Recently, the Supreme Court of the United Kingdom[1] rendered an important judgement on the issue of the applicable law to the arbitration agreement. In summary[2], the court held that: 1) a choice of law to govern a contract containing an arbitration clause will generally be a sufficient indication of the law to which the parties subjected the arbitration agreement; however, 2) if there is no express governing law – the arbitration agreement is to be governed by the law most closely connected with the arbitration agreement, which usually is the seat of the arbitration. The current article examines the issue regarding the law governing the arbitration agreement in the absence of choice from Bulgarian law perspective.

I. Bulgarian national law

The matter is not explicitly regulated in the Bulgarian national law. Neither the Bulgarian International Commercial Arbitration Act, nor the Private International Law Code of Bulgaria or any other legislative act provides any guidance on the applicable law to the arbitration agreement in the absence of choice.

II. International law

The Geneva Convention and the New York Convention regulate the matter.

According to Article 6, Para. 2 of the European Convention for International Commercial Arbitration (the “Geneva Convention”)[3]:

In taking a decision concerning the existence or the validity of an arbitration agreement, courts of Contracting States shall examine the validity of such agreement with reference to the capacity of the parties, under the law applicable to them, and with reference to other questions:

• under the law to which the parties have subjected their arbitration agreement;
• failing any indication thereon, under the law of the country in which the award is to be made;
• failing any indication as to the law to which the parties have subjected the agreement, and where at the time when the question is raised in court the country in which the award is to be made cannot be determined, under the competent law by virtue of the rules of conflict of the court seized of the dispute.

According to Article 5, Para. 1, “a)” of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”)[4] in assessing the validity of the arbitration agreement, the court applies the law which the parties have subjected the arbitration agreement to or, failing any indication thereon – law of the country where the award was made.

In other words according to the Geneva Convention and the New York Convention, the substantive law, applicable to the arbitration agreement (when assessing its validity) in case of absence of choice would be the law of the country where the award was/is to be made.

III. Bulgarian caselaw

According to the Bulgarian caselaw, if the parties have not chosen a governing law for the arbitration agreement – the arbitration agreement shall be governed by the law of the country of the seat of the arbitration.

Furthermore, the Bulgarian caselaw explicitly denies the possibility the arbitration agreement to be governed by the law governing the contract. In Judgement N 1412 of 30.06.2015, case N 58/2015 of the Sofia Court of Appeal[5] the court found that even though the Shareholders’ agreement was governed by the law of the United Kingdom, that was irrelevant in determining the law applicable to the arbitration agreement. Applying Article 5, Para. 1, “a)” of the New York Convention the court found that the substantive law applicable to the arbitration agreement is the law of the country where the award was made (Austria).

The same view was adopted in Judgement N 1191 of 11.07.2016, case N 1535/2011 of Sofia City Court. The court held that the law applicable to the Shareholders’ agreement (chosen by the parties) did not govern the arbitration agreement due to the autonomy (separability) of the arbitration agreement from the underlying contract.

IV. Bulgarian legal theory

The issue of the arbitration agreement in the absence of choice has also been discussed in the Bulgarian legal theory.

It is widely accepted that in the absence of a choice of law applicable to the arbitration agreement, the law of the seat of arbitration will be applicable to the arbitration agreement[6]. Some Bulgarian authors[7] explicitly point out that even if the parties have chosen the substantive law applicable to the contract, this does not mean that the arbitration agreement is governed by the same substantive law, regardless of the fact that the arbitration clause is included in the main contract. The reasoning of the author is that both contracts have completely different subjects, functions and legal consequences.

However, other Bulgarian scholars[8] acknowledge that it could be argued that the law chosen by the parties to the substantive contract could also be considered to be applicable to the arbitration agreement. Reasons being that the grounds for substantive validity should be determined on the basis of the same legal system, as the same defects affect both the substantive and the procedural contract.

V. Conclusion

The applicable law to the arbitration agreement in the absence of choice is not explicitly regulated in the Bulgarian national law. According to the Bulgarian caselaw, if the parties have not chosen a governing law for the arbitration agreement – the arbitration agreement shall be governed by the law of the country of the seat of the arbitration. However, there are also arguments that the arbitration agreement shall be governed by the law governing the main contract and chosen by the parties.

In conclusion, it is advisable that the parties are familiar with the potential pitfalls if the arbitration agreement was governed by the law governing the underlying contract and the law of the seat of arbitration, before concluding the arbitration agreement. In order to avoid uncertainty, the parties should include an explicit choice of law governing the arbitration clause in their contract.

Author: Alexander Georgiev

[1] Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait)

[2] A well-written article about the judgement of the Supreme Court of the United Kingdom could be found here: https://www.corrs.com.au/insights/uk-supreme-court-provides-further-guidance-on-laws-applicable-to-arbitration-agreements

[3] The Geneva Convention was signed by the Republic of Bulgaria on 21 April 1961, ratified on 13 May 1964 and published in the State Gazette, issue no. 57 of 1964.

[4] The New York Convention was signed by the Republic of Bulgaria on 17 December 1958, ratified on 10 October 1961 and has entered in force on 8 January 1962.

[5] The judgements, cited in the current article have entered into force.

[6] Stalev, Zhivko, Arbitration of Private Law Disputes, p. 40 and 61; Alexiev, Assen. National Report for Bulgaria (2018 through 2019), p. 5

[7] Stalev, Zhivko, Arbitration of Private Law Disputes, p. 40 and 62

[8] Zhelyazkova, Ventsislava, Arbitration as a mechanism to resolve disputes concerning rights capable of valuation in monetary terms, p. 103-104