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LEX CONTRACTUS V. SUBSTANTIVE LAW OF SEAT: SETTLING THE CONUNDRUM OF DETERMINING LAW GOVERNING ARBITRATION AGREEMENT

The law governing arbitration agreement (“governing law”) is vital as it ascertain the validity, existence and interpretation of arbitration agreement. However, the parties rarely make an express choice in respect of governing law. Thereby, it is for the arbitral tribunal to determine whether the governing law should follow the law of matrix contract (“lex contractus”) or the substantive law of seat (“seat law”). To settle such conundrum, the court in case of Sulamérica Cia Nacional de Seguros S.A. et al. v. Enesa Engenharia S.A. held that in case the parties have no express agreement on governing law,it shall be determined by an implied choice of parties. Further, in absence of implied choice, the law having the closest and most real connection with arbitration agreement shall be the governing law. This article tries to resolve the existing riddle by analyzing both lex contractus and seat law as the governing law.

Lex Contractus As The governing Law
The one stance to determine the governing law is that the governing law should be same as the lex contractus. In absence of express agreement, the courts in the case of BCY v. BCZ and Arsanovia Ltd and others v. Cruz City Mauritius Holdings held that it should be the presumptive position to hold that the governing law follows the law of matrix contract and not the seat law.Moreover, there are various grounds to hold that that the lex contractus coheres better that the seat law to be regarded as the governing law. One of such grounds is that in practicality, the parties hardly hold standalone negotiation for an arbitration agreement, and for that reason it is regarded as “midnight clause”. Therefore, while recognizing the law of matrix contract, the parties rarely negotiate for the governing law since they intended to govern the whole contract by the single choice of law clause. Thereby, the law of matrix contract extends to the arbitration agreement.Furthermore, the nature of law of matrix contract and governing law is same as they both govern the substantive validity and interpretation of matrix contract and arbitration agreement respectively. Conversely, the governing law should not follow the law of seat since seat governs the procedural matter in an arbitration and it nowhere relates to the validity, interpretation, termination, etc. of arbitration agreement. This stand become more cemented in cases where the choice of seat is delegated. In such a case, the law of matrix contract ought to apply because the law of matrix contract is the only one most closely-connected to arbitral agreement.
Additionally, it can also be argued that the governing law should not follow the law of matrix contract because of doctrine of separability embedded under Article 16(1) of UNCITRAL Model Law.(“Model Law”) However, doctrine of separability is never destined for the purpose of determining governing law. Article 16(1) of Model Law states that:
“The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”
Article 16(1) of the Model Law, by using the phrase “for that purpose”limits the scope of doctrine of separability to provide competence to the tribunal to rule on its own jurisdiction in case of invalidity of the main contract. Thereby, for other purposes such as choice of law analysis, assignment, etc. the arbitration agreement remains to be an integral part of the main contract. Therefore, for the aforementioned reasons, the governing law should follow the law of matrix contract and not the seat law.
Law Of Seat As A Governing Law
As against law of matrix contract, another stance to determine the governing law can be the seat law. As held by House of Lords in the case of Hamlyn & Co. v Talisker Distillery, the parties impliedly intends that the governing law should follow the law of the seat and not the law of the underlying contract. Additionally, in the case of C v. D, the court believed that “it would be rare for the law of the (separable) arbitration agreement to be different from the law of the seat of the arbitration”. The arbitration agreement have a closer and more real connection with the seat of arbitration than with the place of the law of the matrix contract as it is the jurisdiction under which the parties have preferred to arbitrate. The High Court of Singapore in the case of FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others have a detailed analysis to determine the governing law. The Court held that when there is a choice of seat and a choice of the law of the matrix contract, the arbitration agreement should impliedly follow the law of the seat, even if such law is dissimilar from the law of the matrix contract. The matrix contract and the arbitration agreement govern different legal relationships i.e. substantive performance of contract and the dispute resolution in case of failure of substantive relationship respectively. 
Further, in case of failure of substantive legal relationship,the parties covet for neutrality. Consequently, in such instances the procedural law of arbitration takes primacy over substantive law. Thereby, the governing law should follow the law of the seat since it deals in legal relationship after the breakdown of substantive contract. Moreover, the remedies against the award including power of court to regulate tribunal’s jurisdiction is determined by seat of arbitration. Thereby, the parties would reasonably aspire for consistency between the procedural law and substantive law to uphold the validity of the arbitration agreement. Apart for this, the relevance of seat is acknowledged internationally, precisely in Articles 36(1)(a)(i) and 34(2)(a)(i) of the Model Law and Article V (1)(a) of the New York Convention. The seat is considered as a juridical center of gravity by which arbitration agreement gets effectuated and derives its life. As per the seat theory envisaged under Article V(1)(a) of the New York Convention, in case the parties have not expressly or impliedly chosen the governing law, then the law of seat governs the substantive validity of arbitration agreement. Such an approach ensures harmonious treatment of arbitration agreements and advances the goals of uniformity and enforcement of the Convention.
Settling The Conundrum
There are innumerable cases where the law of matrix contract is distinct from the seat law.The author is of the view that in case the parties have not agreed to the governing law, the law of seat should govern the arbitration agreement.The seat determines the procedural law of arbitration i.e. lex arbitri, which prescribes procedural power of the tribunal. If the lex arbitri doesn’t allow the tribunal to exercise certain power, any power to do so under governing law will be ineffectual and invalid since it will not be enforced in jurisdiction where the arbitration is seated. Thereby, the governing law must be in consonance with the lex arbitri. The finest substantive law which is in unification of lex arbitri must be the substantive law of seat. Moreover, if certain power is given under the seat law but not prescribed under the resulting lex arbitri, then the power under the lex arbitri would be implied and enforceable since they are of same jurisdiction. Therefore, to maintain the enforceability and consistency of award the seat law should govern the arbitration agreement.Furthermore, in cases where the lex contractus is of the home state of the parties, but the arbitration agreement provided for arbitration in a neutral seat, the seat law should be the governing law since the parties objectively intend to resolve their dispute in a neutral, efficient and predictable manner.However, such an approach does not apply where the seat law invalidates the arbitration agreement since the parties intend the application of such law which gives effect to their agreement to arbitrate. This will suffice pro-enforcement objectives of New York Conventions and give effect to party autonomy.

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