UK Supreme Court confirms proper approach to arbitration governing law

Out-Law Analysis | 19 Oct 2020 | 10:57 am | 4 min. read

A recent judgment from the UK's highest court has clarified the previously uncertain English choice of law rules for ascertaining the governing law of an arbitration agreement, and the role of the court of the seat in granting anti-suit injunctions.

The central issue before the Supreme Court in this case concerned which system of national law governs the validity and scope of an arbitration agreement when the law applicable to the contract containing it differs from the law of the 'seat', or place, of arbitration.

The claim

In February 2016, a power plant in Berezovskaya, Russia was severely damaged by a fire. Chubb Russia, a Russian insurance company, had insured the owner of the power plant against this type of damage. Enka, a Turkish global engineering and construction company, was one of the subcontractors of the construction project.

The construction contract did not contain a governing law clause. It did, however, contain an arbitration agreement that provided for disputes between the parties to be settled by ICC arbitration in London.

The expeditious manner in which the proceedings were carried out by the court of first instance, the Court of Appeal and the Supreme Court – all within a span of just over seven months – is a true testament to the efficiency with which the English courts act when faced with matters of urgency.

After the fire, in May 2019, Chubb Russia filed a claim in the Moscow Arbitrazh (commercial) Court against Enka, among others, claiming joint liability for the damage caused by the fire. Enka filed a motion to have Chubb Russia's claim dismissed on the grounds that it fell within the scope of the arbitration agreement contained in the construction contract, and therefore ought to be resolved by arbitration in London rather than before the Russian courts. In March 2020, the Russian courts denied Enka's motion to refer the claim to arbitration.

Meanwhile, in September 2019, Enka brought a claim in the English High Court seeking an anti-suit injunction to restrain Chubb Russia from further pursuing the Russia proceedings against it on the grounds that this was a breach of the arbitration agreement. In October 2019, the English court declined to grant an interim anti-suit injunction but gave directions for an expedited trial that took place in December 2019. A judgment delivered shortly after dismissed Enka's claims. The court found that the appropriate forum to decide whether Chubb Russia's claim against Enka fell within the arbitration agreement was the Moscow court and not the English court.

In March 2020, Enka filed a request for arbitration against Chubb Russia with the ICC seeking a declaration that Chubb Russia's claims in the Russian court fell within the scope of the arbitration agreement and damages. Chubb Russia challenged the jurisdiction of the arbitration and denied Enka's entitlement to any of the relief claimed.

In May 2020, Chubb Russia applied to the Supreme Court for permission to appeal, which the court granted at the same time as staying the anti-suit injunction on Chubb Russia. The appeal was expedited and heard over two days in July 2020.

The expeditious manner in which the proceedings were carried out by the court of first instance, the Court of Appeal and the Supreme Court – all within a span of just over seven months – is a true testament to the efficiency with which the English courts act when faced with matters of urgency.

The Supreme Court's decision

In contrast to the Court of Appeal's approach the Supreme Court, by a majority, held that a choice of law for the main contract should generally be treated as the choice of law for the arbitration agreement but that, in the absence of such a choice, the arbitration agreement is governed by the law of the seat as a default.

In arriving at its decision, the Supreme Court referred to a considerable body of English law which proceeds on the assumption that a choice of law for the contract will normally apply to an arbitration agreement in the contract. Recently, the Court of Appeal similarly construed a clause in a contract as meaning that all the terms of the contract were governed by English law, including an arbitration clause which provided for arbitration in France. In a 2012 case, the Court of Appeal said that it was "common for parties to make an express choice of law to govern their contract, but unusual for them to make an express choice of law to govern any arbitration agreement contained within it; and where they have not done so, the natural inference is that they intended the proper law chosen to govern the substantive contract also to govern the agreement to arbitrate".

Dickman Richard

Richard Dickman

Legal Director

Applying the law of the seat as the default rule, where parties have made no choice of law for their contract, upholds the reasonable expectations of contracting parties, who have chosen to settle their disputes by arbitration in a specified place.

Applying these principles, the majority concluded that the arbitration agreement in the Enka contract was governed by English law. This is because the main contract, although governed by Russian law under article 4 of the Rome I Regulation, did not contain any choice of Russian law, either express or implied - which meant that there was no choice of law for the arbitration agreement either. The arbitration agreement was therefore governed by the chosen law of the seat as the default rule.

In addition, unanimously this time, endorsed the Court of Appeal's conclusion that 'forum conveniens' – the 'most appropriate jurisdiction' rule – is irrelevant to the exercise of anti-suit jurisdiction, whatever the proper law of the arbitration agreement. Chubb Russia's appeal was accordingly dismissed.

The Supreme Court's approach - that the same system of law will govern all the parties' rights and obligations - will be a welcome assurance to commercial–parties, providing them with a degree of certainty in knowing that an agreement as to the governing law of the contract will general be an effective choice in relation to their contractual rights and obligations, as well as their disputes.

Unlike arbitration lawyers, commercial parties will be largely unfamiliar with the legal doctrine of 'separability' of the arbitration agreement from the underlying contract. The Supreme Court's approach avoids artificiality and provides clarity on what parties should reasonably expect when an express choice of law is chosen to govern their contract.

In circumstances where no express choice of law has been made to govern the substance of the contract, it is still reasonable to conclude that all the terms of the contract – including an arbitration clause – are governed by the same system of law. Where, however, the parties have selected a place for the arbitration of disputes, as a general rule, the law with which the arbitration agreement is most closely connected is the law of the seat of arbitration. This is because the seat of arbitration is the place where the arbitration agreement is to be legally performed – a rule which accords with international law as embodied in the 1958 New York Convention, and the national law which gives it effect in England and Wales.

Applying the law of the seat as the default rule, where parties have made no choice of law for their contract, upholds the reasonable expectations of contracting parties, who have in fact chosen to settle their disputes by arbitration in a specified place. This is reinforced by the fact that a 'seat' is often selected by parties of different nationalities because it is considered as a neutral forum with which neither party is connected.