When is the law applying to an arbitration agreement not the same as the law applying to the contract?

After a power plant fire in Russia, the plant’s insurers, OOO Insurance Company Chubb, (“Insurers”) paid out USD400 million to the plant’s owner and took an assignment of its rights against Enka, a Turkish sub-contractor involved in the building of the plant, commencing proceedings against Enka in the Moscow courts.

Responding, Enka objected to the Moscow proceedings and commenced arbitration in London and applied for an anti-suit injunction in London to stop the proceedings in Moscow.

The governing law of the arbitration agreement was crucial because, if it was governed by English law then it was accepted that the claims fell within the arbitration agreement. However, if Russian law applied then it was arguable that the claims did not fall within the arbitration agreement.

This application was denied at first instance (December 2019) but was granted on appeal (April 2020), where the Court of Appeal held that the arbitration agreement was governed by English law as the law of the seat of the arbitration, as a ­matter of implied choice, subject only to any extenuating ­circumstances indicating the contrary.

Insurers then (unsuccessfully) appealed against the injunction to the Supreme Court (October 2020), albeit the reasons offered to maintain the injunction by the Supreme Court differed from those in the Court of Appeal.

The Supreme Court Decision

The majority (Lords Kerr, Hamblen and Leggatt) held that:

1. They would apply English law as the law of the forum to determine whether or not the parties had made a choice of law;
2. That in identifying which law governs the validity, scope or interpretation of an arbitration agreement, they must apply English common law rules as the Rome I Regulation excludes arbitration agreements;
3. Applying English common law rules, the arbitration agreement will be governed by: (a) the law expressly or impliedly chosen by the parties; or (b) in the absence of such a choice, the law with which the contract is most closely connected;
4. Where an express choice of law has not been made for the arbitration agreement, but an express or implied choice of law has been made to govern the main contract (which contains the arbitration agreement), then the parties will be presumed to have intended that the law of the main contract should also govern the arbitration agreement, and the choice of a different seat does not automatically ­displace this presumption;
5. A presumption that the law of the main contract should also govern the arbitration agreement could be overcome where there is a “serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective” or by provisions of the law of the seat stating specifically to the contrary;
6. However, if the parties have not chosen a law to apply to the main contract (whether express or implied), the law of the seat will generally be most closely connected to the arbitration agreement and will therefore apply;
7. If the arbitration agreement is part of a multi-tier dispute resolution clause including negotiation and/or mediation terms, the law of the seat of the arbitration will also apply to those other terms in the clause;
8. Therefore, English law was the proper law of the arbitration agreement by virtue of it being the law most closely connected to it as the law of the seat of the arbitration, there being no express or implied choice of Russian law as the law of the main contract nor any extenuating circumstances to prevent this conclusion.

The minority (Lords Burrows and Sales dissenting) preferred the proper law of the contract to apply even if it was ­determined by being the law most closely connected to the contract. However, the majority considered that different parts of a ­contract may be governed by different laws, and while it is generally ­reasonable to assume that parties would intend all parts of their contract to be governed by a single law, the part dealing with an arbitration agreement was more susceptible to having a different law applying, given its focus on dispute ­resolution and its potential for separation from the main ­contract where the validity of the main contract was in question.

As such, the Supreme Court continued the anti-suit injunction, but it also held unanimously that even if Russian law applied to the arbitration agreement, the injunction would still run while the English courts decided if the agreement was valid under Russian law and if so, whether the Insurers’ claim fell within it, given their duty towards the arbitration in London.

Comment

Although a 3:2 majority decision, the Supreme Court has ­clarified an important issue as regards international ­arbitration seated in London. In the absence of an express choice of law, the law governing the validity and scope of the arbitration agreement is that of the seat of the arbitration and not the law applicable to the contract. While it can always be said this issue is ­easily avoided by the parties making a choice of law in the main contract, there are occasions when the parties cannot or do not want to agree a proper law in their main contract. In this event, if parties do agree to seat the arbitration in London, this will be taken to show a willingness to let English law as the law of the seat determine whether the arbitration agreement is valid or not, rather than let it be decided by the law most closely connected to the main contract whatever that is determined to be. It reflects the position adopted in the New York Convention and UNICTRAL and the legislative policy of the Arbitration Act 1996 and is another step towards an internationally consistent approach to arbitration.