International arbitration: governing law
Following a fire in a power plant in Russia, Chubb Russia, the insurers of the plant’s owners, brought proceedings in Russia against Enka, a subcontractor, who they said was responsible for the fire. Enka began proceedings of their own in England saying that the dispute was subject to an arbitration agreement under the contract to refer disputes to ICC arbitration with a London seat and seeking an order that Chubb Russia discontinue the Russian proceedings (otherwise known as an anti-suit injunction).
The dispute quickly went through the Commercial Court and Court of Appeal, then on 9 October 2020, the UK Supreme Court gave their keenly anticipated judgment. As Jeremy Glover discusses, the court had to consider issues relating to scope of the arbitration agreement, including the choice of law and seat.
At first instance, the High Court refused Enka’s application. In doing so, it considered the correct interpretation of arbitration clauses in relation to the choice of law and choice of seat. Specifically, the court said that the appropriate forum to determine the scope of the arbitration agreement was the Russian court. On appeal, the Court of Appeal reversed that decision and held that the refusal to grant an anti-suit injunction was wrong in principle. The English court, as the seat of the arbitration, was necessarily an appropriate court to grant an anti-suit injunction.
Unless there had been an express choice of the law that was to govern the arbitration agreement, the general rule should be that the arbitration agreement is governed by the law of the seat, as a matter of implied choice. Here, there was no express choice of law and the arbitration agreement was therefore governed by English law. Chubb Russia appealed and on 9 October 2020, the Supreme Court by a majority dismissed that appeal.
The central issue was 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. Does the law that governs a contract also govern an arbitration agreement which, though separable, forms part of that contract, or should the law of the chosen seat of the arbitration also govern the arbitration agreement?
Lords Hamblen and Leggatt introduced their majority decision by noting that where an international commercial contract contains an agreement to resolve disputes by arbitration, potentially at least three legal systems may be engaged if a dispute occurs: (i) the law governing the substance of the dispute (usually the law applicable to the contract from which the dispute has arisen); (ii) the law governing the agreement to arbitrate; and (iii) the law governing the arbitration process, which is generally the law of the “seat” of the arbitration, which is usually the place chosen for the arbitration in the arbitration agreement.
Issues may arise because these two systems of law may differ from each other and, indeed, may also differ from the law that governs the validity and scope of the arbitration agreement.They continued that as a matter of principle and authority there were 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. They said this for a number of reasons:
- The approach provides a degree of certainty. The parties can be assured that an agreement as to the governing law will generally be an effective choice in relation to all of their contractual rights and obligations and to all of their disputes.
- It achieves consistency as the same system of law governs all the parties’ rights and obligations.
- It avoids complexities and uncertainties. Where any relationship is subject to two systems of law, problems can arise. The court gave as an example multi-tier dispute resolution clauses. If the arbitration agreement is governed by a different system of law from the main body of the contract, provisions that require negotiation and/or expert determination in advance of arbitration may be governed by the law of the contract, not that of the arbitration agreement.
- It avoids artificiality. The principle that an arbitration agreement is separable is “one which is likely to be much better known to arbitration lawyers than to commercial parties. For them a contract is a contract; not a contract with an ancillary or collateral or interior arbitration agreement”.
One thing of interest here was that the construction contract did not contain a choice of governing law clause. There were 100 pages of primary text and 400 pages of appendices, but there was no provision which said that the contract shall be governed by or interpreted in accordance with a specified system of law. Given that such a clause would be entirely standard in any contract made between substantial organisations based in different countries, the likely reason for the omission was that the parties were not able to agree on a choice of the governing law.
Determining the choice of law
Lords Hamblen and Leggatt said that in the absence of any choice of the law that is to govern the arbitration agreement, it was necessary to fall back on the default rule and identify the system of law with which the arbitration agreement is most closely connected. This will generally be the law of the seat chosen by the parties. In the current case, this was London.
The Supreme Court then summarised the principles which govern the determination of the law applicable to the arbitration agreement in this type of situation:
“i) Where a contract contains an agreement to resolve disputes arising from it by arbitration, the law applicable to the arbitration agreement may not be the same as the law applicable to the other parts of the contract and is to be determined by applying English common law rules for resolving conflicts of laws ...
ii) According to these rules, the law applicable to the arbitration agreement will be (a) the law chosen by the parties to govern it or (b) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected.
iii) Whether the parties have agreed on a choice of law to govern the arbitration agreement is ascertained by construing the arbitration agreement and the contract containing it, as a whole, applying the rules of contractual interpretation of English law as the law of the forum.
iv) Where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract.
v) The choice of a different country as the seat of the arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement …
vii) Where there is no express choice of law to govern the contract, a clause providing for arbitration in a particular place will not by itself justify an inference that the contract (or the arbitration agreement) is intended to be governed by the law of that place.
viii) In the absence of any choice of law to govern the arbitration
agreement, the arbitration agreement is governed by the law with which it is most closely connected. Where the parties have chosen a seat of arbitration, this will generally be the law of the seat, even if this differs from the law applicable to the parties’ substantive contractual obligations.ix) The fact that the contract requires the parties to attempt to resolve a dispute through good faith negotiation, mediation or any other procedure before referring it to arbitration will not generally provide a reason to displace the law of the seat of arbitration as the law applicable to the arbitration agreement by default in the absence of a choice of law to govern it.”
In the case here, the contract from which the dispute had arisen did not contain any choice of the law that was intended to govern the contract or the arbitration agreement. Accordingly, the validity and scope of the arbitration agreement was governed by the law of the chosen seat of arbitration, as the law with which the dispute resolution clause is most closely connected.
This meant that the law applicable to the arbitration agreement was English law.
The anti-suit injunction
Although not a formal part of the decision, Lords Hamblen and Leggatt went on to note that by choosing a seat of arbitration the parties were choosing to submit to the supervisory and supporting jurisdiction of the courts of that seat over the arbitration. They stated:
“[A] well established and well recognised feature of the supervisory and supporting jurisdiction of the English courts is the grant of injunctive relief to restrain a party from breaching its obligations under the arbitration agreement by bringing claims which fall within that agreement in court proceedings rather than, as agreed, in arbitration. A promise to arbitrate is also a promise not to litigate.”
When granting an anti-suit injunction, the English courts’ intention is to uphold and enforce the parties’ contractual bargain as set out in the arbitration agreement. In principle it should make no difference whether that agreement is governed by English law or by a foreign law. What matters is whether there has been a breach of the arbitration agreement and whether it is just and convenient to restrain that breach by the grant of an anti-suit injunction. By agreeing to arbitrate in London the parties were agreeing to submit to the supervisory and supporting jurisdiction of the English courts, including its jurisdiction to grant anti-suit injunctions.
This meant that if the agreement to arbitrate disputes contained in the construction contract had been governed by Russian law, it would have been necessary for the English court to determine whether under the law of
Russia the agreement was valid and the claim which Chubb Russia was seeking to pursue in Russia fell within its scope. If those questions were answered in the affirmative, it would in any event have been appropriate to grant an anti-suit injunction. The injunction granted by the Court of Appeal to restrain Chubb Russia from proceeding against Enka in Russia was therefore properly granted.
Conclusion
The Supreme Court confirmed that when being asked to determine which system of law governs an arbitration agreement, an English court should apply the English common law rules for resolving conflicts of laws. Under that common law, the law applicable to the arbitration agreement will be either the law expressly (or perhaps impliedly) chosen by the parties or, in the absence of such agreement, the system of law most closely connected to the arbitration agreement.
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, it is this choice which will generally apply to the arbitration agreement.
Where the parties have made no choice of the law to govern the contract containing the arbitration agreement, the court must determine the law with which the arbitration agreement is most closely connected. This will typically be the law of the seat of the arbitration. The seat is where the arbitration is to be performed and so it is likely to uphold the reasonable expectations of those who specify the seat without choosing the law to govern the contract. It also helps parties to predict which law will apply and so promotes certainty and reduces the likelihood of dispute.
Here, the contract containing the arbitration agreement had no choice of law. This meant that the arbitration agreement was governed by the law of the seat of arbitration as the law with which the dispute resolution clause was most closely connected. The seat of the arbitration was London which meant English law governed the arbitration agreement.