How important is it to stipulate the choice of seat in an international arbitration agreement?
This article is reproduced by the kind permission of the author, Cecilia Xu Lindsey, of 9 Stone Buildings – barristers’ chambers , London.
Cecilia Xu Lindsey
United Kingdom October 28 2016
The author examines this question within the context of international arbitration under English law.1 Traditionally, the seat of arbitration is regarded as crucial in international arbitration. Selection of one seat over another might have significant consequences for the parties to the arbitration process, such as impact on the applicable arbitral procedure and the outcome of the process due to different laws applied in the relevant proceedings. Sometimes, even if the substantive contract has provided for governing law, it could be argued that the governing law does not apply to the arbitration agreement pursuant to the doctrine of separability of arbitration agreement.2
In recent years, the significance of seat may be regarded as having been lessened; but selecting a seat will have an impact on the level and nature of the supervisory jurisdiction on domestic courts of the seat, nationality of the award and subsequently the recognition and enforcement of the award or challenge to the award. London has retained for a long history the reputation of being one of the five most preferred and widely used seat in international arbitration.3 By selecting a seat as the place of arbitration, for example “ICC in London”, the parties place their arbitral process within the framework of the law of that jurisdiction.
Arbitration Act 1996
The Arbitration Act 1996 (“The Act”) of the UK has been influenced by UNCITRAL Model Law on International Commercial Arbitration 1985 (“Model Law”) but differs from the Model Law in a number of important aspects. The Act offers a coherent and modern framework for both domestic and international arbitration seated in the UK.
The Act sets out mandatory provisions for arbitration.4 Where England is the seat of arbitration, these mandatory provisions in the Act will apply, irrespective of the provisions of the arbitration agreement between the parties. Further, if provisions of the arbitration agreement are inconsistent with the mandatory provisions of the Act, the arbitration agreement could be superseded (in whole or in part) to ensure that the agreement does not contravene the statutory requirements. Provisions in the Act which are not mandatory will apply where an agreement has not provided for to the contrary.
The Act empowers the English court “unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about the matters listed below as it has for the purposes of and in relation to legal proceedings.”5
Role of State Court in England and Wales
A wide range of dispute are capable of arbitration under English law. The Act itself does not specify what disputes are arbitrable and what not.6 Under English law, arbitrability is determined by the court on a case-by-case basis. In general, commercial disputes7 (either contractual or non-contractual) are capable of arbitration. The parties can agree to exclude the court’s power under sections 42, 44 and 45 of the Act.
The Act defines the “seat of the arbitration” as the judicial seat of the arbitration designated by the parties, by the arbitral institution, by arbitral tribunal, or in absence of any such designation determined having regard to the parties’ agreement and all the relevant circumstances.8
Like many other state courts, English court provides support and supervision in the process of arbitration. Although there is general concern that intervention of state court would increase time and cost of the proceedings, English court tends to give parties a great degree of autonomy and not to interfere9 with arbitral proceedings in the jurisdiction of England and Wales. Further, where one party may attempt to frustrate arbitration, English court takes a number of supportive measures including granting injunctive and other interim relief, preservation of assets or evidence and compelling witnesses to give evidence. It is particularly useful, where one party commenced legal proceedings overseas in breach of an arbitration agreement, the other party can apply to the English High Court for an anti-suit injunction to restrain the foreign proceedings.10
London being the most preferred arbitral seat to others has reasons of its neutrality and impartiality of the local legal system, national arbitration law, track record for enforcing arbitration agreements and arbitral awards, and availability of quality arbitrators who are familiar with the seat11, which are all set within the English legal infrastructure.
Seat of Arbitration
When stipulating the seat of arbitration in the arbitration agreement, parties ought to bear in mind different options which are available in different jurisdictions, their motivation for choosing arbitration, and when intervention of a state court is needed for review and means of appeal.
A number of arbitration institutional rules are becoming standardised; many arbitral proceedings adopt UNCITRAL rules if taking place outside an institution or seek guidance from other institutional rules; ad hoc arbitrations continue arise12. 2015 International Arbitration Survey13 conducted by the University of Queen Mary University of London in partnership with White & Case LLP noted that the primary factor determining selection of seat is its reputation and recognition, in particular the appraisal of the established formal legal infrastructure: London is one of the five most preferred and widely used seats and its dominance is likely to remain so in the future. Another reason for selecting London as the arbitration seat is the law governing the substance of the dispute. Interestingly, this Survey discovered that there is implication that “the calibre of a seat may have a strong effect on the popularity of a locally based institution, but the quality of that institution is a less determinative factor for the popularity of a seat.”
Institutional rules contribute a great deal to the emergence of standardised arbitral procedures which most parties and arbitrators expect to apply. ICC and LCIA have been the preferred institutions at least for ten years; the most important factors choosing an institution are “a high level of administration” (which relates to the proactiveness and responsiveness of the institution’s staff) and “neutrality/internationalism”.14 The Chartered Institute of Arbitrators in 2015 identified principles necessary for an “effective, efficient and safe” seat for the conduct of international arbitration.15
In Sulamerica CIA Nacional De Seguros SA and others v Enesa Engenharia SA and others  EWCA Civ 638, the Court of Appeal laid down the guidance that the choice of seat of the arbitration “is to be determined by undertaking a three-stage enquiry into (i) express choice, (ii) implied choice and (iii) closest and most real connection. As a matter of principle, those three stages ought to be embarked on separately and in that order”16, even if the arbitration agreement forms part of the substantive contract, its proper law may not be the law which governs the substantive contract. Where the substantive contract does not contain an express governing law clause, the significance of the choice of seat of the arbitration is likely to be “overwhelming”, for the reason that the system of law of the country seat will usually be that with which the arbitration agreement has its closet and most real connection. Where the substantive contract contains an express choice of law, there is strong indication in relation to the parties’ intention as to the governing law of the arbitration agreement (if there is no indication to the contrary). To avoid uncertainty, it is wise to include an express choice of law to govern the arbitration agreement.17
Where an agent acted (without actual authority of the principal) and agreed upon the law of the seat of arbitration, there could cause problem when subsequently the principal realised that the choice of seat may not be in his favour. In Habas Sinai Ve Tibbi Gazlar Istihsal Endustrisi AS v VSC Steel Company Ltd  EWHC 4071 (Comm), the agent was alleged to have acted without authority and agreed upon that any claims arising out of a breach of the contract would be settled by ICC arbitration in London, the court considered that there is no logical link between the issue of authority and the issue of the law which the contract has its closest connection with and that determining the latter question involves consideration of the contractual terms rather than the authority with which the contract/agreement was made.
Challenge to Arbitral Award
There is growing concern in international arbitration that tribunals may act defensively in certain situations in order to avoid the situation that the award might be challenged on the basis that a party had not had the chance to present its case fully (“due process paranoia”).
The scope of challenges to an arbitral award is determined according to the seat of arbitration; but the scope of judicial review of an award varies from jurisdiction to jurisdiction. The state court of the seat of arbitration are competent to hear applications for setting aside an arbitral award. Section 67 of the Act allows the parties to challenge an award by applying18 to the court on the ground that the arbitral tribunal lacks substantive jurisdiction19, subject to the requirements in ss 70 (2) (3) and 73 of the Act.
Various institutional rules have standardised arbitral procedure and set out the key steps which will be taken throughout the arbitral process and most parties and arbitrators expect to apply. The UNCITRAL Model Law has been widely adopted in national laws on arbitration which further developed standardised procedure, including that in the Act of the UK.
Parties may determine the law and procedural rules which apply to the aspects of their arbitration – this may be achieved independent of the seat of arbitration. Where the parties have not determined the procedural law applicable to their arbitration, the tribunal instead may do so. These may lead the choice of seat less important in determining the law applicable to the arbitration procedure, but it creates uncertainty of which law would be applicable and which party might face a less favourable legal infrastructure which would determine on its dispute.
More significant issue in the choice of seat is when it comes to the recognition and enforcement of the arbitral award. Many states are signatory states to New York Convention20. The Act will recognise and enforce a “New York Convention award”21. A further important question is whether the jurisdiction in which the award will be enforced is a signatory state. As the UK is a signatory state, England will give full enforcement proceedings in its local national courts, with the same effect as if it were a court order in the English jurisdiction.
The laws vary from state to state. The choice of seat in international arbitration still has challenging implication for the parties and the arbitration process. Parties are still advised to give the choice of seat careful consideration, a choice is often better in an independent neutral third state.