Arbitration Agreement: UK Courts determine Proper Law

The UK Supreme Court has delivered an important decision on the correct approach for determining the proper law of an arbitration agreement when the law applicable to the contract containing it differs from the law of the “seat” of the arbitration chosen by the parties.

Background

Where an international commercial contract contains an agreement to resolve disputes by arbitration, at least three systems of national law are engaged when a dispute occurs. They are variously : (i) the law governing the substance of the dispute – typically the law of the underlying contract; (ii) the law governing the agreement to arbitrate; and (iii) the law governing the arbitration process – generally the law of the “seat” of the arbitration.

It is a principle of English arbitration law codified in Section 7 of the Arbitration Act 1996 that an arbitration agreement is separable from the contract of which it forms part and for the purpose of determining its validity or effectiveness it may be treated as a distinct agreement. Accordingly it is possible for the law applicable to the arbitration agreement to be different from that applicable to the underlying contract.

Applicable Law for Arbitration Agreement Validity and Scope

The main issue considered by the court was the determination of which law governs the validity and scope of the arbitration agreement when the law applicable to the contract containing it differs from the law of the seat of the arbitration.

The facts of the case

On 1 February 2016 a power plant in Russia was severely damaged by fire. The owners of the power plant had been insured by the Chubb Russia, the appellants in the case. The plant owners had contracted with a head contractor for construction work to be done on the plant and the head contractor in turn had sub contracted certain work to Enka, the respondent in the case. The sub contract included a provision for disputes to be referred to ICC arbitration in London but made no express reference to any applicable law.

In May 2014 the head contractor transferred all its rights and obligations under the sub contract to the owner.

Following the fire Chubb Russia paid a claim by the owner of the plant under the insurance and assumed all the rights of the owner to claim against any third parties.

In 2019 Chubb Russia brought a claim against Enka in the Russian courts. In response Enka brought a claim in the High Court in London alleging that the Russian proceedings were a breach of the arbitration agreement and seeking an anti-suit injunction to restrain Chubb Russia from pursuing the Russian proceedings. Following appeals through the Court of Appeal the matter came before the Supreme Court.

Applicable Law and Injunction for Arbitration Agreement

The court held that the arbitration agreement in this case was governed by English law. It set out the following reasoning[2]:

1. The question of what law should apply to a arbitration agreement should be determined in accordance with English common law principles rather that the Rome 1 Convention (Regulation (EC) No 593/2008 of the European Parliament on the law applicable to contractual obligations) as the latter expressly excluded arbitrations from its ambit. Under common law rules the law applicable to the arbitration agreement would be (i) the law expressly or impliedly chosen by the parties or, in the absence of such choice, (ii) the system of law most closely connected with the arbitration agreement[3].
2. Where the parties had not expressly chosen the law applicable to the arbitration agreement the law of the underlying contract would apply. This general rule would encourage consistency and coherence and avoid uncertainty.
3. Where the parties had not made a choice of law either for the arbitration agreement or for the underlying contract then the court would have to determine the system of law with which the agreement was most closely connected. In general the arbitration agreement will be most closely connected with the seat of the arbitration[4].
4. In the present case the seat of the arbitration was London and therefore English law should apply to the arbitration agreement[5].
5. The court further upheld the granting of a anti-suit injunction restraining the pursuit of the Russian proceedings. In doing so the court held that it made no difference whether English or a foreign law applied to the arbitration agreement. The question was whether there had been a breach of the agreement and whether it was just and convenient to grant an injunction to restrain that breach[6].

[1] Enka Insaat Ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38

[2] The principles are listed in paragraph 170 of the judgment

[3] para 27

[4] paras 118-119

[5] para171

[6] paras 177 and 184