The interpretation of arbitration clauses: where is the seat of arbitration?

By Prof Jonathan Hill, Professor of Law (University of Bristol Law School).

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© http://wordstodeeds.com/

It is a truism that arbitration clauses are often poorly drafted, not infrequently agreed at the 11th hour or lifted (inappropriately) from unrelated contracts. As a consequence, courts often have to try to make sense of clauses which are unclear or potentially inconsistent. In Shagang South-Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics [2015] EWHC 194 (Comm), [2015] 1 All ER (Comm) 245 the parties had agreed that arbitration was to be ‘held in Hong Kong’, but that ‘English law [was] to be applied’. After the tribunal had rendered its award, the claimant applied to the English court for setting aside of the award under section 67 of the Arbitration Act 1996. As in Dubai Islamic Bank v Paymentech [2001] 1 Lloyd’s Rep 65, the English court’s setting aside jurisdiction depended on England being the seat of arbitration (see Arbitration Act 1996, s 2(1)).

The parties’ arbitration agreement could have been interpreted in one of two possible ways. First, the statement that the arbitration was to be held in Hong Kong might simply have indicated an agreement that Hong Kong should be the physical location (or venue) of any arbitration and the agreement that English law was to be applied signified that the arbitration procedure was to be governed by English arbitration law (ie, the Arbitration Act 1996). According to this interpretation, England would have been the seat of arbitration. According to the Court of Appeal’s decision in the Peruvian Insurance case (Naviera Amazonica Peruana SA v Cia Internacional de Seguros del Peru [1988] 1 Lloyd’s Rep 116), the link between the lex arbitri and the seat of arbitration is a two-way street: if parties choose state X as the seat of arbitration, the law of state X is the law governing the arbitration procedure; by the same token, if parties choose the procedural law of state X as the lex arbitri, state X is impliedly chosen as the seat. Although the authority was not cited, The Bay Hotel and Resort Limited v Cavalier Construction Co Ltd [2001] UKPC 32 might have been used to support the claimant’s interpretation. In the Bay Hotel case a clause which provided that ‘Disputes shall be resolved according to the laws of Turks and Caicos Islands.’ was treated as an express choice of the law of the Turks and Caicos Islands as regards not only the substance of the parties’ contract, but also the procedural law governing any arbitration arising from that contract. In the Bay Hotel case, although the arbitration had taken place in Florida, the seat of arbitration was the Turks and Caicos Islands.

Second, the parties’ choice of English law might have been interpreted simply as a choice of the substantive law governing the parties’ contract. In such circumstances, the choice of Hong Kong as a physical location of the arbitration would properly be interpreted as an implied choice of the seat of arbitration. In Shashoua v Sharma [2009] EWHC 957 (Comm), [2009] 2 All ER (Comm) 477, for example, Cooke J held that, in the absence of ‘significant contrary indicia’, England was the seat on the basis of the parties’ agreement that England was the ‘venue’ for the arbitration.

Accordingly, the distinction between substantive and procedural law (see ICC Case No. 6162, Final Award (1992) XVII YB Comm Arb 153) was fundamental to determining the seat of arbitration in Shagang South-Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics. If the choice of English law referred to the procedural law of the arbitration, England was the seat (and the English court had jurisdiction under section 67 of the Arbitration Act 1996); if, however, reference was to the law governing the contract, Hong Kong was the seat (and the English court did not have jurisdiction to entertain the claimant’s setting aside application). Although parties are at liberty to choose the procedural law to govern an arbitration, it is relatively infrequent that they do so expressly; parties normally chose the procedural law indirectly through their selection of the seat of arbitration. If a contractual term refers to a governing law, it is most likely that the parties intend this law to govern the substance of their underlying legal relationship, rather than the procedure of their agreed dispute-resolution mechanism. On this basis, Hamblen J rejected the claimant’s proposed interpretation and held that the choice of English law identified the substantive law governing the parties’ contract, not the procedural law governing the arbitration. As a result, Hong Kong was the seat of arbitration.

Shagang South-Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics is the latest example in a recent line of cases in which the English courts have considered whether an arbitration has (or had) its seat in England or another country. In some of these cases, the court’s conclusion is difficult to reconcile with the relevant legal authorities (see Hill, ‘Determining the Seat of an International Arbitration: Party Autonomy and the Interpretation of Arbitration Agreements’ (2014) 63 ICLQ 517). In the Shagang South-Asia case, however, the judge was faced with a relatively straightforward question of interpretation. Although Hamblen J could not have known what the parties really intended, the judge adopted the most plausible interpretation of the text of the parties’ agreement. Unlike the judges in some of the other recent cases, he resisted the temptation to conclude that the English court had jurisdiction to determine the claimant’s application on the basis that England was the seat of arbitration.

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