The Missing Link – Proper Law of the Arbitration Agreement

Properly drafted contracts should (and usually do) have:

1. A clause specifying the system of law that governs the contract; and

2. A clause specifying how and where disputes arising under the contract are to be resolved e.g. Singapore Courts or Singapore Arbitration.

If Arbitration is the chosen method of dispute resolution, template arbitration clauses are readily available that usually provide for the seat of the arbitration, number of arbitrators, language of the arbitration and the applicable procedural rules.

However, arbitration clauses (even the templates) rarely provide for the law that governs the arbitration clause.

You’re probably thinking this is some esoteric technical point that only lawyers would get worked up about. However, on the contrary, this is a much-overlooked issue that can have a significant impact on the resolution of disputes under a contract that provides for arbitration.

What is this?

An arbitration clause (even if it is a clause in the main contract) is considered in law as being a separate or standalone contract.

This means that the arbitration clause can have its own governing law which is different from that of the main contract. This governing law of the arbitration clause is often referred to as the “proper law” of the arbitration agreement.

Why is it important?

The proper law of the arbitration clause governs issues such validity of the arbitration clause and subject matter arbitrability (i.e. whether a particular dispute can be dealt with by arbitration). [For more information on subject matter arbitrability, do read our previous article by Mary Anne Chua.]

What happens when the proper law is not specified?

Where the proper law of the arbitration clause is not specified (even if the main contract has an express choice of governing law), the Court will have to examine whether the parties had made an implied choice of the proper law to govern the arbitration clause.

Historically, Courts have implied either the law chosen by the parties to govern the main contract or the law of the seat as the implied choice of the proper law of the arbitration clause.

However, simply applying the governing law of the main contract runs contrary to the severability principle in which the arbitration agreement is seen to be a standalone contract from the main contract. Similarly, simply applying the law of the seat raises issues because parties may have only intended to apply the procedurallaws of the seat rather than to adopt its substantive laws to govern their contractual relations.

Also, there has been a great deal of uncertainty on how the proper law would be implied as the cases have fluctuated between these two options for some time. So the net result is parties spending a lot of time, effort and money arguing about how to fight a case rather than the substantive case itself.

Where are we now?

Two recent cases in Singapore and the United Kingdom have adopted the approach of implying the governing law of the main contract as the proper law of the arbitration clause as a starting point. [BNA v BNB[2019] SGCA 84 and Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2022] UKSC 38].

So what’s the problem?

While there is now more certainty as to the approach of the Singapore and UK Courts, the “governing law” approach can give rise to other difficulties or unexpected consequences.

Imagine a contract that has a governing law clause providing for the law of the People’s Republic of China (PRC) and an arbitration clause providing for arbitration in Singapore, administered by the Singapore Chamber of Maritime Arbitration (SCMA).

Unless expressly specified, the implied proper law of the arbitration agreement would likely be PRC law. If PRC law holds that the particular dispute is not arbitrable or that the arbitration clause is void, the dispute cannot be resolved in the manner originally envisaged i.e. SCMA arbitration in Singapore. Instead, the matter would need to be resolved in a totally unexpected manner, likely through the PRC Courts.

What do I need to do?

Simple – where you have a contact that has an arbitration clause, expressly specify the law to govern the arbitration clause.

However, you need to be alive to this point because, ironically, most standard or template arbitration clauses do not provide for a choice of the proper law of the arbitration agreement.

As to what to choose as the proper law of the arbitration agreement, there is no one size fits all recommendation.

However, the more popular seats of arbitration (Singapore, London, New York, etc) adopt a pro-arbitration stance. As such, there would generally be fewer issues with arbitrability if the seat was chosen as the proper law of the arbitration agreement. This also provides for uniformity within the arbitration agreement.

If you are not sure, seek legal advice. As the saying goes, an ounce of prevention is worth a pound of cure.

For further information, please contact:

K. Murali Pany

Managing Partner

JTJB Singapore Office
E : murali@jtjb.com
T : 6224 3645 / 9687 1165

Samuel Lee


JTJB Singapore Office
E : samuellee@jtjb.com
T : 6220 9388