An end to uncertainty? Court of Appeal guidance on determining the proper law of arbitration agreements7 May 2020
"The contract was silent as to which country’s laws it was to be governed by, but provided that all disputes were to be finally settled under the Rules of Arbitration of the ICC, in London."
The proceedings arose from a massive fire in 2016 at the Berezovskaya power plant in Russia. Enka, a Turkish construction and engineering company, had been engaged as a subcontractor to carry out boiler and auxiliary equipment installation for the plant. The contract had been executed in both Russian and English versions, with the Russian-language version prevailing in the case of inconsistency. The contract was silent as to which country’s laws it was to be governed by, but did contain a dispute resolution clause that provided all disputes were to be finally settled under the Rules of Arbitration of the ICC, in London.
The owner of the plant was insured by Chubb Russia, which indemnified the owner for loss it suffered as a result of the fire and so acquired, by subrogation, all of the owner’s rights to assert liability against parties it considered responsible for the fire. In this capacity, Chubb held Enka liable, alleging that the fire had been caused by defects in the fuel oil pipelines for which Enka had been responsible under the contract and the Russian Civil Code. Chubb filed proceedings to this effect with the Moscow Arbitrazh Court (the “Russian Proceedings”).
In response, Enka argued that Chubb was in breach of the contract (to which Chubb was bound, in exercising subrogated rights) by disregarding the agreement to arbitrate. Enka therefore issued an arbitration claim in England, seeking a declaration that Chubb was bound by the arbitration agreement and seeking injunctions restraining Chubb from pursuing the Russian Proceedings.
In the Commercial Court, Andrew Baker J dismissed Enka’s claim on forums non conveniens grounds, holding that all questions on the scope of the arbitration agreement were more appropriately to be determined in the Russian Proceedings. He did not consider the choice of London as the seat of arbitration to be determinative as to the law governing the arbitration agreement (in part because the ICC is well-known worldwide, and supranational), and saw the choice as indicative of nothing more than “a joint personal preference to come to London rather than, say, Paris, Geneva, New York, Singapore or any other commonly chosen international arbitration venue”.
The curial law
On appeal, Enka argued that it was impermissible, as a procedural matter, for the lower court to have declined to decide the claim on forum non conveniens grounds. It argued that the effect of the arbitration agreement, providing as it did that London would be the seat of arbitration, was that this was the appropriate jurisdiction for the exercise of anti-suit relief.
This was not the same as saying the contract itself was to be governed by English law; rather, the argument related solely to the arbitration agreement within the contract. Enka argued that the supervisory jurisdiction of the court of the relevant seat (in this case London) required the court to ensure that the arbitration agreement was honoured. Chubb, on the other hand, argued that any such supervisory jurisdiction was confined only to arbitrations that have already been commenced, and did not extend to the granting of anti-suit relief that Enka sought.
"The broader term of “curial law”, being the procedural law of the arbitration proceedings, was to be preferred."
In delivering the Court of Appeal’s judgment, Lord Justice Popplewell reasoned that “supervisory jurisdiction” was a somewhat misleading label, as the court of the chosen seat has a raft of powers, even when there is technically no arbitration to supervise (including, for instance, the power to extend the time for commencing an arbitration). The broader term of “curial law”, being the procedural law of the arbitration proceedings, was to be preferred.
In this regard, the Court held, the choice of seat is a legal, rather than practical choice; it is, by its very nature, a choice to submit to the curial jurisdiction of the courts of that seat, even where the arbitration itself is conducted elsewhere.² Indeed, as a matter of standard business practice, the choice is based less on the physical location of the seat, and more on the legal infrastructure, and impartiality of the legal system, in the relevant jurisdiction.³
The parties’ choice, therefore, is designed to promote legal certainty; if the curial court ceded procedural questions around an arbitration agreement to a foreign court, this would create risk of parallel proceedings, and the very uncertainty such agreements were designed to avoid.
In choosing London as the seat of arbitration, the Court of Appeal held that the parties had thereby agreed that the English courts could exercise curial powers – relevantly, in this case, by issuing anti-suit injunctions. Even if the English courts would be required, in so doing, to determine questions under Russian law, it would be appropriate for them to do so if the issue in question fell under their curial jurisdiction of preventing actual or threatened breaches of the arbitration agreement.
The proper law of the arbitration agreement
Having decided that the issue fell within the English Court’s jurisdiction, given the choice of a London seat, the Court turned to the question of whether Chubb Russia had breached the arbitration agreement by filing the Russian Proceedings. In order to do so, the Court needed to determine the proper law of the arbitration agreement itself (the “AA Law”).
It was common ground that the law governing the contract in the main was Russian law and, following the Court’s findings above, that procedural matters around the arbitration agreement were governed by English Law. What was less clear was the relative weight to be attached to the curial law and the main contract law, respectively, in deciding what the AA Law was.
To this question, Lord Justice Popplewell acknowledged that the English authorities do not “speak with one voice”, and that there are differences of approach between other jurisdictions in international arbitration. He therefore characterised the present proceeding as an opportunity “to seek to impose some order and clarity on this area of the law.”
"It is now clear that, unless there are any particular features which demonstrate powerful reasons to the contrary, the proper law of the arbitration agreement will be assumed to be the same as the curial law."
While he held that the question was, in the first instance, to be determined in the usual way of assessing whether there had been an express or implied choice of law, significantly he introduced a new general rule: in the absence of an express choice, the AA Law is to be the same as the curial law as a matter of “implied choice”, absent very strong evidence and reasons why the position should be different.
The judge saw no principled reason why the main contract law should be treated as a source of guidance for the AA Law; it is common, in fact, for parties to consciously choose that different laws are to govern different aspects of their relationships. In this regard, he considered parties’ respective obligations under arbitration agreements to be distinct, and entirely separable, from their obligations under the main terms of the contract. Conversely, there is significant overlap between the scope of the curial law and that of the AA Law. While the former is concerned with procedural issues, the resolution of these issues often go to the parties’ substantive arbitral rights – for instance, where a right to arbitrate is assessed to be time-barred. From a practical standpoint, then, he saw many more reasons why the AA Law should be the same as the curial law, rather than the main contract law.
The Court therefore held that given the choice of a London seat in this case, the arbitration agreement was to be governed by English law.
Enka’s appeal was therefore successful; the Court held that the Russian Proceedings were a breach of the English law arbitration agreement and that Enka was accordingly entitled to the injunctive relief sought.
This is a significant decision, which provides welcome clarification on the approach to identifying the proper law of an arbitration agreement where no express choice has been made. It is now clear that, unless there are any particular features which demonstrate powerful reasons to the contrary, the proper law of the arbitration agreement will be assumed to be the same as the curial law.
For parties to commercial contracts, which often do not make specific provisions for the proper law of the arbitration agreement (even where the governing law of the main contract will be different to the curial law of any arbitration brought pursuant to its terms), the decision provides certainty and confirms London’s position as the arbitration venue of choice. Such parties can now be confident that choosing a London seat will guarantee the availability of the full force of the curial powers of the English courts, as well as reducing potential costly and time-consuming arguments as to the law governing the arbitration agreement.
To avoid all potential doubt parties may, nevertheless, wish to consider making specific provision for the governing law of their arbitration agreement. While (subject to any Supreme Court ruling on this issue) the position now seems reasonably clear under English law, this may not be the case where another jurisdiction is chosen as the seat, and therefore an express choice of law of the arbitration agreement should avoid arguments on this issue.