So Far Yet So Close: Comparing Governing Laws in Arbitration Agreements under English and Chinese Laws.

• Date: 01 March 2023
• Author: Tsang, King Fung

TABLE OF CONTENTS I. INTRODUCTION 484 A. The Controversy of AA Law 487 II. ENGLISH LAW 491 A. Three-Stage Test in Enka 494 1. Express Choice 494 2. Implied Choice 494 3. Closest Connection 494 B. Features of the English Three-Stage Test 495 1. A Pro-Validity Test 495 2. The Continued Relevance of the Curial Law 497 3. An Emphasis on Certainty 498 4. The Reliance on the New York Convention 500 C. The Influence of the English Approach 501 III. CHINESE LAW 502 A. Summary of Chinese Choice-of-Law Rules 503 B. Comparison with the English Test 503 1. Differences from the English Test 504 2. Similarities with the English Test 507 IV. EMPIRICAL RESEARCH ON CHINESE LEGAL PRACTICE 514 A. General Findings 515 B. Pro-Validity 517 C. Reasons for a Higher Foreign Law Application 520 1. Stage One-Express Choice 522 2. Stage One-Proof of Foreign Law 523 3. Stage Two-Curial Law 525 4. Lex Fori 526 5. False Conflict 527 V. FALSE CONFLICT IN SUBSTANTIVE LAW 528 VI. CONCLUSIO 530 I. INTRODUCTION

Deciding the governing law in an international arbitration agreement is one of the thorniest among all choice-of-law issues in contract disputes. (1) This is partly reflected by the possibility of having three different systems of laws applied to the same arbitration agreement. (2) The potential applicable laws to an agreement to arbitrate include (1) the law governing the underlying contract and the substance of the dispute (general contract law), (2) the law governing the arbitration agreement (AA law), and (3) the law governing the arbitration proceedings (curial law). (3) AA law is arguably the most important as it governs the validity of the arbitration agreement, and therefore whether the arbitral tribunal in question has jurisdiction. (4) Hence, this is the threshold question to the entire arbitration. (5) Deciding AA law is controversial, with different countries adopting different choice-of-law approaches to the question. As undesirable as it is, "[t]here is ... no international consensus on the choice-of-law rule applicable to an arbitration agreement." (6)

This Article seeks to shed light on this controversy by comparing the approaches of England and China. They represent the two major camps in the prevailing choice-of-law approaches on AA law internationally. (7) More recently, the UK Supreme Court has restated the choice-of-law approach in AA law in two comprehensive decisions: Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb (Enka) and Kabab-Ji SAL v. Kout Food Group (Kabab-Ji). (8) Under this restated approach, the English courts presume that an express choice of general contract law in the contract also governs the AA law. (9) In the absence of such an express choice, the English approach generally presumes the general contract law to be the AA law. (10) In contrast, the Chinese approach generally presumes the curial law to apply if the parties did not make an express choice. (11)

Beyond the theoretical significance, this comparison also has important practical value as there are many cases involving the two countries. (12) England is clearly a top, if not the top, international arbitration center in the world. (13) It is thus common for these Sino-foreign transactions to provide for arbitration in London. (14) The English approach is also influential in other common law jurisdictions. (15) On the other hand, despite the significant development of the Chinese courts over the past few decades, arbitration remains the favored avenue of dispute resolution in sophisticated commercial transactions involving Chinese and foreign parties. (16) The larger the size of the transaction, the more likely that the parties will opt for arbitration. (17) To harmonize the choice-of-law rules worldwide, one could certainly make an argument that China should adopt the English approach, or at least modify certain components of its approach to resemble the model of England. (18) The comparison assesses the validity of this argument, and more generally how one should look at the conflicting choice-of-law approaches around the world. It concludes that the different approaches may end up reaching the same result, and that is the best one can hope for given dim prospects of a uniform international choice-of-law regime for AA law being adopted. Recognizing that the black letter law and how the law is implemented may not always be consistent in China, (19) we have conducted empirical research on the Chinese cases regarding the choice of AA law in arbitration agreements. This research provides additional justification for selecting the English and Chinese approaches as representative of the two main camps and adds to the depth of our comparison.

1. The Controversy of AA Law

   The AA law is particularly controversial. This is due to five interrelated reasons. First, international arbitration presents tensions among the private agreement between the parties, national laws, and international law. AA law, as the threshold question of international arbitration, reflects the dilemma and conflicts between these three laws. The first two, private agreement and national law, are constant in all international contracts. Courts decide every day, through the application of national choice-of-law rules, the law applicable to international contracts. However, an arbitration agreement is different from general international contracts. It is usually a part, but an independent part, of the general international contract, (20) and its purpose is to take the dispute resolution outside of the ordinary litigation in national courts. (21) Yet, even in that case, national law is not entirely out of the picture. It retains a supervisory role and regulates aspects such as the enforcement of the arbitration agreement. (22) There is, therefore, an inherent tension between the private agreement and national law. (23) In addition, there is a tension between national law and international law. Conflicting choice-of-law rules in contracts among national laws is a constant (more on that below), but many nations are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) and therefore adopt the rules of the New York Convention. (24) However, the New York Convention only sets out the default choice-of-law rules in the context of enforcing arbitral awards, and such rules do not explicitly apply to the pre-award context. (25)

   Further, courts are known to interpret the New York Convention in various conflicting ways, and this causes confusion as to the applicability of the rules under the convention. (26)

   Second and more specific to the tensions between national laws, since arbitration inherently deprives a court of its judicial jurisdiction, the nature of international arbitration and the uncertainties of the New York Convention further widen the gaps between the national choice-of-law approaches. (27) Each country can thus view the extent to which the parties may deprive its courts of jurisdiction by agreeing to arbitration differently, and the same is true for the interpretation of the relevant provision of the New York Convention. (28) Despite widespread adoption around the world of the general approaches of the choice-of-law rules in commercial contracts, such as party autonomy and closest connection, (29) there are great differences in the choice-of-law rules when it comes to deciding the validity of the arbitration agreement. (30) While countries are largely in consensus that parties' express choice of the AA law should be given effect, (31) it is problematic where parties have not explicitly chosen a national law to govern the validity of the arbitration agreement. (32) Among the approaches, there are two main camps, as noted above. (33) The first camp advocates the application of the general contract law in the absence of express choice. This camp is represented by English law, (34) as restated in Enka and Kabab-Ji. The second camp advocates the application of the curial law in the absence of an express choice. (35) China, among others, represents this second camp. (36)

   Third, it is hard to argue that one approach decisively trumps the other. The reality is that most parties opting for arbitration ex ante have not put any thought into the AA law. (37) In the absence of an express choice, both laws have legitimate claims to be the implied choice, (38) or the law with which the arbitration agreement has the closest connection. (39) This makes the utilization of the traditional tools in contractual choice of law in this context very difficult. It is common to find judges and commentators casually linking the law identified by their favorite approaches as the "implied choice" or the law with the "closest connection" to the arbitration agreement without much elaboration. (40)

   Fourth, the issue is not solely the choice of law. It extends to both jurisdiction and enforcement. For jurisdiction, the validity issue may arise in deciding whether the court has jurisdiction to adjudicate the matter. (41) If the arbitration agreement is valid under the governing law, the court must stay the case. (42) For enforcement, signatories of the New York Convention may refuse to recognize and enforce an arbitral award if the arbitration agreement is invalid according to Article V(l)(a). (43) Thus, the validity issue influences all three traditional questions of private international law. (44)

   Fifth, beyond the great debates and theories lies the significant impacts these different approaches have on international commercial arbitration. The inconsistent choice-of-law approaches around the world are certainly not ideal as it means the same international arbitration agreement may be valid in one country but not another, which would unavoidably lead to forum shopping. (45) This discourages the use of international arbitration as an alternative to traditional court litigation. Table 1 below illustrates this problem:

   The...