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LAW OF THE ARBITRATION AGREEMENT
The law governing the arbitration agreement plays a crucial role in determining various substantive aspects of the agreement itself. This includes matters such as the validity, interpretation, and effect of the arbitration clause, as well as the identification of the parties bound by the agreement.
Additionally, it governs issues related to the reference of disputes to arbitration, the enforcement of arbitral awards, and the determination of whether a particular dispute falls within the scope of the arbitration clause.
Given that the arbitration agreement stands independently from the underlying contract, it is possible for the law governing the arbitration agreement to differ from the substantive law governing the contract itself. This allows parties to tailor the legal framework governing their dispute resolution process to meet their specific needs and preferences.
Separability of the Arbitration Agreement
The principle of separability underscores the distinct and independent nature of an arbitration agreement from the underlying substantive contract. This principle allows parties to designate different laws to govern the substantive contract and the arbitration agreement itself, although such arrangements are relatively uncommon due to potential complexities.
The doctrine of separability serves to protect the arbitration clause from being invalidated if the main contract is found to be void or unenforceable. Even if the underlying contract is deemed void due to illegality, the arbitration clause remains enforceable, ensuring that disputes can still be resolved through arbitration.
The concept of separability originated from the case of Harbour Assurance v. Kansa General International Insurance, where the English Court of Appeal held that an arbitration agreement could stand independently even if the main contract was void ab initio.
Under Indian law, the doctrine of separability is explicitly codified in Section 16(1)(a) of the 1996 Arbitration Act. This provision emphasises that an arbitration clause within a contract is to be treated as a separate agreement, and a finding that the contract itself is null and void does not automatically invalidate the arbitration clause.
While the separability of arbitration agreements is well-established, exceptions may arise in cases where agreements are claimed to be non est, or nonexistent from the outset.
Additionally, the validity of arbitration clauses may be affected if the main contract containing the arbitration clause is superseded or novated by a subsequent agreement that does not include an arbitration clause. In such cases, the arbitration agreement may be deemed void if the underlying contract is void ab initio or non est.
Closest Connection Test
When parties fail to specify the law governing the arbitration agreement, tribunals are tasked with determining the intended law. The Sulamerica case established a three-stage test: first, examining any express choice of law;
second, considering implied choices; and third, applying the law with the closest connection to the arbitration agreement in the absence of express or implied choices.
Under the third stage of the Sulamerica test, courts initially look to the substantive law chosen by the parties in the main contract.
However, this presumption can be rebutted, as seen in cases like Sulamerica, where the choice of law rendered the arbitration agreement ineffective, leading the court to consider the seat of arbitration as the closest connection and apply English law.
The Singapore High Court, in FirstLink Investments Corp Ltd v. GT Payment Pte Ltd, shifted the focus of the closest connection test to the arbitral seat, emphasising the importance of neutrality in dispute resolution.
In BCY v. BCZ, the English Commercial Court reaffirmed the presumption that parties intended the same law to govern both the main contract and the arbitration agreement, with the seat being a mitigating factor but insufficient alone to negate this presumption.
In Indian law, recent decisions have shown a shift towards prioritising the seat of arbitration in determining the law governing the arbitration agreement. The Supreme Court's decision in IMAX upheld the critical role of the seat, stating that it determines the law applicable to arbitration.
This approach emphasises the integral relationship between the seat and the arbitration process, regardless of the parties' choice of substantive law in the contract.
Even when parties expressly choose the substantive law of the contract, Indian courts have held that the law of the seat governs the arbitration agreement. This underscores the centrality of the seat in determining the legal framework for arbitration proceedings and related matters.
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