The governing law of an arbitration agreement and why it matters

This was an appeal by Enka Insaat ve Sanayi SA (Enka), against the decision of the High Court (Andrew Baker J) refusing to grant an anti-suit injunction against OOO “Insurance Company Chubb” (Chubb Russia).  Enka was a sub-contractor on a power plant construction project in Russia.  A huge fire had occurred at that plant and Chubb Russia, as subrogated insurer of Enka’s original contractual counterparty, brought a tort claim in the Russian courts against Enka claiming damages for insurance losses arising out of the fire (the Russian proceedings). 

It was common ground that there was a valid and binding arbitration agreement in the construction contract that provided for ICC arbitration in London.  The construction contract was assumed to be governed by Russian law (although this point was not free from doubt), but the arbitration agreement within it did not have an express governing law.  Enka argued that English law governed the arbitration agreement and that the Russian proceedings had been brought in breach of the arbitration agreement.  Chubb Russia claimed that it was governed by Russian law and that there had been no breach as the arbitration agreement did not extend to claims in tort if Russian law applied. 

The High Court refused Enka’s application on the basis that it was not the appropriate forum for deciding the governing law and scope of the arbitration agreement.  We reported on the High Court decision here.  The Court of Appeal, with Popplewell LJ giving the leading judgment, unanimously overturned the judge’s decision. 

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

At first instance, the judge had held that, since the jurisdiction to grant an anti-suit injunction arose under the Senior Courts Act 1981 rather than the Arbitration Act 1996, the English court first had to consider whether it had jurisdiction over the parties.  Where, as here, the alternative forum was outside the EU, this approach would require the English court to consider whether it was the appropriate forum.  The judge had held in essence that the Russian court was the more appropriate forum to decide whether the Russian proceedings were in breach of the arbitration agreement, based in part on his view that the arbitration clause was governed by Russian law.

The Court of Appeal found that the judge’s approach was “wrong in principle”.  The Court emphasised that the English court, as the court of the seat of the arbitration, was necessarily the appropriate forum to grant assistance in favour of arbitration.  This included assistance in the form of an anti-suit injunction under the Senior Courts Act 1981.  The choice of London as the seat represented an agreement between the parties to submit to the jurisdiction of the English courts in respect of the exercise of its supervisory powers.

Moreover, no question arose as to whether, if the arbitration agreement was governed by Russian law, the English court should defer to the Russian court as a matter of discretion on whether the Russian proceedings were in breach of the arbitration agreement.  The Court held that the task of the English court as the court of the seat was to determine whether there was a breach of the arbitration agreement and, if that required determination of issues of foreign law, the English court was required to make those determinations.  If the court determined there had been a breach, the court then had to decide whether injunctive relief should be granted as a matter of discretion. 

Seat of the arbitration provides an implied choice of law

The Court of Appeal then considered what law governed the arbitration agreement.  It reaffirmed the three-stage test typically applied by the English courts:

• Is there an express choice of law for the arbitration agreement?
• If not, is there an implied choice of law?
• If not, with what system of law does the arbitration agreement have its closest and most real connection?

Focusing especially on cases like this one where the law of the main contract and the seat were different, the Court held that an express choice of governing law for the main contract could constitute an express choice for the arbitration agreement too.  This was a matter of construction but was likely to be the conclusion in only a minority of cases.  Otherwise, the general rule should be that the law governing the arbitration agreement is that of the seat as a matter of implied choice, subject only to particular features of the case that demonstrate powerful reasons to the contrary.  By way of example, the Court suggested that the general rule might not apply when the arbitration agreement would be invalid under the law of the seat. 

Applying these principles to the case at hand, the Court held that English law, being the law of the seat, was the correct governing law of the arbitration agreement. Under English law, the tort claim in the Russian Proceedings fell within the arbitration agreement.  The Court went on to consider whether in the exercise of its discretion there was any reason not to grant an anti-suit injunction, concluded that there was not, and duly granted the injunction sought.

Comment

The main interest in this case lies in its analysis of the law governing the arbitration agreement.  The other part of the decision – that a choice of an English seat brings with it the powers of the English courts to enforce an arbitration agreement, including through anti-suit injunctions – provides welcome clarification of what should have been clear previously.

It is well established that an arbitration agreement is separable from the rest of the contract and can therefore have a different governing law to the main contract.  The governing law of the arbitration agreement determines its interpretation, scope and validity.  It can have significant practical consequences for the parties, as this case showed. 

However, there has been no consistency in the cases on how to determine the governing law of an arbitration agreement, where the law of the main contract and the seat are different.  In this case, the Court of Appeal sought to create some clarity, and some commentators have suggested that it achieved this.  There are two reasons to be cautious of this view.  First, there are now three Court of Appeal decisions (the other two being C v D [2007] EWCA Civ 1282 and the Sulamerica case [2012] EWCA Civ 638) which are hard to reconcile.  It is no surprise that permission has been given to appeal to the Supreme Court and so the position may yet change.  Second, if the Court of Appeal’s reasoning is upheld, there will remain room for debate over when exactly the choice of governing law for the main contract will be regarded as an express choice of governing law for the arbitration agreement.    

There is a practical way to avoid this uncertainty, which is to specify the governing law of the arbitration agreement where the law governing the main agreement and the law of the seat differ.  We generally recommend that the law of the seat is chosen in these circumstances.

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.