Editor’s Note: This column was originally published in CLI sister publication Corporate Counsel on March 11.
Every commercial arbitration has a “seat,” and it is crucial to choose it carefully. Selecting the wrong one can undermine the arbitration entirely. The seat provides the framework underlying the arbitration, and the courts of the seat have supervisory jurisdiction. That has several consequences, but three points merit particular attention:
1. An arbitration award may be challenged in the courts of the seat on the grounds set out in the arbitration law of the seat. All countries will allow an award to be challenged on certain, limited grounds (for example, that the arbitrators lacked jurisdiction), but some also allow a challenge based on errors of law or on grounds of public policy. The approach of the local courts is also important—”public policy” can mean different things in different courtrooms.
2. The likely level of court intervention in any dispute will vary based on the seat. In “arbitration-friendly” jurisdictions, the courts typically intervene only to support the arbitration—perhaps to issue urgent interim relief or to enforce the arbitration agreement. Other jurisdictions may allow a more interventionist approach or decline to respect the arbitration agreement, which can lead to additional costs, delay and parallel court proceedings.
3. The law of the seat can play a part in some procedural issues in the arbitration, for example as to whether the tribunal has the power to award costs or interest, or what conflicts of law rules should be applied. It can also play a much more significant role in ad hoc arbitrations—but ad hoc arbitrations are relatively rare (and this article focuses on the position in institutional arbitration).
It is also important to keep in mind that a few emerging markets (for example, China) impose restrictions in some circumstances on the choice of seat.
For these and other reasons, it is possible to get the choice of seat very wrong. Choosing the wrong seat can, for example, severely delay the arbitration, increase the risk of parallel court proceedings and render the award prone to challenge on relatively broad grounds in the local courts. If those courts are not reliable—or your counterparty is well connected—the risks are obvious.
The good news is that there are several “safe” options in terms of seats, which have supportive arbitration laws and reliable, arbitration-friendly national courts. They are also in countries that are party to the New York Convention (an important factor in enforcing any award). Therefore, it should usually be possible to find an acceptable compromise. Commonly adopted “safe” options include (in no particular order) New York, London, Paris, Singapore, Hong Kong and Geneva.
(This is not to say that every other seat is a bad choice. Several other jurisdictions—including in North America and Europe—are arbitration-friendly and would be included by many in this list, but they are not as broadly accepted.)
How, then, should you choose between these “safe” options?
Turning first to a few common misconceptions, the seat need not be the same as the governing law of the contract, or be based in the same place as the chosen arbitral institution. Accordingly, there is no reason why a contract cannot be governed by English law but provide for ICC arbitration in New York. Similarly, counsel do not need to be qualified in the law of the seat, so there is no reason in this example why a party could not (if it wished) instruct English attorneys in the arbitration. In fact, the first question should be whether there are important distinguishing features from a purely legal perspective.
One potentially important legal difference relates to confidentiality. In arbitrations seated in Hong Kong, Singapore and London, the parties are subject (unless they agree otherwise) to a duty of confidentiality. No such obligation is imposed on the parties in Paris (other than in domestic arbitrations) or New York, unless agreed or contained in the applicable institutional rules (and not all the rules provide for confidentiality).
There are other differences. For example, in New York, an award may be challenged based on a “manifest disregard of the law.” But this is a high bar and no international arbitration award has ever been set aside on this ground by the New York courts. Further, the New York courts will determine questions about the jurisdiction of a New York-seated tribunal unless there is clear and unmistakeable evidence that the parties agreed that the tribunal should determine its own jurisdiction. This is a complex area of law, but the key point for present purposes is that the major institutional rules contain such an agreement.
As another example, the English Arbitration Act allows for challenge of an award based on an error of law, but again the threshold is set very high (the decision must be obviously wrong or open to serious doubt, if it is a point of general public importance). Moreover, the parties may opt out of this ground for challenge—and the major institutional rules contain such an opt-out provision.
The other seats also have their quirks, which could be significant in some cases. But it is impossible to say that, as a result of these differences, one is better than the others for all cases. Confidentiality aside, therefore, puely legal factors will rarely drive an informed choice between these “safe” options.
How about cost? Is one of these seats more likely than the others to lead to a cheaper and more efficient arbitration process? Anecdotal evidence differs on this point, but an arbitration in one seat should not be cheaper than in another, all other things being equal. Wherever the seat, the tribunal should set the procedure based on the circumstances of the case—and there is no reason why an international arbitration seated in New York (for example) should have broader discovery than if it was seated in Paris.
That said, all other things may not be equal: in particular, the seat can play a role in the constitution of the tribunal—it is one factor institutions consider in choosing a sole arbitrator or chair. In turn, the nationality and background of the sole arbitrator or chair may inform his or her approach to the arbitration. But this is by no means always the case, and the bottom line is that there is no accepted consensus among international arbitration specialists that one of these seats is more likely to lead to lower (or higher) costs than the others.
In fact, the most important factor is typically neutrality. The ability to select a neutral seat (i.e., not in either party’s “home” jurisdiction) is one of the key advantages of arbitration. But typically that will only rule out a few of these options, still leaving several seats to choose among.
Geography is another important consideration. This is partly driven by convenience—the seat will usually be the default venue for any hearings, although hearings can take place elsewhere so convenience should not be decisive. Additionally, certain seats tend to be selected more in the context of transactions in different regions, partly for reasons of familiarity. For example, a New York seat is common in the South American context, whereas London and Paris are more typical choices in contracts relating to Africa. Similarly, Hong Kong and Singapore are steadily increasing their share of Asia-related arbitrations.
Logistical factors, such as availability in the seat of hearing rooms and associated services (particularly transcribers and interpreters), are sometimes cited as relevant considerations. While such facilities are undoubtedly important in a hearing venue, again they should not be decisive.
One practical issue worth considering is language. A well-drafted arbitration agreement will provide that the arbitration itself will be conducted in English (or another language). Any court proceedings (including any challenge to the award), however, will be in the local language of the seat, which can be inconvenient and may increase costs.
Bringing all of this together, there are four key practical points to take away:
1. Every arbitration clause should specify the “seat.” If no choice is made, the arbitral institution or the tribunal will determine the seat, introducing an unnecessary element of risk and uncertainty.
2. Check that there are no local law restrictions on the location of the seat.
3. New York, London, Paris, Singapore, Hong Kong and Geneva are “safe” choices (but are not the only good choices). There are differences between them, but none of them stands out as preferred for every contract.
4. There is no reason not to start with New York, if your preference is for a seat in the United States. If that is resisted, you can safely offer one of the other options as a compromise, hopefully in exchange for leverage elsewhere.
Chris Parker is a partner in the New York office of Herbert Smith Freehills who specializes in international arbitration. He has acted as counsel and advocate in ad hoc and institutional arbitrations in a number of jurisdictions and under various governing laws. He has broad experience of advising on international disputes, particularly in the energy and telecommunications sectors, and can be reached at email@example.com.