Project development agreements with states and state-owned enterprises (SOEs) are often governed by the law of the host country (sometimes with freezing, stabilization, or other limiting clauses), while also being subject to arbitration seated in a neutral venue.  The assumption is that the courts of the neutral venue will have exclusive jurisdiction to supervise the arbitration and confirm, or set aside, any arbitral award.

A decision issued last week by the U.S. Court of Appeals for the D.C. Circuit in P&ID v. Nigeria puts that assumption in doubt by suggesting that an award can also be set aside by the courts of the state whose substantive law applies to the merits of the dispute.  Together with recent judgments in other jurisdictions, the decision underscores the importance for investors of:  (i) resisting selection of the host state’s substantive law where possible; and (ii) particularly where that is not possible, including express language confirming the parties’ agreement that, notwithstanding the choice of the host state’s law to govern interpretation of the contract, the arbitration process will be governed by the law of the arbitral seat.

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards specifies that an arbitral award may be “set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made” (Article V(1)(e); emphasis added).  Courts traditionally interpret the underlined language to permit set aside only in the courts of the state whose procedural law governs the arbitration.  As the UNCITRAL Secretariat’s Guide to the New York Convention states (at p. 233):  “[a]lthough the Convention does not provide guidance as to the meaning of the expression ‘under the law of which,’ with very few exceptions, courts have generally rejected arguments that these terms referred to the law applicable to the merits.  Courts have decided that it referred instead to the procedural law governing the arbitration[.]”

An opinion from the D.C. Circuit published last Friday appears to depart from the traditional view, suggesting that an award may be set aside by the courts of the state whose substantive law applies to the merits of the dispute.  Specifically, the court stated:  “the New York Convention recognizes that an award may be ‘set aside or suspended’ by courts of the sovereign whose substantive law governs the arbitration, as well as by courts of the sovereign where the arbitration takes place” (slip op., p. 9; emphasis added).

There is reason to doubt whether the court’s opinion reflects a considered rejection of the traditional view.  Prior decisions of the D.C. Circuit recognize that “[t]he phrase ‘under the law of which’ in Article V(1)(e) [of the New York Convention] . . . refers to the procedural law governing the arbitration, not the substantive law governing the Agreement.”  See, e.g., Belize Social Development Ltd. v. Belize, 668 F.3d 724, 731 (D.C. Cir. 2012).  Here, the court’s language may have been influenced by the unusual choice of law provision at issue.  In particular, as the court summarized (slip op., p. 2):

By its terms, the contract was governed by Nigerian law.  It provided for arbitration in London, in accordance with the Nigerian Arbitration and Conciliation Act.

In other words, the parties expressly chose Nigerian law to govern both substance and procedure, and thus the court — despite its express reference to “substantive law” — may not have been focused on the distinction between substantive and procedural law.

But there are also reasons not to dismiss the court’s choice of words.  In particular, the D.C. Circuit’s opinion could be read in the context of decisions in other jurisdictions that have addressed whether parties should be presumed to have agreed that the substantive law of their contract also controls the arbitral process.  In the recent decision of Enka Insaat v. Chubb, [2020] EWCA Civ. 574, the Court of Appeal of England and Wales stopped well short of adopting such a presumption, but nonetheless took the view (at p. 38) that, “[w]here there is an express choice of law in the main contract it may amount to an express choice of the [procedural] law.”  On this view, unless the contract draws an express distinction between substantive and procedural law, the “courts of the sovereign whose substantive law governs the arbitration” might often have jurisdiction to set aside an award.

Whether the D.C. Circuit referred to “substantive law” purposefully or inadvertently, the decision underscores the risk that, in agreeing to the host state’s law to govern a project development or other host country agreement, an investor may unwittingly confer on host state courts the power to supervise arbitration proceedings and set aside arbitral awards, thus undermining the expectation that only the courts of the neutral seat of the arbitration will have this power.  Clear drafting can mitigate this risk.  In particular:

• Where possible, investors should resist selection of the host state’s substantive law.
• Where it is not possible to resist selection of the host state’s substantive law, investors should seek clear contractual language specifying that the procedural law of the arbitration is the law of the seat of the arbitration, and not the law of the host state, and that the courts of the seat have exclusive supervisory jurisdiction over arbitrations arising under the relevant agreement.

Drafted carefully, such language can reinforce that the parties considered and specifically rejected any implication that the host state’s courts could exercise supervisory jurisdiction over arbitrations between them.