a. Mismatch of seat and governing laws

a. Mismatch of seat and governing laws

In international arbitration, different laws may apply to different parts of the dispute. The contract may be governed by one law, the arbitration agreement by another, and the arbitration procedure by the law of the arbitral seat. If these laws are not aligned, this can create uncertainty and practical difficulties for the parties. 

The “seat” of arbitration is particularly important because it determines the procedural law of the arbitration. It also identifies which court has supervisory jurisdiction over the arbitration. 

Uncertainty over the law governing the arbitration agreement 

A common problem arises where the parties have chosen a governing law for the main contract, but have not expressly stated which law governs the arbitration agreement. 

Under the doctrine of separability, the arbitration agreement is legally separate from the main contract. 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. 

Where there is no express choice, a court may have to decide whether the parties made an implied choice. The governing law of the substantive contract is often a strong indication of the parties’ intention. However, if the parties choose a different arbitral seat, that may point in another direction. 

If no implied choice can be identified, the court may apply the law with the closest and most real connection to the arbitration agreement. In many cases, that will be the law of the seat. This creates uncertainty because parties may not know in advance which law will be applied to determine the validity, scope or interpretation of the arbitration clause. 

Mandatory rules of the seat may still apply 

Even if the parties choose a foreign law to govern the contract or the arbitration agreement, the mandatory rules of the seat cannot usually be avoided. 

For example, if the arbitration is seated in Hong Kong, Hong Kong Arbitration Ordinance (Cap. 609) will apply to important procedural matters. Hong Kong courts have statutory powers to intervene in specific functions, including the appointment or removal of arbitrators, reviewing tribunal jurisdiction, granting interim measures (like injunctions), and assisting in taking evidence (such as subpoenas or warrants). 

The award may also be vulnerable if it conflicts with the public policy of the seat. Therefore, even where the parties intended another law to govern their commercial relationship, the law of the seat may still affect the conduct and validity of the arbitration. 

Jurisdictional and award challenges 

A mismatch between the seat, the governing law of the contract and the law of the arbitration agreement may give a party grounds to challenge the tribunal’s jurisdiction or the validity of the award. 

A party may argue that the arbitration agreement is invalid, that the dispute falls outside the scope of the arbitration clause, that the tribunal lacked jurisdiction, or that the wrong law was applied. These objections may be raised at the start of the arbitration, during the proceedings, in set-aside proceedings before the courts of the seat, or at the enforcement stage. 

The courts of the seat usually have the power to set aside an award. If the law of the seat takes a different approach from the law governing the contract or the arbitration agreement, a party may challenge the award on grounds such as invalidity of the arbitration agreement, lack of jurisdiction or procedural irregularity. 

This can also create enforcement difficulties. An award may be set aside or treated as invalid at the seat but still argued to be enforceable elsewhere, depending on the approach of the enforcement court. Conversely, a party resisting enforcement may rely on alleged invalidity of the arbitration agreement or defects in the arbitral procedure. 

These challenges can significantly increase costs, cause delay and undermine the finality of the dispute resolution process. 

Procedural and evidential complications 

Disalignment can also make the arbitration more complicated in practice. 

Some issues may be difficult to classify. For example, limitation periods, estoppel, admissibility of evidence, confidentiality, waiver, or the scope of the tribunal’s powers may be treated differently under different legal systems. One system may regard an issue as procedural and therefore governed by the law of the seat, while another may regard it as substantive and governed by the law of the contract. 

There may also be inconsistent interpretations. The law governing the arbitration agreement may determine whether a particular dispute falls within the arbitration clause. If that law differs from the governing law of the contract, the tribunal or court may have to consider both systems of law. 

Where foreign law is relevant before the courts of the seat, it may need to be proved by expert evidence. This can increase the time and expense of the proceedings. 

Drafting considerations 

To avoid expensive jurisdictional litigation, parties may consider clearly and expressly stating the governing law of the substantive contract, the governing law of the arbitration agreement, and the seat of arbitration.