Whose Law is it Anyway? UK Supreme Court Clarifies Choice of Law Test for Arbitration Clauses in International Contracts

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Which system of national law governs the validity and scope of an arbitration clause when the law applicable to the contract containing it differs from the law of the seat of the arbitration? The UK Supreme Court provided a common sense answer to this narrow yet important issue in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb, [2020] UKSC 38.[1] Briefly, the main principles of law established in Chubb are:

  • The law applicable to an arbitration clause is: (i) the law chosen by the parties to govern it; or (ii) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected.
  • Where the law applicable to the arbitration clause is not specified, the choice of law governing the contract as a whole, if any, will apply to the arbitration clause unless: (i) the law of the seat provides otherwise; or (ii) there is a significant risk that the arbitration clause would be rendered ineffective if governed by the law of the contract.
  • In the absence of any choice of law to govern the arbitration clause, the clause is governed by the law with which it is most closely connected, which will most often be the law of the seat that both parties have chosen for arbitration.[2]

Background

Where an international contract contains an arbitration clause, at least three systems of national law may be engaged when a dispute occurs. They are: (1) the law governing the substance of the dispute; (2) the law governing the arbitration clause; and (3) the law governing the arbitration process, which is the “seat” of the arbitration.

Two competing lines of authority coalesced in Chubb. One line held that (2) was the same as (1), while the other line held that (2) was the same as (3). Chubb brought these two streams of thought together and established a discreet test for determining the law applicable to arbitration clauses.

Facts

A fire destroyed a power plant located in Russia. The owner of the power plant had an insurance policy with OOO Insurance Company Chubb (“Chubb Russia”) that covered the sort of damage that occurred. Once Chubb Russia paid the owner under the insurance policy, Chubb Russia became subrogated to the owner’s rights. Chubb Russia alleged that Enka Insaat Ve Sanayi AS (“Enka”), a Turkish engineering company that had designed part of the power plant, was liable for the fire and the resulting damage. As subrogate, however, Chubb Russia was confined by the terms of the contract between the owner of the power plant and Enka. That contract contained a dispute resolution clause (the “Arbitration Clause”) that referred all disputes related to the power plant to arbitration in London (UK) to be resolved according to the Rules of Arbitration of the International Chamber of Commerce (“ICC”).

Both Chubb Russia and Enka filed claims against one another in Russia, England, and the ICC. Each proceeding related to the interpretation of the Arbitration Clause. Ultimately, the United Kingdom Supreme Court (“UKSC”) was asked to decide which system of national law (Russian or English) governed the validity and scope of the Arbitration Clause when the law applicable to the contract containing it (Russian law) differed from the law of the seat of arbitration (English law).

English Conflict of Laws Rules

English courts normally determine the law applicable to a contract according to the Rome I Regulation, except where that contract contains an arbitration clause, in which case the court applies the common law.[3] The common law states that a contract is governed by: (i) the law chosen by the parties; or (ii) in the absence of such choice, the law with which the contract is most closely connected.

The starting point at common law is the freedom to choose the applicable law. The first important take-away in Chubb is that, in the presence of an apparent choice by the parties of the law to govern an arbitration clause as distinct from the contract as a whole, English courts will apply English law to determine whether that choice of law is valid.[4]

Where the question is whether there has been a choice of law applicable to an arbitration clause, the relevant English law rules are the common law rules that require the court to interpret the contract as a whole applying the ordinary English rules of contractual interpretation.

Choice of Law for the Whole Contract

It is rare for contracting parties to choose the law applicable to an arbitration clause. Where they do, that choice will be given effect to unless public policy says otherwise. In the absence of that choice, however, courts look to a choice of law for the contract as a whole. The second important take-away in Chubb is that the choice of law for the contract as a whole is an implied choice of law to govern the arbitration clause. Where the contract contains both a choice of law and an arbitration clause, the approach is to interpret the governing clause as applying to the arbitration clause for the simple reason that the arbitration clause is part of the contract.[5] The third important take-away in Chubb is that there is an inference that the parties intended this approach to apply even where the arbitration clause provides for arbitration to take place in a different country from the country whose law has been chosen to govern the contract, except in two circumstances.[6]

First, the inference will be negated if the law of the seat provides that arbitrations subject to its law will also be treated as governed by that country’s law.[7] For example, section 6 of the Arbitration (Scotland) Act provides that where the parties to an arbitration agreement agree that an arbitration under that agreement is to be seated in Scotland, but the arbitration agreement does not specify a governing law, then, unless the parties otherwise agree, the arbitration agreement is to be governed by Scots law.

Second, the inference will be negated if there is a serious risk that the law of the main contract will render the arbitration clause ineffective.[8] For example, imagine that a contract between an English company and a Scottish company, to be performed in Scotland, contained an arbitration clause that was valid according to English law but invalid according to Scottish law. Imagine further that the parties did not specify a governing law for the contract as a whole. The governing law would be the system of law with which the contract has its closest and most real connection, which in this case would be Scotland. The court would treat the arbitration clause as governed by a different law from the rest of the contract because the arbitration clause would be null and void if it were to be governed by the law of Scotland.[9]

Applying the Closest Connection Test

Where the parties to a contract have not chosen the law applicable to the arbitration clause, either specifically or by choosing a governing law for the contract as a whole, the law governing the arbitration clause will be the system of law with which the arbitration clause is most closely connected. The fourth important take-away in Chubb is that the law of the place chosen as the seat of the arbitration will be the law most closely connected with the arbitration clause.[10] By agreeing to a seat of arbitration the parties submit themselves to the jurisdiction of the courts of that place. The parties also by their choice of seat impliedly agree to bring any claim for a remedy relating to the existence or scope of the arbitrators’ jurisdiction in the courts of that place. In these circumstances, the seat of arbitration is the place most closely connected to the arbitration clause.

The Majority’s Analysis & Decision

Neither Enka nor Chubb Russia (Energo) chose a system of law to govern the Arbitration Clause. And while Chubb Russia contended that the parties had chosen Russian law to govern the contract as a whole, the Law Lords dismissed this contention.[11] In the absence of any choice of the law to govern the Arbitration Clause, the UKSC fell back on the default rule to identify the system of law with which the Arbitration Clause was most closely connected. 

In assessing the law applicable to the Contract, Lord Hamblen first observed that Enka was engaged to install a boiler and auxiliary equipment to be supplied by Energo. Article 4(1)(b) of Rome I established a prima facie rule that, to the extent that the law applicable to the contract has not been chosen, a contract for the provision of services shall be governed by the law of the country where the service provider “has his habitual residence”. This rule pointed towards the law of Turkey, being where Enka was habitually resident. However, both Energo and Unipro were habitually resident in Russia, and that was also where the services were provided. As such, the fact that the Arbitration Clause specified London was not a sufficient connection to indicate that English law should govern the contractual obligations of the parties. Rather, Russian law would govern.[12]

In assessing the law applicable to the Arbitration Clause, Lord Hamblen applied the common law conflict of laws rules. Those rules provide that the law applicable to an arbitration clause is the law of the seat specified in the clause. As such, English law governed the Arbitration Clause.[13]

Significance

Whatever your industry, the choice of law to govern not just the contract but also the arbitration clause is worthy of consideration. The significance of Chubb lies in its establishment of a simple yet forceful presumption. Chubb provides that an express or implied choice of law will apply to an arbitration clause (e.g., as gleaned from the choice of law applicable to the contract as a whole or, alternatively, as from the choice on the seat of the arbitration). This is arguably more accommodating of the parties’ intentions than treating the law of the contract as a whole as being applicable to the arbitration clause despite the lack of agreement and the existence of an agreed upon place of arbitration. Accordingly:

1. international parties negotiating contracts containing arbitration clauses should include clear and express choices of law for both the contract as a whole as well as the arbitration clause, the validity of the latter being determined according to English law when before the English courts;

2. where the parties do not choose the law to govern the arbitration clause, the choice of law for the contract as a whole will be construed as an implied choice of law for the arbitration clause;

3. the implied choice of law will apply even if the law chosen to apply to the contract as a whole differs from the curial law, unless:

a. the curial law provides that arbitrations subject to its law will also be governed by that country’s law; or

b. there is a serious risk that the law applicable to the contract as a whole will render the arbitration clause ineffective; and

4. where there is no express choice of law for the arbitration clause and one cannot be implied, a court will apply the closest connection test to determine the law that is applicable to the arbitration clause, which generally will be the law of the seat of the arbitration.

[1]Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb, [2020] UKSC 38 (“Chubb”).

[2]Chubb at para 170.

[3]Rome I Regulation, Regulation (EC) No 593/2008 (“Rome I”). Excluded from the scope of Rome I are “arbitration agreements and agreements on the choice of court”: Rome I, s. 1(2)(e); Chubb at paras 25-27.

[4]Chubb at paras 31-34.

[5]Chubb at para 43.

[6]Chubb at paras 46-54.

[7]Chubb at paras 70-94.

[8]Chubb at paras 98-109.

[9]Hamlyn & Co v Talisker Distillery, [1894] AC 202 at 208.

[10]Chubb at para 120.

[11]Enka v Chubb at paras 148-155.

[12]Enka v Chubb at paras 159-161.

[13]Enka v Chubb at paras 162-169.

arbitration international arbitration seat of arbitration choice of law conflict of laws

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