The recent decision of the English Commercial Court in Shagang South Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics (5 February 2015) is a timely reminder to parties to arbitration agreements to take care to express a choice as to the law that is to apply to their arbitration.
Daewoo agreed to charter a ship from Shagang, based on a fixture note which provided: “Arbitration to be held in Hongkong. English law to be applied” and “Other terms/conditions and Charter Party details base [sic] on Gencon 1994 Charter Party.”
When a claim arose, Daewoo commenced arbitration proceedings against Shagang in London and gave notice of the appointment of a sole arbitrator. Shagang failed to respond. The arbitrator wrote to Shagang giving notice that he had accepted the appointment as sole arbitrator. Shagang then queried both his appointment and his jurisdiction, suggesting that the seat of the arbitration was Hong Kong and the law applicable to the arbitration was not English law but Hong Kong law, so that the arbitration was subject to the Hong Kong Arbitration Ordinance (HK Ordinance).
The dispute then centred on the proper construction of the clause in the fixture note and the relationship between that clause and the printed law and arbitration clause in the standard form Gencon charterparty, which provided for arbitration in London in accordance with English law.
The arbitrator issued an award, determining that the arbitration was subject to the English Arbitration Act 1996 (English Act) and that the standard form clause applied. He therefore concluded that he had been properly appointed as sole arbitrator.
Shagang applied to the English Commercial Court under Section 67 of the English Act to set aside the award and for a declaration that the Tribunal was not properly constituted. They argued that the clause in the Fixture Note provided for arbitration in Hong Kong and therefore the applicable procedural law was the HK Ordinance.
Daewoo argued that when the clause in the fixture note was read together with the standard form clause, it provided for Hong Kong to be the geographical location for the arbitration but for the arbitration to be subject to the English Act and English procedural law.
The essential issues in the case were:
- Whether arbitration under the charterparty was subject to English or Hong Kong procedural law.
- If the arbitration was subject to English procedural law, whether the appointment of the arbitrator as sole arbitrator was valid.
The Court first noted that it was important to bear in mind a number of separate concepts:
- The venue/place of arbitration (the geographical location where the arbitration is to be held).
- The “seat” of the arbitration (the country intended to provide the procedural law).
- The law governing the arbitration agreement.
- The law governing the substantive contract (in this case the charterparty).
The Court noted that the arbitration clause in the fixture note had two limbs: (1) where the arbitration was to be held; and (2) what law was to be applied. The most natural meaning of the two limbs was that it was intended to address where and how disputes were to be determined (by arbitration in Hong Kong) and the law governing the determination of the disputes (English law). Agreeing that disputes were to be held in Hong Kong suggested that all aspects of the arbitration process were to take place there, including any supervisory court proceedings that might be required. It was far less usual to make an express choice of procedural law, which is often left to be inferred from the chosen place of arbitration. When an express choice is made, this is normally by reference to the governing statute.
The Court emphasised that clear words were necessary for the parties to choose a seat of arbitration which differs from the place of arbitration.
The authorities did not support Daewoo’s case that there was clear wording or other contrary indication sufficient on the facts of the case to displace the conclusion that the agreement that the arbitration was to be “held in Hong Kong” carried with it an implied choice of Hong Kong as the seat of the arbitration and Hong Kong law as the procedural law. The words “English law to be applied” in the Fixture Note were not sufficiently clear to have that effect since they most naturally referred to the substantive rather than procedural law applicable.
The Court concluded that the parties intended to do something which did not fit with the standard form charterparty scheme.
As Daewoo had appointed the sole arbitrator under the standard form scheme, which was inapplicable, the appointment was invalid. Further, even if English law did apply, the provisions of the English Act had not been correctly followed and so the appointment was invalid in any event.
Where an arbitration agreement provides for arbitration “to be held” in a particular geographical location, that location will be deemed to be the seat of the arbitration unless there are clear words or something else that indicates that was not the intention of the parties.