SPECIAL LBN ON THE GOVERNING LAW OF ARBITRATION AGREEMENT
The governing law of arbitration agreements regulates many issues such as the formation, existence, validity, scope, legality, interpretation, termination, effects, and forceability of the arbitration agreement as well as the identity of the parties to the arbitration agreement. As national laws adopt their own criteria, they do not regulate these issues uniformly. It is therefore essential to know which law is to be applied.
Mathieu Abdoul and Axelle Compain of our office explore this issue of the governing law of arbitration agreement with discussion on various jurisdienctions.
Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait)
A Franchise Development Agreement and several related agreements for the operation of a restaurant franchise in Kuwait have been signed in 2001 between Kabab-Ji SAL (Lebanon) (“KJS”) and Al-Homaizi Foodstuff Company WWL (“AHFC”). The contract contained a clause designating English law as applicable to the contract, as well as an arbitration agreement providing for ICC arbitration with a seat in Paris, without specifying the law applicable to the arbitration proceedings. The contract contained a No Oral Modification (NOM) clause. In 2005, AHFC became a subsidiary of Kout Food Group (“KFG”), also located in Kuwait. However, KFG does not become a party to the agreements.
Following a dispute, KJS initiated arbitration proceedings against KFG. In the arbitration, KFG argued that it was not a party to the franchise agreement and challenged the arbitral tribunal’s competence. On 11 September 2017, the award was made, and the arbitral tribunal ruled in favour of KJS. In support of its decision, the arbitral tribunal stated that under the law of the seat (the law of the country where the award is made, in this case, French law), KFG had been a party to the Arbitration Agreement and had therefore breached the agreements.
While on 13 December 2017, KFG sought to have the award set aside before the Paris Court of Appeal, on 21 December 2017 KJS brought proceedings under Section 01 of the Arbitration Act 1996 (AA 1996) for recognition and enforcement of the award before the English Commercial Court. By a decision of 29 March 2019, the Commercial Court concluded that English law rather than French law had to govern the arbitration agreement. It was considered that in the lack of written consent to set aside the NOM clauses, KFG did not become a party to the arbitration agreement. However, the judge stayed the proceedings while awaiting the decision of the Paris Court of Appeal in case further evidence on this issue might emerge.
Both parties appealed the Commercial Court’s decision: while KJS appealed the conclusions that KFG was not bound by the arbitration agreements, KFG appealed the Commercial Court’s decision to postpone a final decision on enforcement pending the decision of the Paris Cour d’Appel.
The English Court of Appeal overturned the first instance judgment in a decision dated 20 January 2020. It held that the arbitration agreement was subject to English law which did not allow the extension of the arbitration agreement to the parent company. It supported its decision on the grounds that the contract, which constituted an indivisible whole, did not limit the chosen applicable law to the sole law of the contract, but extended it to all terms of the contract, including the arbitration agreement.
In France, on 23 June 2020, the Paris Court of Appeal rejected KFG’s request to set aside the arbitral decision. The Paris Court of Appeal justified its decision by applying the substantive rule of French international arbitration law: an arbitration agreement may be extended to non-signatory parties when their involvement in the performance of the contract gives rise to a presumption that they have accepted the clause.
Both decisions have been challenged before the English Supreme Court and the French Cour de Cassation.
In December 2021, the Supreme Court confirmed the decision of the English Court of Appeal. It held (i) that the law governing the extension of the arbitration agreement to a third party is English law, (ii) that the arbitration agreement cannot be extended to a non-signatory party and (iii) that there was no need to stay the proceedings pending the Paris Court of Appeal’s decision. In support of its decision:
- According to Article V(1)(a) of the New York Convention, for conflict of law purposes, the primary rule is that the governing law of the arbitration agreement is the law chosen by the parties. Where no choice had been indicated, the applicable law is the law of ‘the country where the award was made’. It relied on the case Enka Insaat Ve Sanayi A.S. (Respondent) v OOO Insurance Company Chubb (Appellant) UKSC 38;  1 W.L.R. 4117 to identify the law applicable to an arbitration agreement when the law applicable to the arbitration agreement was not specified. The latter stated that where no applicable law is specified in the arbitration agreement, the agreement is generally governed by the law expressly chosen by the parties to govern the entire contract. In this case, the Supreme Court applied its considerations in Enka with equal force.
Furthermore, under the New York Convention, the governing law of an arbitration agreement chosen by the parties is not required to take a particular form, a general clause is sufficient. In this case, it was clear from the language of the FDA that the law to which the parties had subjected the arbitration agreement was English law, based on the applicable law clause, which applied to all clauses of the contract document, including the arbitration agreement.
- Under the NOMs, it was up to KJS to show that KFG had become a party to the FDA, or that KFG was prevented from invoking the breach of those agreements. The legally effective NOM clauses (MWB Business Exchange Centres Ltd v Rock Advertising Ltd  UKSC 24) were therefore an insuperable obstacle to KJS’s novation argument.Finally, the Supreme Court held that the Court of Appeal was also correct to overturn the first instance judge’s adjournment decision, as the risk of contradictory judgments was unavoidable in circumstances where the English and French courts would be applying their own respective laws to the question of the existence and validity of the arbitration agreement.
- In France, by its decision of 28 September 2022, the Cour de cassation dismissed the appeal made by KFG. It concluded that French law applied to the Arbitration Agreement, using the substantive rules of French law to extend the arbitration clause to a non-signatory: the agreement can be extended to a third-party who is materially involved in the performance of the contract. It justifies its decision by stating that the arbitration clause is legally independent of the main contract and that its existence and validity must be assessed based on the common will of the parties. Unless the parties wish otherwise, it is not necessary to refer to state law. In this case, the only common will of the parties was to designate English law as the law governing the main contract, which was not sufficient to designate English law as the law governing the arbitration agreement. Moreover, the judge added that KFG did not provide any evidence of the parties’ common intention to designate English law as the law governing the arbitration agreement.
How would the Vietnamese court rule?
In Vietnam, under the separability doctrine in accordance with Article 19 of the Law on Commercial Arbitration 2010, the arbitration agreement is “completely independent” from the main contract. Thus, the governing law of the main contract will not automatically be the governing law of the arbitration agreement.
Normally, under Vietnamese law, the governing law of the arbitration agreement will be Vietnamese law or be determined in line with the parties’ agreement. However, the governing law of an arbitration agreement can be questioned if a party to the arbitration agreement is a foreign party and the parties fail to choose the governing law. If so, the governing law of the arbitration agreement shall be:
- Determined in line with the treaties in which Vietnam is a contracting state;
- Agreed by the parties if the treaties in which Vietnam is a contracting state, or the law of Vietnam allow the parties to agree on the governing law;
- In the absence of treaties or the parties’ agreement, the legal system is most closely related to the agreement. According to Article 683.2 of the Vietnamese Civil Code, the law having the closest connection with the agreement is:
- The law of the country where the seller, being a natural person resides or the seller, being a juridical person is established in terms of sale contracts;
- The law of the country where the provider being a natural person resides or the provider, being a juridical person is established in terms of service contracts;
- The law of the country where the transferee, being a natural person resides or the seller, being a juridical person is established in terms of contracts transferring rights to use or intellectual property rights;
- The law of the country where employees frequently perform jobs in terms of labor contracts. If an employee frequently works in multiple countries or the country in which the employee frequently works is unidentifiable, the law of the country with which his/her labor contract is most closely associated shall be the law of the country in which the employer, if a natural person, resides or the employer, if a juridical person, is established,
- The law of the country where consumers reside in terms of a consumer contract.
The arbitration agreement is unlikely to fall within the scope of Article 683.2 of the Civil Code. In other words, the criteria for determining the closest connection law system in relation to the arbitration agreement is not provided by Vietnamese law.
In this case, the law of the seat (the law of the country where the award is made) has the closest connection to the arbitration agreement and will thus be the governing law for such an arbitration agreement under Vietnamese law. Indeed, the court of the place where the arbitral award is made will set aside the arbitral award and determine the validity of the arbitration agreement and the tribunal’s decision on jurisdiction.
Furthermore, according to Dispatch 246/TANDTC-KT dated 25 July 2014 of the Supreme People’s Court guiding the recognition and enforcement of the foreign arbitral award, Section 4 of the Dispatch prescribes that “4. With regard to the validity of the arbitration agreement, the tribunal shall consider the laws of the country on which parties agree or the laws of the country where the award is made in case the parties fail to agree on the governing laws of the arbitration agreement to determine the validity of the arbitration agreement”. Despite the fact that the law of the country where the award is made (i.e., the law of the seat) shall only be considered for the assessment of the validity of the arbitration agreement, it is likely that under the laws of Vietnam in case of the absence of the parties’ agreement on the governing law of the arbitration agreement, the law of the seat shall govern the arbitration agreement.
However, it is notable that under Vietnamese law, not only the court of the place where the arbitral award is made shall govern the arbitral proceedings.
- With respect to the request for an appointment of an arbitrator for ad hoc arbitration, according to Article 5.3 of Resolution 01, the court of the residential place of the respondent shall have jurisdiction to appoint the arbitrator.
- With respect to the request for changing the arbitrator for ad hoc arbitration, according to Article 5.4.a of the Resolution 01 the court of place resolving the dispute shall have the jurisdiction to re-appoint the arbitrator. It is ambiguous whether “the place resolving the dispute” referred to in Article 5.4.a of the Resolution 01 is the place of arbitration as interpreted in Article 3.8 of the Law on Commercial Arbitration.
As a result, in cases of ad hoc arbitration, the law of the respondent’s residential place or the law of the place where the dispute is resolved may have a close connection to the arbitration agreement, resulting in the arbitration agreement’s governing law. As a result, in cases of ad hoc arbitration, the law of the respondent’s residential place or the law of the place where the dispute is resolved may have a close connection to the arbitration agreement, resulting in the arbitration agreement’s governing law.
- The seeming confusion between the “seat” and “venue” of arbitration in Vietnamese law
When drafting the international arbitration agreement in a contract, the “seat” of the arbitration is one of the most important factors to be considered. It is often confused with the “venue” of the arbitration, which is not the same thing. While the “seat” of arbitration is the legal system in which the arbitration agreement exists, the “venue” of arbitration is the physical place where hearings take place.
The choice of the “seat” of arbitration is of double importance: the mandatory provisions of the seat of arbitration will always apply to the arbitration and the “seat” of arbitration will also generally determine the procedure governing the arbitration proceedings and the court which has the power to intervene in the arbitration proceedings.
In Vietnamese, “seat” and “venue” are translated as the same word (i.e., place). The Law on Commercial Arbitration (LCA) 2010, which is the main legislation governing international arbitration, distinguishes between “seat of arbitration” and “venue of arbitration,” as do “pro-arbitration” countries such as Singapore. However, LCA does not have a clear definition of these two notions. It simply refers to the “place for dispute settlement” under Articles 3.8 and 11 of the LCA 2010.
Even if Article 3.8 of the LCA 2010 provides information about the dispute resolution place, it is not clear which of the places between the dispute resolution place, the place where the award is made and the location where the arbitral tribunal conducts the hearing, will be considered as the “seat” of arbitration under Vietnamese law. Article 5.4 of Resolution No. 01/2014/NQ-HDTP refers to Article 3.8 of the Law Commercial Arbitration when specifying which court has jurisdiction over the arbitration proceeding.
By suggesting that the dispute resolution place is a legal concept and not a physical one, the Supreme Court’s guidance of Law on Commercial Arbitration 2010 seems to indicate the dispute resolution place could be a “seat” of arbitration.
But can the place where the award is made also be considered as the “seat” of arbitration? Indeed, the New York Convention 1958 on recognition of foreign arbitral awards also used the words “where the award is made”, dispute resolution place is the “venue” of arbitration according to the proposal of the drafting team of the LCA 2010 and the Vietnamese Civil Procedures Code 2015 also refers to the country where the award is made when considering the grounds for rejecting recognition of a foreign arbitral award.
According to Article 11 of Vietnam LCA, the “venue” for dispute settlement by arbitration in Vietnam is as agreed by parties or decided by arbitration council. It is specified that the parties may agree on the place of settlement of disputes and that if no agreement is reached, the Arbitration Council shall decide on the place. The place may be inside or outside the territory of Vietnam. In addition, unless otherwise agreed by the parties, the arbitration board may meet at a place deemed appropriate to enable its members to exchange opinions, take witness statements, consult experts, or evaluate property, assets, or other documents.
In a case relating to the application of the IBA rules in 2019, the Hanoi People’s Court decided to overturn the arbitral tribunal’s decision because, among other things, the arbitral tribunal changed the “venue” of the arbitration hearing despite the parties’ mutual selection.
As a result, because the Law on Commercial Arbitration makes no clear distinction between “seat” and “venue” of arbitration, they may be treated interchangeably.
However, besides the LCA 2010, the VIAC Rules (rules from the Vietnam International Arbitration Centre (VIAC)) can be used to govern arbitrations. These rules seem to have distinguished the concepts of “seat” and “venue” of arbitration by separating two paragraphs for each matter. Articles 22.1 and 22.2 of the VIAC Rules regulate the “seat” and “venue” of arbitration respectively.
Under Article 22.1 of the VIAC Rules, the choice of “seat” of arbitration is subject to the parties’ agreement. In the absence of the parties’ agreement, the tribunal shall have the discretion to determine the appropriate “seat” of arbitration. The seat of arbitration is commonly expressed as a city. The key aspects of the seat are (i) the jurisdiction in which the seat is located since it is the procedural law of that jurisdiction that will govern the arbitration; and (ii) the court at the seat to which a party may make applications, such as apply for a setting aside of an arbitral award.
Article 22.2 of VIAC Rules provides that the hearing shall be conducted at any location deemed appropriate by the Arbitral Tribunal, unless the parties agree otherwise. Since Article 22 of the VIAC Rules is silent on the criteria for the arbitral tribunal to determine the seat and venue of arbitration, we can also refer to the criteria regulated under Article 11 of the LCA mentioned above.
Apart from the default provision of the law, there is another way to distinguish between these two concepts: one must consider the implications of both notions. Thus, concerning the “seat” of arbitration, it is necessary to refer to the legal system, the procedural law, the judicial system, and the enforcement procedure. On the other hand, with regard to the “venue” of arbitration, it is necessary to refer to the convenience for the members of the tribunals, for the parties and other participants in the arbitration proceedings as well as to the associated expenses.
 Articles 664 and 683 of Civil Code No. 91/2015/QH13 dated 24 November 2015 (“Civil Code”)
 Article 5 of the Resolution 01/2014/NQ-HDTP dated 20 March 2014 guiding the Law on Commercial Arbitration (“Resolution 01”)
 Article 5.3 of the Resolution 01.