The "Governing Law" Of A Contract Is Distinct From The Procedural Law Of An Arbitration

The purpose of this bulletin, the eighth in our "Dispute Resolution Clauses - Two Minute Drafting Tips" series, is to provide parties involved in negotiating commercial agreements with quick, actionable tips for crafting effective dispute resolution clauses. This bulletin explains how a clause specifying the "governing law" of a contract differs from an arbitration clause that specifies a "seat" or "place" of arbitration, and why it is important to consider each choice separately when drafting.

Contracts often include a "governing law" clause, particularly when the parties or the subject matters of their contract are in different jurisdictions. These clauses address something different from an arbitration clause that specifies a "place" or "seat" of arbitration. The jurisdiction identified as the "governing law" and arbitral "seat" or "place" need not be the same – in fact, a contracting party may have good reasons for wanting them to differ.

The distinction, in a nutshell, is this:

• The "governing law" clause determines the substantive law of the contract.
• The "seat" or "place" of arbitration (usually specified in the arbitration clause) determines the procedural law of arbitration.

"Governing Law" of the Contract Determines Substantive Law

Consider, for example, this simple "governing law" clause: "This agreement shall be governed by and construed in accordance with the laws of the Province of Ontario." This clause means that Ontario law will govern the parties' substantive rights and obligations under the contract. That is, Ontario law informs how the contract is interpreted, whether a breach has occurred, application of legal doctrines (e.g., frustration, force majeure, good faith), and what remedies are available.

"Seat"/"Place" of Arbitration Determines Procedural Law of Arbitration

The designation of a "seat" or "place" of arbitration, not the specification of "governing law", determines the procedural law of an arbitration. The procedural law, which is typically set out in a jurisdiction's arbitration legislation (e.g., British Columbia's Arbitration Act or International Commercial Arbitration Act), would include considerations such as:

• Appointment and challenge of arbitrators
• Jurisdictional and procedural issues
• Interim measures and procedural orders
• Judicial recourse from awards
• Rules on confidentiality, evidence, and hearings

So, the sample "governing law" clause above does not mean that the Ontario Arbitration Act will govern the arbitration. If the parties included an arbitration clause specifying a "seat" or "place" of arbitration in Vancouver, British Columbia, then the British Columbia Arbitration Act (or International Commercial Arbitration Act) governs arbitral procedure — even if the contract interpretation is governed by Ontario law.

Why the Distinction Matters

Parties can reduce the potential for procedural disagreements at the outset of an arbitration by specifying both the "governing law" of the contract and the "seat" or "place" of arbitration.

There may be good reasons for a party to want the "governing law" to differ from the "seat" or "place" of arbitration. Arbitration legislation differs from jurisdiction to jurisdiction. Some jurisdictions, for instance, allow for less judicial oversight in arbitrations than others.

The point is: make sure to think about the preferred "seat" or "place" of the arbitration rather than assuming it should necessarily be the same as the "governing law" of the contract.

In Case You Missed It

For more insights, check out our previous bulletins in the "Dispute Resolution Clauses - Two Minute Drafting Tips" series:

• Bulletin #1 - Using Model Arbitration Clauses and "Administered" Arbitrations
• Bulletin #2 - Addressing Panel Size and Arbitrator Qualifications
• Bulletin #3 - Mandating Arbitration and Clarity of Scope
• Bulletin #4 - Establishing Clear Procedures for the Appointment of Arbitrators
• Bulletin #5 - The Importance of Considering Emergency Measures in Dispute Resolution Clauses
• Bulletin #6 - When Should Your Contract Contemplate Expedited Arbitration Procedures
• Bulletin #7 - The Pros and Cons of Multi-Tiered/Escalating Dispute Resolution Clauses

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.