The UK Supreme Court has issued a decision clarifying how English law will determine the governing law of an arbitration clause in an international contract. The UK Supreme Court’s decision has potentially material repercussions for parties entering into arbitration clauses that provide that London as the seat of arbitration, especially agreements signed by or with State-owned entities.
Parties to international commercial arbitration agreements often seek to separate the law governing the substance of the contract from the law governing the arbitration clause. Separating the contract’s governing law from that of the arbitration clause provides assurance that the parties’ consent to neutral, international arbitration is preserved by reference to a well-recognised system of law – even if, as a separate commercial matter, the parties agree to another legal system to govern their contractual performance and disputes as a whole. This approach is often accepted by State-owned or State-affiliated entities, who might otherwise seek to have contractual performance and the substance of any disputes governed by their own domestic law.
A recent decision by the UK Supreme Court suggests that, when parties are looking to separate the law governing the arbitration clause from the law governing the rest of the contract in London-seated arbitrations, they should do so expressly.
In its decision in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb  UKSC 38, the UK Supreme Court considered a case where a subcontractor (Enka) that aided in the construction of a power plant in Russia had been sued by Chubb, the insurer of the power plant, for damages arising out of a fire. Following the Commercial Court and Court of Appeal proceedings, the UK Supreme Court was called to determine whether, and to what extent, the law governing an arbitration clause is separate from the contract’s governing law – and when the arbitration clause is governed, instead, by the law of the seat of arbitration. As the law governing the main contract was Russian law while the agreed seat of the arbitration was in England, the outcome of the question would impact the English court’s ability to restrain concurrent domestic Russian legal proceedings by means of an anti-suit injunction.
Lords Hamblen and Leggatt, writing for the majority judgment with which Lord Kerr agreed, confirmed that it was acceptable under English law to separate the law governing the contract from the law governing the arbitration clause. They also reasoned that English choice of law principles applied as lex fori to the question of what law governed the arbitration clause. From there, their judgment determined that, under English law, if there is no general choice of law clause in a contract and the arbitration is seated in England, English law will apply to the arbitration clause. However, when the parties have a general choice of law clause that applies to the contract as a whole (as is the most common approach in major international contracts), that choice of law clause – and not the law of place of the seat of arbitration – will presumptively govern the arbitration clause. Finally, their judgment confirmed that if the arbitration clause has its own special choice of law clause separate from the contract’s governing law more generally, the special choice of law clause will govern the arbitration clause.
Dissenting from this ruling, Lord Burrows and Sales suggested that, if there is no contractual choice of law clause, the law of the contract more generally should still govern the arbitration clause. However, neither rejected the finding that the parties can elect a different law to govern the arbitration clause as compared to the contract as a whole.
There are highly regarded jurisdictions for international arbitration that will presume that it is the law of the place of the seat of arbitration that governs an arbitration clause, regardless of the general choice of law clause in the contract. The UK Supreme Court’s judgment confirms that that approach will not automatically apply in arbitration clauses with London seats. Thus, if parties wish to separate the law governing the contract from that governing the arbitration clause (and also elect the seat of arbitration as London), they might consider doing so expressly. This might often be done by including an express choice of law clause in the arbitration clause that refers the clause to the laws of England and Wales.
It is also important to note that the majority’s decision also leaves open the possibility that, even without such express language in the arbitration clause, the circumstances may still demonstrate the parties’ intent to elect English law as the governing law of the arbitration clause.
For questions or comments on this client alert, please contact:
Mr Robert G Volterra (firstname.lastname@example.org);
Mr Peter Flint (email@example.com); or
Mr Gunjan Sharma (firstname.lastname@example.org).