UK Supreme Court Establishes Test to Determine Governing Law of Arbitration Agreements

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Morgan LewisThe Court’s 9 October decision in Enka Insaat Ve Sanayi AS v. OOO “Insurance Company Chubb” (Chubb) not only ends the uncertainly that parties faced in this important question, but is also a call to action to adapt arbitration agreements in existing and future contracts.

In a (potentially) surprising decision, the UK Supreme Court has established a new test for determining the governing law of an arbitration agreement. The result is that parties and their legal representatives are well advised now to include an express choice of law for the law applicable to the arbitration agreement if they want the arbitration agreement to be governed by the law of the seat of arbitration. Failure to make this express choice will result in the arbitration agreement being governed by the law of the substantive main contract (an outcome parties may not want, or have envisioned at the time of entering the contract).

As explained in our previous LawFlash, when entering into a commercial contract it is common for parties to agree to a dispute resolution clause that, in turn, may state that disputes are to be resolved by way of arbitration (the arbitration agreement).

While it is often the case (and, indeed, desirable) that parties to a commercial contract will expressly state the law which will govern the substantive main contract, it is less common for those same parties to state the law which will govern the arbitration agreement itself. The question that sometimes arises in that scenario is: what law governs the arbitration agreement?

The answer to the question is crucial to parties because any award made under an invalid or ineffective arbitration agreement, or made exceeding the scope of the arbitration agreement, would be unenforceable.

CHUBB

As we explained in our previous LawFlash on this topic, on 29 April 2020, the Court of Appeal, in Chubb, sought to bring clarity to this question when it held that in circumstances where there is no express choice of law for the arbitration agreement, the starting assumption is that the arbitration agreement is governed by the law of the seat of arbitration (subject only to powerful reasons to the contrary). In this instance, the seat of arbitration was London and, so, English law governed the arbitration agreement.

On appeal, the Supreme Court (by a majority of 3–2) handed down its judgment, dismissing Chubb’s appeal and affirming the Court of Appeal’s decision that English law governed the arbitration agreement. However, and crucially, although the Supreme Court came to the same decision as the Court of Appeal, it arrived at it via a very different route, overruling the Court of Appeal and, in the process, establishing clear (and welcome) guidance as to how to answer the question.

The Supreme Court has, in essence, provided a decision tree that must be worked through (to a greater or lesser extent, depending on the circumstances):

  1. Question one - have the parties expressly chosen a law to govern the arbitration agreement? If the answer is “yes” then, unsurprisingly, that brings an end to the question as that law will govern the arbitration agreement. If the answer is “no”, question two must be asked.
  2. Question two – have the parties chosen (either expressly or impliedly) a law to govern the substantive contract? If the answer is “yes”, then (as a general rule) it is that law which will govern the arbitration agreement. So, for example, if the substantive contract is governed by the laws of New York, that is the law that will govern the arbitration agreement (and that is the case even if the seat of arbitration is different, for example, London). The general rule can be rebutted – for example, if the arbitration agreement would be ineffective were it to be governed by the law of the substantive contract. If the answer is “no”, question three must be asked.
  3. Question three – have the parties chosen a seat of arbitration (or, put another way, have the parties chosen a curial law)? If the answer is “yes”, then (as a general rule) that is the law which will govern the arbitration agreement. If the answer is “no”, you have to consider question four.
  4. Question four – what is the law that is most closely connected to the arbitration agreement? That is the law that will govern the arbitration agreement. Fortunately, there will always be an answer to question four that will bring the investigation to an end.

The Supreme Court, in Chubb, had to ask itself question three (above) as: (i) the parties had not expressly chosen a governing law of the arbitration agreement; and, (ii) the parties had not chosen (expressly or impliedly) a law to govern the substantive contract. However, as the parties had stated that the seat of arbitration was London, England, the Supreme Court held that English law governed the arbitration agreement (this was the case even where it was held that, by virtue of Article 4 (3) of the Rome I Regulation[1], Russian law governed the substantive contract).

CONCLUSIONS

The Supreme Court has, in Chubb, provided clarity and may help to reduce otherwise costly and time-consuming arguments, and therefore ultimately ease access to arbitration.

However, it means that parties should take the opportunity to review their contracting practice for arbitration agreements. It is now clear that a choice of the seat of arbitration may not be sufficient to make the law of the chosen seat applicable to arbitration agreement. Parties should make an express choice of law for the arbitration agreements, rather than just the substantive main contract.

It may also be a call to action for arbitration institutions to adapt their model clauses to make parties aware of the need to think about the law applicable to the arbitration agreement.

 

Trainee Nicholas Woolf contributed to this LawFlash.

 

[1] Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations.

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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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