Case Update: Federal Court Rules on Seat of Arbitration and the Law of the Arbitration Agreement

The Federal Court in its grounds of judgment dated 17 August 2017 has ruled on the Thai-Lao Lignite v Government of the Lao People’s Democratic Republic appeal.

The Question of Law and the Determination

There was one critical question of law that was answered by the Federal Court:

Where the governing law of the contract is foreign law and the seat of arbitration [seat] is Malaysia, does the parties’ stipulation of Malaysia as the seat constitute an express agreement that the law governing the arbitration agreement is Malaysian law?

In answer to this question, the Federal Court answered as follows.

The seat of the arbitration establishes the lex arbitri and the curial law of the arbitration.

Where the seat is Malaysia, the Arbitration Act 2005 (AA 2005) is the lex arbitri. Section 30(4) of AA 2005 provides that where parties failed to designate the law applicable to the substance of the dispute, the arbitral tribunal shall apply the law determined by the conflict of laws rules. It follows, that where parties failed to designate the law applicable to the arbitration agreement, the arbitral tribunal shall apply the law as determined, also, by the conflict of laws rules.

Under the conflict of laws rules, the law with the closest and most real connection to the arbitration agreement is the law applicable to the arbitration agreement. More often than not, the law of the seat has the closest and most real connection to the arbitration agreement.

The stipulation of Malaysia as the seat is not an express agreement that the law applicable to the arbitration agreement is the law of Malaysia.

But under the conflict of laws rules, the stipulation of the seat is usually decisive in the determination of the law applicable to the arbitration agreement. Unless it is shown to be the contrary, the stipulation of Malaysia as the seat is a tacit agreement that the law applicable to the arbitration agreement is the law of Malaysia.

Comments

There had previously been uncertainty on this significant issue on what would be the law governing the arbitration agreement when the arbitration agreement was silent. In many cases, an arbitration agreement (i.e. the arbitration clause itself) would be silent on any express governing law. Parties may have assumed that the governing law of the contract itself would govern the arbitration agreement.

In the above Thai-Lao Lignite decision, the governing law of the contract was effectively New York law while the arbitration agreement stated that the seat of arbitration was Malaysia. Hence, the issue of law was whether the law governing the arbitration agreement would be the law of the seat (i.e. Malaysian law) or the law governing the contract (i.e. New York law).

The Federal Court decision now effectively tilts the Malaysian law interpretation such that the law governing the arbitration agreement should be the law of the seat.

This is now contrary to the conventional English Court of Appeal Sulamerica approach: where the arbitration agreement is silent on the law governing the arbitration agreement, there is a rebuttable presumption that the law governing the arbitration agreement is the same as the law governing the contract.

Our Malaysian law position is also not the same as the Singapore law position as set out in the BCY v BCZ decision which adopted the Sulamerica approach.

Ultimately, to avoid any potential conflict and expensive litigation, it may be good to incorporate some express wording in the arbitration agreement such as: “the governing law of this arbitration agreement shall be the law of Malaysia.” Parties should not assume that the law governing the contract would be the same law governing the arbitration agreement.

 

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