UK Supreme Court confirms the English law approach to identifying the governing law of arbitration agreements

United Kingdom

On 9 October 2020, the UK Supreme Court handed down judgment in a significant arbitration case concerning the governing law of arbitration agreements and the English courts’ ability to grant anti-suit injunctions in support of arbitration.

In summary, the Supreme Court has taken what is perhaps a purist approach. Rather than set out a general default rule that establishes the governing law of the arbitration agreement by reference to either the seat or the governing law of the main contract, the Supreme Court has preferred a methodical application of the established English law principles on determining the governing law of contracts. On the one hand, this provides clarity on the English law approach to identifying the governing law of arbitration agreements, but on the other it leaves open the possibility for different outcomes depending on the facts and circumstances of each case.

On anti-suit injunctions in support of arbitration, the Supreme Court has maintained its pro-arbitration stance and fortified the tools available for London-seated arbitrations.

Our previous article on this case is available here and sets out the factual background to this case, together with our analysis of the first instance and Court of Appeal decisions, which we also summarise below.

The first instance decision

In December 2019, Andrew Baker J held that the choice of arbitral seat in this case was the “only hook upon which any attempt even could be made to suggest that [the arbitration agreement] is governed by English law”, but that it did not in fact convey a default choice of governing law. As discussed below, the Court of Appeal subsequently placed far greater importance on this “hook” of the arbitral seat in its reasoning.

The Court of Appeal decision

The role of the seat and forum conveniens: anti-suit injunction

The Court of Appeal found that the approach at first instance to the role of the seat was “wrong in principle”. Rather, the English court as the court of the seat of the arbitration was “necessarily” the appropriate court to grant an anti-suit injunction and the question of forum conveniens did not in fact arise.

The court drew upon previous authorities in observing that the “choice of seat is by its very nature a submission to the curial [or procedural] jurisdiction” of that seat and the primary function of court of the seat is to determine whether an anti-suit injunction should be granted. It further held that questions of forum conveniens do not arise when the court is exercising that curial jurisdiction, which would undermine certainty and party autonomy.

The governing law of the arbitration agreement

In determining the “proper law” of the arbitration agreement, the Court of Appeal noted that it is well established that such law may not necessarily be the same as the main contract law. Although the English courts have generally preferred to adopt the law governing of the main contract as the law governing the arbitration agreement (e.g. in Channel Tunnel Group Ltd v Balfour Beatty Ltd[1993] AC 334 and Kabab-Ji S.A.L v Kout Food Group [2020] EWCA Civ 6 - our previous article is available here), the courts have also held that in the absence of an express choice of law, the governing law is more likely to be the law of the seat of the arbitration rather than the law of the main contract (e.g. C v D[2007] EWCA Civ 1282).This latter approach was favoured by the Court of Appeal. However, as explained below, the Supreme Court has preferred a methodical application of the English law rules on determining the governing law of contracts over a simplistic default rule that prefers the seat or the law of the main contract.

Seeking to “impose some order and clarity on this area”, the Court of Appeal set out the following test to determine the governing law of the arbitration agreement:

  1. application of the 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?
  2. Where there is an express choice of law in the main contract, it may amount to an express choice of the law for the arbitration agreement. 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.
  3. In the absence of express choice, there is a “strong presumption” that the parties have impliedly chosen the law of the seat as the governing law of the arbitration agreement. However, this is a rebuttable presumption and another system of law could govern the arbitration agreement where there are powerful countervailing factors in the relationship between the parties or the circumstances of the case.

The Court of Appeal treated the choice of seat in the arbitration agreement as an implied choice of law for the arbitration agreement in accordance with 1(ii) above.

The Supreme Court decision

Following a hearing in July 2020, the Supreme Court handed down judgment on 9 October 2020. The Court dismissed the appeal by a 3:2 majority, with Lord Hamblen and Lord Leggatt giving the leading judgment (with whom Lord Kerr agreed) and Lord Burrows and Lord Sales each giving dissenting judgments. Although the majority reached the same outcome as the Court of Appeal in holding that the governing law of the arbitration agreement in this instance was English law, its reasons for doing so were partly different from the Court of Appeal. It is this difference that is significant.

Three systems of national law and the role of “curial law”

The Supreme Court majority opened its judgment with some important remarks on the distinctions to be drawn between the “three systems of national law […] engaged when a dispute occurs.” These are:

(i) the law governing the substance of the dispute, which is generally the law applicable to the main contract;

(ii) the law governing the agreement to arbitrate; and

(iii) the law governing the arbitration process (the “curial law”, which is the law of the seat of the arbitration).

The court emphasised that the laws governing the substance of the dispute and the curial law may be different from each other, and different from the law governing the validity and scope of the arbitration agreement

The court held that the extent to which the choice of curial law (i.e. the choice of seat) carries any implication that the parties intended the same system of law to govern the arbitration agreement also depends on the content on the curial law. In that regard, the court found that under the English Arbitration Act 1996 there is no basis for a general inference that parties who choose London or another English seat of arbitration always intend their arbitration agreement to be governed by English law. Moreover, the primary reason for selecting London as a place of arbitration is, for the Supreme Court, the attractiveness of London as a forum in which to arbitrate international disputes, where international arbitrators qualified in England and Wales are “perfectly familiar with applying systems of law other than their own”. Indeed, in the English courts as well “questions of foreign law are dealt with […] on a daily basis”.

What is the correct approach to determining the proper law of an arbitration agreement?

In summary, the principles established by the majority in the Supreme Court are:

(i) The starting point is the English common law rules for resolving conflicts of laws rather than the provisions of the Rome I Regulation because article 1(2)(e) of Rome I excludes from its scope “arbitration agreements and agreements on the choice of court”.

(ii) The next question is what law is chosen by the parties to govern the arbitration agreement. In the absence of such a choice, the governing law will be law with which the arbitration agreement is most closely connected.

(iii) In order to determine whether the parties have made a choice, the arbitration agreement and the contract containing it are to be construed, as a whole, applying the rules of contractual interpretation of English law (being the forum of the dispute).

(iv) If there is no separate choice of law for the arbitration agreement, but there is a choice of governing law for the main contract, the main contract governing law will generally apply to the arbitration agreement. The Supreme Court stated it would “put the principle of separability of the arbitration agreement too high” to say that a choice of law to govern the main contract has “little to say” about the choice of law of the arbitration agreement. The Supreme Court majority’s approach also accords with commercial common sense, recognising that commercial parties are unlikely to be familiar with the separability principle and that for them, in the words of the majority, “a contract is a contract […] they would therefore reasonably expect a choice of law to apply to the whole of that contract”.

(v) The fact that the seat of the arbitration is different from the choice of governing law of the main contract is not on its own enough to negate an inference that the governing law of the main contract applies to the arbitration agreement as well. The Supreme Court rejected here the reasoning of the Court of Appeal, noting that there is no “strong presumption” that the parties have, by implication, chosen the law of the seat of the arbitration to govern their arbitration agreement.

(vi) However, factors that can indicate a different governing law for the arbitration agreement are:

(a) a provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration agreement will also be treated as governed by that country’s law (e.g. Section 6 of the Arbitration (Scotland) Act 2010); or

(b) the existence of a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective (this is in keeping with the “validation principle” of English law that “the contract should be interpreted so that it is valid rather than ineffective”). The Supreme Court majority recognised that this will require having regard to the words used in the contract, the surrounding circumstances and the extent of the risk that the arbitration agreement would be undermined if its validity and scope were governed by the relevant system of law. The Supreme Court majority reiterated the formulation of Moore-Bick LJ in the Sulamérica Cia Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638, paragraph 31, that commercial parties are generally unlikely to have intended a choice of governing law for the contract to apply to an arbitration agreement if there is “at least a serious risk” that a choice of that law would “significantly undermine” that agreement.

Each of the above two factors may be further reinforced if it can be shown that the seat was deliberately chosen as a neutral forum for the arbitration.

(vii) If there is no express choice of law to govern the main contract, it does not automatically follow that the contract (or the arbitration agreement) is intended to be governed by the law of the seat.

(viii) If, following the above, there is no express or implied choice of law that can be determined, then one is required to determine the law with which the arbitration agreement is most closely connected. It is only then that it may be said the arbitration agreement is most closely connected with the law of the seat chosen by the parties. The majority held that despite the reasonable assumption, as a starting point, that the parties have intended for all terms of their contract to be governed by the same system of law, there is authority (including Sulamérica) for a “general rule” that the arbitration agreement is most closely connected with the law of the seat of the arbitration, even if that law differs from the law applicable to the parties’ substantive obligations. The majority noted that the seat is where the arbitration is to be performed (legally speaking, if not physically), whereas the place of performance of the substantive obligations of the contract may not have a “significant connection” for the purpose of determining the law of the arbitration agreement.

(ix) Dispute resolution clauses that include provisions for good faith negotiation, mediation or any other procedure before a dispute can be referred to arbitration will not generally provide a reason to displace the law of the seat of arbitration as the law applicable to the arbitration agreement when (viii) above applies.

In his dissenting judgment Lord Burrows was of the view that “absent an express choice of law in the arbitration agreement, there is a presumption (or general rule) that the proper law of the main contract is also the proper law of the arbitration agreement; and there is no such presumption (or general rule) that the law of the seat is the proper law of the arbitration agreement”.

In the present case, Lord Burrows was also of the view that if there is no express or implied choice of law that applies then the country with which the contract is most closely connected ought to be the same as that of the laws governing the main contract as opposed to the country of the seat.

Application to the present case

For the majority of the Supreme Court, this case fell to be decided by reference to (viii) above, i.e. there was no express or implied choice of law for either the arbitration agreement or the main contract. Accordingly, the majority considered with which system of law the arbitration agreement was most closely connected and decided it was the law of the seat (i.e. English law).

For the dissenters, the position was more straightforward. The dissenting opinion was that there was a choice of law in relation to the main contract, being Russian law, and this ought to have carried across to the arbitration agreement.

Anti-suit injunction: the power of a London seat

The majority held that in granting an anti-suit injunction, the English courts are seeking to uphold and enforce the parties’ contractual bargain as set out in the arbitration agreement. Therefore, in principle it should make no difference whether that agreement is governed by English law or by a foreign law. In both cases the enquiry is whether there has been a breach of the arbitration agreement and whether it is just and convenient to restrain that breach by the grant of an anti-suit injunction. The majority agreed with the Court of Appeal that forum conveniens was not relevant; the parties had agreed to arbitration in London and therefore to submit to the supervisory jurisdiction of the English courts.

The granting of an anti-suit injunction is always a matter of discretion, and although in some cases it may be sensible to await a decision of a foreign court, this deference and the principle of comity is outweighed by the importance of upholding the parties’ bargain (to arbitrate).

Conclusion

Despite the complexities of this area of the law, the key takeaway from the judgment is that “choice” will always prevail. Wherever possible, in order to ensure certainty in the event of a dispute, the parties should consider and agree in their contracts upon all three systems of law that will be relevant to a dispute: (i) the law applicable to the main contract (the substantive law); (ii) the law governing the agreement to arbitrate; and (iii) the seat of the arbitration. This will be particularly important where the country of the governing law of the contract is different from the country of the seat.

Where parties have selected a law applicable to their main contract, this is likely to apply to their arbitration agreement as well, even if the law of the seat is different. This is subject to the factors set out in (vi) above, including the application of the “validation principle”, which is likely to assist in preventing parties from circumventing their arbitration agreements.

Commercial parties may nevertheless find themselves in difficulty when they fail to turn their minds to two out of three of the systems of law when drafting their contract. If the only reference to a system of law in the contract is to the seat of the arbitration, the search for their intentions will end, replaced by the objective application of a rule of law looking for the system of law most closely connected with the arbitration agreement. Although not rooted in the parties’ intentions, this general rule is nevertheless beneficial for parties insofar as it will provide certainty for parties faced with disputes arising out of contracts that are silent as to the applicable law.

The difference in analysis between the majority and the dissenters on the law governing the main contract will, no doubt, be instructive in future disputes not just about the governing law of the arbitration agreement, but also the governing law of other contacts.