What law governs my arbitration agreement? Court of Appeal provides welcome clarification in Enka v Chubb [2020] EWCA Civ 574
It also reconfirms, if such confirmation was needed, that the English courts will act where they are able to hold parties to their bargain where they have agreed to arbitrate by granting anti-suit injunctions to prevent proceedings brought in breach of such an agreement.
In his judgment, Popplewell LJ summarised that “[t]he current state of the authorities” regarding how parties are to determine what law governs their arbitration agreements “does no credit to English commercial law which seeks to serve the business community by providing certainty.” He therefore charged himself with “[i]n my view the time has come to seek to impose some order and clarity on this area of the law, in particular as to the relative significance to be attached to the main contract law on the one hand, and the curial law of the arbitration agreement on the other, in seeking to determine the [law governing the arbitration agreement].”
This insight covers:
- why the law governing an arbitration agreement may be different from the law governing the underlying contract
- why the law governing an arbitration agreement is important
- what clarification the Court of Appeal has given in how parties are to determine what law governs their arbitration agreements
Arbitration agreements are distinct agreements from the underlying contract; they can be governed by a separate law to that which governs the rest of the contract
When entering into a contract, parties will often specify how they want any disputes which arise to be resolved (ie whether by way of court litigation or by arbitration etc). When parties wish to refer their disputes to arbitration, they need to do so expressly and in writing (section 5 Arbitration Act 1996 (“AA 1996”)).
Arbitration agreements are regarded as a separate agreement in themselves which are distinct from the rest of the contract (section 7 AA 1996 and re-emphasised in the House of Lords decision in Fiona Trust v Privalov [2007] UKHL 40)). Because of this, the law which governs them can be different from that which governs the underlying contract.
In addition to this, there may be an issue as to what law governs the procedure of the arbitration (i.e. what procedure should apply to the arbitration itself).
Put simply, there can often be three distinct laws which apply to an agreement which contains an arbitration agreement:
- Substantive Law – namely the governing law or proper law of the contract which governs the underlying contract itself (i.e. the substantive terms and parties’ obligations under the contract)
- Arbitration agreement law – namely, the law which governs the arbitration agreement itself which will determine issues about its scope, effect, construction or validity (such as whether a dispute is covered by the scope of the arbitration agreement or to honour awards)
- Procedural law of the arbitration – namely the law which governs the arbitration procedure (often referred to as the “curial law” or “lex arbitri”)
Most parties will clearly set out in their contracts the substantive law which governs the terms and obligations of the contract. Further, parties usually take care to ensure that they select the seat of the arbitration. Following Shagang v Daewoo [2015] EWHC 194 (Comm), the seat the parties have chosen will usually dictate what procedural law the parties have chosen to govern the arbitration process.
However, most if not all standard form arbitration clauses do not specify what law it is which is to apply to the second limb above – i.e. that which governs the arbitration agreement. They will specify which institutional arbitration rules are to apply, what seat the arbitration is (ie the place / country the arbitration will take place), what language and how many arbitrators there are. But they do not specify the law which is to govern the arbitration agreement. Some drafters will amend the arbitration agreement by specifying what law governs it in order to reduce the risk of uncertainty later on.
There is often overlap between the second and third limbs above (ie what law governs the arbitration agreement and the procedure of the arbitration). As Toulson J commented in XL Insurance Ltd v Owens Corning [2001] 1 All ER (Comm) 530, there are “various provisions” in the AA 1996 “which could not readily be separated into boxes labelled “substantive arbitration law” or “procedural law” because that would be an artificial division”. However, Toulson J accepted that there were cases where they may be different and therefore it will be necessary to determine what law governs the arbitration agreement.
But what happens when it is silent? Often it can be fairly straight forward to work out what the parties implied to be the law governing the arbitration agreement. For example, the parties may have selected the seat of the arbitration as London, the governing law of the contract as English law and the contract is performed in England. In that case, it would be safe to assume English law governs the arbitration agreement.
But what happens in cases like Enka v Chubb where the seat of the arbitration is London, the underlying contract is governed by Russian law and the contract is performed in Russia? What law governs the arbitration agreement in that case?
Why is the law which governs the arbitration agreement important?
The law which governs the arbitration agreement is important because it will determine what laws apply to the framework of the arbitration – i.e. what laws apply to supervise the arbitration. That is important because it will dictate which law regulates the substantive matters of the arbitration such as the interpretation, validity and effect of the arbitration agreement and questions as to the scope of the agreement (i.e. whether particular disputes are covered by the scope of the agreement). It will also usually dictate which courts have supervisory jurisdiction over the arbitration and the arbitration agreement itself.
What happened in Enka v Chubb?
The case concerned a contract to build a power plant in Russia. The contract between the owner and contractor (Enka) contained a tiered dispute resolution clause which ultimately provided for ICC arbitration seated in London. The arbitration clause did not specify what law governed it. The parties had agreed that the underlying contract was governed by Russian law.
In 2016, there was a fire at the plant which caused approximately USD 400 million in damages. The owner claimed under an insurance policy with Chubb. Exercising its subrogated rights, Chubb issued proceedings against Enka and ten other defendants in the Russian courts alleging its works were responsible for the fire. Enka applied to the English courts seeking a declaration that Chubb was bound by the arbitration agreement and sought an injunction restraining Chubb from carrying on the proceedings in Russia.
At first instance, the judge declined to make a determination as to which law governed the arbitration agreement (whether that be Russian or English law). He indicated however that it was strongly arguable that it was Russian law. The judge found however that the English courts did not have jurisdiction to determine the relief sought because questions about the scope of the arbitration agreement could be determined more appropriately by the Russian courts seized of the matter or by commencing arbitration to seek a direction from the tribunal. Enka appealed the decision.
Before the Court of Appeal hearing was heard, a first instance court in Russia determined that Enka was not liable. However, the appeal in England was continued to restrain Chubb from exercising its automatic right of appeal in Russia.
How was the law which governed the Arbitration Agreement determined before the Court of Appeal decision in Enka v Chubb?
As Popplewell LJ commented, “[t]he current state of the authorities does no credit to English commercial law”. In Sulamerica v Enesa [2012) EWCA Civ 638, the Court of Appeal laid down a three stage test to determine what the law of the arbitration agreement is, namely the governing law is either (i) expressly chosen; (ii) impliedly chosen; or (iii) in the event it is neither expressly nor impliedly chosen, it will be the law that has "closest and most real connection".
However, courts since had applied conflicting approaches to how the second and third answers should be determined.
For example, in Arsanovia v Cruz City [2012] EWHC 3702 (Comm), the judge concluded that the parties had implied that Indian law should apply to their arbitration agreement in a contract where Indian law governed the main contract, references had been made in in the arbitration agreement that provisions of Indian law should apply to interim relief but where the arbitration was to be seated in London. In Kabab-Ji v Kout Food Group [2020] EWCA Civ 6 however the main contract was expressly governed by English law and contained an arbitration clause providing for ICC arbitration in Paris. The Court of Appeal upheld the first instance decision finding that the law governing the arbitration agreement was English law on the basis that the express choice of law in the main contract was also an express choice of the law governing the arbitration agreement as a matter of construction.
Court of Appeal’s Decision in Chubb v Enka - what clarifications were made?
In seeking to grapple with the test, Popplewell LJ stated that the test in Sulamerica was “a sensible starting point”. However, in order to clarify the test clearly, he formulated that the test for determining what law governs the arbitration agreement shall be as follows:
- First, it should to be determined by applying the three stage test required by English common law conflict of laws rules, namely: (i) Is there an express choice of law? (ii) If not, is there an implied choice of law? (iii) If not, with what system of law does the arbitration agreement have its closest and most real connection?
- Where there is an express choice of law in the main contract that may amount to an express choice as to the law which governs the arbitration agreement. Whether it does so will be a matter of construction of the whole contract, including the arbitration agreement, applying the principles of construction of the main contract law if different from English law.
- In all other cases where it is silent as to what law governs the arbitration agreement, the “general rule” will be that it will be the same as what the parties had chosen as the seat (i.e. the law which will govern the arbitration agreement will be that of where the parties have chosen as the seat of their arbitration). The judge’s rationale for this was that there is often a “substantial overlap” between the two. He held that this general rule will only be rebutted “where there are powerful countervailing factors in the relationship between the parties or the circumstances of the case” to determine otherwise.
Popplewell LJ did acknowledge that difficulties may emerge in applying the test where parties had not expressly chosen a seat for their arbitration. He said that certain institutional rules remedied this in any event (such as the ICC Rules which provide that the ICC Court will determine the place of the arbitration). However, he did not seek to expand on this given it was not relevant in Enka v Chubb.
Applying the test formulated by Popplewell LJ, the Court of Appeal determined that the law of the arbitration agreement between Enka and the owner (which Chubb had exercised its subrogated rights over) was English law. It held accordingly that the English courts had supervisory jurisdiction over the arbitration agreement. And it therefore concluded that it had jurisdiction to issue an injunction restraining Chubb from continuing with the Russian proceedings.
Another important aspect of the judgment is that it also reconfirms that the English courts will have jurisdiction to issue injunctions restraining parties from commencing or continuing court proceedings in breach of an arbitration agreement which states that the arbitration would be seated in England & Wales. That is even the case where no arbitration has been commenced or is even intended (following the Supreme Court decision in AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] UKSC 35). As Popplewell LJ said:
"The English court as the court of the seat of the arbitration is necessarily an appropriate court to grant an anti-suit injunction and questions of forum conveniens do not arise. This follows from two essential principles. First, the choice of the seat of the arbitration is an agreement by the parties to submit to the jurisdiction of the courts of that seat in respect of the exercise of such powers as the choice of seat confers. Secondly, the grant of an anti-suit injunction to restrain a breach or threatened breach of the arbitration agreement is an exercise of such powers. It follows, therefore, that by the choice of English seat the parties agreed that the English Court is an appropriate court to exercise the power to grant an anti-suit injunction.”
The caveat to that is that if proceedings are commenced in the Court of another EU Member State in breach of an arbitration agreement, the English Courts are not able to restrain those proceedings under EU Law (often cited as the West Tankers principle). For more information about anti-suit injunctions, see here.
Conclusion – if in doubt, spell out the law which governs the arbitration agreement
The decision is a welcome clarification as to how parties should determine what law governs their arbitration agreements. It also demonstrates the English court’s long standing approach of holding parties to their bargains – if they have agreed to arbitration then they should arbitrate. It is yet to be seen whether Chubb will appeal the decision to the Supreme Court.
Whilst a welcome decision, in order to prevent any disputes or delay later on, parties entering into arbitration agreements may wish to expressly set out which law it is which governs the arbitration agreement. For the sake of an additional clause which is likely to be uncontroversial at the time of entering into an agreement, it may save many problems later on.
Parties should note however that if parties select a law to govern their arbitration agreement which is different from the place of the arbitration, the English courts have previously determined in Shagang v Daewoo [2015] EWHC 194 (Comm) that the procedural law which should apply to the arbitration shall be that of the seat selected unless expressly stated otherwise.