Supreme Court lays down the (governing) law for arbitration agreements

19 November 2020

Setting

The Supreme Court majority judgment eloquently sets the scene in the opening words: where you have an international commercial contract containing a clause submitting any disputes to arbitration (an “arbitration agreement”), you are engaging with – potentially – three different systems of national law. They are:

  • the law governing the substance of the dispute
  • the law governing the arbitration process itself
  • the law governing the arbitration agreement

These systems of law do not have to be the same. The first, the law governing the substance of the dispute, is normally the governing law applicable to the contract from which the dispute has arisen. The law governing the arbitration process (the “curial” law) is normally going to be the law of the seat of the arbitration (and the seat need not necessarily be the physical location of the tribunal).

But what about the third – the law governing the arbitration agreement? This clause normally sits towards the end of a commercial contract, hidden among the boilerplate. Common sense would suggest that the law of the contract (normally in the “governing law” clause almost always found at the very end of a commercial contract) should govern the agreement to submit disputes to arbitration.

However, there are two schools of thought on this subject: one school says that the law governing the larger commercial contract should also govern the arbitration agreement while the other school looks to the law of the seat as the law governing the arbitration agreement. In the English case-law, there are cases going either way even at Court of Appeal level.

In this particular case, the Court of Appeal had tried to impose order on chaos and stated that, without an express choice of law governing the arbitration agreement itself, the law of the seat should prevail in most cases. The question was how the Supreme Court should decide the matter in Enka v Chubb [2020] UKSC 38.

Factual background

Chubb was the insurer of the owner of a power plant in Berezovskaya in Russia, which was damaged by fire in 2016. The contract between the designer of the plant and Enka, a subcontractor, contained a dispute resolution clause submitting disputes to arbitration under the ICC rules, to be conducted in London, England in English. The designer assigned its rights to the owner of the plant, agreeing that the same dispute resolution rules should apply to the dispute between the owner of the plant and Enka. Chubb paid out on the insurance claim and became subrogated to the owner’s rights as against Enka.

This led to a welter of litigation in Russia and England. The question at heart concerned the law governing the arbitration agreement and deriving from this, whether an anti-suit injunction should be granted to restrain Chubb proceeding against Enka in the Russian courts.

Legal background

There is no statute or regulation to fall back on: the Rome I Regulation (dealing with conflict of laws) does not by its express terms apply to agreements to arbitrate. This means that the court must resort to common law rules, albeit that they are similar to Rome I.

The common law rules would normally indicate the following factors when deciding the law applicable to an arbitration agreement:

  • Party choice – if the parties have stated their choice of law, the court will normally apply it
  • When construing the contract to ascertain a choice of law for the contract, the court should apply English Law (regardless of what the contract itself says about choice of law) so the court would look at the contract as a whole using ordinary rules of contractual interpretation
  • Without a choice of law (express or implied) the court then looks to find the system of law which with the contract has the closest and most real connection
  • English Law can in theory apply different systems of law to different parts of a contract but this is an unusual conclusion: however, with an arbitration agreement, the courts are more willing to identify a different governing law
  • This leads to the perhaps odd conclusion that Rome I on conflict of laws could well apply to a commercial contract while the common law rules would apply to the arbitration agreement contained within it

Judgment – the “new” law

The Supreme Court noted the many cases that proceeded on the assumption that a choice of law clause in a commercial contract will normally govern an arbitration agreement contained within it: after all, why not? Parties rarely specify a different choice of law for their arbitration agreement. The Supreme Court listed five reasons why this should be so: certainty, consistency, avoidance of complexity, avoidance of artificiality and maintenance of coherence. Legally, the doctrine of “separability” means that an arbitration agreement can for some purposes be seen separately from the rest of the commercial agreement that contains it, but most parties rarely provide for different governing laws for the commercial agreement AND the arbitration agreement it contains. Indeed, outside the world of arbitration, most lawyers and businessmen are probably unaware of it.

However, this reasoning starts to break down when you have international contracts which apply a choice of law for a commercial contract between two parties from different jurisdictions but then the contract provides for disputes to be submitted to arbitration in a jurisdiction different from the parties’ respective jurisdictions and indeed different from the choice of law that the parties had made in their contract. At that point, there is less reason to suppose that the express choice of law chosen for the commercial contract should apply to the arbitration agreement, which is going to operate in different circumstances and for different purposes.

As against which, the Supreme Court saw a stronger connection between a commercial contract and the arbitration agreement contained within it – not an inseparable connection, though. In general, the law as stated by the Supreme Court is that the court should apply the choice of law made by the parties for their commercial contract to an arbitration agreement contained within it in the ordinary course.

Choosing a seat of the arbitration in a jurisdiction different from the governing law of the commercial contract will not, of itself, necessarily mean that the law of the seat applies to the arbitration agreement. Some factors could indicate that the law of the seat should nonetheless apply to the arbitration agreement e.g. where the local law provided so or where there was a serious risk that applying the law governing the commercial contract would make the arbitration agreement ineffective.

Where the parties have not, expressly or impliedly, made a choice of law for their arbitration agreement, then the court has to ascertain which system of law the arbitration agreement has the closest connection with. In that case, the seat chosen by the parties will normally be the system of law that governs the arbitration agreement. This will be in preference to the place where the commercial contract itself is (or was) to be performed. After all, the arbitration agreement serves a different purpose from the other provisions in the commercial contract that contains it and it makes sense, from a number of different perspectives, to apply the law of the seat of the arbitration to the arbitration agreement, absent any choice made by the parties.

Judgment – applying the law to the facts

The parties had not – as is usual – chosen a system of law to govern the arbitration agreement itself, or indeed for the commercial contract as a whole. This latter point is, of course, highly unusual in a detailed contract between international contractors and the Supreme Court concluded that an obvious explanation for the omission was that the parties simply could not agree on a mutually acceptable governing law. Be that as it may, the only possible conclusion was that there was no express choice of law and nothing in the agreement to point to that conclusion either.

The inquiry therefore moved to the closest connection inquiry: which system of law did the arbitration agreement have the closest connection with? This will normally be the seat, in this case, London, England. However, the inquiry did not rest there.

To understand the law applicable to the commercial contract, it was necessary to apply the provisions of the Rome I Regulation. This looked in the first place to the “habitual residence” of the the service provider: Enka was a Turkish company so this indicated that Turkish Law would apply. However, the contract was in Russian as the authoritative version, notices were similarly to be given in Russian, all the work was to be done in Russia according to the applicable rules and regulations of Russian Law. This meant that the commercial contract was “manifestly” more closely connected with Russia and so Russian Law applied to it.

However, the dispute resolution clause containing the arbitration agreement was complex and involved various stages, including good faith negotiations followed by an escalation procedure and only then arbitration. How should a court approach this – could it disentangle the negotiation and dispute escalation aspects from the arbitration agreement proper and apply different governing laws to them, or did both of them fall to be governed by one governing law and, if so, which – Russian or English (or Turkish)?

The majority of the Supreme Court was undeterred: it has become very common to have complex, staged dispute resolution clauses culminating in arbitration. For that reason, it will normally be the case that the same law which governs the arbitration provisions applies to the rest of the dispute resolution/escalation provisions as well.

And so, in conclusion, after a magnificent review of both case-law and global academic opinion, the Supreme Court concluded that the law of the seat (England) applied to the dispute resolution provisions including the arbitration agreement. The Supreme Court in the end agreed with the conclusion of the Court of Appeal, albeit for different reasons. It also upheld the anti-suit injunction given by the Court of Appeal to restrain Chubb from proceeding against Enka in the Russian courts.

Thoughts

This was a splendid trawl through decades of case-law and academic learning from all around the globe. The majority of the Supreme Court was concerned to come to a decision that was justifiable on the basis of the existing authorities as well as being in line with international norms and opinion.

For those drafting commercial contracts, an extra consideration should be the dispute resolution clause where it includes some sort of submission to arbitration. As the majority observed, while arbitration lawyers are used to the concept of seeing an arbitration agreement as legally “separable” from the rest of the commercial terms, most other people are not. Many businessmen would be surprised to discover that, having agreed a choice of law clause for their commercial contract, the court could possibly impose a different one for their arbitration agreement. This decision rationalises the situation but the better approach would still be to include an express choice of law clause for both the commercial contract as well as any arbitration agreement contained within it.

A further point relates to including an arbitration agreement in a complex dispute resolution clause including some sort of tiered structure. In this case, the Supreme Court found that the same governing law applied to both the arbitration agreement as well as to the whole dispute resolution clause but again, the better approach would be to make this clear by express wording.

Richard Stephens
19 November 2020

This note is for general information only and should not be relied on as legal advice. Take professional advice before taking any steps.