MINISTRY OF JUSTICE

HANOI LAW UNIVERSITY

FINAL ASSIGNMENT
SUBJECT:
LAW ON COMERCIAL ARBITRATION

Topic:
Law governing Arbitration agreement

Name : Phạm Hồng Hà

Student number : 433522
Class : N02.TL2

Hanoi, 2021
TABLE OF CONTENT
A. INTRODUCTION..............................................................................................1
B. CONTENT..........................................................................................................1
I. OVERVIEW.......................................................................................................1
II. PRINCIPLE OF DETERMINING APPLICABLE LAW..........................2
1. Party autonomy.................................................................................................2
2. Lex causae........................................................................................................3
3. Lex arbitri.........................................................................................................4
4. Validation principle..........................................................................................5
C. CONCLUSION...................................................................................................6
D. BIBLIOGRAPHY..............................................................................................7
 A. INTRODUCTION

The past few decades have witnessed an unprecedented growth of

international trade and commerce which has generated the need for more
efficient methods of dispute resolution. Arbitration was considered the best
way of satisfying this need besides court litigation. However, choice-of-law
complexities will arise in an international dispute because of the difference
among domestic laws. Therefore, the issue of deciding which law will govern
an arbitration agreement arises as a crucial part of an arbitration process.

In the scope of a semester assignment, the following content will

emphasize some prominent points related to the topic “Law governing
Arbitration agreement”.

B. CONTENT
I. OVERVIEW

The issue of determining applicable law is raised both at the beginning

of an arbitration process by the arbitral tribunal and by the domestic court after
the arbitral tribunal render a decision on its jurisdiction; when the court sets
aside arbitral award; or in the case of recognition and enforcement of foreign
arbitral awards.

The aim of determining applicable law to an arbitral agreement is to

answer whether the existence, validity and the scope of an arbitration
agreement are legal or not. The choice-of-law rules applied by arbitral tribunals
differ in several respects from the approaches followed by domestic courts.
Those differences arise in connection with three choice-of-law problems: (i) the
determination of the law applicable absent a choice-of-law by the parties, (ii)
the interpretation and supplementation of the law chosen by the parties, (iii) the
application of mandatory norms.

There are multiple common approaches: (i) Party autonomy; (ii) Lex
causae: law applicable to the merits of the dispute; (iii) Lex arbitri: Law of the
seat of arbitration; (iv) A validation approach

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 II. PRINCIPLE OF DETERMINING APPLICABLE LAW
1. Party autonomy

Party autonomy is the freedom of the parties to construct their

contractual relationship in the way they see fit 1. As an arbitration agreement is
basically a contract, the parties to an international contract have the freedom to
determine the law applicable to their dispute. In other words, it all depends
upon the parties themselves to arrange their arbitration agreement freely,
explicitly or implicitly.

The principle of party autonomy is recognized under Article V of the

New York convention: an arbitration agreement must be valid “under the law
to which the parties have subjected it”. Vietnam Law on Commercial
arbitration 2010 also endoses the principle in Article 14.2: “For a dispute
involving foreign elements. the arbitral tribunal shall apply the law selected by
the parties.”

Generally, it is assumed that the law applicable to the substance chosen

by parties will also govern the arbitration clause 2. However, the doctrine of
separability enables the arbitration clause to be governed by different law
which applicable to substance. Often, parties choose to include an arbitration
agreement either within or accompanying their contract. The law applicable to
the arbitration agreement determines the scope of the arbitration agreement, its
validity, its enforceability, and its interpretation.

Basically, when the parties choose a law applicable to arbitration

agreement, this law will be applied firstly. However, in some circumstances,
the law of the place of arbitration (lex arbitri) has a dominant role (which will
be scrutinised in another part), because each country wants to govern the
conduct of arbitration within its boundary.

2. Lex causae

1
Abdulhay (2004), Corruption in International Trade and Commercial Arbitration, Kluwer Law International
London: United Kingdom, p.159.
2
Union of India v McDonnel Douglas Corp [1993] 2 Lloyd’s Rep 48

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 In the absence of explicit choice of law clause made by the parties,
applying the law governing the merits of the dispute to govern the arbitration
agreement itself can be considered a convenient way. This is called lex causae.

At first glance, since the arbitration agreement is usually a part of the

contract between parties, applying the substantive law of the main agreement to
the arbitration clause seems to be a sensible solution. In general, out of
practicability, it is in the parties’ best interest that all provisions of a contract
are subject to the same law, namely a law that they or their lawyers know well
and trust3, which seems to best fulfill the parties’ expectations of
“predictability”, “foreseeability” and “certainty”. Data underlines this
conclusion: In 2010, Queen Mary University of London looked at the factors
behind choice-of-law decisions in arbitration: The main reasons for choosing
the applicable substantive law were the neutrality and impartiality of the legal
system (66%), the appropriateness of the law for the type of contract (60%),
and familiarity with and experience of the particular law (58%) 4.

However, the influence of the doctrine of separability should also be

critically evaluated. The choice made for the main contract should not
automatically be extended to the arbitration clause. It is indeed undisputed that
the arbitration agreement can be subject to a different law than the lex causae.
It is apparent that while the arbitration clause’s purpose is dispute resolution,
the goal of the main contract is to determine the rights and obligations of the
parties under said substantive contract. It therefore seems difficult to accept that
the law of the main agreement should automatically be applied to the
arbitration agreement. However, it does not necessarily follow from the
doctrine of separability that the law applicable to the arbitration agreement has
to be deduced independently from the parties’ agreement in all cases. In
addition, those arbitration laws that contain the separability doctrine treat the
arbitration agreement as distinct only in the context of its existence or validity.
3
Ilias Bantekas (2010), “The Proper Law of the Arbitration Clause: A Challenge to the Prevailing Orthodoxy”,
Journal of International Arbitration, 1-8, p. 5.
4
Queen Mary University of London, 2010 International Arbitration Survey p. 11.

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 Moreover, the doctrine does not, for instance, require that the conclusion of the
arbitration agreement needs to be assessed separately from the main agreement.
Therefore, when assessing the validity of the arbitration agreement, one should
rather look at the parties’ intentions.

According to Article 3(1) Rome I Regulation, the choice of law “shall be

made expressly or clearly demonstrated by the terms of the contract or the
circumstances of the case.” An implicit choice of law therefore is only possible
if this is “clearly” demonstrated – this also would have to be the case for the
arbitration agreement and is not fulfilled by a mere choice of law for the main
contract. Therefore, the implicit extension of the lex causae to the arbitration
clause requires clearer indications than a mere choice of law for the substantive
contract. If one considers that Article V(1)(a) New York Convention contains a
default rule in the absence of a choice of law, the extension of the law of the
main agreement to the arbitration clause would therefore require that the
circumstances of the individual case clearly indicate that the parties have
willingly chosen to apply this law to the arbitration agreement.

3. Lex arbitri

The second option for determining the law applicable to the arbitration
agreement is to extend the law at the seat of arbitration to the arbitration clause.
The principle has been recognized in international binding documents:

- Article 16(4) London Court of International Arbitration (LCIA) Rules: “The

law applicable to the arbitration agreement and the arbitration shall be the law
applicable at the seat of the arbitration…”
- Article V(1)(a) New York Convention stipulates: In the absence of a choice
of law, the validity of an arbitration agreement should be determined according to the
law of the country where the award was made, i.e. the seat.
- Vietnam Civil Code 2015 provides that regarding a contract where there is a
foreign party and where the parties have not agreed on the applicable law, the law of
the country having the closest connection with such contract will apply. Arguably, the
country where the arbitration is seated (Seat Country) is the country that has the

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closest connection to the arbitration agreement. Therefore, the law of the Seat Country
should be the governing law of said arbitration agreement.

This law at the seat of the arbitration is often more closely connected to
the arbitration agreement than the law of the main agreement. In this context, it
has to be noted that the seat of the arbitration is a legal construct, meaning that
the actual proceedings, including hearings, can take place in another country.
The choice of a specific seat of arbitration indicates that the parties have
consciously decided to conduct their arbitration in a specific jurisdiction. The
selection of the seat is of utmost importance for the entire arbitration. For
instance, the seat of arbitration determines the role of national courts as well as
the available grounds for setting aside the award. For this reason, one can
assume that it is coherent with the parties’ intentions that all questions relating
to the arbitration agreement should be settled in accordance with the law at the
seat of arbitration. In the absence of parties’ intention to the contrary, the law at
the seat of the arbitration should therefore apply to the arbitration agreement.
Therefore, in cases where it is unclear whether an implicit choice of law was
made, one should directly apply the law at the seat of the arbitration.

A different interpretation would almost directly contradict the clear

wording of Article V(1)(a) New York Convention: If one considers the purpose
of the fallback provision in relieving the courts from the often complicated
search for the main connecting factor for the legal relationship, this goal would
be undermined by applying the law of the main agreement too extensively.
Therefore, the choice of law for the substantive agreement should only be
extended to the arbitration clause if there are clear indications of parties’
intentions. If this is not the case, the law at the seat of arbitration should be
applied.

4. Validation principle

Another approach is the so-called “validation principle” which is largely

based on Article II New York Convention. Article 178 of Swiss PIL Act
stipulates: “As regards its substance, the arbitration agreement shall be valid if

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 it conforms either to the law chosen by the parties, or to the law governing the
subject-matter of the dispute, in particular the law governing the main
contract, or if it conforms to Swiss law”.

Proponents of this approach wish to apply the law that leads to the
validity of the arbitration agreement or the law that would uphold the existence
and validity of the arbitration. The arbitration agreement could therefore even
be held valid if it was invalid under the relevant laws of Article V(1)(a) New
York Convention. Instead of relying on abstract choice-of-law rules, the
purpose of this approach is to further the parties’ economic interest. Any
uncertainties arising through the traditional choice-of-law approach should be
overcome, as, according to the proponents of this principle, neither the
applicability of the lex causae nor of the lex arbitri sufficiently take into
account the parties’ expectations and respecting party autonomy.

The purpose of international arbitration would be undermined by

applying formalistic national rules, which would, at the end of the day, prove
arbitrary and unpredictable. Therefore, one should simply apply the law that
supports the parties’ original intentions, namely to have a valid and enforceable
arbitration agreement5. According to this approach, it is unthinkable that parties
would choose a law that leads to the invalidity of the arbitration agreement.
However, this pro-arbitration approach has to be strictly distinguished from the
question of the applicable law. Moreover, while the validation principle has a
certain practical appeal, it cannot be reconciled with the existing rules on
conflict of laws6. Further problems can again arise at the enforcement stage if
the validation principle is not accepted by the courts in the enforcement State.
Some experts claim that this approach therefore focuses on the hypothetical
will of the parties. Accordingly, parties would have chosen a law that would
lead to the validity of the arbitration agreement. Therefore, the law of the main
contract would be extended to the arbitration agreement if the law at the seat
led to the invalidity of the arbitration clause, and vice versa.

5
Born, The Law Governing International Arbitration Agreements: An International Perspective, p. 835.
6
Glick, Venkatesan, ‘Choosing the Law Governing the Arbitration Agreement’, pp. 148

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 C. CONCLUSION

Because of the contractual nature of arbitration, the arbitrator's choice of

applicable law should be guided by the intent of the parties. If the intent of the
parties cannot be ascertained, the arbitrator must decide whether to resort to
conflict rules to determine the applicable substantive law. Choosing the
applicable substantive law based on conflict rules, however, is impractical
because the result is the double conflicts problem, which in turn leads to
uncertainty of the applicable law. From a theoretical point of view, application
of conflict rules often does not promote the purpose of the rules or the interests
of the parties. Nevertheless, some arbitrators still consider application of the
forum's conflict rules convenient and practical.

D. BIBLIOGRAPHY
1. Union of India v McDonnel Douglas Corp [1993] 2 Lloyd’s Rep 48
2. Abdulhay (2004), Corruption in International Trade and Commercial
Arbitration, Kluwer Law International London: United Kingdom.
3. Born, The Law Governing International Arbitration Agreements: An
International Perspective.
4. Glick, Venkatesan, ‘Choosing the Law Governing the Arbitration Agreement’.

5. Ilias Bantekas (2010), “The Proper Law of the Arbitration Clause: A Challenge
to the Prevailing Orthodoxy”, Journal of International Arbitration, 1-8.
6. Queen Mary University of London, 2010 International Arbitration Survey.