor Mark A. Nordenberg University Professor and Academic Director, Center for International Legal Education, University of Pittsburgh School of Law. This blog post is based on the discussions in a panel presentation I moderated at the Pax Moot Private International Law Conference held in Ljubljana, Slovenia, on April 26, 2024 and sponsored by the Centre for Private International Law at the University of Aberdeen Faculty of Law. The material in this post summarizes the presentations in that panel, which built upon the keynote address I presented prior to the panel discussion. (link to be added)
[ii] [2020] UKSC 38 (Oct 9, 2020).
[iii] Id. ¶ 1.
[iv] Id. ¶ 170.
[v] Law Commission Review of the Arbitration Act 1996: Final Report and Bill, Law Com No 413, ¶ 1.8 (Sept. 5, 2023), available at https://www.lawcom.gov.uk/project/review-of-the-arbitration-act-1996/.
[vi] Law Commission Consultation Paper 257, Review of the Arbitration Act 1996, A consultation paper, available at https://cloud-platform-e218f50a4812967ba1215eaecede923f.s3.amazonaws.com/uploads/sites/30/2022/09/Arbitration-Consultation-Paper.pdf. “The Law Commission was set up by section 1 of the Law Commissions Act 1965 for the purpose of promoting the reform of the law.” Id. at iii.
[vii] Law Commission Consultation Paper 258, Review of the Arbitration Act 1996, Second Consultation Paper (March 2023), available at https://cloud-platform-e218f50a4812967ba1215eaecede923f.s3.amazonaws.com/uploads/sites/30/2023/03/Arbitration-CP2.pdf.
[viii] Id. at 3.
[ix] United Nations Convention on Contracts for the International Sale of Goods (CISG), available at https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg (“This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States”).
[x] See, Boris Praštalo, CISG as the (Rules of ) Law Applicable to the Arbitration Agreement: Exploration from an English Perspective, Kluwer Arbitration Blog (June 3, 2024), available at https://arbitrationblog.kluwerarbitration.com/2024/06/03/cisg-as-the-rules-of-law-applicable-to-the-arbitration-agreement-exploration-from-an-english-perspective/.
[xi] Coinbase, Inc. V. Suski, 602 U.S. ___ (May 23, 2024), quoting Henry Schein, Inc. V. Archer & White Sales, Inc., 586 U.S. 63, 69 (2019).
