ENGLISH SUPREME COURT DECIDES APPROACH TO DETERMINING GOVERNING LAW OF ARBITRATION AGREEMENT

On 9 October 2020, the English Supreme Court handed down its judgment in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, which is likely to become the leading English law authority on the applicable principles relating to determining the proper law of an arbitration agreement and the role of the courts of the seat in granting anti-suit relief.

The Supreme Court issued the decision following an expedited appeal against a recent judgment of the Court of Appeal ([2020] EWCA Civ 574), which we discussed in our previous blog post. The Supreme Court dismissed the appeal by a majority, with Lords Burrows and Sales dissenting.

Background

As discussed in our previous blog post, OOO Insurance Co Chubb (“Chubb Russia”) was seeking to overturn the decision of the Court of Appeal, which had precluded Chubb Russia from pursuing a subrogation claim in the Russian courts (the “Russian Court Claim”) and determined that the Russian Court Claim was brought in breach of the arbitration agreement (the “Arbitration Agreement”) in the main contract (the “Contract”).

The Court of Appeal concluded that: (i) the English court as the court of the seat was an appropriate court to grant an anti-suit injunction and questions of forum conveniens did not arise; and (ii) the Arbitration Agreement in the Contract was governed by English law. The Court of Appeal came to this conclusion on the basis of the following principle: unless there has been an express choice of the law that is to govern the arbitration agreement (which there was not in this case), the general rule should be that the arbitration agreement is governed by the law of the seat, as a matter of implied choice, subject only to any particular features of the case demonstrating powerful reasons to the contrary.

Chubb Russia argued before the Supreme Court that the Arbitration Agreement formed an integral part of the Contract, and therefore, upon the application of the rules of contractual construction, the Arbitration Agreement should be governed by the same system of law as the Contract (i.e. Russian law, being the law impliedly chosen by the parties). Enka Insaat ve Sanayi AS (“Enka”) argued that the Arbitration Agreement was a separate contract, and the starting point should accordingly be the Arbitration Agreement itself (rather than the Contract, as suggested by Chubb Russia). According to Enka, by agreeing to arbitration seated in London, the parties impliedly agreed that the Arbitration Agreement was governed by English law.

Majority’s view

Governing law of the arbitration agreement

The Supreme Court accepted Chubb Russia’s submissions that an arbitration agreement will usually be governed by the law chosen to govern the main contract, concluding that the choice of a different seat of arbitration is not generally sufficient to negate this. The Supreme Court  did note, however, that additional factors may be relevant, e.g. where there is a serious risk that the arbitration agreement would be ineffective if governed by the same law as the main contract. The Supreme Court therefore rejected the Court of Appeal’s reasoning that the law of the seat will govern the arbitration agreement as a matter of implied choice, where there is no express choice of law in the arbitration agreement.

The Supreme Court set out the following general principles on the governing law of the arbitration agreement:

The majority (Lords Hamblen, Leggatt and Kerr) agreed with the Court of Appeal that on a proper construction of the Contract there had been no express or implied choice of Russian law to govern the Contract itself. The majority concluded that the Contract was governed by Russian law by virtue of Article 4(3) of the Rome I Regulation (on the basis that the Contract was more closely connected with Russia than with any other country). As for the Arbitration Agreement, it had its closest and most real connection with the law of the seat, which was English law. Therefore, although the Supreme Court took a different approach to the Court of Appeal in respect of the determination of the law governing the arbitration agreement, the Supreme Court came to the same conclusion on which system of law governed the Arbitration Agreement in this case.

The anti-suit injunction

In its appeal, Chubb Russia argued that the Court of Appeal was wrong to grant an injunction to restrain Chubb Russia from pursuing the Russian Court Claim in alleged breach of the Arbitration Agreement. According to Chubb Russia, as the Arbitration Agreement was governed by Russian law, it would have been just and convenient for the English court to stay the English proceedings to allow the Russian court to determine whether it had jurisdiction to hear the Russian Court Claim.

The Supreme Court affirmed the Court of Appeal’s decision that, in principle, it makes no difference whether an arbitration agreement is governed by English or foreign law. Forum conveniens, which is an issue that goes to the court’s jurisdiction, is not relevant either. The issues to determine are as follows: whether there was a breach of the arbitration agreement and, if so, whether it is just and convenient to grant an injunction to restrain that breach. While there may be circumstances in which it would be appropriate to await a decision of a foreign court before granting an injunction (e.g. if the scope of the arbitration agreement was due to be determined by the highest court in the relevant country in the near future), deference to foreign courts should generally give way to upholding the importance of the parties’ bargain.

Dissenting views of Lords Burrows and Sales

Lords Burrows and Sales agreed with the majority that, if the parties expressly or impliedly choose the law of the contract, this choice also applies to the arbitration agreement. However, they dissented on what the default position should be in the absence of such choice, taking the view that despite a different seat for the arbitration, the arbitration agreement will usually also have the closest and most real connection with the law of the main contract.

Comment

The Supreme Court’s decision has introduced much-needed clarity on the question of which law shall govern the arbitration agreement. This is welcome news for the international arbitration community, setting aside previous uncertainty on this point and putting in place a clear and straightforward approach. This pro-arbitration decision provides welcome certainty that the law of the contract will usually govern the arbitration agreement itself and recognises that the willingness of the English courts to uphold the parties' bargain on forum is an important reason why parties choose to arbitrate in England.

For more information, please contact Craig Tevendale, Partner, Vanessa Naish, Professional Support Consultant, Rebecca Warder, Professional Support Lawyer, Olga Dementyeva, Associate or your usual Herbert Smith Freehills contact.