English Court of Appeal clarifies the principles to determine the law governing arbitration agreements

By Sophie Eyre, Megan Curzon

05-2020

A recent decision by the Court of Appeal demonstrates the importance of good drafting when contractual parties agree that future disputes should be subject to arbitration.  The judgment  clarifies the principles for establishing the law governing arbitration agreement provisions. It is a useful reminder of both the importance of drafting express choice of law provisions in an arbitration agreement and also the importance of clarity when drafting contracts with different choice of laws governing the main agreement and any arbitration provisions. 

Enka Insaat ve Sanayi AS v OOO Insurance Co Chubb [2020] EWCA Civ 574 was an appeal by Enka, a Turkish construction company, to overturn a decision refusing to grant an anti-suit injunction against Chubb who it alleged was in breach of an arbitration agreement which provided for all disputes to be resolved by ICC arbitration seated in London. The arbitration agreement did not, however, contain an express choice of law clause governing the arbitration agreement.

Background 

A valid contract (“the Contract”) existed between the parties relating to construction of a power plant located in Russia. The Contract contained no express choice of law clause, only that Russian law was to govern specified provisions. The Contract did include an arbitration agreement provision specifying that any dispute was to be settled under the Rules of Arbitration of the International Chamber of Commerce (“the ICC”) and that the place of the arbitration would be London.

Chubb commenced proceedings against Enka in Russia, claiming damages in relation to a fire that had occurred  at the power plant. Chubb claimed that the fire had been caused by low-quality performance of works that Enka was responsible for under the Contract. In response Enka sought an anti-suit injunction from the English court to prevent Chubb from continuing proceedings in Russia, on the basis that Chubb's failure to resolve the dispute via arbitration was in breach of the arbitration provisions in the Contract. 

In the first instance decision, the judge declined to decide whether the arbitration clause in the Contract was governed by English or Russian law. He dismissed Enka's claim on forum non conveniens grounds, and held that matters could be more appropriately determined by the Russian court. 

Enka appealed this decision, claiming that the judge was wrong in principle, and that the English Court was the appropriate forum to exercise anti-suit relief. 

Choice of seat provided the English court with jurisdiction

The Court of Appeal held that the judge was incorrect in his finding that the English court did not have jurisdiction to decide whether the Russian proceedings were a breach of the arbitration agreement. Questions of forum non conveniens did not arise because provisions specifying a seat of arbitration in the arbitration agreement indicated that the parties had agreed to submit to the jurisdiction of the courts of the seat, when exercising powers conferred by the choice of seat. An anti-suit injunction to restrain a breach of the arbitration agreement was an exercise of the powers conferred by the choice of seat provisions, and therefore the English court was an appropriate forum. 

Having established that the English court had jurisdiction to decide this issue, the Court then addressed whether the Russian proceedings were a breach of the arbitration agreement. 

Determining the law of an arbitration agreement 

In its decision, the Court of Appeal clarified the principles to be applied to establish the proper law of the arbitration agreement.

The law of the arbitration agreement is to be determined by applying the three stage test required by English common law conflict of laws rules:

(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?

The Court stated that an express choice of law in the main contract may amount to an express choice of the law of the arbitration agreement. However, whether it does will be a matter of construction of the whole contract, including the arbitration agreement provisions, applying the principles of contract law construction of the main contract (if different from English law). 

In all other cases, there is a strong presumption that the parties will have impliedly chosen the choice of the seat as the law of the arbitration agreement. However, a different system of law may govern the arbitration agreement where there are powerful countervailing factors in the relationship between the parties or the circumstances of the case. It will be a matter of fact in each case and this is where the third stage of the test may be relevant.

Applying the above principles, the Court of Appeal found that Chubb was in breach of the arbitration agreement. Whilst it was common ground between the parties that the law of the Contract was Russian law, this was implied on the basis that Russian law was only referred to as the 'applicable law' in a limited number of provisions. As a result, the Court held that there was a presumption that the parties had impliedly chosen the proper law of the arbitration agreement to be the choice of the seat, which was English law. 

Impact of this decision when drafting arbitration agreements

This decision provides helpful guidance as to how the law of an arbitration agreement  will be determined, and highlights the impact of governing law clauses and the seat of arbitration in this assessment. It also demonstrates the value of clarity when drafting arbitration clauses; the time and expense of satellite litigation would likely have been avoided in this case if there had been express governing law provision in both  the main Contract and the arbitration clause. Taking time to do this at the outset of the relationship between the parties will avoid costs and time wasted once a dispute has arisen.

For more articles on arbitration, arbitration agreements and disputes in general take a look at Disputes+, Bird & Bird's dedicated DR know-how portal.