For those unfamiliar with arbitration it can often come as a surprise to find out that an arbitration clause in a contract is considered to be separate from the main contract and survives the termination of the main contract. This is known as the doctrine of separability and is widely recognised in many countries around the world but the application of it does vary from country to country.
So there are two contracts; the main contract and the arbitration contract (i.e. the arbitration agreement/clause). The main contract is about the commercial obligations of each of the parties while the arbitration contract is the basis for the appointment of an arbitrator and resolution of any disputes arising out of the main contract.
To avoid confusion it would be advisable to put the following elements in the arbitration clause: the number of arbitrators, the place of arbitration (also known as “the seat of the arbitration”), the governing law of the main contract and the law governing the arbitration clause.
What happens if nothing is said about the law governing the arbitration clause? The Court will have to decide whether it is the law of the seat or the law of the main contract. The recent case of Shagang South Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics  EWHC 194 (Comm) decided in the English Commercial Court is a good illustration of how the Court decides this question and also highlights the difficulties that can arise if an arbitration clause has been drafted too vaguely.
The background to the Shagang case is that Daewoo had agreed with Shagang to charter a ship. The agreement between the two parties stated that:
“ ARBITRATION TO BE HELD IN HONGKONG [sic]. ENGLISH LAW TO BE APPLIED.  OTHER TERMS/CONDITIONS AND CHARTER PARTY DETAILS BASE ON GENCON 1994 CHARTER PARTY  THIS CHARTERPARTY TO APPLY ENGLISH VERSION”.
The Gencon 1994 Charter Party (“GenCon 94”) referred to in the parties’ agreement stated:
“ This Charter Party shall be governed by and construed in accordance with English law and any dispute arising out of this Charter Party shall be referred to arbitration in London in accordance with the Arbitration Acts 1950 and 1979 or any statutory modification or re-enactment thereof for the time being in force...”
In February 2014, arbitration proceedings were commenced by Daewoo against Shagang relating to a cargo dispute. There was no response from Shagang so Daewoo appointed Mr Rayment as sole arbitrator and he gave notice to parties of his appointment in March 2014.
Shagang’s lawyers queried the arbitrator’s appointment and his jurisdiction. They suggested that the seat of the arbitration was Hong Kong and the law applicable to the arbitration was Hong Kong law not English law, i.e. the Hong Kong procedural rules, Hong Kong Arbitration Ordinance (“HK Ordinance”).
The Arbitrator took the view that the arbitration procedural law was English and the standard clause in the Gencon 94 applied. In July 2014, he proceeded to issue his Award. Shagang applied to the Court under section 67 of the English Arbitration Act 1996 to have the Award set aside and for a declaration that the Tribunal was not properly constituted.
Hong Kong Law
Shagang argued that since clause 23 of the parties’ agreement provided for arbitration in Hong Kong then the procedural law relating to appointment of arbitrator etc was Hong Kong ‘s HK Ordinance. They sought support for that argument on the basis that Clause 19 of GenCon 94 is not consistent with clause 23 so the Arbitrator had no jurisdiction.
Daewoo argued that clause 23 and clause 19 when read together provide for Hong Kong to be the geographical location for the arbitration but that the arbitration is subject to English law and English arbitration procedural law so the Arbitrator had jurisdiction and the Award was allowed.
The Court decided that Shagang’s argument was correct and that there needs to be clear wording or some other contrary indication to displace the assumption that “to be held in Hong Kong” carries with it an implied choice that Hong Kong is the seat of arbitration and the procedural rules of HK Ordinance apply.
The Court took the view that the reference to “English law to be applied” was not clear wording or a contrary indication to displace the assumption that Hong Kong rules applied. It was more likely to mean that English law applied to the main contract rather than the arbitration clause.
The Court also agreed with Shagang that clause 23 did not fit with clause 19 of the GenCon 94 which suggested the parties wanted to do something different.
The Shagang case shows that if parties do not expressly state the law of the arbitration clause then it will be assumed that the place of the arbitration will be the seat of the arbitration so its law will apply to the arbitration clause. The only way to displace this assumption will be the use of clear words or an indication that another law applies to the clause.
Contract drafters should take note of this case as it is a timely reminder that if they wish to avoid uncertainty and potential litigation then they should specify the law of the arbitration agreement/clause. For example, brief wording such as ‘the governing law of this arbitration agreement shall be the law of Scotland’ would suffice to avoid any confusion arising.
If you have any queries arising from this article, please contact our Dispute Resolution team on 0131 226 8200.
DISCLAIMER: While every effort has been made to ensure the accuracy of this blog post, it is not intended to provide legal advice as individual situations will differ. No recipients of content in this blog post should act or refrain from acting on the basis of the blog post without seeking the appropriate legal advice on the particular facts and circumstances at issue from a qualified solicitor in their jurisdiction. The blog post is for general information only and is not legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. No solicitor-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with a solicitor qualified to practise in your jurisdiction. Should you be interested in seeking our assistance with a legal matter, please contact the Dispute Resolution team on 0131 226 8200.