Why contracts should always state the law applicable to the arbitration agreement: lessons from the French and UK apex courts applied to Malaysia and beyond

When you include an arbitration settlement in your contract, make positive it specifies what the regulation relevant to the arbitration arrangement is. Without the need of these kinds of specification, you operate the danger of troubles through the arbitration alone, as perfectly as at the enforcement stage.

This should be each company’s get-away from the (in)well-known Kabab-Ji saga, which arrived to its end in the variety of a choice by the French Cour de Cassation on 28^th September 2022.¹ In this decision, the French apex courtroom – as expected – confirmed the long-standing placement of French courts that exactly where the seat of arbitration is in France, French law shall apply to the arbitration arrangement. In this scenario, French legislation governs the validity, effectiveness, transfer or extension of an arbitration arrangement.

Generally, the position less than English regulation (where the regulation governing the arbitration arrangement is unspecified) is that a governing regulation clause for the entire deal applies to the arbitration agreement which types portion of the agreement except wherever, inter alia:²

• Any provision of the law of the seat signifies that exactly where an arbitration is subject to that legislation, the arbitration arrangement will also be governed by that country’s law and/or
• The existence of a major threat that, if governed by the similar regulation as the main contract, the arbitration agreement would be ineffective.

In this fight of law of the seat vs. regulation governing the deal, English courts had been termed upon to enforce the award and French courts to set it apart. The United kingdom courts – such as the United kingdom Supreme Court docket³ – refused to enforce an arbitral award when it was alleged that the respondent of the arbitration had not been a get together to the arbitration arrangement. They attained this decision implementing English regulation. In distinction, the French courts – now like the Cour de Cassation – refused to established apart the really very same award on this allegation. As you might have guessed, they arrived at this determination applying French law. To anybody who isn’t an professional in worldwide arbitration, this raises numerous thoughts:

i. Does the arbitration settlement not form portion of the contract?

ii. Then, how can there be numerous legal guidelines which use to one particular and the very same deal and in 1 and the very same matter?

iii. And, most importantly: what can you do to clear away the uncertainty as to what the relevant legislation should be?

Let us glance at these in detail.

An arbitration settlement – even if aspect of greater deal – is addressed as an impartial settlement. Hence, additional than one rules can use

Arbitration agreements can be standalone agreements, generally in the type of agreements to post a specific dispute, which has by now arisen, to arbitration (i.e., submission agreement).⁴ In follow, nonetheless, they normally variety component of a much larger deal (e.g. agreement for the sale of items), which at the conclude contains a clause on jurisdiction, the applicable legislation, and many others.

On the other hand, even when an arbitration agreement sorts a section of a larger sized deal, the basic principle of separability dictates that the arbitration arrangement shall be addressed as an settlement impartial of the other terms of the arrangement.⁵ As a final result, it is only organic to believe that each and every deal could be governed by a various law.

No matter whether this assumption is right relies upon entirely on the regulation governing the arbitration agreement. But, as Kabab-Ji demonstrates, courts from two neighbouring international locations decided distinct regulations relevant even in the similar make a difference.

How can you clear away the uncertainty as to the relevant law?

The remedy is extremely uncomplicated: just consist of a phrase in your deal which sets forth the regulation relevant to the arbitration arrangement. For occasion, the AIAC’s product arbitration clause incorporates the proposed inclusion: “The regulation governing the arbitration clause/submission settlement shall be […].”⁶

There simply cannot be any basic guideline as to which regulation you ought to choose when drawing up the deal. It depends on the type of deal, whether or not you are claimant or respondent in the arbitration proceedings (and who could know when drafting the agreement?) and a number of other components. In addition, you need to come across a legislation that is appropriate to your agreement spouse.

Nevertheless, irrespective of what regulation you decide on: a certain decision leaves no home for discussion. You will have certainty. Had the parties in the Kabab-Ji saga picked English legislation to govern the arbitration agreement, the arbitral tribunal would have possible discovered that it experienced no jurisdiction. There would not have even been any disputes prior to the French and the English courts. Experienced they selected French legislation, there would possibly not have been any environment-aside proceedings in France and the enforcement proceedings in the British isles would have been done much a lot quicker and at lower charges: English courts totally figure out the parties’ preference to the legislation governing the arbitration agreement and so would not have had to decide the law relevant.

The Malaysian see on the legislation governing the arbitration arrangement

The Federal Court dominated in 2017 in Thai-Lao Lignite that “[u]nless it is revealed to be the opposite, the stipulation of Malaysia as the seat is a tacit arrangement that the legislation relevant to the arbitration arrangement is the legislation of Malaysia.”.⁷ Thai-Lao Lignite was affirmed by the Federal Court in Masenang,⁸ which was however involved with domestic arbitration. In other phrases, the Malaysian solution is much more in line with the French strategy alternatively than the English approach.

But knowing this only offers much more clarity for Malaysia. The courts of other countries could perfectly get a different approach – as we saw in Kabab-Ji.⁹

Sure features of Malaysian Rules on arbitration arrangement

In the context of Malaysian regulations, particular subject-matters of dispute are “not capable of settlement by arbitration”.¹⁰ For occasion, dispute in regard of default of payments and remedies readily available to the chargee. This is mainly because the National Land Code 1965 is a finish and detailed code of legislation on the rights and therapies of the events under statutory cost of the land.¹¹

Additional, in some conditions, the arbitration arrangement could properly be opposite to community plan¹² past the circumstances of contravention of community policy said in the Malaysian Arbitration Act 2005, i.e. the award was induced or afflicted by fraud or corruption, or the policies of organic justice had been breached in the arbitral proceedings or in the creating of the award.¹³ For instance, in the analogous context of court proceedings, which is possible to be likewise utilized to arbitral awards:

• The Federal Court in Merong Mahawangsa,¹⁴ explained that it was opposite to the Malaysian community policy to hire the individual for beneficial consideration for the reason of utilizing his placement and desire to procure gains from the government because “… the sale of affect engenders corruption and undermine general public self-confidence in the authorities, which is inimical to community curiosity” and
• The High Court docket in The Ritz Resort,¹⁵ stated that profits that might be made from gambling and prostitution could pretty be explained to be profits from vice. So, a foreign judgment for these revenue would facial area impediment to enforcement in Malaysia.

Also, in which third celebration funding (“TPF”) is envisaged, in the occasion of arbitral proceedings, all over again it would be clever to be pro-actively encouraged on prospective features of TPF which may well not stand in law. For occasion, phrases of the TPF agreement might nicely operate afoul of the relevant provisions of the Moneylenders Act 1951 (Rev. 1981), if they could be construed as in fact a moneylending transaction and in which case, the funder ought to be a licenced moneylender. In a different situation, if the terms are these types of that attorneys representing the funded get together are sure to comply with the funder’s directions even in conditions which would compromise their skilled independence or be incompatible with the administration of justice, they may possibly properly be held as opposite to general public policy and therefore, void.¹⁶

Your up coming methods – the actions you really should choose based mostly on the Kabab-Ji saga This brings us back again to what we now highlighted previously mentioned: you will only have certainty if you stipulate the regulation relevant to the arbitration agreement in your contracts. Don’t stipulate it and you may possibly finish up in a dispute of its individual in your arbitration. In order to make certain that you do not unnecessarily waste income, we advise you just take the next techniques:

• For all your contracts with an arbitration agreement you enter in the upcoming, make positive to always involve a provision on the regulation governing the arbitration agreement:
  • A uncomplicated “The legislation governing the arbitration settlement shall be the law of [name of country].” is ample.
  • This basic addition will possibly conserve you thousands and thousands of Ringgits in (international) courts.
• For all your current contracts, evaluate the arbitration agreements in your contracts:
  • Get started with your crucial customers and your crucial suppliers and get the job done your way down to less critical types.
  • Where by language concerning the legislation applicable to the arbitration agreement is missing, advise your customer/supplier accordingly and propose that you incorporate according language to take out uncertainty. Arguably, it is improved to enable your buyer/provider decide on the legislation relevant than not acquiring any in accordance language.
• Even so, hold in head our community coverage concerns stated earlier mentioned. Thus, anytime you are in question, achieve out to your legal advisor. It is much better to invest a smaller sum to get information on your arbitration arrangement now, then owning to spend a big amount of money on arbitration and placing-aside/enforcement proceedings later on.

Summary

Arbitration agreements are sometimes referred to as “midnight clauses” – they are the quite last provisions that parties concur on in their contract. At the time the industrial phrases of a agreement are set, the events often do not pay out a lot awareness to other parts of the contract, which includes the arbitration agreement. All the when, the arbitration settlement including the regulation(s) selected by the events enjoy a quite crucial part, as is illustrated by the Kabab-Ji saga.

The earlier mentioned demonstrates that it is constantly prudent to procure lawful suggestions on repercussions of the applicable rules the parties intend to govern the arbitration arrangement prior to coming into the agreement. It could well be the situation that any or some of the repercussions could not be palatable to the get-togethers or any of the events.