For international commercial contracts subject to an arbitration agreement to resolve disputes (including insurance or reinsurance agreements), two systems of national law may be engaged:
- The law governing the contract from which the dispute has arisen.
- The law governing the arbitration. That is usually the law of the seat of the arbitration – the place chosen for the arbitration in the arbitration agreement.
The recent judgment by the English Supreme Court of Appeal in the matter of Chubb Russia, dealt with the question of what system of national law governs the validity and scope of the arbitration agreement when the law applicable to the contract containing it differs from the law of the seat of the arbitration.
There has been much debate internationally on the appropriate law and approach.
The Chubb Russia judgment provides a useful summary of both the English and international debate in that regard.
It is preferable that the parties to the agreement specify the law to govern it.
In the absence of such a choice the court said that, in English law (and the position is no different in South Africa) the law applicable to the arbitration agreement will be the system of law with which the arbitration agreement is most closely connected.
That is determined by construing the arbitration agreement and the contract containing it as a whole.
Where the law applicable to the arbitration agreement is not specified, the choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract.
The choice of a different country as a seat of arbitration is not on its own sufficient to negate an inference that the choice of law to govern the contract was intended to apply to the arbitration agreement.
Factors that may determine whether the arbitration agreement is intended to be governed by the law of the seat of arbitration are:
- Any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration will be treated as governed by that country’s law.
- The existence of a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective.
- Circumstances indicating that the seat was deliberately chosen as a neutral forum for the arbitration.
Absent an express choice of law to govern the whole contract, a clause providing for arbitration in a particular place will not by itself justify an inference that the contract, and the arbitration agreement, is intended to be governed by the law of that place. The arbitration agreement is governed by the law to which it is most closely connected. Where the parties have chosen a seat of arbitration, this will generally be the law of the seat even if it differs from the law applicable to the parties’ substantive contractual obligations.
The fact that the contract requires the parties to attempt to resolve a dispute through good faith negotiation, mediation or other procedures before referring it to arbitration will not generally provide a reason to displace the law of the seat of the arbitration as the law applicable to the arbitration agreement by default, in the absence of a choice of law to govern it.
On the facts in Chubb Russia, the contract from which the dispute had arisen contained no choice of law intended to govern the contract or the arbitration agreement within it. The court held that the validity and scope of the arbitration agreement was governed by the law of the chosen seat of arbitration, as the law with which the dispute resolution is most closely connected, in this case English law.
The provisions of the South African International Arbitration Act do not affect this conclusion.
When concluding any international commercial contract, which includes insurance or reinsurance contracts with non-South African resident parties or a non-South African risk, the parties should specify the law governing the substance of the dispute, the agreement to arbitrate, and the arbitration process to avoid uncertainty.