How to determine the governing law of an arbitration agreement? Should it be the law applicable to the contract containing the arbitration agreement, or should it be the law of the seat of the arbitration? The recent landmark decision by the UK Supreme Court (the "Supreme Court") in Enka Insaat ve Sanayi A.S. (Respondent) v OOO Insurance Company Chubb (Appellant)  EWCA Civ 5 has shed light on this issue.
Facts and procedural history
The Appellant was the insurer of a power plant in Russia owned by PJSC Unipro (the "Owner"). The Owner entered into a contract with another company as the head-contractor for construction work to be carried out at the power plant, who in turn engaged the Respondent as a sub-contractor. The contract between the head-contractor and the Respondent (the "Contract") provided that disputes arising out of the Contract "...shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce" and "...the place of arbitration shall be London, England" (the "Arbitration Agreement").
The power plant was severely damaged by fire in 2016. The Appellant as a result paid out the insurance claim made by the Owner, and hence became subrogated to all the rights of the Owner to claim compensation from third parties, including from the Respondent for the damage caused by the fire.
The Appellant brought a claim against the Respondent in Russia for the damage caused by the fire to the power plant notwithstanding the Arbitration Agreement between them. The Respondent filed a motion in the Russian proceedings to have the Appellant's claim dismissed and refer it to arbitration by reason that the dispute ought to be so resolved pursuant to the Arbitration Agreement instead. The Russian court dismissed the Respondent's motion but also dismissed the Respondent's claims against all the defendants on the merits. The Respondent subsequently brought a claim before the English court on the ground that the Appellant was in breach of the Arbitration Agreement for proceeding in the Russian court and hence sought an anti-suit injunction against the Appellant. The application was dismissed at first instance but was overturned in the Court of Appeal. The Court of Appeal declared that as a general rule, an arbitration agreement is to be governed by the law of the seat as a matter of implied choice if there was no express choice of law, subject to "any particular features of the case demonstrating powerful reasons to the contrary". Accordingly, the Court of Appeal granted the anti-suit injunction sought by the Respondent. For this reason, the Appellant appealed to the Supreme Court.
In lodging its appeal, the Appellant argued that the parties have chosen Russian law as the governing law for the Contract and there is an implied understanding that the Arbitration Agreement will equally be governed by Russian law notwithstanding their choice of London as the seat of arbitration. Accordingly, the Appellant argued that the injunction was wrongly granted by the Court of Appeal and the English courts should not interfere with the Russian proceedings.
By a 3:2 majority, the Supreme Court affirmed the general rule that where the parties have not specified the applicable law to an arbitration agreement but have chosen a system of law to govern the contract containing such arbitration agreement, that choice will apply to the arbitration agreement. Where however no choice is made as to the governing law of a contract, the default rule then applies: the arbitration agreement is governed by the system of law "most closely connected" to it. In general, that would be the law of the seat of arbitration.
The majority of the Supreme Court provided the following rationale: (i) the seat is where the arbitration is to be performed, and the purpose and matter of the arbitration agreement is different from that of the contract that contains it; (ii) such rule maintains consistency with international law (most notably the New York Convention) and other legislative policies; (iii) such rule is likely to uphold reasonable expectations of the contracting parties that by specifying the location for the arbitration, they also have specified the law to govern the arbitration agreement; and (iv) such rule provides legal certainty. As such, given that the Contract did not provide for its governing law, the appropriate choice of law for the Arbitration Agreement should be the English law, being the law with which the Arbitration Agreement is most closely connected with and the law as applied in the seat of arbitration.
In giving the above ruling, the majority of the Supreme Court has also ruled that the Court of Appeal has erred in finding a strong presumption that the parties have chosen the law of the seat of the arbitration to govern the arbitration agreement because it is a "different and separate agreement" from the contract. The Supreme Court held that this concept puts the separability of the arbitration agreement too high. Where the parties have included a choice of law clause to govern a contract, it should be construed as also being the choice of law governing any arbitration agreement included in the contract. Even if an arbitration agreement is to be viewed as a separate agreement from the contract, an arbitration clause is nonetheless part and parcel of the rights and obligations provided under the contract.
The Supreme Court also discussed the "overlap argument" (as endorsed by the Court of Appeal), which provides that since the curial law (the procedural law governing the arbitration proceedings between the parties) is so closely related to the proper law of an arbitration agreement, they should be the same law. The governing law of the contract should generally be presumed not to apply to an arbitration clause if the parties have chosen a different curial law for the arbitration. In response, the Supreme Court decided that although a choice of the seat of arbitration and curial law may be capable of supporting an inference that the parties were choosing the law of that place to govern the arbitration agreement, it should not be taken as a presumption to be applied invariably.
Having considered the correct legal principles as applied to the present dispute, the majority of the Supreme Court held that the neither the Contract nor the Arbitration Agreement contained any choice of the law. The Supreme Court accepted that given the complexity of the Contract, such omission was intentional and rejected the Appellant's submission that the Contract was somehow governed by Russian law due to references to the same as the "Applicable Law" throughout the body of the Contract.
As such, the default rule applies and the Arbitration Agreement is governed by the law of the chosen seat of arbitration (i.e. London), as the law with which the dispute resolution clause is most closely connected. Thus, the majority of the Supreme Court upheld the Court of Appeal's conclusion that English law governs the arbitration agreement, albeit for different reasons as discussed above. It was therefore legitimate for the Court of Appeal to grant the anti-suit injunction in this case.
When there is any dispute as to the choice of law governing an arbitration agreement, parties shall first look into their contract to confirm whether they have any choice of law clauses. In the absence of such, the law of the seat of arbitration, being the law most closely connected to the arbitration agreement, will likely be adopted as the governing law given this landmark ruling by the Supreme Court. To prevent disputes on jurisdiction from the outset, before entering into any contracts containing arbitration clause, parties are reminded to carefully check the clauses and seek legal advice whenever necessary so as to ensure that any preferred choice of law clause is rightly incorporated into the contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.