This knowledge partnership article follows last month’s article on termination and post-termination rights, February’s article on governances and change control procedures, and November’s piece discussing pre-contractual negotiations in tech and outsourcing contracts.

In Part 1 of this Technology and Outsourcing Hot Spots series, we mentioned the importance of managing disputes from as early as the contract drafting stage. We considered that parties should ensure an accurate translation of their agreed obligations and scope of work into the formal contract, thereby avoiding disputes involving erroneous or unspoken expectations.

This is also an appropriate mindset for the drafting of dispute resolution clauses. A properly drafted dispute resolution clause gives parties an appropriate dispute resolution mechanism, allows for an enforceable decision and avoids costly and time consuming jurisdictional fights prior to the determination of the substantive dispute.

Complex matters

Given the likely complexity of disputes that arise out of technology and outsourcing disputes, it is important to ensure that the dispute resolution clause is properly drafted. This ensures that parties get the type of dispute resolution mechanism that they want (that is, an enforceable decision at the end of the hearing) while avoiding costly jurisdictional fights and delays prior to the substantive hearing.

The most common problems that parties face are a lack of clarity as to whether disputes have been properly submitted to arbitration and/or whether the courts still have jurisdiction to determine the dispute. In a similar vein, even if the courts have jurisdiction over the disputes at hand, it is not always clear which national courts have such jurisdiction.

In the case of the former, the party who wishes to initiate arbitration or who has already initiated arbitration might find itself in court as it attempts to persuade the court to stay its proceedings in favour of arbitration. In the latter situation, a party who has initiated litigation in one national court could find itself on the receiving end of an application for those proceedings to be stayed and/or subject to an anti-suit injunction so that the dispute is litigated in another forum instead.

In the worst case situation, a party who has the benefit of an arbitral award might find the award set aside or that a court refuses to recognise and enforce the award on the basis that there had no arbitration agreement between the parties, or that the tribunal had lacked jurisdiction to determine the dispute.

There are several issues that parties ought to consider when drafting dispute resolution clauses.

This post considers only one of those issues – the multiple laws at play in an arbitration. Our next article in this series will consider the use of multi-tier and unilateral arbitration clauses.

Multiple Laws

We have dealt with this issue more extensively in a previous post. In Law and Practice of International Commercial Arbitration, the learned authors of the text identified “at least five different systems of law which in practice may have a bearing on international commercial arbitration” (Redfern and Hunter, Law and Practice of International Commercial Arbitration, 4ed., 2004 at [2-04]).

These are:

1. the law governing the capacity of the parties to enter into an arbitration agreement;
2. the law governing the arbitration agreement and the performance of that agreement;
3. the law governing the existence and proceedings of the arbitral tribunal – the lex arbitri;
4. the substantive law or the proper law of the contract; and
5. the law governing recognition and enforcement of the arbitral award.

These distinctions arise out of (i) the fact that the parties to the dispute may not have any connection to the law they have chosen to govern their contract and (ii) a further recognition that the arbitration agreement is a separate and distinct agreement from the underlying contract to which the arbitration agreement is commonly one of the clauses.

Laws 1 and 5 are rarely in dispute. The law governing the capacity of the parties to enter into an arbitration agreement is generally that of the law governing the place of incorporation of the corporate entity or the domicile of a natural person. The law governing recognition and enforcement of the arbitral award is the law of the place in which the award is sought to be set aside, recognised and/or enforced.

However, disputes often revolve around laws 2, 3 and 4. These are often governed by one and the same law i.e. the substantive law of the contract is often the same law which governs the arbitration agreement and the arbitration process.

However, there can be convoluted exceptions, as was the case in the recent English Court of Appeal decision of Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others, [2012] EWCA Civ 638. An earlier post sets out the facts and legal reasoning of the case.

To summarise, the two insurance contracts in issue contained an arbitration clause for disputes to be resolved by arbitration seated in London. However those same contracts also contained an express choice of Brazilian law as the governing law of the contracts as well as an exclusive jurisdiction clause in favour of the Brazilian courts. The Court of Appeal held that the arbitration agreement (and the lex arbitri) was governed by a law (English law) that was different from that chosen to govern the substantive obligations of the underlying contract (Brazilian law).

The decision of the English Court of Appeal had real repercussions. According to the party arguing that Brazilian law was the governing law of the arbitration, Brazilian law would have required their consent to commence arbitration. In contrast, English law would have considered that the arbitration clause(s) constituted an agreement on their part to submit to arbitration and that no further consent would have been required to commence arbitration.

In Naviera Amazonia Peruma SA v Compania International de Seguros de Peru [1988] 1 Lloyd’s Rep 116 ("Peruvian Insurance case"), parties had provided for an arbitration to be located in Peru but subject to English procedural law. The English Court of Appeal held while it was conceptually possible, the mere reference that the arbitration was to be governed by English procedure is insufficient for the English courts to take jurisdiction over disputes relating to the arbitration.

This is to be contrasted with the case of Braes of Doune Wind Farm v Alfred McAlpine [2008] EWHC 426 (TCC), where the English High Court was faced with nearly the opposite situation from the Sulamerica case. Under an EPC contract, the arbitration agreement was expressly stated to be subject to English law but the seat of the arbitration was to be Glasgow, Scotland. Furthermore, the arbitration clause expressed that any reference to arbitration shall be deemed to be a reference to arbitration within the meaning of the English Arbitration Act 1996.

After considering both the Peruvian Insurance case as well as C v D [2007] EWHC 1541, the English High Court took the view that what parties meant was for the arbitration to be seated (in the legal sense of the word) in England (and Wales) and that the reference to Glasgow, Scotland as the seat of the arbitration was really a reference to having the hearings take place in the geographically convenient location of Glasgow, Scotland.

Takeaways

Parties can prevent disputes about the proper law governing the arbitration at the drafting stage. Disputes often arise because insufficient attention is paid to the fact that arbitration clauses are not simply a dispute resolution mechanism, but jurisdictional clauses in their own right.

Parties should therefore consider which court, singular, should have supervisory jurisdiction over the arbitration process. The place where that court is located should then be the seat of the arbitration. For good measure, the law governing the arbitration agreement should be expressly stated to be the law of that place of arbitration.

Our next article in the series will consider the use of multi-tier and unilateral arbitration clauses and in particular, what they are and what are the benefits and drawbacks for parties who might contemplate incorporating them into the main contract.

Note

Olswang Singapore corporate partner Andrew Stott and dispute resolution partner Jonathan Choo will be visiting Delhi this week.  They are panellists on a half day seminar on 26 April on Dispute Resolution in the Technology, Media and Telecoms sectors at the Lalit, New Delhi.  They are proposing a panel discussion on the following: “Current Legal Issues of Challenge in the Technology, Media And Telecommunications Sectors in India” and “Making Arbitration work for TMT Disputes”.

This session will discuss Current global TMT trends and how they impact the sectors in India.

• M&A and Investment climate and joint venture issues.
• Regulatory changes and challenges and Licensing issues.
• Intellectual property and data protection challenges.

Please click here to read more information or contact directly to attend.

Olswang Asia, based in Singapore, is a full service law firm particularly focused on advising businesses in the Technology, Media and Telecoms industries. For enquiries or further information, please email , or contact Olswang Asia at +65 6720 8278.

Check out Olswang’s Singapore International Arbitration Blog at http://singaporeinternationalarbitration.com/