Pinsent Masons advises Photon Energy N.V. and Bankhaus Scheich Wertpapierspezialist AG on EUR 55m GREEN bonds
Out-Law Analysis | 11 Feb 2021 | 10:03 am | 17 min. read
A common tip given to parties drafting arbitration clauses is to ensure that they comply with the checklists provided by the major institutions such as the ICC and LCIA.
Both the ICC and the LCIA recommend including the following four items in an arbitration clause: the seat of the arbitration; the number of arbitrators; the language of the arbitration; and the law governing the contract.
The UK Supreme Court case of Enka v Chubb shows that parties would be well advised to add another item to their arbitration clause checklist, which could potentially save them years of unwanted satellite litigation: the law governing the arbitration clause itself.
The importance of this was recently highlighted in the case of Enka v Chubb considered by the UK Supreme Court. Our global arbitration team has taken a look at how the issue before the English judges in this case would be handled in other jurisdictions.
As Florian Quintard explains, in the case of Enka v Chubb, the parties had been careless when drafting their contract and arbitration clause: the contract did not specify its governing law and the arbitration clause did not specify the law governing the arbitration agreement.
The Supreme Court considered the following two situations:
The Enka v Chubb case shows that parties should be aware that their chosen seat will not determine the law applicable to the arbitration agreement, in cases where the contract contains a governing law clause, which is typically the case. This can seem counterintuitive, especially as the Supreme Court decided in the same case that the seat of arbitration in the contract, London. tilted the balance in favour of English law as the law most closely connected to the arbitration agreement.
The safest way to maintain control over the law governing the arbitration agreement is to expressly specify it in the arbitration clause.
As Paris-based Florian Quintard explains, the position is starkly different in France.
French courts have developed the so-called "substantive rules" – "règles matérielles" – of international arbitration law, which allow parties to forego any recourse to conflict of laws methods, such as the "closest connection" test relied on in the Enka v Chubb case. More specifically, one of these substantive rules specifies that the existence and efficiency of the arbitration clause must be envisaged in accordance with the parties’ common intention, without any need to refer to any national law. French law will therefore assess the arbitration clause without any reference to the applicable law of the underlying contract. This means that the arbitration clause is considered to exist autonomously from the remainder of the contract.
If faced with the facts of the Enka v Chubb case, French courts would therefore have held that the seat of the arbitration would have automatically designated the law applicable to the arbitration clause, whether or not the contract specified its applicable law.
Specifying the law of an arbitration agreement in all arbitration clauses would avoid any such satellite litigation which can lead to conflicting decisions
In light of this, is it necessary for parties to stipulate the law applicable to the arbitration clause in the context of a contract including a Paris-seated arbitration clause? At first glance, it would appear that this is not necessary, given that, under French law, the seat chosen will determine the law applicable to the arbitration agreement. However, in an international context, the same arbitration agreement may be assessed by different state courts.
This is what happened in the KFG v Kabab-Ji case, where French courts applied the above substantive rule to hold that the arbitration agreement was governed by French law. Subsequently, in the context of enforcement proceedings in England, the English courts held that as the law applicable to the contract was English law, English law was the law applicable to the same arbitration agreement. Specifying the law of an arbitration agreement in all arbitration clauses would avoid any such satellite litigation which can lead to conflicting decisions.
According to Melbourne-based Gemma Thomas, while an Australian court has not specifically considered this issue, it would primarily seek to give effect to the intention of the parties as evidenced by their agreements and, possibly, the surrounding circumstances.
In effect this means that where no other governing law is expressed to apply to the arbitration agreement, the governing law of the main contract will ordinarily apply to the arbitration agreement. Where there is no governing law specified in the main contract, the seat of the arbitration will be a persuasive indicator that the parties intended that the governing law of the seat applies.
There might be some circumstances where the court cannot identify a choice of law by reference to the parties’ agreements and surrounding circumstances, in which case it may determine that the jurisdiction which has the closest connection to the arbitration agreement is the governing law. It is likely that an Australian court would find the UK Supreme Court’s decision in Enka v Chubb persuasive and find that the law of the seat is the default position. At a minimum, an Australian court would likely consider that the seat of the arbitration is highly relevant.
Singapore-based Wynne Tay explains that, where there is no express choice of governing law of the arbitration agreement, the Singapore courts have recognised that the substantive law of the main contract is a starting point in determining the implied choice of law governing the arbitration agreement. The Singapore courts have held that the governing law of the main contract is "a strong indicator of the governing law of the arbitration agreement unless there are indications to the contrary" and a choice of seat different from the place of the governing law of the main contract is itself insufficient to displace the starting point. In fact, the Singapore courts have, on multiple occasions, found the implied choice of law governing the arbitration agreement is the same as the choice of governing law of the main contract.
It has also been suggested that the governing law of the main contract should only be displaced if choosing it as the governing law of the arbitration agreement would in effect negate the arbitration agreement even though the parties have evinced a clear intention to arbitrate.
Notwithstanding all this, the Singapore courts have yet to consider the specific situation where there has been no choice of governing law of the main contract. The Supreme Court decision in the case of Enka v Chubb will be persuasive before the Singapore courts if and when the issue arises.
According to Hong Kong-based Karah Howard and Mohammed Talib, the current position in Hong Kong regarding the determination of the implied choice of governing law in an arbitration agreement is unclear: case law says one thing whilst conflict of law commentary says another.
Although there is room for doubt … we consider the question would rightfully be answered by applying Hong Kong conflict of laws rules, such that even where a contract contained a governing law clause, the law governing the arbitration agreement would be the law of the seat of arbitration
Case law supports an approach in line with that taken by the UK Supreme Court in the case of Enka v Chubb, that first, the contract including the arbitration clause must be examined to see if there was any agreement, express or implied, by the parties as to both the proper law of contract, or the governing law of the arbitration agreement. It is only if agreement cannot be found that the implication arises from the choice of the seat, that the law of that place would be the governing law of the arbitration agreement. It is not permissible to look at the arbitration agreement in isolation and regard should be had to the surrounding circumstances including the law governing the substantive agreement. The Hong Kong courts have thus expressly rejected the use of the separability principle, according to which an arbitration agreement should be considered as a different and separate agreement.
On the other hand, more recent views from commentators from a conflict of laws perspective tell a different story. Graeme Johnston and Paul Harris SC, authors of 'The Conflict of Laws in Hong Kong', suggest that, based on the legitimate commercial expectation/purpose and separability principles, "if the contract contains a governing law clause and identifies a place of arbitration, then the Hong Kong court should conclude that the arbitration agreement is governed by the law of the place of the arbitration".
These commentators consider the analysis and conclusions provided for in case law to be wrong, being based on older English law decisions handed down before the enactment of the English Arbitration Act. However, they agree that where there is no express or implied choice of governing law under the contract but the arbitration agreement – expressly or impliedly – identifies a place of arbitration, then a Hong Kong court should conclude that the arbitration agreement is governed by the law of the place of arbitration. This is the same as the decision in the Enka v Chubb case.
This approach of focusing on the seat of arbitration, rather than the main contract, it can be argued, is consistent with the separability principle and section 34(1) of the Arbitration Ordinance (Cap. 609) in Hong Kong, which adopts Article 16 of the UNCITRAL Model Law and provides that "an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract".
Although there is room for doubt given the earlier case law and the English decision in the case of Enka v Chubb which may be of some persuasion, we consider the question would rightfully be answered by applying Hong Kong conflict of laws rules, such that even where a contract contained a governing law clause, the law governing the arbitration agreement would be the law of the seat of arbitration.
As Beijing-based Qing Nancy Ao explains, Article 18 of the Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships provides that the parties concerned may choose the laws applicable to arbitral agreement by agreement. In the absence of such a choice being made, the laws at the locality of the arbitral institution or the seat of the arbitration apply.
The issue is also considered in a report published by the Supreme People's Court entitled 'Provisions on Several Issues concerning Trying Cases of Arbitration-Related Judicial Review'.
That report said: "Parties shall make an express declaration of will when choosing by agreement the law applicable to the recognition of the effect of an arbitration agreement, and the law applicable solely to the contract as agreed upon may not be invoked as the law applicable to the recognition of the effect of the arbitration clause of the contract (Article 13)."
It also said: "A people's court shall, when deciding the law applicable to the recognition of the effect of a foreign-related arbitration agreement under Article 18 of the Law of the People's Republic of China on Choice of Law for Foreign-Related Civil Relationships, invoke the law recognising the effect of the arbitration agreement, where neither party chooses an applicable law and the application of the law in the place of the arbitral institution will lead to a conclusion regarding the effect of the arbitration agreement different from that of the law in the place of arbitration (Article 14)."
Johannesburg-based Andrew Fawcett explains how the Enka v Chubb case would have been considered in South Africa.
Under South African law the parties to an international arbitration are free to agree the law applicable to the arbitration. Where the parties to an international contract have not agreed on which law applies, the general rule of South African private international law is to distinguish between the rules of procedural law and the rules of substantive law. The procedural law of arbitration is generally governed by the law of the place of arbitration, this being the International Arbitration Act 2017 in South Africa, and the rules of substantive law by the law most closely connected with the performance of the underlying contract, such as the law of the place where the agreement was concluded or was to be carried out.
If, however, there is an express choice of law to govern the arbitration agreement, that choice will be effective, irrespective of the law applicable to the contract as a whole. If there is no choice of law for the arbitration agreement but there is an express choice of law to govern the contract as a whole, the arbitration agreement will also normally be governed by that law: this is so whether or not the seat of the arbitration is stipulated, and irrespective of the place of the seat.
In the event of there being no choice of law for the underlying contract or for the arbitration agreement, then the law applicable to the arbitration agreement will be the law of the seat of the arbitration, and the law of the underlying contract will be the law most closely connected to the performance of the underlying contract.
Article 28 of the International Arbitration Act provides that the law designated by the parties is the substantive law unless otherwise expressed and that where the parties have not designated the applicable law the arbitral tribunal shall apply the law which it considers applicable.
The South African position therefore mirrors the position in English law as set out by the UK Supreme Court in the case of Enka v Chubb.
As Madrid-based Sofia Parra, Begona Charro and Claudia Fernández López-Areal explain, the law applicable to an arbitration agreement in Spain is regulated by Article 9.6 of the Spanish Arbitration Act 60/2003.
Far from choosing a preferred set of laws, whether the law of the seat or the law applicable to the dispute, Article 9.6 of the Act applies a "most favourable criteria" approach, whereby the agreement will be valid under Spanish law as long as it complies with either: the law chosen by the parties to govern the arbitration agreement; the law applicable to the substance of the dispute, or; Spanish law.
Therefore, the test will be applied in relation to those three legal systems and, as long as the arbitration agreement is valid under one of them, it will be considered valid under Spanish law. It is an approach similar to that of Article 178 of the Swiss Arbitration Law which seeks to preserve the validity of an arbitration clause.
However, this position is without prejudice to the effect that specific statute may have on arbitration agreements in some circumstances, such as the Spanish Insolvency Act, which contemplates expressly the possibility to suspend the validity of an arbitration agreement if certain conditions are met.
According to Munich-based Dr. Martin Eimer, the UK Supreme Court decision is largely in line with the approach taken by the Federal Supreme Court in Germany.
Where the parties to a contract do not express a choice in respect of the law applicable to the arbitration agreement contained therein, it is generally assumed, by reference to the choice of law governing the contract as such, that the parties also wanted this governing law to apply to the arbitration clause.
However, contrary to the findings of the UK Supreme Court, the default in case the main contract does not contain a choice of law provision either is not that the law governing the arbitration agreement ought to be determined by the closest connection principle. It is the firm position under German law that in these circumstances the law of the seat of the arbitration is applied – with one of the reasons for this being that this aligns with the principle expressed in Article V 1.(a) and II of the New York Convention. Since, according to the UK Supreme Court, the seat of the arbitration typically has the closest connection, the difference in practice is likely to be minimal.
As Doha-based Jonathan Collier and Joseph Lee explain, arbitrations which take place in Qatar are governed by Qatari Law No.2 of 2017 – the Qatari Arbitration Law.
In addition, for an international commercial arbitration taking place outside of Qatar where the parties agreed that the arbitral proceedings shall be subject to the Qatari Arbitration Law, for instance by way of agreeing the seat of arbitration to be Qatar, then the Qatari Arbitration Law is also applicable.
Partner, Head of Office, Doha
There is no system of binding precedent in Qatar and therefore no analogous decision to that in Enka v Chubb
The parties are free to agree the applicable substantive law (see Article 28(1) of the Qatari Arbitration Law). In the absence of agreement, the tribunal will apply the law provided for in the rules on conflicts of law (see Article 28(2) of the Qatari Arbitration Law). That aside, there are several conflicts of law provisions under the Qatari law mandating what substantive law will be applied in the absence of an express choice of law by the parties and so the nature of the agreement must be taken into account (see Articles 12(2), 27, 29 and 55 of Law No. 22 of 2004 (the Qatari Civil Code).
There is no system of binding precedent in Qatar and therefore no analogous decision to that in Enka v Chubb. Other than the reference to the rules of the conflict of laws at Article 28(2), the Qatari Arbitration Law does not expressly provide guidance on the question of which system of law would govern the arbitration agreement where there is no choice of governing law in the contract. Equally, we are not aware of a reported case which expresses the correct approach as a matter of Qatar law.
However, Article 35 of the Qatari Arbitration Law provides grounds on which enforcement of an award can be declined and Articles 35.1(d) and 35.1(e) state that enforcement may be declined if the party against whom the enforcement is sought presents to the competent judge of enforcement proof or evidence that "[t]he formation of arbitral tribunal, or the appointment of arbitrators or the arbitration proceedings have violated the applicable law, agreement of the parties, or, in the absence of agreement, the law of the seat of arbitration". This suggests that "in the absence of agreement" as regards the law governing the arbitration agreement, the applicable procedural law is that of the seat. This approach would be consistent with the decision in the case of Enka v Chubb – i.e. absent a choice of law of the contract, the governing law of the arbitration is the law most closely connected to the arbitration agreement.
However, it is possible that the position would be different in circumstances where the substantive governing law mandated by the conflicts of law provisions under the Qatari law is different from the law of the seat under the arbitration agreement. Although such circumstances may be limited in practice, we have yet to see how the law governing the arbitration agreement will be determined in those circumstances.
Dubai-based Mark Raymont and Melissa McLaren said the position in the UAE depends on whether arbitrations are subject to the law 'onshore' or in the 'offshore' free zones, namely the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM)
The UAE Federal Arbitration Law (FAL) or Law No.6 of 2018, governs arbitrations seated in onshore UAE and is the default procedural law. In terms of substantive law, Article 37(1) of the FAL provides that the arbitral tribunal shall determine the dispute in accordance with the rules of law chosen by the parties. In the absence of the parties' choice, the tribunal shall apply the substantive rules of law it deems most closely connected to the dispute. However, the law is silent as to what the governing law of the arbitration agreement will be.
Notwithstanding this, any challenge to the validity of an arbitration clause may find itself before the UAE courts and the governing law they would apply in such circumstances is therefore key. There is no system of binding precedent in the UAE and court decisions can therefore only give an indication of a potential outcome. There is therefore no analogous decision to the judgment of the UK Supreme Court in the case of Enka v Chubb in the UAE jurisprudence.
Under Article 19(1) of the UAE Federal Civil Transactions Law 1985, and under the FAL, parties are free to choose the governing law of an agreement. However, in practice, the UAE courts are likely to apply UAE law regardless of any contractual choice of law clause. It is therefore anticipated that, whether or not an agreement contains a governing law clause, UAE law would be applied to any interpretation of the arbitration agreement. By way of example, the FAL contains numerous provisions dealing with the validity of the arbitration agreement and these are commonly interpreted in the UAE courts under UAE law, such as matters relating to the authority to arbitrate of the contracting parties.
Aside from onshore UAE, the UAE is home to two common law free zones based on English common law – the DIFC and the ADGM. The DIFC Arbitration Law (Law No.1 of 2008) governs arbitrations seated in the DIFC. As to substantive law, under Article 35 the tribunal will apply the rules of law chosen by the parties but, in the absence of such a choice, the tribunal apply conflicts of laws rules to determine the law. The Arbitration Law is silent as to the governing law of the arbitration agreement.
The DIFC has its own body of statutes and case law and, under the provisions contained in Article 8(2) of the Law on the Application of Civil and Commercial Laws in the DIFC, English law can be applied to plug any gaps to the extent that it is not provided for in DIFC law or law chosen by the parties. That said, there is no existing analogous case to Enka v Chubb, or application of that decision, in current DIFC case law. In light of this, it is anticipated that the DIFC courts, and any arbitral tribunal seated in the DIFC, would follow the approach of the UK Supreme Court to the interpretation of an arbitration clause.
The ADGM Arbitration Regulations 2015 apply to arbitrations seated in the ADGM. As regards substantive law, Article 44 states that the arbitral tribunal shall decide the dispute in accordance with the rules of law chosen by the parties and, in the absence of such a choice, the tribunal shall decide the dispute in accordance with the rules of law it considers appropriate. The law is silent as to the governing law of the arbitration agreement itself.
The ADGM jurisdiction differs to the DIFC in that English law is directly applicable (Article 1, ADGM Application of English Law Regulations 2015), including English case law, on an "evergreen" basis. This means that case law applies automatically as it develops and is not static. As a result, it is anticipated that the ADGM courts, and any arbitral tribunal seated in the ADGM, would apply the same approach as the UK Supreme Court.
Pinsent Masons advises Photon Energy N.V. and Bankhaus Scheich Wertpapierspezialist AG on EUR 55m GREEN bonds