Skyscrapers in financial district, City of London, London, UK.

Introduction

The rules around the law applicable to an arbitration agreement generate considerable discussion in arbitration circles, both in England and elsewhere. The two candidates of usual choice are (i) the law applicable to the underlying agreement containing the arbitration agreement and (ii) the seat (legal place) of the arbitration (i.e., curial law), which is often stipulated in the arbitration agreement.

The position under English law was not entirely clear, giving rise to confusion and unnecessary litigation. The Court of Appeal’s recent judgment, in Enka Insaat ve Sanayi AS v OOO “Insurance Company” Chubb and Others [2020] EWCA Civ 574, is therefore to be welcomed for importing some certainty and predictability into the relevant rules of English law.

The focus now, absent an express choice in the arbitration agreement itself, is on construing the underlying contract (including the arbitration agreement therein) as a whole in an effort to ascertain the intention of the parties. Absent an express choice, there is now a strong presumption that the parties have impliedly chosen the law of the seat (or place) of the arbitration (i.e., the curial law) as the law of the arbitration agreement. Powerful countervailing factors are required to displace this general rule.

Facts

The claimant / appellant (Enka Insaat ve Sanayi AS (“Enka”)) is a Turkish company engaged in the construction and engineering business, with substantial presence and history in Russia. It was engaged (by CJSC Energoproekt, the general contractor (“Energoproekt”), under a contract dated 27 June 2012 “Contract”) as a subcontractor to provide works relating to the boiler and auxiliary equipment installation in respect of a power plant located in Russia.

The arbitration agreement, contained in Clause 50 of the Contract, provided for ICC arbitration seated in London, England. The contract of assignment dated 21 May 2014, whereby Energoproekt assigned its rights against Enka to the ultimate employer (PJSC Unipro (“Unipro”)), reiterated the arbitration agreement in the Contract.

A fire broke out in February 2016 at the plant, causing substantial damage. Between November 2016 and May 2017, Unipro’s insurer (Chubb Russia) paid out c. US$400 million under an insurance policy, thereby becoming subrogated to Unipro’s rights as against Enka.

On 25 May 2019, Chubb Russia (a defendant / the respondent in the English proceedings) commenced legal action against Enka before the Moscow Arbitrazh Court (“Moscow Claim”), blaming Enka to have caused the fire due to its defective fuel oil pipelines. Enka denied any liability, on the basis that the works alleged to have caused the fire were excluded from scope and performed by another subcontractor. This was seemingly conceded by Unipro in its correspondence with Enka during the aftermath of the fire.

Enka filed its claim with the English Commercial Court on 16 September 2019, seeking (i) a declaration that Chubb Russia was bound by the arbitration agreement in the Contract and that such agreement applied to the Moscow Claim and (ii) an injunction to restrain Chubb Russia from continuing the Russian proceedings in breach of the arbitration agreement and to require Chubb Russia to discontinue the said proceedings.

Andrew Baker J, at first instance [[2019] EWHC 3568 (Comm)], dismissed Enka’s request for an anti-suit injunction on the grounds of forum non conveniens, i.e., that the Russian Court was best placed to decide whether to stay its own proceedings in favour of arbitration. He stopped short of deciding the law applicable to the arbitration agreement, but noting that it was “well arguable that the arbitration agreement is governed by Russian law or, which is more strictly pertinent, that ICC arbitrators would so rule” [72].

Ruling

Enka appealed against that decision. The judgment of the Court of Appeal was handed down by Popplewell LJ, with whom Flaux and Males LJJ concurred.

Proper law of an arbitration agreement

After a careful review of the authorities dating back to 1894, which the Court considered far from ideal given the ultimate aim of “English commercial law…to serve the business community by providing certainty” [89], it was held that absent an express choice (in the arbitration agreement or elsewhere in the underlying contract), the general rule (as a matter of implied choice) should be that the proper law of an arbitration agreement should be the curial law (i.e., the law of the place of arbitration – its lex fori) [91].

In reaching the conclusion above, the following pearls of wisdom were issued:

  • It is well established that the law of an arbitration agreement need not necessarily be the same as the proper law of the underlying contract. [68]
  • There is no principled basis for treating the law applicable to the underlying contract as a significant source of guidance in respect of the determination of the proper law of an arbitration agreement where the arbitration agreement points to a different curial law. This follows from the doctrine of separability of the arbitration agreement, as recognised in section 7 of the English Arbitration Act 1996. [92]
  • In determining the proper law applicable to the arbitration agreement, one must have regard to the three stage test required by English common law conflict of laws rules, namely: (1.) whether there is an express choice of law; (2.) if the answer is “no”, whether there is an implied choice of law; and (3.) if the answer is again “no”, determining which system of law the arbitration agreement has its closest and real connection. [105(1)]
  • Where there is an express choice of law in the underlying contract, such may amount to an express choice of the law of the arbitration agreement. This is essentially a matter of construction of the contract as a whole, including the arbitration agreement, applying the principles of construction of the law of the underlying contract if different from English law. [105(2)]
  • In all other cases, there is a strong presumption that the parties have impliedly agreed that the curial law (i.e., the law of the place of arbitration) will also be the law applicable to the arbitration agreement. This general rule may “yield to another system of law governing the arbitration agreement where there are powerful countervailing factors in the relationship between the parties or the
    circumstances of the case
    “. [105(3)]

His Lordship also confirmed the widely-held view that choice of seat is distinct from the geographical venue at which hearings take place: “Absent specific agreement to the contrary, a London seated arbitration may be conducted for the convenience of the tribunal and the parties anywhere in the world.” [46] This is likely to ease concerns some have around virtual hearings for seat-related reasons where the arbitration is seated in London.

Applying the principles above, Popplewell LJ held that English law was the proper law of the arbitration agreement, given the designation of London as the seat of arbitration in Clause 50 of the Contract. The Court noted, as a relevant factor, that though Russian law governed the Contract, that was not by virtue of express party choice [106]. In any event, and alternatively, it was said that even if there was an express Russian law choice, it was not “one of those rare cases where [such express choice] is or informs an express choice of the [law of the arbitration agreement]” [108]. A strong connection between the express choice of law and the arbitration agreement would seemingly be required.

In light of the above, the Moscow Claim was considered a breach of the agreement to arbitrate. Exercising its discretionary power, the Court granted the anti-suit injunction request (see further below).

Granting anti-suit injunctions

Popplewell LJ held the trial judge’s approach in respect of the jurisdiction to award anti-suit injunctions to be wrong in principle. He declared that where England is selected as the seat of the arbitration, the English court is “necessarily an appropriate court to grant an anti-suit injunction and questions of forum conveniens do not arise” [para 42]. He reasoned that “[I]f the curial court were to defer on forum conveniens grounds to the non-curial court, it would be defeating rather than upholding the considerations of certainty and party autonomy…” [para 57].

This, he expressed, follows from two essential principles: (1.) By choosing a certain seat for their arbitration agreement, the parties agree to “submit to the jurisdiction of the courts of that seat in respect of the exercise of such powers as the choice of seat confers“; and (2.) that the grant of an anti-suit injunction to restrain breach or threatened breach of the arbitration agreement is an exercise of such powers, i.e. falling within the “supervisory jurisdiction” of the curial (lex fori) court. It therefore follows that, where England is selected as the seat of the arbitration, the English court has jurisdiction to, inter alia, issue anti-suit injunctions.

As explained by Popplewell LJ, the task of the English court, having found jurisdiction to grant an anti-suit injunction, is twofold: (1.) whether the foreign proceedings are a breach of the arbitration agreement and (2.) if so, whether relief should be granted as a matter of discretion. Having answered the first in the affirmative, Popplewell LJ disagreed with Andrew Baker J that the Court should not exercise its discretion because of (i) Enka’s delay, (ii) Enka’s participation in the Russian proceedings and (iii) Enka’s failure to commence arbitration, noting that:

  • In respect of Enka’s delay, the procedural defects in respect of the Moscow Claim were only cured on 4 September 2019 and Enka swiftly moved to file its claim with the English court on 16 September 2019, i.e., in less than two weeks’ time. On that basis, there was no undue delay in Enka initiating steps to protect its rights. There was therefore no delay by Enka which provided a good reason to not grant the injunctive relief sought. [114-119]
  • In respect of Enka’s participation in the Russian proceedings, by way of submissions (including expert opinions on English law from Lord Neuberger and Professor Briggs), such was not a matter for legitimate criticism. This was considered as no more than an attempt to get the Moscow Court to force Chubb Russia into respecting its bargain not to litigate the claim in Moscow. [113]
  • Finally, in respect of Enka’s decision not to commence arbitration, Popplewell LJ disagreed that this was a “very significant factor“; it was simply irrelevant for the purposes of the injunction. His Lordship reasoned that the anti-suit injunction jurisdiction arises irrespective of any actual or contemplated arbitration proceedings, by virtue of the independent negative promise (contained in the arbitration agreement) not to commence proceedings anywhere in the world.[112]

Commentary

The Court of Appeal’s judgment provides useful guidance and clarity on the proper law of an arbitration agreement, and the related jurisdiction of English courts to grant anti-suit injunctions. It also usefully clarifies that the right to seek an anti-suit injunction from the English courts is not dependent on commencing or undertaking to commence proceedings before the agreed forum. A party is entitled to seek an anti-suit injunction simply on the basis that the other party has breached its independent negative promise contained in the arbitration agreement not to commence proceedings elsewhere.

The judgment has brought some certainty into what was otherwise largely confusing and chaotic set of rules and principles. The guidance from the Court is that the exercise is essentially one of construction of contract as a whole, respecting the principle of party autonomy, a principle that sits at the core of arbitration. Parties and their counsel should therefore consider extending the law applicable to the underlying contract to cover the arbitration agreement through express wording, where the arbitration agreement stipulates another jurisdiction as the place of the arbitration (i.e., the curial law) or simply remains silent as to its seat. Alternatively, parties should consider expressly stipulating the law applicable to the arbitration agreement, whether that is the curial law or the law of another (possibly third) jurisdiction, ideally in the arbitration agreement. Deferring that decision may in time come back knocking!

The Court of Appeal’s judgment is currently on appeal to the Supreme Court, scheduled to be heard on 27-28 July 2020 – see here