A Simple Question That Defies a Simple Answer: the UK Supreme Court Addresses What Law Governs an Arbitration Agreement

A Simple Question That Defies a Simple Answer: the UK Supreme Court Addresses What Law Governs an Arbitration Agreement

October 29, 2020, Covington Alert

This month, the UK Supreme Court issued a decision of fundamental importance to the field of international arbitration, undertaking to answer a simple, but timelessly vexing, question: what law governs the validity and scope of an arbitration agreement, where the law that governs the parties’ contract differs from the law of the seat of arbitration? Is it the law of the contract, in which the arbitration agreement is found, or the law of the seat, where an arbitration is to be held?

In many international commercial contracts, parties choose a substantive law to govern their contract and choose a perceived neutral seat, in a different jurisdiction, for any arbitration thereunder. But in few contracts do parties also specify a law to govern the validity and scope of their arbitration agreement, which determines what issues are arbitrable and the validity of any agreement to arbitrate.

By a 3-2 majority, the UK Supreme Court held, in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, that where the parties have not expressly stated the law governing their arbitration agreement, their express choice of a governing law for their contract will generally also apply to their arbitration agreement within that contract, subject to certain exceptions. In the absence of any choice of law to govern the main contract or the arbitration agreement, the arbitration agreement will be governed by the law with which it is most closely connected—generally, the law of the seat of the arbitration. The Supreme Court also confirmed that, by choosing London as the seat of arbitration, parties submit to the jurisdiction of the English courts to grant anti-suit relief in aid of arbitration, including where the arbitration agreement is governed by a foreign law. 

Commentators have rightly applauded Enka for providing guidance on this important question. But it bears mention that the Court issued a split decision; adopted virtually the opposite default rule from the one that the Court of Appeal had announced; and found the question not only insusceptible to a bright-line answer, but also requiring observance of several, necessarily case-specific exceptions. Significant uncertainty remains for parties seeking to enforce or resist arbitration before the English courts (or arguing about the scope or validity of arbitration agreements in London arbitrations), at least where the law governing the arbitration agreement is not expressly stated. Enka thus primarily serves to remind parties that they may wish to specify in their contract the law that they expect or want to govern their arbitration agreement.

Background

Enka involved parallel proceedings before courts (and an arbitral tribunal) in Russia and England. The English proceedings started when Enka petitioned the English Commercial Court for an anti-suit injunction to restrain Chubb Russia from pursuing a claim in the Moscow Arbitrazh Court, in alleged breach of an arbitration agreement contained in a construction contract. The construction contract provided for arbitration seated in London, subject to ICC Rules, but did not expressly state the law governing the arbitration agreement or the main contract. Chubb Russia argued that it was entitled to pursue Enka in the Russian courts on the basis that, under Russian law, its tort claims fell outside the scope of the arbitration agreement. The English Commercial Court dismissed Enka’s claims, finding that the Moscow Court was the more appropriate forum to decide whether Chubb Russia’s claims fell within the scope of the arbitration agreement. The English Court of Appeal disagreed and issued an anti-suit injunction. The Court of Appeal held that in London-seated arbitrations, the question of which forum is more appropriate does not arise when an English court is presented with an application for an anti-suit injunction and that Chubb Russia’s claims fell within the scope of the arbitration agreement, which was governed by English law in any event. The Court of Appeal reasoned that, in the absence of an express choice of law to govern an arbitration agreement, there is a strong presumption that the parties have impliedly chosen the law of the seat of arbitration as the law governing their arbitration agreement.   

UK Supreme Court Decision

Approach to determining the law of the arbitration agreement

The UK Supreme Court dismissed Chubb Russia’s appeal, but it rejected the Court of Appeal’s reasoning for how to determine the law governing an arbitration agreement. The key principles, as announced by the Supreme Court, are as follows:

• In a London-seated arbitration, English common law rules on conflict of laws determine the law that governs the arbitration agreement. In England, the law that governs the arbitration agreement will either be (a) the law chosen by the parties to govern it; or (b) absent any such choice, the system of law with which the arbitration agreement is most closely connected.

• In the absence of an express choice of law governing the arbitration agreement, the law that the parties have chosen to govern the main contract will presumptively also govern the arbitration agreement by implication, as it may be inferred that, where parties specify a law to govern their contract, they intend that law to apply to the whole of their contract, including the arbitration agreement within it. (As the Court reasoned, while an arbitration agreement is “separable,” it is not a distinct and separate agreement.) By way of exception, however, the law of the seat may govern the arbitration agreement if (a) any provision under the law of the seat indicates that the law of the seat should govern the arbitration agreement; or (b) applying the law governing the main contract to the arbitration agreement would create “a serious risk” that the arbitration agreement would be invalid (the “validation principle”).

• In the absence of an express or implied choice of law to govern the main contract or the arbitration agreement (as was the case in Enka), the arbitration agreement will be governed by the law with which it is most closely connected. This will generally be the law of the seat, where the parties have chosen a seat. 

The significance of the Court’s exceptions to the general rule

As the foregoing indicates, the Court found a bright-line rule elusive and also found it necessary to articulate significant exceptions that, by their nature and scope, could undermine the general applicability of the key principles that the Court articulated and prompt disputes on this issue, at least in a case without a clear and uncontestable choice of law expressly governing the arbitration agreement.

For example, the Court’s analysis may encourage a party that seeks to avoid application of the law of the contract to cite provisions in the law of the seat that may indicate that the law of the seat should apply to the arbitration agreement. And although the Court’s embrace of a “validation principle” is welcome in the abstract, a party that seeks to avoid application of the law of the contract may look for something in that law that would be problematic for the validity of a resulting award under the law of the seat, thereby potentially avoiding application of the law of the contract. Similarly, whether the law of the seat is “most closely connected” to a given arbitration agreement is necessarily a fact-bound inquiry, the answer to which may be a matter of judgment. Enka thus leaves the door open for parties to advance creative arguments about which law should govern their arbitration agreement.

Application of the law to the facts

In Enka itself, where the parties specified neither a law to govern the arbitration agreement nor a law to govern the contract more generally, a majority of the UK Supreme Court concluded that Russian law governed the main contract because the contract was most closely connected with Russia. The majority went on to conclude, however, that the arbitration agreement was governed by English law, the law of the seat, as the law most closely connected to the arbitration agreement.

As the majority acknowledged, in the absence of an express choice of law to govern either the main contract or the arbitration agreement, judges “inevitably” will differ over whether the parties have made an implied choice of law to govern their arbitration agreement, with some concluding that there has been an implied choice of law from whatever circumstances may imply the governing law of the contract, while others may conclude that there has been no such choice, necessitating application of the closest connection test.An English court faced with a similar arbitration clause and similar facts to those presented in Enka thus could arguably have arrived at a different conclusion from the Supreme Court’s majority. Indeed, whilst the majority concluded that the parties had made no choice of law to govern their main contract, relying mainly on the absence of any express agreement to that effect, the minority concluded, on the same facts, that the parties had chosen Russian law to govern the main contract, albeit impliedly, citing various connections to Russia, including that Russia was the place of performance.    

Role of the English courts in granting anti-suit relief

The Court also commented on the role of English courts in granting anti-suit relief. It affirmed the Court of Appeal’s decision that, when such relief is sought with regard to a London-seated arbitration, the question of whether London is the more appropriate forum for such relief does not arise: by choosing London as the seat of arbitration, parties submit to the jurisdiction of the English courts to grant anti-suit relief, even where the arbitration agreement is governed by a foreign law. The Supreme Court also noted that the grant of an anti-suit injunction is always a matter of discretion.

Comment

As the Supreme Court noted, when it waded into this thicket, the Court of Appeal observed that “the time has come to seek to impose some order and clarity on this area of the law.” The Supreme Court apparently agreed. But as Enka makes clear, there is no answer of universal application to the question of what law should govern an arbitration agreement, where one law governs the contract generally and a different jurisdiction provides the seat of arbitration. Differences and conflicts across national legal systems make such easy answers elusive. What can be said is that:

• Enka provides an important (and in the UK, controlling) framework for deciding what law governs an arbitration agreement.

• That framework provides no bright-line answer and is susceptible to creative and nuanced lawyering in cases where (as in Enka) there may be material differences between how the law of the contract and the law of the arbitral seat would treat the validity and scope of the arbitration agreement.

• To minimize uncertainty and scope for mischief, parties may be well served by specifying in their contracts the law they expect to govern their arbitration agreement.

If you have any questions concerning the material discussed in this client alert, please contact any of the following members of our International Arbitration practice.