THE LAW GOVERNING INTERNATIONAL ARBITRATION AGREEMENTS: AN INTERNATIONAL PERSPECTIVE

• Citation: (2014) 26 SAcLJ 814
• Published date: 01 December 2014
• Date: 01 December 2014
• Author: Gary B BORN Partner, Wilmer Cutler Pickering Hale and Dorr LLP; Chair of the International Arbitration Practice Group

The article analyses the choice of law governing the substantive validity of international arbitration agreements from an international perspective. It examines the evolution in approach of judicial and arbitral decisions rendered over the last century on the issue in chronological order — by looking at the past and the present of the choice-of-law analysis first, before addressing its future. The article reviews the various existing approaches to the choice of law governing the substantive validity of international arbitration agreements, including the historical application of the law of the judicial enforcement forum; the law of the arbitral seat; the law applicable to the parties' underlying contract; and more recently, the law with the “closest connection” or “most significant relationship” to the parties' arbitration agreement. The article discusses the deficiencies in these traditional choice-of-law analyses, which led to inconsistent and unpredictable results. The article proposes to remedy these insufficiencies by a proper application of the principles set out in the New York Convention and the UNCITRAL Model Law, which provide for the application of uniform international principles mandating the presumptive validity of international commercial arbitration agreements and a validation principle applicable to the choice of the law governing such agreements. The article concludes that the future of this choice-of-law analysis is the application of an international two-part rule comprising: (a) a uniform international rule prohibiting discrimination against arbitration agreements; and (b) a validation principle, selecting that national law which will give effect to the parties' agreement to arbitrate. This approach is not merely sound choice-of-law policy; it also effectuates the parties' intentions and objectives in selecting a neutral, efficient means of resolving their commercial disputes, and is mandated by the New York Convention's text and pro-arbitration purposes, as well as the text and purposes of the UNCITRAL Model Law.

I. Introduction

1 The author was asked to address the common law perspective on the law governing the arbitration agreement but has taken the liberty of departing from this direction. This was not done just out of a spirit of rebellion, but because a division between a “common law perspective” and a “civil law perspective” in selecting the law governing international arbitration agreements is artificial, and fosters an incorrect view that the arbitral process has different objectives, and deploys different means to achieve those objectives, in civil law and common law jurisdictions. Such an approach is inconsistent with the objective of the international arbitral process, which is to provide a system for resolving international disputes that transcends domestic choice-of-law complexities, and with the text and purpose of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards1 (“New York Convention”), which seeks to establish a single uniform set of international legal standards for recognition and enforcement of international arbitration agreements (and arbitral awards).2

2 A distinction between a common law approach, on the one hand, and a civil law approach, on the other hand, may reflect historical differences among jurisdictions in addressing the issues of the law governing international arbitration agreements. Nonetheless, this distinction should be regarded as a relic of the past, rather than a feature of the future. As explained below, the choice of the law governing international arbitration agreements should be approached from an international perspective, which is characterised by the application of a validation principle and of an international non-discrimination rule, with the aim of facilitating recognition and enforcement of international arbitration agreements.3

3 The choice of the law governing an international commercial arbitration agreement is a recurrent and vitally important issue in the arbitral process. It is a complex subject which arises in most disputes over the existence, validity and interpretation of international arbitration agreements. The subject has given rise to extensive commentary, and almost equally extensive confusion, which does not comport with the ideals of international commercial arbitration —ie, the objective of simplifying, expediting and rationalising transnational dispute resolution.

4 In addressing the substantive validity of international commercial arbitration agreements, this article first approaches the matter chronologically, by examining the past and the present of the choice-of-law analysis, before addressing its future. As discussed below, review of judicial and arbitral decisions rendered over the last century shows that there have been substantial advances in the choice-of-law rules governing international arbitration agreements, aimed at achieving the purposes of those agreements — namely, providing efficient, neutral and expert means of resolving international disputes in a single, centralised forum. Although there were hesitations and, in some cases, hostility regarding that objective, existing choice-of-law rules have gone far in effectuating this basic objective of the arbitral process.

5 As explained in greater detail below, courts in a number of jurisdictions historically applied the law of the judicial enforcement forum to the substantive validity of arbitration agreements. This analysis, premised on the remedial nature of arbitration, has been largely abandoned, in favor of choice-of-law rules based on specified connecting factors, such as the law of the arbitral seat or the law

applicable to the parties' underlying contract. More recently, courts in some jurisdictions have developed more flexible approaches based on the determination of the law with the “closest connection” or “most significant relationship” to the parties' arbitration agreement.

6 Despite significant advances in the choice-of-law analysis over the past century, contemporary choice-of-law approaches rest on arbitrary distinctions and have often produced inconsistent and unpredictable decisions. These deficiencies and inconsistencies make it clear that substantial room for improvement remains on the issue of the law applicable to international commercial arbitration agreements.

7 As discussed below, the uncertainties that persist in contemporary choice-of-law rules governing international arbitration agreements could be remedied by a proper application of the principles set out in the existing international instruments — in particular, the New York Convention and the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration (“Model Law”).4 These instruments provide for application of uniform international principles mandating the presumptive validity of international commercial arbitration agreements and a validation principle applicable to the choice of the law governing such agreements.

8 A validation principle looks to the purposes of international arbitration agreements and provides for application of the law that will give effect to the parties' agreement. This principle rests on the premise that parties generally intend application of that law which will give effect to their agreement to arbitrate and provide safeguards against the peculiar jurisdictional and choice-of-law uncertainties of transnational litigation. Notably, and unlike some national law systems, the validation principle is mandated by the New York Convention and the Model Law and applies to all international arbitration agreements, regardless where the arbitral seat is located.

9 The thesis of this article is that the proper choice-of-law analysis for the substantive validity of international arbitration agreements is a two-part rule, which finds its basis in the text and objectives of the New York Convention and the Model Law. As discussed below, this analysis requires application of: (a) a uniform international rule prohibiting discrimination against arbitration agreements; and (b) a validation principle, selecting that national law which will give effect to the parties' agreement to arbitrate.

10 The foregoing analysis has not received meaningful attention from commentators. Nonetheless, a number of national arbitration statutes, domestic court decisions and international arbitral awards have — either expressly or implicitly — applied a validation principle. Similarly, courts in some jurisdictions have also directly applied substantive principles of international law to the issues of substantive validity of international arbitration agreements. In particular, some decisions have interpreted the New York Convention as requiring the application of a non-discrimination principle, forbidding the application of idiosyncratic or discriminatory national law rules that would affect the validity and enforceability of international arbitration agreements. These decisions confirm both the benefits and practical utility of the choice-of-law analysis suggested in this article.

II. Choice-of-law rules applied to international arbitration agreements: An imperfect solution

11 Courts in various jurisdictions and arbitral awards have historically adopted a number of different approaches to selecting the law governing international arbitration agreements. These approaches have ranged from application of the law of the judicial enforcement forum to the contemporary choice-of-law approaches based on application of the law of the arbitral seat, the law of the underlying contract, or the law with the “closest connection” or “most significant relationship” to the arbitration agreement. As discussed below, none of these approaches has proven fully satisfactory.

A. Choice-of-law analysis and the separability presumption

12 Discussion of the choice-of-law principles governing international arbitration...