UK Supreme Court rules on test of governing law of arbitration agreement; takes robust stance on anti-suit injunctions.

In a landmark decision (Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors  [2020] UKSC 38) the UK Supreme Court (“UKSC”) has clarified the application of the test, under English rules, of what law governs an arbitration agreement. The case is also commercial in its approach to anti-suit injunctions in support of English seated arbitrations.

Background

Enka was a sub-contractor in the construction of a power plant in Russia. The main contractor’s rights against Enka under their contract (the “Contract”) were assigned to the plant owner.

The plant was damaged by fire and Chubb Russia, as insurers, paid out a large sum to the plant owner. In May 2019, Chubb Russia commenced subrogation proceedings against Enka in the Russian courts.

Enka applied to the English courts for an anti-suit injunction to restrain those proceedings. This was based on an ICC arbitration clause in the Contract, with seat in London. The Contract did not contain a conventional governing law clause (it was common ground this would be Russian law, but whether by choice was disputed). Nor was there an express choice of law in respect of the arbitration agreement.

The judgments below

At first instance, the judge refused the injunction. He found that the arbitration clause was governed by Russian law, but that the injunction required an assessment of whether the English court was properly seized. On the facts (including participation by Enka in Russia, and delay) he felt it had not been.

The Court of Appeal disagreed and granted the injunction. It held that in cases where the parties have not used an express choice of law in respect of the arbitration clause, the law of the seat should apply (and it was common ground that there was a breach of the clause if English law did). As to the principles behind an anti-suit injunction, it took a robust view and held that when the English courts consider granting one to support an English seated arbitration, they should just look at two questions; whether there is a breach of the arbitration agreement (under its applicable law) and whether there are strong reasons not to grant the relief (not the case here).

UKSC: Governing law of the arbitration agreement

In England, common law rules apply to determine this question (the Rome I Regulation excludes choice of court and arbitration agreements from its scope). The test being: (i) is there an express or implied choice of law to govern the arbitration agreement? (ii) if not, with what system of law does the arbitration agreement have its closest connection?

In cases where the law of the main contract and that of the seat do not “match” (as in Enka) a question therefore arises as to which of those two candidate laws should apply? The UKSC decided the process was as follows ([170-171] of the judgment being a useful summary)

The first question is to enquire whether the parties have actually made a choice of law to govern their arbitration clause. This was to be answered applying English principles of contractual interpretation (as the lex fori) [29-34].

In that respect, if the law applicable to the arbitration clause has not been specifically addressed but a choice of governing law for the main contract has been made, then generally that latter choice should be interpreted as extending to the arbitration clause [43-52]. 

The UKSC thus departed from the Court of Appeal’s analysis on this point. Its view was based on authority, principle, [43-54] and a more refined view of separability [60-64] and the framework of the Arbitration Act 1996 (the “Act”) [73-94]. In such cases, this inference will not, therefore, generally be displaced by a choice of seat which does not “match” the law governing the contract; although the Supreme Court did provide some limited examples as to where that might be possible (e.g. if the law of the seat was prescriptive as to the law applicable to the clause - this not being the case under the Act - or there was a serious risk of invalidity) [70-72, 95-109, 170(v,vi)],

If, however, the parties have not chosen a law to govern the main contract (or the arbitration clause) then the test of closest connection will apply. That test would generally lead to an application of the law of the seat [118-146]

Applying the above, as there was no specific choice of law for the arbitration clause, the UKSC looked at whether any choice of law (express or implied) was made for the Contract. On the facts, this was not the case so, accordingly, the arbitration clause fell to be governed by English law under the “closest connection” test [147-156].

One final point; the arbitration clause was within a wider set of ADR provisions. If those were governed by Russian law (as the law applicable, in the absence of choice, to the Contract) did it still make sense for English law to apply to the arbitration clause? The UKSC squared this circle by treating the entire dispute resolution provision as the “arbitration agreement” and subject to the above rules which meant that English law still applied [162-169].

UKSC – Anti-suit injunctions in aid of English seated arbitration

On this point, the UKSC agreed with the Court of Appeal. Although discretionary, where foreign proceedings are allegedly in breach of an arbitration agreement the inquiry is to simply ask whether there has been a breach (under its applicable law). If so, the court will uphold the parties’ bargain unless there are strong reasons not to [173-185].

Comment and conclusions

On applicable law, many may feel that the UKSC has brought the law more into line with the expectations of commercial parties - who might, as we observed in our earlier post, have regarded the Court of Appeal’s dismissal of the parties’ choice of law of the main contract as esoteric.

On a more day-to-day basis, the decision may, however, have a more limited practical impact. Parties, where the seat of arbitration is in England and the law of the contract is not English, frequently consider using an express choice of law to govern the arbitration clause. Often, for similar considerations to those at [53], this is in favour of the law governing the main contract. That approach should not change. The UKSC’s clarification of this area is welcome but is a general interpretative approach. Therefore, in such cases, an express designation still carries the value of some increased certainty (it will, of course, always be necessary to ensure the clause is properly drafted and works under the chosen law). 

As to anti-suit injunctions the decision re-affirms a clear and orthodox approach to their grant which (subject to the current restraints of EU Law where it applies) remains one of the strengths of English seated arbitration.

Finally, for completeness, Lord Burrows and Lord Sales issued dissenting judgments but these were limited to preferring the law of the main contract as the default rule under the “closest connection” test, and whether, on the facts, the parties had chosen a law to govern the Contract.

Click here for the judgment.