Arbitration agreements: Governing law

In 2012, Enka, a Turkish company, was a sub-contractor on a project for the construction of the Berezovskaya power plant in Russia. In February 2016, a fire broke out at the plant, causing significant damage. Chubb Russia paid out approximately US$400 million under a property insurance policy to the owner of the plant in respect of the damage caused by the fire.  

Subsequently, Chubb Russia brought a subrogation claim for damages in the Moscow Arbitrazh Court against 11 defendants, including Enka, alleging that they were responsible for the fire. Enka responded by bringing anti-suit proceedings in England against Chubb Russia to prevent Chubb Russia from pursuing the Russian proceedings on the basis that the relevant construction contract contained an arbitration clause providing for ICC arbitration in London.  

At first instance, Andrew Baker J declined to grant an anti-suit injunction to restrain Chubb Russia from pursuing the Russian proceedings on the grounds that the “proper forum” to determine the scope of the arbitration agreement and its applicability to the Russian proceedings was not the English Courts but the Moscow Arbitrazh Court. Enka appealed and, in the meantime, served a Notice of Arbitration on Chubb Russia pursuant to the arbitration clause in the construction contract.

In reversing Andrew Baker J's decision, the Court of Appeal held that forum conveniens considerations are irrelevant and granted the anti-suit injunction restraining Chubb Russia from pursuing the Russian Proceedings. The Court of Appeal held that there is a strong presumption that parties have chosen the law of the seat as the law governing the arbitration, unless there are "powerful countervailing factors" in the parties' relationships or in the circumstances of the case. On the facts, there being no express choice of law, the arbitration agreement was governed by English law as a matter of implied choice. The Court of Appeal reasoned that since the parties had chosen England as the seat of the arbitration, the English court had supervisory power over the arbitration and could accordingly grant an anti-suit injunction to restrain Chubb Russia from pursuing remedies in Russia.  Chubb Russia appealed to the Supreme Court.

The Supreme Court unanimously rejected the Court of Appeal’s reasoning that, save in rare cases, an arbitration agreement will be governed by the law of the seat. However, the majority concluded that, as the relevant contract contained no express or implied choice of Russian law, the arbitration agreement was governed by the law of the seat of the arbitration, being the law with which it was most closely connected. As that seat was London, the majority dismissed the appeal brought by Chubb Russia and upheld the Court of Appeal’s decision (but for different reasons) that English law governed the validity and scope of the arbitration agreement. On this basis, they also confirmed that the anti-suit injunction preventing Chubb Russia from pursuing the Russian proceedings against Enka had been validly granted.

The majority concluded that the Court of Appeal was wrong to hold that there is a “strong presumption” that, by nominating the seat of the arbitration, the parties have impliedly chosen that the law of that seat should govern the arbitration agreement. They recognised that whilst a choice of seat could, in certain cases, support this inference, the Arbitration Act 1996 does not justify any general inference where the seat is England.

In summarising the principles governing the determination of the law applicable to the arbitration agreement, the majority outlined the following roadmap:

• 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.
  
  
• 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, applying the rules of contractual interpretation of English law as the law of the forum.
  
  
• 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.
  
  
• 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.
  
  
• Additional factors which may negate such an inference and may in some cases imply that the arbitration agreement was intended to be governed by the law of the seat are: (a) any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration will also be treated as governed by that country’s law; or (b) the existence of a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective.
  
  
• 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.

Lords Burrows and Sales dissented in Chubb Russia’s favour. They considered that there had been a clear choice of Russian law for the main contract, given the multiple references to Russian law throughout the agreement in addition to the wider circumstances of the case: the relevant contract was to be performed in Russia; its primary language was Russian; and the contractual price was to be paid, in Russian currency, to a Russian bank account.

Even if there had been no choice of Russian law for the main contract, the minority would have held that the law of the arbitration agreement was still the same as that of the main contract. Lords Burrows and Sales considered it was unnecessary and unhelpful to impose a general rule that in the absence of a choice of law for the main contract, an arbitration agreement will have its closest and most real connection with the law of the seat; commercial parties would expect all the clauses of their contractual document to be governed by the same system of law, and this would avoid practical difficulties such as the potential application of different rules on the admissibility of pre-contractual negotiations to the main contract on the one hand, and to the arbitration agreement on the other.

Lords Burrows and Sales expressed doubts about the approach of the majority and considered it would produce "undesirable practical and unprincipled consequences" by forcing the same contract to be governed by different laws and giving too much weight to the seat of arbitration.

The Supreme Court emphasised the role of the English court in enforcing the parties’ arbitral bargain where they have chosen English seat arbitration, including through grant of anti-suit injunctive relief. Considerations of international comity have a much lesser role to play in this contractual context. 

In all cases, regardless of what law governs the main contract and the arbitration agreement, if the seat is England, the English court simply considers whether there has been a breach of the arbitration agreement and whether it is just and convenient to restrain that breach by granting an anti-suit injunction. Considerations of forum conveniens and comity are irrelevant. The English court will uphold the parties’ agreement to submit disputes to arbitration in the absence of a strong reason to the contrary.

Irrespective of industry, when negotiating the terms of international contracts under which any disputes are to be resolved by arbitration, to avoid uncertainty, and unless the parties intend that a different law should apply to the agreement to arbitrate (in which case that law should be stated expressly in the arbitration provisions), the parties should agree and incorporate an express choice of law into their main contract. Absent an express or implied choice of law in the main contract, if the arbitration clause provides for an English seat, the law of the arbitration agreement is likely to be determined as English as the law with which the arbitration agreement is most closely connected.

The fact that the Supreme Court was divided in its judgment may result in a continuation of the debate on this issue among commentators and arbitration experts. The dissenting opinions of Lords Burrows and Sales demonstrate support for the arguments: (i) that the law governing the main contract, even absent a choice-of-law provision, should presumptively apply to the arbitration agreement; and (ii) that an arbitration agreement is in fact most closely connected with the law of the main contract.  It will be interesting to see whether the law on these points develops in a different direction in the future.

Of note, the proceedings before the Commercial Court, the appeal to the Court of Appeal, and the appeal to the Supreme Court were all heard within just over seven months. This was described by the majority in the Supreme Court as "a vivid demonstration of the speed with which the English courts can act when the urgency of a matter requires it".