International Arbitration Report

UK Supreme Court clarifies how to determine which law governs an arbitration agreement in absence of an express or implied term

Australia | Publication | November 2020

Download full report

Introduction

The Supreme Court has brought welcome clarity to the English law approach to determining the law governing an arbitration agreement in its judgment in Enka Insaat Ve Sanayi A.S. (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38. In summary, the Supreme Court ruled that if parties to a contract have not expressly or impliedly specified the law that governs their arbitration agreement, then the governing law of the contract (if specified) would apply. This is the case even if the seat is different to the governing law of the contract. But if the governing law of the contract is not specified, whether expressly or impliedly, then the arbitration agreement will be governed by the law most closely connected with the arbitration agreement. In general, that will be the seat of the arbitration. This article considers the reasoning of the Supreme Court judges as they worked through what has been an academically and practically contentious area of English law. This judgment was eagerly anticipated and reflecting that it was resolved on an expedited basis, with the appeal proceeding via both the Court of Appeal and the Supreme Court in a matter of months.

Key prior cases

The English law approach to determining the governing law of an arbitration agreement has, since the Court of Appeal judgment in Sulamerica CIA Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638, been determined by reference to a three stage test: (i) an express choice of law; (ii) an implied choice or (iii) the law with the closest and most real connection with the arbitration agreement. In the years following Sulamerica, courts and practitioners alike have differed in analyses of points (ii) and (iii). A key dividing question has been whether an express choice of the law governing the substantive contract could amount to an implied choice of the law governing the arbitration agreement, or whether the law of the seat of arbitration would, as the law most closely connected, govern the arbitration agreement.

This line of authority was further developed in the recent 2020 Court of Appeal judgment of Kabab-Ji S.A.L. v Kout Food [2020] EWCA Civ 6. The Court of Appeal held that a governing law clause reading “[t]his Agreement shall be governed by and construed in accordance with the laws of England” was also an express choice of law governing the arbitration agreement as a matter of construction of the particular terms of the contract and the arbitration clause in that case.

Facts

The claimant, Enka Insaat Ve Sanayi AS (Enka), entered into a subcontract with CJSC Energoproekt for certain works relating to the construction of a power plant in Russia. The subcontract contained an arbitration agreement requiring all disputes in respect of the subcontract to be referred to international arbitration seated in London and conducted under the ICC Rules. However, the subcontract contained no express choice of law governing the substantive contract nor the arbitration agreement.

A fire erupted at the Plant causing significant damage. The owner of the Plant received 21.6 billion Roubles with respect to the damage under its insurance policy with the first defendant, OOO “Insurance Company Chubb” (Chubb). By doing so, Chubb became subrogated to any rights the owner had against Enka or others in respect of liability for the fire. Chubb argued that Enka was responsible for the fire due to allegedly low-quality of works provided by Enka. In 2019, Chubb commenced proceedings in the Moscow Arbitrazh Court against Enka and 10 co-defendants. As a result of this, Enka issued an Arbitration Claim in the Commercial Court in London seeking a declaration that Chubb was bound by the arbitration agreement in the subcontract, and sought an anti-suit injunction restraining Chubb from continuing the Russian Proceedings on the basis that they violated the arbitration agreement. Enka asserted that the arbitration agreement was governed by English law.

At first instance, the Commercial Court held that the Moscow Arbitrazh Court was the appropriate forum to determine the scope of the arbitration agreement and refused the injunction on forum non conveniens grounds. The Court of Appeal overturned that decision and held that, in the absence of an express choice of governing law of the arbitration agreement, the governing law is the law of the seat – the choice of seat also amounting to an implied choice of governing law of the arbitration agreement – and granted the anti-suit injunction. In his reasoning, Popplewell LJ referenced the Kabab-Ji case, and sought to achieve clarity by setting out a default rule. Firstly, he noted that an express choice of the law of the arbitration agreement may be found in the arbitration agreement itself, alternatively in the express choice of law governing the substantive contract, or in a combination of such express choice with the terms of the arbitration agreement, properly construing the contracts. In all other cases, the governing law of the arbitration agreement is the law of the seat “as a matter of implied choice, subject only to any particular features of the case demonstrating powerful reasons to the contrary” ([2020] EWCA Civ 574, para 91).

The Supreme Court, in a split decision of 3:2, disagreed with Popplewell LJ’s reasoning, interpretation of the authorities and default rule, and substituted their own versions of clarity in this long disputed area of law.

The majority judgment

Lord Hamblen and Lord Leggatt (with whom Lord Kerr agreed) delivered the Supreme Court’s majority judgment. As a starting point, the majority stated that where an English court must decide the law governing an arbitration agreement, it must apply English common law conflict of law rules. A court should apply the common law rules rather that the provisions of the Rome I Regulation on the Law Applicable to Contractual Obligations ((EC) No 593/2008) (Rome I Regulation) because Rome I expressly excludes arbitration agreements (and choice of court agreements) from its scope. (Although the court noted that given the similarity between the two regimes, it would be rare to yield a different result under the two regimes). According to English common law rules, the law applicable to the arbitration agreement will be: (i) the law expressly or impliedly chosen by the parties; or (ii) in the absence of such choice, the law “most closely connected” with the arbitration agreement.

In determining the first question – whether the parties have made a choice of law – the court held that it is a question of interpretation, and the court should construe the arbitration agreement by applying English law rules of contractual interpretation as the law of the forum seized. In this, the Supreme Court disagreed with the Court of Appeal which had asserted that to construe the contract, the court should apply the principles of the law of the substantive contract, even if different to English law. The Supreme Court definitively stated “The main contract law, if different, has no part to play in the analysis.” – the law of the forum only should be applied. The court also noted that there is no sharp distinction between an express or implied choice – and in any event whether a choice is express or implied is not a distinction with any legal consequence; an implied choice is as effective as an express choice.

In determining the law governing an arbitration agreement, the majority offered a default ‘rule’: where the parties have not specified the law applicable to the arbitration agreement, but they have chosen the law to govern the contract containing the arbitration agreement, this choice will generally apply to the arbitration agreement on the basis that it is an implied choice of law governing the arbitration agreement. The court stated that the assumption that, unless there is good reason to conclude otherwise, all the terms of a contract are governed by the same law, applies to an arbitration clause as it does to any other clause of a contract (although the court noted that an arbitration clause may more readily than other clauses be governed by a different law given it has a different subject matter and purpose than the substantive contract). The majority further stated that: “it is natural to interpret such a governing law clause, in the absence of good reason to the contrary, as applying to the arbitration clause for the simple reason that the arbitration clause is part of the contract which the parties have agreed is to be governed by the specified system of law”. This rule encourages legal certainty and consistency of approach.

The court held that it was wrong to assert (as the Court of Appeal had done) that there is a “strong presumption” that the parties have chosen, by way of implied choice, the law of the seat of the arbitration to govern the arbitration agreement. The basis on which the Court of Appeal had made this assertion was rooted in the principle of separability and that the law governing a contract had little bearing on the arbitration agreement as a “different and separate agreement”. The majority reasoned that this overstated the separability principle which, in its essence, is used where applying the law governing the contract would render the arbitration agreement invalid or ineffective. This, the court said, is reflected in the wording of section 7 of the Arbitration Act 1996 (the Act), which provides that “an arbitration agreement which forms or was intended to form part of another agreement … shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement” (our emphasis).

The majority also gave significant weight to section 4(5) of the Act which states that a “choice of a law other than the law of England and Wales… as the applicable law in respect of a matter provided for by a non-mandatory provision… is equivalent to an agreement making provision about that matter”. The majority reasoned that only the mandatory provisions of the Act would apply by virtue of section 4(5) if the arbitration agreement is governed by a law other than English law. It therefore followed that the Act provides for a situation where the law governing the arbitration agreement and the law of the seat are distinct, which militates against an implied choice of the law governing the arbitration agreement merely by virtue of selecting the seat.

Where there has been no express choice nor implied choice – including by virtue of choosing the law governing the substantive contract, as was the case here – the court turns to the second limb of the test above and must determine the law with which the arbitration agreement is most closely connected. Again, the majority supported a default ‘rule’, namely that the law of the seat of arbitration would be the law most closely connected with the arbitration agreement, subject to strong countervailing factors. Such default rule was justified on the following basis:

the seat is the legal place of performance of the arbitration;
this approach is consistent with international law and legislative policy;
to the default rule upholds reasonable expectations of contracting parties who specify a seat of arbitration without turning their minds to a governing law clause; and
this approach provides legal certainty and predictability in the absence of choice.

As the seat of the arbitration was London, the majority upheld the Court of Appeal’s judgment that English law governed the arbitration agreement – the end result being an agreement with the Court of Appeal in substance, albeit a significant difference as to reasoning.

As regards the injunctive relief sought, the Supreme Court affirmed the Court of Appeal’s decision that it makes no difference whether the arbitration agreement is governed by English law or foreign law as the inquiry is the same: whether there been a breach of the arbitration agreement in commencing proceedings and, if so, whether it is just and convenient to grant an injunction to restrain that breach. English courts will generally give significant weight to the parties’ bargain in considering whether it is appropriate to grant injunctive relief.

The dissenting judgment

Given the narrow majority, it is also worth briefly covering the dissenting judgment. Lord Burrows delivered the dissenting judgment with whom Lord Sales agreed. Lord Burrows agreed with the majority that where parties have expressly or impliedly chosen the law of the contract then that choice applies to the arbitration agreement. His dissent concerned how and when an express or implied choice had been made, and the default position in the absence of an express or implied choice.

Lord Burrows agreed that where there has been no express choice of law governing the arbitration agreement the starting point for the analysis should be to assess the law with which the arbitration agreement is most closely connected. He held that the law with which the arbitration agreement is most closely connected must be the law with which the substantive contract is most closely connected.

Unlike the majority, Lord Burrows started by applying the Rome I Regulation (which is the EU and therefore English conflict of law rules) to determine the law governing the substantive contract. Applying Rome I, he found that the contract was governed by Russian law. On his reasoning, it therefore followed that the law most closely connected with the arbitration agreement was also Russian law.

The question of validity of the arbitration agreement under Russian law did not specifically arise in this case, and the dissenting judgment offered no substantive comment on whether their assessment would alter if the arbitration agreement would be invalid as a matter of Russian law. In obiter, Lord Burrows suggested that a narrow approach to this question would be preferred, agreeing with written submissions by Enka’s counsel that “It is impossible to say that just because Russian law takes a narrower view of AAs than English law does … that the parties must have intended English law to apply. That is results-based reasoning that ignores the fact that there are legitimate reasons for adopting a narrower approach”.

The dissenting judgment agreed with the majority that questions of granting an anti-suit injunction do not depend on the law governing the arbitration agreement, rather whether pursuing the foreign proceedings is a breach of the arbitration agreement. Given that they had concluded that Russian law governs the arbitration agreement, they held that they would remit to the Commercial Court the question of whether, applying Russian law, there had been a breach justifying the grant of an anti-suit injunction.

This dissenting judgment of Lord Burrows and Lord Sales highlights that there remains diverging views within the judiciary which will no doubt continue to be debated in the arbitration community.

Conclusion

The Supreme Court decision in Enka is an important development of English arbitration law, and one worthy of note for all commercial parties who choose to include arbitration agreements in their contracts. However, in practice, good drafting has always prescribed expressly stating both the choice of governing law of the substantive contract as well the governing law of the arbitration clause. Failure to specify both has the potential to lead to disputes and extensive satellite litigation as evidenced in this case. With this recent Supreme Court judgment, however, there is now greater certainty as to how such disputes will be resolved.

With thanks to Aman Tandon, trainee, for his contribution to this article.