Goodwin Insights 23 October 2020

Fire At Russian Power Plant Sparks UK Supreme Court Decision On Arbitration Agreement Law

The UK Supreme Court has recently set out the principles to determine the proper law of an arbitration agreement. While it remains the case that parties are free to choose the systems of law that will govern their contract, often parties do not sufficiently turn their minds to the effect of that choice (if any choice has been made) on the resulting dispute, and specify their intentions for the arbitration process that will follow. This decision answers the long-outstanding question of what law governs the validity and scope of the arbitration agreement when the law applicable to the contract differs from the law of the seat of arbitration. 

Background to the appeal

In Enka Insaat Ve Sanayi A.S. (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38, the relevant contract contained an arbitration agreement providing that the seat of the arbitration was London and it was to be conducted under ICC Arbitration Rules. There was no express choice of law clause in the contract or in the arbitration agreement, but the contract did contain some references to Russian laws and regulations. 

Chubb commenced proceedings against Enka (among others) in Russia following a fire at a power plant, as Enka had contracted to provide certain services in relation to the construction of that power plant and Chubb (as the owner of the plant’s insurer) alleged (as subrogee) that Enka and the other defendants were responsible. In response, Enka sought from the English High Court (i) a declaration that Chubb was bound by the arbitration agreement; and (ii) an anti-suit injunction restraining Chubb from pursuing claims in Russia. That application was refused by the High Court, but Enka succeeded on appeal to the Court of Appeal. Chubb then appealed to the Supreme Court, where 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”. 

Systems of law engaged when a dispute occurs

When an arbitration agreement is triggered, different laws might apply to different aspects of the arbitration:

  1. The law governing the substance of the dispute — this is usually governing law of the underlying contract that contains the arbitration clause.
  2. The law governing the arbitration process — applicable to procedural matters that arise during the arbitration such as the appeals process and enforceability, this is usually the law of the seat. 
  3. The law governing the arbitration agreement — applicable to questions such as the validity or the scope of the agreement to arbitrate.

The Supreme Court’s decision

The majority (3:2) of the Supreme Court held that when the parties have chosen (expressly or impliedly) the governing law of the contract, this should generally be interpreted as a choice of law in respect of the law of the arbitration agreement as well. The Supreme Court considered that the reasonable expectations of most commercial parties would be that the arbitration agreement was part of the main contract in which it was contained and noted the need for certainty and consistency on this question. This is a different conclusion from that reached by the Court of Appeal which instead focussed on the doctrine of separability of arbitration agreements, holding that express wording is required in order to conclude that the governing law clause in the contract also extends to the arbitration agreement.

Because the parties had not expressly agreed upon the governing law of the contract, the Supreme Court went on to consider whether the parties had made an implied choice of governing law. This was considered as a matter of contractual interpretation. The Supreme Court again did not agree with the Court of Appeal’s conclusion that the choice of a seat of arbitration indicates a preference for the law of that seat. Therefore, even if the parties have chosen a seat of arbitration that is different to the governing law of the contract, the choice of law (express or implied) in respect of the underlying contract will also apply to the arbitration agreement. However, there are factors that might change that presumption, for example, parties should not be taken to have impliedly agreed to a governing law under which the arbitration agreement would be invalid.

As the Supreme Court did not find an express or implied choice of law (although it determined that the contract was governed by Russian law by application of Article 4(3) of the Rome I Regulation, as the contract was more closely connected with Russia than any other country), the question for the court then became what system of law had the closest and most real connection with the arbitration agreement. The Supreme Court determined that an arbitration agreement generally has the closest and most real connection with the law of the seat, and therefore held that English law applied to the arbitration agreement.

The result of the decision is that the law of the arbitration agreement is the law chosen, expressly or impliedly, by the parties to govern the underlying contract. Failing such a choice, it is the law with which the arbitration agreement has the closest and most real connection. That will usually be the law of the seat.

The decision also confirms that when the law of the seat is English law, the English courts will have jurisdiction to grant anti-suit injunctions to restrain breaches of the arbitration agreement — even if the law of the arbitration agreement is not English law. This is due to the supervisory function granted to the English courts as the courts of the seat of arbitration. 

Comment

  • Including clarity and detail upfront in the arbitration agreement can avoid costly and lengthy litigation over what the parties intended when the arbitration agreement was drafted. Parties should specifically consider and expressly specify their choice of the governing law of the contract, the law of the arbitration agreement, the seat of the arbitration and rules applicable to the arbitration, in order to avoid something that was not intended being imposed by the courts. 
  • Although it is not currently common to specify the law of the arbitration agreement in addition to the governing law of the contract, doing so is important because different legal systems under which questions such as the validity or scope of the arbitration agreement are determined may result in very different outcomes.
  • The hearing of both appeals took place on an expedited basis — the appeal to the Court of Appeal and the appeal to the Supreme Court were both heard within a timeframe of just over seven months. As put by the Supreme Court: “This is a vivid demonstration of the speed with which the English courts can act when the urgency of a matter requires it.”