English Court of Appeal Clarifies Test for Governing Law of Arbitration Agreements

Morgan Lewis
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Morgan LewisIn April 2020 and following an inconsistent approach by the English courts to the question of which law governs an arbitration agreement, the English Court of Appeal held in Enka Insaat Ve Sanayi AS v. OOO “Insurance Company Chubb” that absent any express agreement of the parties, the starting assumption is that the governing law of the arbitration agreement is the same as the law of the seat of arbitration.

When entering into a commercial contract it is common (indeed advisable) for parties to expressly state the substantive law of the contract (i.e., the law governing the substance of the contract and, if necessary, any disputes arising out of the contract). It is also common for the parties to set out a dispute resolution mechanism which (depending on the jurisdictional clause) may call for arbitration and specifying the “seat” of arbitration (i.e., the curial law). The curial law will govern the arbitration and, amongst other things, its procedure.

Where the parties have contracted for disputes to be resolved by arbitration, their agreement to arbitrate is treated as distinct and separate from the main contract (even if it is contained in the main contract); this is the concept of separability (which is recognised in Section 7 of the Arbitration Act 1996).

However, because the agreement to arbitrate is separable from the main contract itself, questions concerning what law governs the arbitration agreement, including issues relating to the validity, meaning, and scope of the arbitration agreement, can arise. The parties are free to agree on the law governing the arbitration agreement in a separate provision, but failing such express choice, is it the substantive or curial law that governs it?

The answer to this question is pivotal both for parties to obtain access to arbitration and as any award made under an invalid or ineffective arbitration agreement, or made exceeding the scope of the arbitration agreement, would be in effect unenforceable.

POSITION OF ENGLISH COURTS: SULAMÉRICA

In the case of Sulamérica Cia Nacional de Seguros SA v. Enesa Engelharia SA (Sulamérica), the English Court of Appeal prescribed a three-stage process for the determination of the law governing the arbitration agreement.

Express Choice

It is perfectly possible (and, indeed, advisable) for parties to state the law governing the arbitration agreement (and this need not be the same as the substantive law or, indeed, the curial law). Thus, the starting point the courts have taken when considering this question is whether there is an express statement as to the law governing the arbitration agreement. This position has (unsurprisingly) remained unchanged following Enka Insaat Ve Sanayi AS v. OOO “Insurance Company Chubb” (Chubb).

Implied Choice

Absent an express choice, the courts will move to stage two and consider whether there is an implied choice of law. The courts will look at two key aspects of the relationship between the parties: (1) the substantive law and (2) the curial law.

Closest and Most Real Connection with the Arbitration Agreement

If stage two does not produce an outcome, the court will move to stage three and consider to which law the arbitration agreement has the closest and most real connection. As acknowledged in Sulamérica, there is a very fine line between stages two and three, and often there is an overlap.

The court in Sulamérica held that the starting assumption at stage two is that the governing law of the arbitration agreement is the same as the substantive law. Of course, it should be noted that in Sulamérica the court did, in fact, find the substantive law (Brazilian law) was not the law of the arbitration agreement, which called for arbitration seated in London (with the court holding that English law (the curial law) governed the arbitration agreement).

The court thus held that the starting assumption may be departed from where specific factors lead to the conclusion that the parties could not have intended the substantive law to be the governing law of the arbitration agreement.

POSITION OF ENGLISH COURTS: CHUBB

As part of an intention to clarify this area of law (indeed, Lord Justice Popplewell was critical of the current state of affairs, noting that “[t]he current state of authorities does no credit to English commercial law which seeks to serve the business community by providing certainty”), the Court of Appeal held in Chubb that the starting assumption (absent an express choice of law) is that the law governing the arbitration agreement is the same as the curial law (i.e., that of the seat of arbitration). The court determined that this starting assumption is subject only to powerful reasons to the contrary.

The decision in Chubb is on the basis of three principle considerations.

Insignificance of the Law of the Main Contract

Due to the concept of separability, the substantive law only relates to the terms (exclusive of the terms of the arbitration agreement) of the main contract and their validity, interpretation, and performance (or, as Lord Justice Popplewell stated, “there is no principled basis for treating the main contract law as a significant source of guidance for the [arbitration agreement] law in cases where there is an arbitration clause with a different curial law [seat]”).

Therefore, the substantive law of the main contract has little bearing on the governing law of the arbitration agreement as it is directed to a different and separate agreement. Importantly, the judgment notes that the concept of separability is a key element of international arbitration.

Overlap of Scope of Curial Law and Arbitration Agreement

Due to the overlap, the reasoning in Chubb is that two different systems of law should not apply to one set of arbitration proceedings. According to the Court of Appeal, this is because “as a matter of commercial common sense, one would not expect businessmen to choose two different systems of law to apply to their arbitration package.” Generally, the rights of the parties to a valid arbitration agreement will be decided by the courts of the seat of arbitration, and the relevant courts will be the result of the choice of the seat of arbitration.

By way of example, a party electing to have the seat of arbitration in London will have English law (in particular the Arbitration Act 1996) as its curial law, and the parties will be able to rely on the intervening powers of the English courts.

The Arbitration Act 1996 is not limited solely to procedural powers, but also determines the substantive rights of the parties under the arbitration proceedings. Thus, it is to be inferred that as the parties are aware that the choice of seat will have a significant impact on the substantive rights of the parties during the course of the arbitration, the parties intended for a particular law (i.e., the curial law, or in the example above, English law) to govern all aspects of the arbitration agreement (including its validity, meaning, and scope).

A Matter of Implied Choice, Not Closest and Most Real Connection

Chubb has made it clear that this is a decision in relation to the second stage of the process used by English courts, rather than the third stage. As outlined above, due to the significant overlap, where a party chooses the curial law, it can rightfully be implied that the parties intended the same law to apply to the arbitration agreement itself, and it is not due to the fact that the curial law has the closest and most real connection to the arbitration agreement.

The Chubb case reiterates the three-stage process to be used by English courts when determining the law of an arbitration agreement. It does, however, seemingly place a higher burden on displacing the general rule that curial law is the law governing the arbitration agreement if the court reaches stage two of the process.

The general rule will only yield where there are powerful countervailing factors in the relationship between the parties or in the circumstances of the case. It remains to be seen what circumstances would require a court to proceed to the third stage of the Sulamérica process and assess which law has the closest and most real connection to the arbitration agreement.

CONCLUSION

The decision in Chubb seeks to bring certainty to this area of the law. In this sense, it has achieved its objective, since a clear process is affirmed and a general rule for determining the (implied) choice of law governing an arbitration agreement has been established.

In many ways, the certainty brought by the decision is more important than the conclusion of the case itself. The clarification Chubb offers on the application of the three-stage process laid down in Sulamérica may significantly reduce otherwise costly and time-consuming arguments as to the law governing agreements to arbitrate absent express choice, and therefore ultimately ease access to arbitration.

Yet, even after the decision of the Court of Appeal in Chubb, some uncertainties remain. First, Chubb was granted permission to appeal the decision to the UK Supreme Court, and a hearing was held in July 2020. Second, unless the Supreme Court offers more guidance on the circumstances under which a court must proceed to the third stage of the Sulamèrica test, some uncertainty as to the law governing an agreement to arbitrate—and consequently fertile ground for costly arguments—persists.

If nothing else, the Chubb discussion reiterates the importance of accurate and comprehensive drafting. The issue of implied choice of law of an arbitration agreement only falls to be considered where there is no express choice of law. Thus, accurate and comprehensive drafting should allow parties to avoid additional costs and delays associated with resolving disputes of this nature.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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