Determining the law applicable to the arbitration agreement is one of the most complex and significant legal issues in international trade and investment contracts, given the legal independence enjoyed by the arbitration clause from the underlying contract (Doctrine of Separability).
The parties may agree to choose a particular law to govern the subject matter of the commercial dispute without considering the need to determine the law applicable to the arbitration clause itself. This may create procedural gaps affecting the validity and effectiveness of the agreement.
For companies investing in Egypt or Egyptian companies contracting with foreign parties, a precise understanding of this concept represents an essential safeguard for the validity of recourse to arbitration and the enforceability of the arbitral award.
The Concept of the Autonomy of the Arbitration Clause and the Separation of the Governing Law
Commercial arbitration is based on the principle of the autonomy of the arbitration clause from the underlying contract in which it is contained. This principle means that the arbitration clause is treated as a standalone agreement with its own independent legal regime; consequently, the invalidity or rescission of the main contract does not necessarily entail the invalidity of the arbitration clause.
This independence means that the underlying contract may be governed by a particular substantive law, such as Swiss or English law, while the law applicable to the arbitration agreement may be a different and independent law, which may be the law of the seat of arbitration (Lex Arbitri) or the law of the state in which enforcement of the award is sought.
The Egyptian and Comparative Legal Framework for Determining the Governing Law
Egyptian Law No. 27 of 1994 on Arbitration in Civil and Commercial Matters regulates arbitration agreements and the determination of the legal rules applicable to them, in line with established international principles.
- Party Autonomy and Express Choice: Egyptian law allows the parties freedom to choose the law applicable to the arbitration clause. Where the contract expressly provides that the arbitration clause is subject to a specified law, that choice will generally be given effect.
- Silence and the Absence of an Express Provision: If no independent law is specified for the arbitration clause while a particular law is chosen for the main contract, an issue arises concerning the interpretation of the parties’ intentions. Modern legal systems and Egyptian courts have, in many instances, applied the “law of the seat of arbitration” (Lex Arbitri) as the law most closely aligned with the parties’ presumed intention in the absence of an express choice.
- International Conventions (1958 New York Convention): Egypt is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Article (5/1/a) of the Convention provides for the application of the law governing the parties’ capacity, or the law to which the parties have subjected the arbitration agreement, and, in the absence of such choice, the law of the country in which the award was made, namely the seat of arbitration.
Legal Risks and Commercial Consequences for Companies
Failure to determine the law applicable to the arbitration agreement with precision may result in serious financial and procedural consequences for business operations. The problem does not arise only at the commencement of arbitration; its effects may extend to the enforcement stage.
- Risk of Invalidity of the Arbitration Clause: The arbitration clause may be valid under the law governing the main contract but invalid under the mandatory law of the seat of arbitration or the law of the state in which enforcement is sought, which may deprive the tribunal of jurisdiction.
- Procedural Jurisdictional Disputes: Time and money may be consumed in preliminary disputes over the applicable law before the merits of the commercial dispute are even addressed.
- Difficulties in Enforcing Awards: The opposing party may be given a legal basis to challenge the validity of the agreement during set-aside proceedings or enforcement applications before national courts under the New York Convention.
- Disruption of Contracts and Commercial Operations: Resolution of disputes involving shipping, import and export operations, construction contracts, and technology contracts may be delayed as a result of increasingly complex arbitration proceedings.
Special Considerations for International Clients and Investors in Egypt
When drafting investment and international trade contracts connected with the Egyptian market, particular attention should be given to a number of matters that may directly affect the validity and enforceability of the arbitration agreement.
- Egyptian Public Policy: If the seat of arbitration or the place of enforcement is in Egypt, mandatory provisions of Egyptian law and public policy must not be violated, particularly in relation to matters that may not be subject to settlement or arbitration, such as bankruptcy disputes or certain matters relating to real property ownership.
- Administrative and Government Contract Disputes: Egyptian legislation requires, in certain contracts to which an administrative authority is a party, the approval of the competent minister for the arbitration clause, while the dispute may in many cases also be subject to Egyptian law.
- Consistency Between the Law of the Contract and the Law of the Seat: Conflicts should be avoided between the legal regime governing the contract and the procedural and substantive framework applicable to the arbitration agreement and the proposed seat.
Common Mistakes in Drafting an Arbitration Clause
Issues concerning the governing law often arise at the drafting stage. Some errors may appear minor when the contract is signed but become significant once a dispute arises.
- Failure to Specify the Law Governing the Agreement: Relying on a clause that specifies the governing law of the contract as a whole without expressly referring to the law applicable to the arbitration agreement.
- Drafting Pathological Clauses (Pathological Clauses): Using ambiguous language such as “the arbitration shall be subject to international rules” without identifying a specific legal regime.
- Conflict Between the Law and the Seat: Selecting a seat of arbitration belonging to a legal system that prohibits arbitration of the subject matter of the dispute while insisting on the application of another law that permits it.
- Failure to Consider the Parties’ Capacity: Failing to verify that the applicable law grants the company representative the legal capacity and authority necessary to sign the arbitration agreement.
Practical Best Practices for Consistent Drafting
The scope for disputes over the governing law can be reduced if the issue is addressed clearly at the contract drafting stage, while taking into account the relationship between the law of the contract, the law of the arbitration agreement, and the seat of arbitration.
- Express and Independent Provision: Include a subparagraph within the arbitration clause clearly stating: “This arbitration agreement shall be governed by and construed in accordance with the laws of (X)”.
- Aligning the Law of the Clause with the Seat of Arbitration: From a legal perspective, it is preferable to choose the law of the seat of arbitration as the law governing the arbitration agreement in order to avoid procedural conflict.
- Using Institutional Precedents: Rely on model clauses issued by reputable arbitration institutions, such as the Cairo Regional Centre for International Commercial Arbitration (CRCICA), while adapting them to the nature of the transaction.
- Dual Review: Ensure that the wording is compatible with the law of the contract, the law of the seat, and the law of the potential country of enforcement.
When Is the Involvement of a Specialized Lawyer or Local Counsel in Egypt Necessary?
Determining the law applicable to the arbitration agreement requires specialized legal advice from a lawyer or local legal counsel (Local Counsel), particularly in contracts involving connecting factors with multiple countries and legal systems.
- Before signing international commercial contracts concluded with Egyptian parties or in connection with projects carried out on Egyptian territory.
- When a dispute arises and before commencing the filing of arbitration proceedings, in order to determine the appropriate procedural strategy.
- When planning to enforce a foreign arbitral award in Egypt, to verify the formal and substantive validity of the arbitration agreement in accordance with Article 58 of the Egyptian Arbitration Law.
- For the review and drafting of complex contracts concluded with government authorities or Egyptian public sector companies.
How Can Specialized Legal Support Help?
El Rouby Law Firm provides comprehensive and institutional legal support in the fields of arbitration and international trade to assist companies and investors in dealing with the complexities associated with the law governing arbitration agreements.
- Contract and Tailored Clause Drafting: Preparing and reviewing arbitration clauses to ensure full consistency between the law of the contract, the law applicable to the arbitration agreement, and the law of the seat of arbitration.
- Risk Management and Dispute Prevention: Assessing arbitration clauses in existing contracts, identifying weaknesses, and drafting amending addenda to protect the legal positions of the parties.
- Representation Before Arbitral Tribunals: Representing companies and investors in domestic and international arbitration proceedings and acting as Local Counsel for foreign law firms and companies in Egypt.
- Compliance and Enforcement: Managing proceedings to set aside arbitral awards, enforcement proceedings, and judicial recognition of foreign awards before Egyptian courts in accordance with the New York Convention and national rules.
Frequently Asked Questions About the Law Applicable to the Arbitration Agreement
What is the law applicable to the arbitration agreement?
It is the legal system that determines the validity of the arbitration clause or submission agreement, the parties’ capacity to enter into it, its formation, effectiveness, and interpretation, and it is independent from the law governing the subject matter of the underlying dispute under the contract.
Can the law governing the arbitration clause differ from the law governing the main contract?
Yes. Given the principle of the autonomy of the arbitration clause, the main contract may be governed by the law of one state, while the arbitration clause may be governed by the law of another state pursuant to the parties’ agreement or the rules of private international law.
What happens if the parties do not specify the law applicable to the arbitration agreement?
In the absence of an express provision, arbitral tribunals and courts generally rely on the law of the seat of arbitration (Lex Arbitri) or the rules applicable under the 1958 New York Convention.
What is the position of Egyptian law on choosing the law governing the arbitration agreement?
Egyptian Law No. 27 of 1994 recognizes the parties’ freedom to choose the law applicable to the arbitration agreement, provided that mandatory rules relating to public policy are not disregarded.
How does failure to specify the law governing the arbitration agreement affect enforcement of the award?
This may open the door to challenges seeking to set aside the award or refusal of enforcement before the courts of the country of enforcement on the basis that the arbitration agreement is invalid under the law of the seat or the law of the enforcing state.
Can an arbitration clause be governed by Egyptian law in a contract governed by English law?
Yes. In application of the principle of party autonomy and the autonomy of the arbitration clause, the parties may expressly provide that Egyptian law applies to the arbitration clause and its procedural rules while the main contract remains subject to English law.
References
- Egyptian Arbitration Law: Law No. 27 of 1994 on Arbitration in Civil and Commercial Matters.
- 1958 New York Convention: United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
- Cairo Regional Centre for International Commercial Arbitration (CRCICA): model clauses and institutional arbitration rules.
- United Nations Commission on International Trade Law (UNCITRAL): Model Law on International Commercial Arbitration.