DISPUTE RESOLUTION: International Arbitration: Why Where Matters: The Seat of Arbitration in International Energy Contracts

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The Seat of Arbitration and the New York Convention

The June 2012 issue of the King & Spalding Energy Newsletter included an article summarizing "Tips for Arbitration Agreements in International Energy Contracts."
[1] Among those tips was the need to evaluate carefully and expressly designate in the contract the official site, or seat, of arbitration of any dispute arising out of or in connection with the parties' agreement(s). This follow-on article explains in more detail why that choice is so important.

Designating the seat of arbitration is one of the most important elements of an effective international commercial arbitration agreement. Parties should keep two key factors in mind in making that decision: (1) the seat should in most cases be in a state that is a party to the New York Convention to benefit from the protections of that treaty; and (2) the seat should be in a jurisdiction that has a well-developed body of arbitration law, courts experienced with arbitration issues, and a tradition of supporting and respecting international arbitration agreements and awards.

The New York Convention

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards,
[2] to which 149 States are now party, is the primary multilateral treaty with respect to international commercial arbitration. Known as the New York Convention, it applies to arbitral awards made in the territory of another State or considered not domestic under the law of the State in which enforcement is sought. [3]

While arbitration provides a neutral forum and allows parties to craft by agreement the process by which their contractual disputes will be resolved, international arbitration often requires the assistance of national courts to function effectively. The New York Convention provides a legal framework for the national courts of its Contracting States to review, recognize, and enforce those agreements and the awards flowing from them.

Among other things, the Convention provides for the courts of Contracting States to recognize an agreement in writing by which the parties undertake to submit their disputes to arbitration, unless it finds that the agreement is null and void, inoperative, or otherwise incapable of being performed.
[4] It further provides for each Contracting State to recognize and enforce an arbitral award made in another state, except under the limited bases for refusing recognition or enforcement defined in the Convention. [5]

While the Convention does not require reciprocity, many parties, including the United States, have declared that they will only apply the Convention to awards made in the territory of another Contracting State. [6] By siting the arbitration in a state which is a party to the Convention, the parties ensure they may obtain the benefits and protections of the Convention with respect to the aid of the local courts in recognizing and enforcing their arbitration agreement, the arbitral process, and any arbitral award.

Application of Local Law at the Seat of Arbitration

The New York Convention provides for each Contracting State to adopt local law applying the Convention in its territory, setting terms for the recognition and enforcement of agreements and awards consistent with conditions set out in the Convention.
[7] In the United States, for example, this was done through Chapter 2 of the Federal Arbitration Act. [8] The Convention thus places local law at the center of its implementation. The significance of local law, however, goes well beyond implementing the New York Convention.

When it comes to arbitration agreements, it is important to distinguish between a law governing the substantive issues in dispute and a law governing matters concerning arbitration under the contract (the lex arbitri). Regardless of the contractual designation of substantive law, the seat of the arbitration ordinarily governs arbitral procedure, including any local court involvement in aid of the arbitration or review and recognition of the award.
[9] For example, if a Production Sharing Agreement provides it is governed by English law, the arbitrators will apply English law to substantive issues; but if the arbitration is seated in Geneva, Swiss law will apply to the conduct of the arbitration. While some jurisdictions recognize that parties may expressly choose the procedural law of another jurisdiction, this is rarely done and is ill-advised. It is simpler to agree upon and designate a neutral seat having arbitration law with which the parties are comfortable. [10]

Setting Aside the Award Distinguished from Enforcing the Award

In evaluating an arbitral seat, it is also important to distinguish between setting aside an arbitral award and enforcing (or refusing to enforce) an arbitral award.

Under both the New York Convention and pre-existing arbitration jurisprudence, the courts of the place in which the arbitration was held or whose procedural law governed an arbitration have primary jurisdiction to review an award and determine its validity. That is, the only place where an arbitration award may be set aside or invalidated is at the place where the award was issued; i.e., the seat of arbitration. The courts of other jurisdictions have secondary jurisdiction and may only determine whether to enforce the foreign award in their jurisdiction.
[11]

Further, rather than the New York Convention, the local law at the seat of an arbitration determines whether an award may be set aside. Consistent with this rule, the New York Convention does not address or restrict the grounds for setting aside an arbitration award; instead, it addresses – and significantly restricts – the grounds on which the courts of other Convention parties may refuse to enforce an award falling under the Convention. [12] Notably, one of the grounds on which a court may refuse to enforce a foreign award is that the award has been set aside in the country in which or under the law of which it was made. [13]

As a practical matter, the parties and arbitrators may agree to hold hearings in a location other than at the seat of arbitration, without changing the seat or the place from which an award is issued. [14] This flexibility may be expressly provided for in an arbitration agreement, including through the choice of rules under which the arbitration will be conducted, or in procedural orders issued by a tribunal in a particular proceeding. [15]

Given the importance of local law, parties should be careful to choose a place of arbitration with well-developed arbitration law and jurisprudence, and with courts experienced in international arbitration matters and sympathetic to the arbitral process. The most popular sites for international arbitration all have differences, but share these essential qualities.
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[1] As in that article, this article also deals with international arbitration of disputes pursuant to commercial contracts rather than arbitration pursuant to bilateral or multilateral investment treaties.
[2] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature June 10, 1958, 330 UNTS 38; 21 UST 2517; 7 ILM 1046 (New York 1958).
[3] New York Convention art. I. An agreement or award may be considered non-domestic, for example, if it is between citizens of the same state but involves property in another state, envisages execution or performance in another state, or otherwise reasonably concerns foreign states. See, for example, Federal Arbitration Act, 9 U.S.C. § 202.
[4] New York Convention art. II(1)-(3).
[5] New York Convention arts. III, V.
[6] See New York Convention art. I(3). The current status of the Convention, including all parties and reservations, is available at www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html.
[7] New York Convention art. III.
[8] Federal Arbitration Act, 9-U.S.C. §§ 201-208.
[9] For a more thorough discussion, see Nigel Blackaby and Constantine Partasides, REDFERN AND HUNTER ON INTERNATIONAL ARBITRATION ¶¶ 3.34-3.87 at 173-193 (Oxford Univ. Press 2009) ("REDFERN & HUNTER").
[10] See REDFERN & HUNTER, supra, ¶¶ 3.63-3.66 at 185-186; Jack J. Coe, Jr., INTERNATIONAL COMMERCIAL ARBITRATION: AMERICAN PRINCIPLES AND PRACTICE IN A GLOBAL CONTEXT § 3.2.1 at 52-53 (Transnational Pub. 1997).
[11] See, e.g., Gulf Petro Trading Co. v. Nigerian National Petroleum Corp., 512 F.3d 742, 746-47 (5th Cir. 2008).
[12] See id.; see also Albert Jan van den Berg, THE NEW YORK ARBITRATION CONVENTION OF 1958 at 20 (Kluwer 1981). The New York Convention expressly allows any interested party to take advantage of an arbitral award in any manner and to the extent allowed under the local law of the place in which enforcement is sought. New York Convention art. VII.
[13] New York Convention art. V(1)(e). As van den Berg notes, this and the corollary provision in Article VI allowing a court before which an enforcement application is pending to stay the decision on enforcement pending a decision on an application to set aside at the seat of arbitration "affirm the well-established principle of current international commercial arbitration that the court of the country of origin is exclusively competent to decide on the setting aside of the award." van den Berg, supra, at 20.
[14] See REDFERN & HUNTER, supra, ¶¶ 3.55-3.59 at 181-83.
[15] Some of the most well-known rules of arbitration expressly provide for hearings and meetings to be held at places other than the official seat of the arbitration. See, for example, ICC Arbitration Rules art. 18 (2012); LCIA Arbitration Rules art. 16 (1998); UNCITRAL Arbitration Rules art. 18 (2010).


 

Topics:  Arbitration, Arbitration Agreements, Arbitration Awards, Contract Drafting, Foreign Arbitration Clauses, Foreign Jurisdictions

Published In: Alternative Dispute Resolution (ADR) Updates, General Business Updates, Energy & Utilities Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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