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Choice of law in arbitration agreements: important clarification from UK Supreme Court

An eagerly awaited decision of the UK Supreme Court handed down on 9 October 2020 clarifies, in the context of an arbitration seated in London, how the English courts will determine the proper law of an arbitration agreement. The decision is a salient reminder of just how important it is to carefully and precisely draft an arbitration agreement.

Enka Insaat Ve Sanayi A.S. (Respondent) (Enka) v OOO Insurance Company Chubb (Appellant) (Chubb) [2020] UKSC 38 followed an application by Enka in the High Court of England for the enforcement of an arbitration agreement. Enka sought an anti-suit injunction to restrain Chubb from prosecuting claims in the Russian courts following a fire in a power plant in that country. Enka’s application was dismissed at first instance.  

Enka was successful on appeal with the Court of Appeal granting the injunctive relief and restraining Chubb from appealing the decision of the Russian Court. Chubb appealed to the UK Supreme Court.

As the Supreme Court observed:

“The central issue in this appeal concerns which system of national law governs the validity and scope of the arbitration agreement when the law applicable to the contract containing it differs from the law of the seat of the arbitration.”

The law governing the substance of the dispute in this case was Russian law; the procedural law was that of England, the parties having chosen London as the seat and the arbitration was to be conducted in English under the ICC Arbitration Rules. There was no express choice of law clause in either the underlying contract or in the arbitration agreement. The Court of Appeal held that the law applicable to the arbitration agreement was English law.

In its 115-page judgment, by majority (Lord Burrows and Lord Sales dissenting), the Supreme Court dismissed Chubb’s appeal, albeit for different reasons to those of the Court of Appeal, thereby clarifying an issue that has ”long divided courts and commentators”.

The majority judgment of the UK Supreme Court, which is considered in more detail below, makes it clear that for an arbitration seated in London, the proper law of the arbitration agreement, absent a choice of law by the parties, will be the law of the seat. This, according to the ‘default rule’, is the law of the place with which the arbitration agreement is most closely connected.

Whilst the judgment emphatically clarifies the law, it also emphasises the importance of a choice of law clause in both the contract containing the parties’ substantive rights and obligations and, where there may be doubt, in the arbitration agreement itself. This is not a common practice, although legal advisers taking a conservative approach have, at least since for the past decade, tended to include a choice of law paragraph in the arbitration clause.  

The inclusion of an express clause insulates the parties against extensive (and expensive) litigation concerning the dispute resolution process and, in particular, disputes over the scope and validity of the parties’ arbitration agreement. A choice of law clause, choosing either the same or a different law to that governing the underlying contract, is entirely consistent with party autonomy, a primary element of international commercial arbitration.

The question before the Supreme Court

The ultimate (and practical) question before the court was whether Enko was entitled to injunctive relief to bring to an end litigation in Russia involving disputes between the parties which, on Enka’s submission, fell within the scope of the parties’ arbitration agreement.  

The critical analysis for the international arbitration community was the enunciation by the Court of the principles applicable to determine the law of the arbitration agreement where the contract embodying that agreement (and the arbitration agreement itself) is otherwise silent.

Determining the law of an arbitration agreement

The majority’s decision was given by Lord Hamblen and Lord Leggatt (Lord Kerr agreeing).

The majority identified the conceptual distinction between three different systems of law which could apply to an internationally commercial agreement with an arbitration clause.

  • the law governing the substance of the dispute (usually the law applicable to the contract from which the dispute has arisen);

  • the law governing the agreement to arbitrate; and

  • the law governing the arbitration process.

Arbitration agreements are excluded under the Rome I Regulation.[1] In determining the governing law of the arbitration agreement, the Court was therefore required to apply the rules developed by the common law in England for determining the law governing contractual obligations. As the Court observed:

”Those rules are that a contract (or relevant part of it) is governed by: (i) the law expressly or impliedly chosen by the parties; or (ii) in the absence of such choice, the law with which it is most closely connected.”

and

“The starting point at common law … is that contracting parties are free to choose the system of law which is to govern their contract, provided only that their choice is not contrary to public policy.”

Having considered and discussed the relevant jurisprudence the Court found, as its starting position, that ”it is both consistent with authority and sound in principle to apply English law as the law of the forum to ascertain whether the parties have agreed on the law which is to govern their contract (and, if not, what law governs it in the absence of agreement),” adding that:

”To apply any other law for this purpose would introduce an additional layer of complexity into the conflict of laws analysis without any clear justification and could produce odd or inconsistent results.”

In doing so, the Supreme Court rejected the assertion of the Court of Appeal that “in construing the contract to determine whether a choice of governing law applies to an arbitration agreement with in, the court should apply the principles of construction of the main contract law if different from English law.”

On the question of whether the parties had chosen, either expressly or impliedly, the law which governed their arbitration agreement, the Court stated, acknowledging that the Rome I Regulation recognises the distinction, that:

“The distinction, however, is not a sharp one: language may be more or less explicit and the extent to which a contractual term is spelt out in so many words or requires a process of inference to identify it is a matter of degree. Determining whether the parties have agreed on a choice of law to govern their contract is in every case a question of interpretation. It is also important to keep in mind that whether a choice is described as express or implied is not a distinction on which any legal consequence turns. An implied choice is still a choice which is just as effective as a choice made expressly.”

Turning now to what the Court referred to as the ‘default rule’, the acknowledgment that in determining a governing law, “the court is no longer concerned with intention at all and is applying a positive rule of law, with the rule being that the contract is governed by the system of law with which it has its “closest and most real connection”’.

The Court noted, consistent with practice, that different obligations in the same contract can be governed by different laws, noting, however that “[t]o apply different systems of law to different parts of a contract has the potential to give rise to inconsistency and uncertainty”. The Court then considered the unique role of the arbitration clause (being concerned not with substantive rights, but with an agreement as to how disputes arising from the substantive rights are to be resolved) and the ‘cardinal’ principle of separability. The Court observed that this principle was relevant to the conflict of laws analysis because “it alleviates the difficulty identified by Dicey, Morris & Collins … in treating different parts of a contract as governed by different laws:

“Where the separability principle is recognised by the putative applicable law of the arbitration agreement, no inconsistency will arise from treating issues such as whether the contract is discharged by frustration, or whether the innocent party may terminate or withhold performance on account of the other party’s breach, or whether the contract has been rescinded for misrepresentation, as governed by a different law from the law of the arbitration agreement, as the resolution of those issues will not affect the validity or enforceability of the arbitration agreement.”

The Court was also influenced by the fact that the possibility that the arbitration clause might be governed by a different law to that of the container contract was not inconsistent with the Rome I Convention.

As courts, arbitration practitioners and tribunals well know, it is rare for an arbitration agreement to contain an express choice of law. Conversely, contracts with a connection to more than one country do usually contain a choice of law clause, the parties having specifically turned their mind to this.  

In discussing the competing views of earlier jurisprudence as to whether the law governing the entire contract extended to the arbitration agreement (as a separate contract), the court acknowledged this distinction. The court concluded for a number of reasons, including benefits of certainty and consistency, that under English law “[a]s a matter of principle and authority there are therefore strong reasons why an agreement on a choice of law to govern a contract should generally be construed as applying to an arbitration agreement set out or otherwise incorporated in the contract”. The majority did however accept that it was unlikely that the choice of law clause would govern the arbitration agreement where it would render the arbitration agreement invalid or where there was a serious risk that a choice of that law would undermine the arbitration agreement..

As to the international perspective, the Court observed that “although there is no uniformity, there are many commentators on international arbitration who support such an approach, at least where there is an express choice of governing law for the contract”. As the Court notes in the judgment, although earlier jurisprudence in Singapore supported the view that the law of the seat should generally apply to the arbitration agreement where the parties had themselves failed to choose a governing law, the decision of Steven Chong J in BCY v BCZ [2016] SGHC 249 (later confirmed on appeal) rejected that view.

The judgment sets out a detailed analysis of the findings of the Court of Appeal. It cites, and then rejects, what the Supreme Court refers to as the ‘overlap argument’, an argument which:

“…rests on the premise that the curial law which governs the arbitration process is so closely related to the law governing the arbitration agreement that a choice of law to govern the contract should generally be presumed not to apply to an arbitration clause when the parties have chosen a different curial law.”

The majority judgment clearly states, after consideration of the relevant jurisprudence from which the argument developed and reference to the provisions of the Arbitration Act 1996, that:

“… [a]s the legislation contemplates and specifically provides for a situation in which the arbitration agreement will be governed by a foreign law even though English law governs the arbitration process, no necessary inference can be drawn that, by choosing an English seat and with it English law as the curial law, parties are also impliedly choosing English law to govern their arbitration agreement.”

The Court added, after observing the popularity of London as a seat for arbitration amongst the international business community, that:

“‘There can in these circumstances be no general implication that a choice of London (or any other major arbitration centre) as the seat of arbitration demonstrates an intention that the parties’ contractual obligations will be governed by the law of that place.’

Connection with law of seat

The Court observed that where the parties have not chosen a law to govern their contract, it is reasonable to assume that all terms of the contract, including the arbitration agreement, will be governed by the same law. Furthermore,

“There are a number of reasons of principle and policy which in our opinion justify as a general rule regarding the law of the place chosen as the seat of arbitration as the law most closely connected with the arbitration agreement which in the absence of choice will apply by default.”

These ‘principles and policy’ include the place of performance of the arbitration agreement, legal certainty, the consistency of this rule with international law and legislative policy and the fact that it ‘is likely to uphold the reasonable expectations of contracting parties who have chosen to settle their disputes by arbitration in a specified place but made no choice of law for their contract.

The governing law in this case

It being common ground between the parties that the contract in this case did not contain a choice of law clause, the Court applied the principles and ‘rule’ discussed above to determine the law governing the parties’ arbitration agreement.  

In doing so, it rejected the argument that the underlying construction contract made clear that the parties intended Russian law to apply because of the fact that the contract contained obligations to comply with ‘applicable law’, which was defined by reference to Russian law. This did not necessarily imply that the parties had chosen Russian law to govern the validity and interpretation of the parties’ contractual rights and obligations. As there was no express selection of any system of law in the contract and its terms did not point ineluctably to the conclusion that the parties intended Russian law to apply, the default rule applied.

The Court concluded:

“ … that the contract from which a dispute has arisen in this case contains no choice of the law that is intended to govern the contract or the arbitration agreement within it. In these circumstances the validity and scope of the arbitration agreement (and in our opinion the rest of the dispute resolution clause containing that agreement) is governed by the law of the chosen seat of arbitration, as the law with which the dispute resolution clause is most closely connected. We would therefore affirm - albeit for different reasons - the Court of Appeal’s conclusion that the law applicable to the arbitration agreement is English law.

Consequent on this finding, the Court dismissed the appeal, holding that an anti-suit injunction should generally be granted to uphold the parties’ bargain and accordingly the anti-suit injunction was properly granted.


[1] Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations)


Authors

HANNA Andrew SMALL
Andrew Hanna

Senior Associate


Tags

Arbitration

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