Picture this: your company signs a major cross-border contract with a business in another country. A dispute erupts six months later, and suddenly neither party can agree on where the arbitration should be held, which country’s courts have supervisory control, or even which country’s laws apply. Legal fees mount. Operations freeze. What looked like a routine agreement has become an expensive nightmare.
This scenario, plays out in boardrooms and courtrooms with surprising regularity. The culprit is almost always the same: businesses treat their choice of law and jurisdiction clauses as afterthought boilerplate rather than strategic business decisions, to be negotiated and made when relations between parties are cordial. In the context of international arbitration, getting these clauses wrong can delay enforcement.
Two Different Clauses, Two Different Jobs
Before exploring why these clauses matter, it is important to understand what each one actually does – because they are frequently confused.
A governing law clause designates which country’s legal system will interpret your contract. It answers the question: if we disagree about what this agreement means, which laws decide?
A jurisdiction clause determines where disputes get resolved (also known as forum selection clauses)- whether in national courts, or before an arbitral tribunal, and in which city or country. This clause gains particular importance because in the context of arbitration, this will also indicate which laws and rules govern the conduct of the arbitration – the procedural law.
These provisions work in tandem but serve different purposes. You can have Malaysian law govern a contract while disputes are arbitrated in London. You can seat an arbitration in Singapore while the tribunal applies California law to the interpretation of the contract. This flexibility is one of international arbitration’s great advantages but it also creates room for costly mistakes if the clauses are not carefully aligned.
The Hidden Complexity: The Law of the Arbitration Agreement
Here is where things get particularly important for businesses considering arbitration. Most commercial parties assume that if their contract is governed by, say, Indian law, then naturally their arbitration clause is also governed by Indian law. This assumption is legally incorrect and potentially disastrous.
An arbitration clause is treated as a separate agreement from the main contract, a doctrine known as separability. This means the arbitration agreement can be governed by an entirely different law from the underlying contract.
Singapore courts apply a three-stage test (as established in BCY v BCZ [2017] 3 SLR 357) to determine what law governs an arbitration agreement: first, whether parties have expressly stated the law governing the arbitration agreement; second, if there is no express choice, the court will consider whether there is an implied choice of law governing the arbitration agreement. It would first look to the governing law of the contract; and third, if there is no express or implied choice, the court will ascertain which is the system of law with which the arbitration agreement has its “closest and most real connection”. The Singapore Court of Appeal, in Anupam Mittal v Westbridge Ventures II Investment Holdings, went further and adopted a “composite approach” – examining not only the law of the arbitration agreement, but also the law of the seat and relevant public policy considerations so as to determine the arbitrability of the dispute. The message for commercial parties is clear: do not leave the law of your arbitration clause to inference.
What Happens When the Clauses Conflict
The cautionary tale of BNA v BNB and BNC, illustrates exactly what happens when these clauses pull in different directions. The parties’ contract was governed by People’s Republic of China (“PRC”) law, but their arbitration clause referred disputes to SIAC “for arbitration in Shanghai.” This single 11-word phrase – “submitted to the Singapore International Arbitration Centre for arbitration in Shanghai” triggered years of litigation in both Singapore and Chinese courts, consuming enormous time and expense before the parties could even address the underlying dispute. The legal challenge being whether Singapore or Chinese law governed the arbitration agreement.
The core problem? The parties had not ensured coherence between the law governing their contract, the seat of the arbitration, and the rules of their chosen arbitral institution. When these three elements point in different directions, jurisdictional challenges become almost inevitable.
Why the Seat of Arbitration Matters So Much
The “seat” of an arbitration is not merely the city where hearings happen. It is a legal concept that determines which country’s courts supervise the arbitration, which procedural laws apply, and which courts can intervene if things go wrong. Parties select a seat because they have “notional confidence that the supervisory court would recognise and give effect to the arbitration agreement.” Choosing Singapore as a seat, for instance, brings with it the International Arbitration Act, the UNCITRAL Model Law, and a judiciary with a well-established pro-arbitration track record.
Practical Steps for Getting It Right
The following are some concrete steps businesses should take when drafting these clauses:
Be explicit about all three layers. State clearly: (1) the law governing the main contract; (2) the seat of arbitration; and (3) ideally, the law governing the arbitration agreement itself. Many parties address the first two but omit the third, leaving it to courts to infer.
Check for coherence. Ask whether the substantive law, the seat, and the rules of the chosen arbitral institution are compatible. In particular, does the substantive law permit a foreign arbitral institution to administer your dispute? Some jurisdictions may impose restrictions that can invalidate your arbitration clause.
Do not treat arbitration clauses as a midnight exercise. As multiple cases demonstrate, arbitration clauses are frequently rushed through at the final stage of contract negotiations. Given the consequences of getting them wrong, they deserve careful, deliberate attention.
The Strategic Value of Getting It Right
Choice of law and jurisdiction clauses are not administrative boxes to be ticked, they are the foundation upon which your entire dispute resolution strategy rests. A poorly drafted clause can leave you litigating preliminary questions for years before your actual dispute is ever heard. A well-drafted clause, by contrast, gives you certainty, reduces enforcement risk, and can provide a significant strategic advantage if a dispute arises.
For businesses operating across borders, the investment in clear, coherent, and carefully considered governing law and arbitration clauses is one of the most cost-effective forms of legal protection available.
