4. Governing law and choice of law

4. Governing law and choice of law

A well-drafted arbitration agreement should ideally distinguish between three distinct systems of law that may govern different aspects of the process. While these laws are often the same in practice, they are legally independent: 

1. the substantive law of the contract, which governs the underlying commercial rights and obligations of the parties, such as whether a contract was breached or how damages are assessed; 
2. the proper law of the arbitration agreement, which governs the formation, existence, validity, interpretation, scope and enforceability of the obligation to arbitrate; and 
3. the procedural law of the arbitration, which is determined by the seat of the arbitration, and which governs the internal conduct of the proceedings and the external relationship between the arbitration and the supervisory courts. 

Determining the law of the arbitration agreement 

The proper law of the arbitration agreement governs whether the agreement is valid, whether it has been discharged, and whether its wording is broad enough to encompass a specific dispute.  

The arbitration agreement is legally separate from the main contract. While the governing law of the arbitration agreement often matches the substantive law of the underlying contract, the two can be different. Therefore, even if the main contract is governed by, for example, English law, it does not automatically mean that the arbitration agreement is also governed by English law. 

In Hong Kong, determining the applicable law for an arbitration agreement is a three-stage process: 

1. Seeking an express choice of law; 
2. If none is found, seeking an implied choice of law; and 
3. If there is neither an express nor an implied choice, identifying the system of law with which the agreement has its closest and most real connection. 

In the absence of an express choice for the arbitration clause itself, an express choice of law governing the substantive contract is generally considered a strong indication of the parties’ intention for the arbitration agreement as well. Although the choice of a seat is a critical factor, Hong Kong courts have held that there is no clear presumption that the law of the seat should automatically override the law of the contract. Instead, the court must perform a construction exercise to ascertain the parties’ intent within the specific context of their agreement. While a deliberate choice of a neutral seat like Hong Kong is a significant factor pointing toward Hong Kong law, it is not a settled rule and must be balanced against other indicators of intent, such as the governing law of the main contract. 

If no express or implied choice can be found, the agreement is governed by the law with which it is most closely connected. This will generally be the law of the seat.