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Governing law of an arbitration agreement: UK Supreme Court ruling brings clarity

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02 December 2020

The Supreme Court unanimously held that, if the parties have chosen a governing law for a contract containing an arbitration clause, this would usually amount to an express or implied choice of governing law for the arbitration clause too. The majority held that, where there is no express or implied choice of governing law of the contract, the arbitration clause would be governed by the law with which it has the closest and most real connection – usually the law of the seat: Enka Insaat ve Sanayi A.S. v OOO Insurance Company Chubb [2020] UKSC 38

This was an appeal by OOO “Insurance Company Chubb” (Chubb Russia) against a decision of the Court of Appeal granting an anti-suit injunction restraining Chubb Russia from pursuing litigation in the Russian courts against Enka Insaat ve Sanayi SA (Enka). Enka sought an anti-suit injunction on the basis that Chubb’s claim should have been brought in arbitration pursuant to an arbitration agreement in the relevant contract, which provided for London-seated arbitration under the ICC Rules. The High Court refused; however, the Court of Appeal disagreed and granted an anti-suit injunction.

The relevance of the governing law of the arbitration agreement was that, if it was governed by English law, it was common ground that the Russian claims fell within the arbitration agreement. However, if the arbitration clause was governed by Russian law, it was arguable that the Russian claims fell outside it. The Court of Appeal had held that, by choosing the law of the seat, the parties would usually also be making an implied choice of a law to govern the arbitration agreement, even if the law of the main contract was different.

Governing law of the arbitration agreement

The Supreme Court confirmed that the law applicable to an arbitration agreement is the law expressly or impliedly selected by the parties or – in the absence of such a choice – the law most closely connected with the arbitration agreement. This test has not been controversial. However, there has been ongoing uncertainty under English law about how to apply it where there is no express choice of law for an arbitration agreement. In particular, it has been unclear whether, in the absence of such an express choice, the law of the seat or the law of the contract would apply to the arbitration agreement. This judgment settles that uncertainty.  

The Court unanimously held that, where the parties have chosen a governing law for their contract, this would generally be construed as a choice of law for the arbitration agreement too, unless there was good reason to conclude otherwise. This means that a governing law clause for the contract would usually be interpreted as applying to the arbitration clause as well. The Supreme Court rejected the Court of Appeal’s conclusion that there would be a strong presumption that the parties had impliedly chosen the law of the seat to govern the arbitration clause.

However, the Court was split on what the approach should be if there was no express or implied choice of law to govern the arbitration agreement, ie if there was no governing law clause in the main contract. The majority (Lords Hamblen, Leggatt and Kerr) held that the law with the closest connection to the arbitration agreement was the law of the seat. The minority considered that there was an implied choice of law for the arbitration agreement which matched whatever law was held to apply to the main contract following English law rules for determining the applicable law (Lord Burrows), or that the law with the closest connection to the arbitration agreement was the law of the main contract (Lord Sales).

The decision on the case itself really turned on the applicable law analysis for the main contract. The majority found that the parties had made no express choice of law for the main contract. They held that the arbitration agreement was governed by English law, as the law of the seat, on the basis that this was the law which was most closely connected to the arbitration clause. The minority considered that the parties had made a choice of Russian law for the main contract and, therefore, for the arbitration agreement.

English seat brings with it the jurisdiction to issue an anti-suit injunction

The Supreme Court confirmed the Court of Appeal’s decision to issue an anti-suit injunction. The Court held that, even had the arbitration agreement been governed by Russian law, comity would not prevent the English courts from issuing an anti-suit injunction. It found that deference to a foreign court would give way to the importance of upholding the parties’ agreement to specify London as the seat, and preventing a party to an arbitration agreement from litigating in breach of that agreement.  

Comment

The Supreme Court’s judgment provides clarity in what was an unsettled area of law. It lays down a clear process to follow when identifying the governing law of an arbitration agreement. Nevertheless, the process can be easier to describe than to apply: whether there has been a choice of governing law for the arbitration agreement (express or implied) can be difficult to determine in practice, as the divergence of opinions in this case demonstrates. Yet the outcome of this test can lead to different outcomes, with the arbitration agreement either governed by the law of the main contract or the law of the seat. Thus, while the test is clear, its outcome is not necessarily easy to predict.

The law applicable to an arbitration agreement may sound like a somewhat esoteric issue but, as the law which determines its interpretation and scope, it can have significant practical consequences. Different governing laws may, for example, result in claims falling within or outside the scope of the arbitration agreement, or lead to the arbitration agreement being held valid or invalid. In these circumstances, the practical advice remains the same. Parties should therefore ensure that, where the law of the main contract differs from the choice of seat, the governing law of the arbitration agreement should be expressly defined. Often, the seat is chosen for being a safe and predictable place for resolving international disputes, while the governing law may be a less-predictable local law. In these circumstances, it would be sensible to specify the law of the seat to govern the arbitration agreement.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.

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