By Othniel A. Ikpibako, FCIArb.
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An arbitration is international where the parties to an arbitration, at the time of concluding the agreement, have their places of business in different states; or different from the state where the parties have their places of business – is the place of the arbitration or place where substantial part of the obligations is to be performed or where the subject-matter of the dispute is most closely connected; or where the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.
Parties to an arbitration are subject to various laws, compliance with them and their application, will lead to a valid and enforceable award. In other words, falling short of these laws or their non-application, will lead to the award being set aside or not being recognised and enforced. In a domestic arbitration, where the relevant laws have not been defined or agreed to by the parties, the same national laws of both parties would apply. However, in an international arbitration, where the parties have not defined or agreed to the applicable laws, the choice of law rules will apply as determined by the arbitral tribunal.
The laws to be considered by the parties to an international arbitration, from the point of drafting the arbitration agreement, are: the law governing capacity of the parties to enter into the arbitration agreement; the law governing validity of the arbitration agreement; the governing law of the contract; the governing law of the arbitration; the procedural rules; and the law governing the subject matter of the dispute. The relevance of each in the arbitration process is explained below.
- The law governing capacity of the parties. This is the law of the domicile of the parties, relating to the capacity of the parties to enter into a valid arbitration agreement. In almost all jurisdictions of the world, minors, persons of unsound mind and unincorporated bodies lack the capacity to enter into a contract; hence, they cannot also enter into a valid arbitration agreement. Also, the capacity of an agency of government to enter into a valid arbitration agreement is determined by the statute of that state, usually, whether they possess corporate personality which can conclude a binding contract.
Where a party to the arbitration agreement is under any incapacity under their domestic law, the resultant award will not be recognised and enforced and same will be liable to be set aside. [See Sections 55 (3) (a) (i) and 58 (2) (a) (i) of the Arbitration and Mediation Act 2023 (Nigeria); Section 31 (2) (a) of the International Arbitration Act 1994 (Singapore)].
- The law governing validity of the arbitration agreement. Generally, for an arbitration agreement to be valid, it must be in writing. Importantly, the requirement of a written arbitration agreement is mandatory for the recognition and enforcement of the resultant award under the Convention on the Recognition and Enforcement of Foreign Arbitral Award 1958 (New York Convention). [See Section 2 of the New York Convention].
The law which governs the validity of the arbitration agreement is the governing law of the arbitration, providing for the form of an arbitration agreement. [See Section 2 of the Arbitration and Mediation Act; See Sections 5 to 7 of the Arbitration Act 1996 (United Kingdom); See Section 2A of the International Arbitration Act].
Where the arbitration agreement is not valid, the resultant award will be set aside and not recognised and enforced. [See Sections 55 (3) (a) (ii) and 58 (2) (a) (i) of the Arbitration and Mediation Act; Section 31 (2) (b) of the International Arbitration Act].
- The governing law of the arbitration. The governing law of the arbitration also known as the procedural law of the arbitration, governs the arbitration process, among others, such as the validity of the arbitration agreement, the appointment and challenge of the arbitral tribunal, court’s intervention in the arbitration, recognition and enforcement of the award or setting aside an award. The seat of the arbitration will determine the procedural law by default; in other words, the procedural law of the seat of arbitration will govern the arbitration, known as the curia law or lex fori. However, owing to party autonomy in arbitration, they can choose a procedural law different from that of the seat of arbitration, which will then govern the arbitration. The applicable procedural law, which will govern the parties arbitration process, is known as the lex arbitri.
Some examples of procedural laws are the Arbitration and Mediation Act 2023 (Nigeria), the Arbitration Act 1996 (United Kingdom), the International Arbitration Act 1994 (Singapore), the Federal Arbitration Act, US Code: Title 9 (United States of America) and the Arbitration Law of the People’s Republic of China 1994.
- The procedural rules. Both the procedural law and the procedural rules regulate the arbitral proceedings. Obviously, where there is a conflict between the procedural law and the procedural rules the former will prevail.
The applicable procedural rules, based on party autonomy in arbitration, is also by the choice of the parties. However, where there is no agreement as to the procedural rules, the arbitral tribunal shall conduct the proceedings, in such manner as it considers appropriate. However, most procedural laws have procedural rules annexed as a schedule to the law, hence, to be applied to the relevant arbitral proceedings.
From the foregoing, three scenarios can play out under this heading: firstly, where the parties have chosen any particular procedural rules, such will be applied without more; secondly, where the parties have not chosen any procedural rules and the applicable procedural law has procedural rules, such will be applied; thirdly, where the parties have not chosen any procedural rules and the applicable procedural law does not have procedural rules, the arbitral tribunal shall conduct the proceedings in such a manner as it considers appropriate, constrained only by the applicable procedural law. [See Section 31 of the Arbitration and Mediation Act].
The examples of procedural rules are the UNCITRAL Arbitral Rules 2013 and the various institutional arbitration rules such as the CIArb Arbitration Rules 2015 and the International Chamber of Commerce (ICC) Arbitration Rules 2023.
- The governing law of the contract. Regardless of the seat of the arbitration, the parties may choose the law of any state to apply to the substance of the contract. An example of governing law clause would be, “any dispute that may arise from this contract as to its existence, interpretation, breach or termination shall be determined in accordance with the law of Ghana.”
Where the parties fail to choose a law to resolve the substance of the dispute, the choice of law rules will be applied by the arbitral tribunal to determine the applicable law. [See Section 46 Arbitration Act].
The merit of the dispute will be resolved by the governing law. Thus, the governing law will determine issues such as the rights and duties of the parties, substantive remedies, nature and quantum of damages and the burden of proof.
Furthermore, the arbitral tribunal may be empowered by the parties, by agreement, to decide the merit of the dispute based on a just legal principle, that is, as amiable compositeur, or not based on any legal principle but on fair, equitable and moral principles, to wit, et eaquo et bono. [See Article 43 (2) Arbitration Rules, First Schedule, Arbitration and Mediation Act].
- The law on the subject matter of the dispute. The subject matter of the dispute must be capable of settlement by arbitration and also not contrary to the public policy of the state where recognition and enforcement is sought, otherwise the resultant award will not be recognised and enforced and same liable to be set aside. [See Sections 55 (3) (b) and 58 (2) (a) (i) of the Arbitration and Mediation Act; Section 31 (4) of the International Arbitration Act].
Every dispute which involves the exercise of the sovereign power is not capable of settlement by arbitration. This includes disputes: which involve a party’s change of status such as divorce and adoption; involving the state and the citizenry such as criminal proceedings and taxation. The foregoing, among others, are not capable of settlement by arbitration. Also, in some Arab states such as Saudi Arabia, interest on loan (riba) is considered as contrary to public policy; hence, an award on such cannot be enforced in those states and liable to be set aside. It is advisable to check the arbitration laws or public policy in the states of the parties, at the time of conclusion of the agreement, to know the disputes which can be resolved through arbitration.
Recommendations:
- Because of party autonomy in arbitration, they can choose the laws they want to govern them, and these laws should be defined in the arbitration agreement from the outset. This is to avoid the problem of what is known as a midnight clause in arbitration. A typical arbitration clause which will encompass all the applicable laws (except the governing law of the contract) is a follows:
If any dispute arises from this agreement, the parties shall refer the matter to an arbitration to be determined by a sole arbitrator who shall be appointed by the Chairman of the Chartered Institute of Arbitrators UK (Nigeria Branch) which seat of arbitration shall be Nigeria and the arbitration shall be administered under the UNCITRAL Arbitration Rules.
- During drafting the arbitration agreement, the parties should be sure of the capacity of the parties under their respective domestic laws, so that the arbitral award is not set aside eventually which could lead to a huge waste of resources and time.
Othniel A. Ikpibako is a legal practitioner and a Fellow of the Chartered Institute of Arbitrators, and can be reached on truthlawfirm@gmail.com
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