International Commercial Arbitration – Which law should govern the arbitration agreement?
Written by Xanthia Iacovides, Associate at the Litigation Department
International Commercial Arbitration (ICA) is an alternative dispute resolution method, other than Courts, to resolve disputes arising under international commercial contracts. Often, contracting parties indicate at the time of their contract whether arbitration would apply in case of a dispute between them. However, lots of inefficiencies may present at a later stage regarding the governing law of the arbitration agreement. This article focuses on the long-standing debate of which law would be governing the arbitration agreement; referring thus, to the way that Courts used to handle cases, where the governing law of arbitration agreements was unclear. Furthermore, it analyses the ruling of recent cases, as to today’s approach, while finally, it spells out the criteria, that should be applied, for deciding the governing law of arbitration agreements.
The traditional approach as to the governing law of arbitration agreements
It should be noted that, as there is not yet a fundamental arbitration case-law in Cyprus regarding this subject matter, this article discusses the ruling of recent English cases. Channel1 case, is a fundamental case, that shows how the situation was at early stages. Specifically, Lord Mustill stated that “It is by now firmly established that more than one national system of law may bear upon an international arbitration. Thus, there is the proper law which regulates the substantive rights and duties of the parties to the contract from which the dispute has arisen. Exceptionally, this may differ from the national law governing the interpretation of the agreement to submit the dispute to arbitration. Less exceptionally it may also differ from the national law which the parties have expressly or by implication elected to govern the relationship between themselves and the arbitrator in the conduct of the arbitration: the ‘curial law’ of the arbitration, as it is often called.”2
While the first part of Lord Mustill’s words adopts the traditional approach in applying the proper law, in case the choice of the national law has not been expressed or implied by the parties, he moves forward to consider that the proper law “exceptionally” and “less exceptionally” differs from the interpretation of arbitration agreement and the curial law respectively. However, is this the case today? Is today’s trend on the majority of the arbitration agreements to apply the proper law or the law of the arbitration seat?
Traditionally, the arbitration clause within a contract was considered as part of the substantive contract of the parties and therefore the governing law was the national law of the contract as the principle of separability had not existed. Hence, the traditional approach, was in favour of the proper law. Prior to the Channel case, Courts on other cases overturned the traditional approach by stating that proper law can differ from curial law depending on the interpretation of the agreement. Furthermore, Courts illustrated that three “national systems of law may bear upon an international arbitration;”3 the proper law, the law that applies to the agreement of the arbitration and the curial law.
Considering therefore the mentioned deviations from the traditional approach, Lord Mustill seeks to clarify this area of law in the Channel case where he added that exceptionally though, according to the interpretation of the agreement, or the expressed or implied choice of the parties, the governing arbitration agreement law, which is the curial law may differ from the substantive law. In the Channel case, it was held that in the absence of opposition, the parties tend to practise the law of one national system in order to governed their overall relationship.
Does recent case-law following the traditional approach as to the governing law of arbitration agreements?
However, moving forward to more recent cases, at XL Insurance Ltd v Owens Corning4 case, the court ruled that the applicable law to the arbitration agreement is the law of arbitral seat as it was expressed impliedly by the parties, despite the fact that the contract was governed by another law. In line with this, in C v D5 case, the Court suggested that, where the curial differs from proper law, there is “increased likelihood” that the law applying to the curial law prevails and governs the arbitration agreement and the agreement to refer. The Court of Appeal changed slightly this view, and held that it should initially clarify whether parties express the chosen national law as to the agreement of arbitration, and thereafter to apply the most real and closest connection law; which almost always is the national law of arbitration seat, the curial law, instead of the proper law of the contract.
The above view followed in Sulamerica6 case. However, in Sulamerica the Court recognised a shift to the seat of arbitration, outlining that the law which governed the contract is separable from the law that governs the agreement of arbitration. Therefore, the Court, applied the arbitration seat as the law governing the arbitration agreement based on the “more close and real connection”7 test and ruled the principle of separability as enshrined in the case of Fiona Trust.8 The Court highlighted that, the underlining contract, proper law, is a distinct and separate agreement from the arbitration agreement. The very recent case of Enka9 adopted and reconfirmed the views expressed at Sulamerica10 and C v D11 cases as to which law should govern the arbitration agreement, Enka’s12 judgement in 2021 by the Supreme Court held that “unless there has been an express choice of the law that is to govern the arbitration agreement, the general rule should be that the arbitration agreement is governed by the law of the seat, as a matter of implied choice.” 13
In concluding, this article argues that recent cases outdated the previous case-law. Recent cases held that proper law mostly vary from curial law, the seat of arbitration, while the law governing the interpretation of the arbitration agreement, is more likely to be the same with the national law of the arbitration proceedings. While the debate is still ongoing as to which law should prevail over the arbitration agreement, today, it is more likely that on an international basis, and more specifically in England and Cyprus, Courts would apply the principle of separability and the “closest and most real connection” test, in case where no express or implied choice of law is made by the parties in the arbitration agreement, correlating thus the curial law with the seat of arbitration. Hence, prior to entering any arbitration agreement, in order to avoid any kind of disagreement between the parties and unwanted results, it is recommended to take a legal advice, as to which law will govern the arbitration agreement of the parties.
1 Channel Tunnel Group Ltd.v. Balfour Beatty Construction Ltd  AC 334
2 Channel (n.1), 357-8
4 XL Insurance Ltd v Owens Corning  1 All ER (Comm) 530
5 C v D  2 Lloyd’s Rep 367
6 Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors  EWCA Civ 638
7 Peter Ashford, “The Proper Law of the Arbitration Agreement” (2019) 85, Issue:3, Chartered Institute of Arbitrators, 281
8 Fiona Trust & Holding Corp v Privalov  1 Lloyd’s Rep 254
9 Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb,  UKSC 38
10 Sulamerica (n.6)
11 C v D (n.5)
12 Enka (n.9)