UK Supreme Court clarifies approach to determining governing law of arbitration agreements

On 9 October 2020, the UK Supreme Court handed down a judgment in Enka Insaat Ve Sanayi A.S. (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38, which clarifies how the English courts should determine the proper law of arbitration agreements.

 
Plurality of laws in arbitration, and why it matters

The question of which law governs an arbitration agreement is important and can make or break a dispute resolution mechanism that the parties believe they have in place.

It is not uncommon for crucial issues – such as whether an arbitration agreement is valid, whether a particular dispute falls within its scope and whether an arbitral tribunal has jurisdiction – to turn on the proper governing law of the arbitration agreement.

In Enka, for example, the party that brought court proceedings in Russia despite the existence of an arbitration agreement was prepared to accept that, if the arbitration agreement was governed by English law, the substantive dispute in question fell within its scope and the English courts were entitled to grant an anti-suit injunction restraining the Russian proceedings.

 The challenge to the injunction rested wholly on an argument that the arbitration agreement was in fact governed by Russian law.

The question of governing law is also a complicated one. It is well-established that the law governing the arbitration agreement may not be the same as the law governing the main substantive contract in which the arbitration agreement is contained or to which it relates.

Furthermore, as noted by the Supreme Court in Enka, different conflict of law rules apply to determining the law governing the arbitration agreement and the law governing the main contract.

A further complication arises if the parties choose as the seat (the legal place) for their arbitration, a jurisdiction, which is different to the jurisdiction whose laws govern the main contract.

For example, in Enka the main contract for construction services was governed by Russian law, but the seat in the arbitration clause was London. This meant that the law governing the arbitration procedure was English law, and explains why the English courts were asked to grant an anti-suit injunction and, for that purpose, had to determine the governing law of the arbitration agreement.

If different systems of laws govern (i) the main substantive contract, and (ii) the arbitration procedure to resolve disputes arising out of it, which laws should govern the arbitration agreement? This is the key question with which the Supreme Court had to grapple in Enka.

The Supreme Court's decision

Arguably, the conclusions reached by the Supreme Court (in a majority judgment) are pragmatic and reflect what commercial parties would have expected, namely:

 

1. The English courts should first consider whether the parties have made an express or implied choice of law applicable specifically to the arbitration agreement. In determining this question, the court should interpret the contract, including the arbitration clause, as a whole applying English law as the law of the forum.

 

2. If the parties did not choose the law applicable to the arbitration agreement specifically, but did choose the law to govern the main contract containing that arbitration agreement, this choice will generally be interpreted as applying to the arbitration agreement.

 

3. If the parties did not choose the law applicable to the main contract, the court must determine the law with which the arbitration agreement is most closely connected. As a general rule, applicable by default, the arbitration agreement will be most closely connected with the law of the seat of arbitration. The Supreme Court expressly contemplated (without deciding) only two possible exceptions: the general rule may not apply (a) where the arbitration agreement would be invalid under the law of the seat, but not under the law governing the rest of the contract; or (b) where no seat has been designated.

The rule in item 2 above is particularly important in practice: international commercial contracts often include a general choice of law clause, but rarely expressly state the law applicable specifically to the arbitration agreement.

Some recent decisions of the English courts, culminating in the Court of Appeal judgment in Enka itself, suggest that, in the majority of such situations, the general rule should be that the arbitration agreement law is the law of the seat of the arbitration as a matter of implied choice.

The Supreme Court did not agree with this approach, rightly pointing out that it is natural to interpret a governing law clause as applying to the arbitration clause for the simple reason that the arbitration clause is part of the same contract.

On the facts of Enka, the Supreme Court found that there was no choice of law governing either the arbitration agreement or the substantive contract. Therefore, according to the rule in item 3 above, the law of the arbitration agreement was English law as the law of the chosen seat of arbitration.

Accordingly, the anti-suit injunction was upheld.

The decision in Enka also re-affirmed London's advantages as a place of choice for international arbitration in a different aspect. This aspect was only briefly considered by the Supreme Court in view of its other conclusions, and arguably because the principles were not seriously in doubt.

The Supreme Court confirmed that, by agreeing to arbitrate in London, the parties are agreeing to submit to the supervisory and supporting jurisdiction of the English courts, including its jurisdiction to grant anti-suit injunctions.

That jurisdiction cannot be challenged by arguing that England is not the most appropriate forum. Furthermore, the English courts will exercise this jurisdiction irrespective of whether the arbitration agreement is governed by English or foreign law. This position upholds the parties presumed desire to avoid having to engage in foreign court proceedings when they have opted for London-based arbitration.

This article was authored by Iurii Nikitin, an associate in the dispute resolution team at Fieldfisher. For more information on our arbitration expertise, please visit the relevant pages of the Fieldfisher website.