Shagang South-Asia (Hong Kong) Trading Co Ltd v. Daewoo Logistics (The Nikolaos A) [2015] EWHC 194 (Comm)

A recent Commercial Court decision considered the position when a contract provides for the law of one jurisdiction to be applicable, but for the arbitration to take place outside that jurisdiction. Unless the parties have clearly and expressly provided to the contrary, the law governing the arbitration procedure will be that of the seat of the arbitration.

The background facts

The underlying dispute in this case concerned alleged short landing of a cargo of steel products at Jebel Ali in 2008. Claims arose and were passed down the charterparty chain.  The charterparty between Shagang and Daewoo was one of the links in that chain. The Fixture Note provided as follows:

23. ARBITRATION: ARBITRATION TO BE HELD IN HONG KONG. ENGLISH LAW TO BE APPLIED.

24. OTHER TERMS/CONDITIONS AND CHARTER PARTY DETAILS BASE ON GENCON 1994 CHARTER PARTY.

Many readers will be familiar with the Gencon 1994 form and with the law and arbitration clause found at clause 19 of that form. That clause provides a series of options for the parties to select and further states that, if none of the options are selected, the first of those options is to apply. That first option, clause 19(a), provides for the application of English law and the resolution of disputes in London arbitration.

Daewoo purported to commence arbitration against Shagang by appointing Timothy Rayment as arbitrator. Shagang did not respond to the request that they appoint their own arbitrator, so Daewoo purported to appoint Mr Rayment as sole arbitrator. Shortly thereafter, Shangang instructed English solicitors, who queried the appointment of Mr Rayment and thus his jurisdiction as arbitrator. Shagang’s argument was that the seat of the arbitration was Hong Kong and that the applicable procedural law was, therefore, Hong Kong law. Accordingly, the Hong Kong Arbitration Ordinance (the “HKAO”) applied. They further argued that it followed from this that Mr Rayment had not been validly appointed and lacked jurisdiction.

Mr Rayment made an award on his own jurisdiction. He found that English law governed the conduct of the arbitration proceedings, even though the seat of the arbitration was Hong Kong. He also held that Gencon clause 19(a) applied and that, therefore, he had been validly appointed as sole arbitrator. Shagang appealed to the Court under s.67 of the Arbitration Act 1996, which deals with challenging arbitration awards on jurisdictional grounds.

The Commercial Court decision

The Court set aside the arbitration award. The Court concluded that the arbitration ought properly to have been subject to Hong Kong procedural law, that the appointment of an arbitrator had to be made under clause 23, not under clause 19(a) Gencon, and that the arbitrator had not, therefore, been validly appointed.

In reaching its decision, the Court placed particular weight on the following points:

  • It would be unusual for parties to specify the curial (i.e. procedural) law of a contemplated arbitration and still more unusual for them to wish to apply the procedural law of somewhere other than the seat of the arbitration. Such a division clearly has the potential to cause difficulties. For example, the HKAO is  compulsorily applicable to all arbitrations taking place in Hong Kong, whether or not the parties wish that to be the case.
  • By contrast, it is quite common for parties to apply different laws in respect of the substance of the dispute and in respect of the procedural aspects of the arbitration.
  • Clear words or indications are required in order to displace the presumption that the parties wish the law of the seat of the arbitration to be the applicable procedural law.
  • The weight of authority supported the points above. Shagang were able to cite a wealth of authority in support of their case, whereas Daewoo could identify only one reported case in which the applicable procedural law was found not to be the law of the seat. There had been clear words to that effect in that one case.
  • The effect of clause 23 was to displace entirely clause 19(a) Gencon. The clauses could not be read together and clause 23 would prevail.

Comment

This decision affirms what, in our view, was generally understood to be the position, namely that the choice of an arbitration seat implies a choice of the procedural law of that seat. It is perhaps a little surprising that it was necessary, in this case, to go as far as a s.67 appeal in order to reach this conclusion. Nevertheless, the clarity offered by the decision is to be welcomed. Parties wishing, for whatever reason, to apply a different procedural law to that of the seat must use clear and unambiguous words in their arbitration agreement if they are to achieve that goal. If necessary, legal advice should be obtained.

The decision also serves as a reminder of the importance of clear drafting, particularly in the context of dispute resolution clauses. In this case, Daewoo have expended significant time and, presumably, costs, without yet having reached the point at which the substantive issues are under consideration. They may well also have incurred a significant costs liability to Shagang. We do not know whether Daewoo’s claim has now become time-barred, depriving them of any recourse at all against Shagang, but that certainly appears possible, given the time that has elapsed since the events giving rise to the dispute.

Finally, from a Hong Kong perspective, it is pleasing to note the positive comments made by the English Judge about Hong Kong arbitration: “… a well known and respected arbitration forum with a reputation for neutrality, not least because of its supervising courts”.