Which country's laws govern an arbitration agreement?

9 minute read
16 October 2020

Where parties have chosen to arbitrate their disputes, but have not specified the law of the contract or arbitration agreement, what laws apply to the arbitration agreement? This was the vexed question considered by the Supreme Court in an expedited appeal in Enka Insaat Ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38.

The laws of international arbitration

International arbitration can involve a complex interplay of different systems of law:

  • First, there is the law of the substantive agreement between contracting parties, which will be applied by the arbitrator(s) in determining the parties' rights and obligations under the contract in the event of a dispute.
  • Secondly, there is the law of the arbitration, which determines certain matters of procedure in any such arbitration (this often, but not always, accords with the seat of arbitration chosen by the parties).
  • There is also the law governing the parties' agreement to arbitrate, which determines matters such as the scope and validity of the arbitration agreement.
  • There may be other different systems of law applicable, which are beyond the scope of this article.

These systems of law may be chosen by the parties (expressly or impliedly). They may also be different from one another. So for example, parties may choose for their substantive rights and obligations under a construction contract to be governed by French law, but for any ensuing arbitration to be seated in London, with the arbitrator(s) adopting English law procedures and interpreting their arbitration agreement in accordance with English law. This may be desirable for example to seek a 'neutral' forum away from either party's home territory, or where one or both parties have concerns about the independence of national courts.

Related to this is the concept of the 'separability' of arbitration agreements. Most modern national arbitration laws (including, in England, Wales and Northern Ireland, the Arbitration Act 1996) recognise separability, i.e. that an agreement to submit disputes to arbitration can be treated for some purposes as a separate agreement, even if it forms part of a wider contract. Without this concept of separability, any dispute (legitimate or otherwise) about the existence or validity of the main contract would by definition call into question the existence of the arbitration agreement contained within it, thereby potentially undermining the agreed dispute resolution mechanism, leading to satellite disputes and possibly leaving the parties without an adequate means of resolving disputes.

But if the contracting parties have not chosen the law(s) to govern their dealings, how are courts to determine which laws apply? The Rome I Regulation contains a code by which the governing law of a contract can be determined, but this expressly does not apply to arbitration agreements. How then, in the absence of choice, should a court determine which country's law governs the arbitration agreement?

Background to the case

In Enka Insaat Ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38 a fire broke out at an industrial plant in Russia. The plant owner's insurers brought proceedings in the Russian courts against the subcontractors, alleging liability for the fire. The subcontractors asserted that their sub-contract contained a London-seated arbitration clause, and so sought an anti-suit injunction in England to restrain the Russian proceedings.

A dispute arose as to which law governed the arbitration agreement, as English and Russian law were likely to come to different conclusions as to whether or not the Russian proceedings were within its scope, and therefore in breach of the arbitration agreement.

The High Court refused the injunction, forming the view that the Russia courts were the appropriate forum for the dispute, and therefore declining to decide which law governed the arbitration agreement.

On appeal, the Court of Appeal overturned that decision. It adopted a presumption that, in the absence of party choice, an arbitration agreement should be governed by the law of the seat of arbitration (in this case English law); that the Russian proceedings were in breach of the arbitration agreement; and that the insurers should be restrained from pursuing the Russian proceedings. The Court of Appeal therefore issued an anti-suit injunction.

The insurers appealed to the Supreme Court, an appeal that was heard on an expedited basis to reflect the urgency of the matter.

Supreme Court decision

As all judges sitting in this Supreme Court case agreed in their judgments, the question of which law applies to an arbitration agreement in the absence of clear choice is one which courts and commentators have long grappled with and been divided on, and the Court of Appeal has come down on either side of the issue in recent years. It is perhaps unsurprising therefore that, while they could agree that the issue is divisive, the Supreme Court panel was itself divided – Lords Hamblen, and Leggatt (with whom Lord Kerr agreed) delivered the majority judgment; Lord Burrows gave a dissenting judgment (with which Lord Sales agreed), and Lord Sales also gave his own judgment. These judgments collectively run to 115 pages debating the relative merits of the "main contract approach" (whereby the law of the arbitration agreement follows that of the main contract) and the "seat approach" (where the law of the arbitration agreement follows that of the seat of arbitration). We focus here on the majority judgment, which provides useful guidance on how the courts will approach this conundrum.

  • The law of an arbitration agreement is either the law chosen by the parties or, failing that, the law with which the arbitration agreement is most closely connected.
  • The parties may have chosen the law of the arbitration agreement expressly, or impliedly – this is a question of contractual interpretation for the court.
  • Where the parties have chosen the law to govern their contract, but not specifically chosen the law of the arbitration agreement (a common scenario) the governing law of the contract should generally also apply to the arbitration agreement that sits within it.
  • The fact that parties may have chosen a different seat of arbitration (or place for the arbitration), is not enough to displace this presumption – the governing law of the contract will still apply to the arbitration agreement. The court did consider limited other indicators which may displace the main contract presumption, for example where applying the law of the contract (rather than the seat) would actually be likely to defeat the parties' intention to arbitrate.
  • In the absence of any choice of law (whether for the contract as a whole or the arbitration agreement within it), the arbitration agreement is governed by the law with which it is most closely connected. This will generally be the law of any seat of arbitration the parties have chosen (even if the substance of the contract is more closely connected with a different law).

Applying these principles in this case, the majority held that the parties had not made a choice of law (either for the arbitration agreement or the contract as a whole), but because they had chosen London as the seat of arbitration, the arbitration agreement was most closely connected with, and therefore governed by, English law. This was notwithstanding the main construction contract's evident close connection with Russia. Accordingly, the Russian court proceedings were in breach of the arbitration agreement, and it was legitimate for the Court of Appeal to have granted an anti-suit injunction to restrain the appellant from pursuing those proceedings. All judges agreed however that whether it is appropriate to grant an anti-suit injunction does not depend on the governing law of the arbitration agreement, but only on whether pursuing the foreign proceedings is a breach of that agreement: "The court's concern will be to uphold the parties' [agreement to arbitrate]… and the court's readiness to do so is itself an important reason for choosing an English seat of arbitration."

Comment and guidance

The majority considered that this framework for a default rule was consistent with approaches taken in other jurisdictions, and was likely to uphold the reasonable expectations of parties who have chosen a seat of arbitration but no governing law. Where parties are unable to agree a governing law, they reasoned, but agree on a neutral seat of arbitration, then following the law of the seat is likely to give best effect to the parties' commercial intention by providing a legal regime which will uphold their decision to arbitrate.

Although this authoritative decision provides certainty on the default approach courts will take in future, contracting parties are strongly advised to put the matter beyond doubt: wherever possible, make an express choice of governing law for the arbitration agreement, as well as for the main contract. In practice (as duplicative and counter-intuitive as this may at first appear to contract drafters), this means two governing laws clauses – one for the main contract, and one in the arbitration or dispute resolution clause.

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