U.K. Supreme Court provides welcome clarity on how to determine the governing law of an arbitration agreement

In its recent decision in Enka v Chubb [2020] UKSC 38,¹ the U.K. Supreme Court has provided a high degree of clarity on the test to be applied to determine the governing law of an arbitration agreement. The Court also took welcome – and principled – steps to guard against the possibility of litigants arguing that arbitration agreements are invalid or otherwise impaired under their governing law.

Further underlining London's status as a leading pro-arbitration jurisdiction, the Supreme Court confirmed that English courts will not be deterred from granting anti-suit relief by arguments that an arbitration agreement is governed by foreign law or that the scope of the arbitration agreement will be determined in foreign proceedings.

Introduction

Most commercial contracts contain an express choice of law clause to govern the parties' substantive rights and obligations, and most arbitration clauses specify what the "seat" or "legal place" of the arbitration will be. But very few contracts contain an express agreement on the governing law of the arbitration clause. 

In circumstances where the parties have chosen different systems for the substantive law of their contractual relationship and the curial law of the seat of the arbitration, the question therefore arises which of these two systems of law governs the arbitration agreement? 

The answer to this question can have significant real world consequences. It can affect, for example: (i) whether a non-signatory can be party to an arbitration; (ii) whether claims in tort are covered by the arbitration agreement; and (iii) whether the arbitration agreement is even valid.

The approach to determining the governing law of the arbitration agreement

The English law test for determining the governing law has long been easy to state but difficult to apply in practice. The court must consider: (1) is there an express choice of law? (2) if not, is there an implied choice of law? (3) if not, with which system of law does the arbitration agreement have its closest and most real connection?² 

Contracts containing a choice of law clause

The Supreme Court decision in Enka v. Chubb ends the uncertainty in the vast majority of cases. It clarifies that a general choice of governing law clause will constitute an express choice of law that extends to the arbitration clause, and thus most cases will now be resolved under limb (1) of the test. 

The Court held that, as a general rule, a choice of law to govern the parties' substantive obligations will "apply [ ] to an arbitration agreement set out in a clause of the contract, even where the law chosen to govern the contract differs from that of the place chosen as the seat of the arbitration."³ So, for example, with respect to an ordinary English law contract specifying ICC arbitration in Paris, the arbitration agreement will be governed by English law rather than French law. ⁴

The general rule established by the Supreme Court is, however, subject to two significant caveats. First, the English courts will not be receptive to any argument that the arbitration agreement is invalid under its applicable law. The Supreme Court applied the "validity" or "validation" principle of general English contract law ("the contract should be interpreted so that it is valid rather than ineffective"⁵) to the choice of law question. Accordingly, if a party raises the argument that an arbitration clause is void and of no legal effect under the substantive governing law, there will be "a very powerful inference that such a meaning could not rationally have been intended."⁶ 

Second, the presumption in favour of the substantive governing law may be displaced where there is a specific provision in the "law of the seat which indicates that, where an arbitration is subject to that law, the arbitration [agreement] will also be governed by that law".⁷

Where either of these exceptions apply, it will be necessary for the Court to apply limbs (2) and (3) of the test to determine the governing law. In practical terms, this will usually mean that the law of the seat will apply in circumstances where either exception is applicable.

Contracts that do not contain a governing law clause

While all the justices of the Supreme Court agreed on the approach to be taken to cases containing a governing law clause, there was a divergence of views on the approach to be taken in cases where the contract lacks such a clause. 

The majority gave detailed consideration to the argument (which had been successful in the Court of Appeal) that, in the absence of an express agreement, there would be an implied agreement under limb (2) in favour of the law of the seat. The Court disagreed with this conclusion and held that "a choice of the seat of arbitration [cannot] by itself be construed as an implied choice of the law applicable to the arbitration agreement."⁸

However, the majority went on to hold that, in the absence of choice (express or implied), there is a general rule under limb (3) that the law of the seat will be the law with the closest and most real connection to the arbitration agreement. The practical impact of the disagreement between the Court of Appeal and Supreme Court is thus limited. In a typical case involving a contract where the parties have chosen a seat but omitted to choose a governing law, the same result will be reached under limb (3) of the test that would have been reached under limb (2) if the Court of Appeal decision had been upheld (i.e., the law of the seat will apply).

As the majority noted, this general rule "enables the parties to predict easily and with little room for argument which law the court will apply by default".⁹

Different approaches to the facts of the Enka case

The major difference between the majority and the minority appears to be the approach that should be taken at limb (2) of the test. This is illustrated by the facts of the Enka case and the disagreement between the majority and minority on the substantive result.¹⁰

The Enka case concerned a contract that did not contain a governing law clause but did contain various references to Russian law. Chubb contended that, construing the agreement as a whole, there was an agreement that the contract (including the arbitration clause) was governed by Russian law. Enka conceded that the substantive governing law was Russian but contended this was only because of the connections between the contract and the law of Russia and not because of a choice made by the parties. 

The majority found that references to Russian law within the text of the contract did not "point ineluctably to the conclusion that the parties intended Russian law to apply."¹¹ The majority therefore found no express or implied agreement on the applicable law, and applied the default rule under limb (3) that the arbitration agreement was governed by the law of the seat (i.e., English law).

The minority would have found that the various references to Russian law within the contract (together with other contextual factors¹²) were sufficient to demonstrate a choice by the parties of Russian law (under either the Rome I Regulation or the implied choice test at common law).¹³ Having found such an implied choice of the substantive law, the minority would have applied the same logic as applied by the majority for an express governing law clause, and found that the "implied choice encompasses, or carries across to constitute, an implied choice of Russian law for the arbitration agreement."¹⁴

The minority also disagreed about the weight that should be accorded to the parties' choice of the seat when applying limb (3) of the test (i.e., determining the law that has the closest and most real connection with the arbitration agreement). The minority would have prioritised the principle that "the parties would have wished to produce reasonable coherence across their whole contractual relationship"¹⁵ and so would have found Russian law applicable under limb (3) of the test.

What about the anti-suit injunction?

Amid all the debate on the applicable law, it is easy to lose sight of what the parties were really arguing about. Chubb was arguing that the arbitration agreement was governed by Russian law to support its contention that the English courts should defer to the Russian courts on the question of whether certain Russian litigation had been brought in breach of the arbitration agreement, and therefore that the English courts should refrain from granting an anti-suit injunction.

The Supreme Court held that "in granting an anti-suit injunction the English courts are seeking to uphold and enforce the parties' contractual bargain" and that "in principle it should make no difference whether that agreement is governed by English law or by a foreign law".¹⁶

While the Supreme Court noted that there could be circumstances in which the English courts would choose to defer to a foreign court on the scope of an arbitration clause, those would be very few in practice.¹⁷ In particular, the Court confirmed that it will generally be inappropriate to defer to a foreign court in circumstances where the foreign court proceedings determining the scope of the arbitration are the same proceedings that are the target of the requested anti-suit injunction.¹⁸

Accordingly, when faced with an application for an anti-suit injunction in respect of an arbitration agreement governed by foreign law, the English court will generally hear expert evidence of the foreign law and determine for itself whether the foreign proceedings have been brought in breach of the arbitration agreement

Comments

The Supreme Court's decision provides a major step forward in clarifying English law and reducing the scope for future litigation on this issue.

The statement of a clear choice of law rule for all contracts including a governing law clause provides parties with a high degree of certainty. An obvious advantage of this approach is that the courts will not generally be required to conduct detailed textual analysis to determine whether a particular choice of law clause (and associated contractual boilerplate¹⁹) meets, or falls short of, the degree of specificity required to extend the choice of law to the arbitration agreement under limb (1) of the test. 

The express application of the "validation" principle to the choice of law question also provides a principled basis for the courts to avoid the conclusion that an arbitration agreement is invalid under its governing law. The statements of the Supreme Court provide a clear disincentive for litigants to raise such an issue and will avoid the need for the lower courts to present policy-based judgments as textual analysis.

Lingering uncertainty perhaps remains as to what will constitute an "implied agreement" on the governing law, with the majority appearing to require a high standard of certainty and the minority being more willing to infer a choice from contextual factors. Future cases will likely test the boundaries of what can properly be taken into account at limb (2) when deciding whether there has been an implied choice in favour of the substantive law. 

For absolute certainty, it remains best practice for parties to state expressly, within the arbitration clause itself, the law that the parties wish to apply to their arbitration agreement.

_{1 Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 ("Enka").
2 See Sulamerica Cia Nacional de Seguros SA v Enesa Engelharia SA [2013] 1 WLR 102, paras. 9 and 26.
3 Enka, para 53.
4 Note that the French Courts would take a different view on this question. See, for example, P. Brumpton, E. Oger-Gross, B. Withers & N. Aujouannet-Kelner 'Dallah Revisited: The French and English Courts in Conflict Again Regarding Arbitral Jurisdiction Over Non-Signatories'.
5 This is a translation of the latin maxim 'verba ita sunt intelligenda ut res magis valeat quam pereat' provided by Staughton LJ in Lancashire County Council v Municipal Mutual Insurance Ltd [1997] QB 897, 910; cited by the Supreme Court in Enka at para. 95. 
6 Enka, para. 106. 
7 The precise ambit of this exception is unclear. The two examples cited by the Supreme Court (Section 48 of the Swedish Arbitration Act and Section 6 of the Arbitration (Scotland) Act 2010) create a default rule in favour of the law of the seat, but only where the parties have not reached agreement on the law to govern their arbitration agreement. This, of course, raises a degree of circularity as to whether any such provision can displace the presumption that the parties have agreed on the law governing their arbitration agreement by specifying a law that governs the substantive provisions of their agreement.
8 Enka, para 117.
9 Enka, para 144. 
10 See Enka, para 260, per Lord Burrows (dissenting)
11 Enka, para. 155.
12 For example, that the primary language of the contract was Russian and that payments were to be made in Russian Roubles (see Enka, para 204 per Lord Burrows (dissenting)). 
13 See Enka, paras 205-207, per Lord Burrows (dissenting).
14 Enka, para. 260, per Lord Burrows (dissenting).
15 Enka, para 289, per Lord Sales. 
16 Enka, para 177. 
17 See Enka, para. 183 ("The grant of an anti-suit injunction is always a matter of discretion. There may be circumstances in which it would be appropriate to await a decision of a foreign court. If, for example, the scope of the arbitration agreement was about to be determined by the highest court in the country of the governing law in unrelated proceedings, then it might be sensible for the English court to await that decision.")
18 See Enka, para. 183.
19 See, for example, Kabab-Ji S.A.L (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ 6, paras. 62-70.}

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