Home > Law of the Seat v Law Proper Law of the Contract: Governing Arbitration Clauses in the Absence of Choice

Law of the Seat v Law Proper Law of the Contract: Governing Arbitration Clauses in the Absence of Choice

29th April 2020

Law of the Seat v Law Proper Law of the Contract: Governing Arbitration Clauses in the Absence of Choice

Part 2 of: Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors (Rev 1) [2020] EWCA Civ 574

Background

This was an appeal against a refusal at trial to grant an anti-suit injunction against a party alleged to be in breach of a London arbitration clause by bringing proceedings in Russia.

The arbitration clause (‘the Clause’) in the present case was in the following terms:

50.1 If [the matter cannot be resolved by negotiations], the Dispute shall be referred to international arbitration as follows:

  • the Dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce,
  • the Dispute shall be settled by three arbitrators appointed in accordance with these Rules,
  • the arbitration shall be conducted in the English language, and
  • the place of arbitration shall be London, England.

Given the absence of an express choice, the Clause engaged the question of the relative weight to be given to the curial law of the arbitration agreement and the main contract law, where they differ, in determining the law governing the arbitration agreement.  Popplewell LJ (with whom Flaux and Males LJJ agreed) commented that this was a question on which “it would be idle to pretend that the English authorities speak with one voice” and “the current state of the authorities does no credit to English commercial law which seeks to serve the business community by providing certainty.”

The Issue and Common Ground

Part 2 of this article considers the second of the two issues decided on appeal: (ii) what was the governing law of the arbitration clause?

It was common ground that the Contract was governed by Russian law but that, under the doctrine of separability, this did not mean the proper law of the Clause (“the AA law”) was also Russian law.  The English conflict of law rules were also not in themselves in doubt: given that the Rome I Regulation does not apply to arbitration agreements, the AA law is to be determined by applying the three stage test required by English common law conflict of laws rules, namely (i) is there an express choice of law? (ii) if not, is there an implied choice of law? (iii) if not, with what system of law does the arbitration agreement have its closest and most real connection?

The Court of Appeal

Having reviewed the authorities, Popplewell LJ concluded at [90]-[91]:

  1. Where … there is an express choice of the AA law, no conceptual difficulty arises. An express choice of AA law may exceptionally be found in the arbitration agreement itself. If not, it may be found in the terms of an express choice of main contract law, or a combination of such express choice with the terms of the arbitration agreement…That will be a matter of construction of the whole contract, including the arbitration agreement, applying the principles of construction of the main contract law if different from English law. This solution is likely to be confined to cases where there is an express choice of main contract law. If the main contract law is not one by express choice it is difficult to conceive of circumstances in which it could support a finding of express choice of AA law. It is not a conclusion which will follow in all cases, or indeed the majority of cases, in which there is an express choice of main contract law but only in the minority of such cases where the language and circumstances of the case demonstrate that the main contract choice is properly to be construed as being an express choice of AA law.
  2. In all other cases, the general rule should be that the AA law is the curial law, as a matter of implied choice, subject only to any particular features of the case demonstrating powerful reasons to the contrary.

The rationale for such conclusion may be considered by reference to two principal factors:

  1. There is no principled basis for treating the main contract law as a significant factor in determining the AA law in cases where there is an arbitration clause with a different curial law. Under the doctrine of separability, the law of the main contract is a system of law applicable to the terms of the main contract, other than the terms of the separate arbitration agreement; this is so whether or not the main contract law arises by express or implied choice of the parties, or by any other conflicts rules applied by a court.
  2. The overlap between the scope of the curial law and that of the AA law strongly suggests that they should usually be the same, as the scope of the curial law is not limited to the exercise of purely procedural powers. It involves the curial court determining aspects of the substantive rights, such as under s 5 of the Arbitration Act 1996 (requirement the arbitration agreement to be in writing or evidenced in writing).

In the present case, the governing law of the main contract was Russian law but this was held not to be by express choice.  Given that the curial law was English law, Poppellwell LJ concluded that the proper law applicable to the Clause was English law.

Commentary

This judgment provides clarity on an area of law which has long been uncertain in English law.  Subject to any appeal to the Supreme Court, it is clear that:

  • The AA law is to be determined by applying the three-stage test required by English common law conflict of laws rules.
  • Where there is an express choice of law in the main contract it may amount to an express choice of the AA law. Whether it does so will be a matter of construction of the whole contract, including the arbitration agreement, applying the principles of construction of the main contract law if different from English law.
  • In all other cases there is a strong presumption that the parties have impliedly chosen the curial law as the AA law. This is the general rule, but 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.

The judgment is also interesting for what was not determined and accordingly remains open.  First, Popplewell LJ made clear that the presumption that the parties have chosen the curial law as the AA law is an implied choice arising at stage (ii) of the AA law inquiry, rather than by application of the closest and most real connection test at stage (iii).  It therefore remains to be seen what countervailing factors would suffice to displace the implied choice of curial law as AA law, and the extent to which an enquiry of such factors would remain part of stage (ii) or would properly form part of stage (iii).

Second, the guidance set out by Popplewell LJ should not be applied to contracts governed by a proper law that does not recognise the doctrine of separability.  It remains to be seen how the three-part English common law conflict of rules test applies in these cases; though, it should be noted that the present appeal has made at least one statement of principle which should apply: an express choice of that law to govern the main contract may be a reason for also treating the such choice as an express choice of AA law.

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