The Current Position on the Proper Law of an Arbitration Agreement

English cases

The method of determining the proper law of an arbitration agreement has not yet been considered by the highest court in this jurisdiction. Two cases have touched on the issue.

In Channel Tunnel Group v Balfour Beatty Construction [1993] AC 334, Lord Mustill stated, obiter, that in international arbitration there may be “more than one national system of law” relevant to the determination of a dispute but it would be “exceptional” for the law governing the interpretation of an arbitration agreement to differ from the law of the main contract.[1]

Dallah Real Estate and Tourism Holding Company v Government of Pakistan [2010] UKSC 46; [2011] 1 AC 763 (“Dallah”) concerned the enforcement of a USD 20m award rendered by a French tribunal against the Government of Pakistan. Lord Collins referred to the 1996 Act and specifically section 103(2)(b). That sub-section gives effect to the principle in Article V(1)(a) of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the NY Convention”). It provides that a Court may refuse recognition or enforcement of an award where a person proves that the arbitration agreement was not valid “under the law to which the parties subjected it, or failing any indication thereon, under the law of the country where the award was made.”[2]  However, the Supreme Court was not required to consider the effect of the NY Convention in English law.

Sulamérica

Prior to the Court of Appeal’s recent decision in Enka Insaat ve Sanayi AS v OOO Insurance Co Chubb [2020] EWCA Civ 574 (“Enka”), the leading English case on the proper law of an arbitration agreement was Sulamérica Cia Nacional de Seguros SA v Enesa Engelharia SA [2012] EWCA Civ 638; [2013] 1 WLR 102 (“Sulamérica”).

Sulamérica concerned a dispute between a group of Brazilian construction companies and their insurers. The insurance policies, written in Portuguese, provided for Brazilian law as the exclusive governing law and for the Brazilian courts to have exclusive jurisdiction over disputes between the Brazilian parties. There was also an arbitration clause which provided for arbitration seated in London. The construction companies began litigation in Brazil. The insurers sought an anti-suit injunction in favour of London arbitration.

The Court of Appeal endorsed a three-stage test for determining the proper law of the arbitration agreement.[3] First, if there is an express choice of law, that is determinative. Second, if there is no express choice, the Court will consider whether the parties have impliedly chosen a law. At this stage it is assumed, in the absence of a contrary indication, that the law of the main contract applies to the arbitration agreement. Third, where it is not possible to establish the law by implication, it is necessary to consider what would be the law with the ‘closest and most real connection’ with the arbitration agreement.

In Sulamérica, despite the many connections to Brazil as described above, English law as the law of the seat was held to govern the arbitration agreement. The presumption in favour of the law of the main contract was rebutted. At stage three, the Court gave precedence to the choice of London as the seat in finding that English law had the closest and most real connection with the arbitration agreement.[4]

In an important passage, Moore-Bick LJ held that, usually, the implied choice of law for the arbitration agreement would be the law of the substantive contract, “unless there are other factors present which point to a different conclusion. These may include the terms of the arbitration agreement itself or the consequences for its effectiveness of choosing the proper law of the substantive contract”.[5] Here, there was a “serious risk” that, if Brazilian law applied to the arbitration agreement, that would render the arbitration agreement nugatory.[6] Clearly the Court of Appeal had this concern firmly in mind, although it chose not to decide the case on this basis.

The Sulamérica test is unsatisfactory. The law of the main contract will usually apply to the arbitration agreement, except when it does not. The law of the seat may be implied, or it may have a closer connection to the arbitration agreement, whatever that may mean, except when it does not. There are real problems with the second and third stages of the Sulamérica test. It was accepted by Moore-Bick LJ that these two stages blur into each other.[7] In Sulamérica, there is no proper analysis of whether (or how) to imply a governing law for the arbitration agreement. Furthermore, at stage three, there is no guidance as to whether there is a hierarchy of factors which determine the “closest and most real connection”. It is unsurprising that the case-law following Sulamérica has been confused.

Kabab-Ji

The issue arose again before the Court of Appeal in Kabab-Ji, this time in the context of a dispute as to whether the respondent in the arbitration was a party to the arbitration agreement in the main contract. The main contract had originally been concluded between the claimant and a third party that had subsequently come to be a subsidiary of the respondent who had (it was alleged) performed the main contract itself. The claimant contended that the respondent had succeeded to the third party’s rights and obligations under the main contract including under the arbitration agreement. The main agreement contained an express provision or provisions that it was to be governed by English law. The arbitration clause did not contain an express choice of law but did provide for ICC arbitration in Paris. The Paris-seated tribunal issued an award in which it concluded that the law governing the arbitration agreement was French law and that, on application of that law, the Respondent was a party to the arbitration agreement. The claimant prevailed on the merits.

The successful claimant sought to enforce the award in England. The respondent sought to resist on the basis that the tribunal had not applied the law selected by the parties: it contended that the arbitration agreement was governed by English law. At the same time, the unsuccessful respondent sought to have the award set aside in Paris, on essentially the same basis.

In January 2020, the English Court of Appeal denied enforcement on grounds that the respondent ought not to have been found to have been a party to the arbitration agreement. On the issue of the proper law of that arbitration agreement, the decision rested on the finding that, as a matter of contractual interpretation, the combination of a broadly-worded governing law clause in the main contract, further provisions in the main contract, and an express stipulation in the arbitration agreement that the tribunal was to apply “all provisions” of the main contract amounted to an express choice of the proper law of the arbitration agreement. The Court further found that this express choice was not negatived by the express choice of Paris as the seat of the arbitration. The Court acknowledged the point that, if it were true in this case that the express proper law provisions in the main contract amounted to an express choice of proper law for the arbitration agreement as well, that could potentially be said of every contract containing an arbitration clause that also had a main contract proper law provision. However, the court resisted that as being a necessary conclusion by reference to the specific provisions at issue in this case.

On one reading, the Court of Appeal’s decision involved nothing more than the application of straightforward and unexceptional principles of contractual interpretation. However, the readiness of the court to discern an express proper law for the arbitration agreement from the terms of the main contract has attracted comment. The Court of Appeal’s decision will not, in any event, be the last word on the matter. In July 2020, the Supreme Court gave the claimant permission to appeal. At the same time, the proceedings in the French courts have continued.

Enka

As noted above, Enka is the most recent English decision in this area. The Supreme Court is due to hear this appeal on 27-28 July 2020, following the Court of Appeal’s judgment delivered on 29 April 2020.

Enka is a Turkish construction and engineering company with substantial Russian operations. It was engaged as a subcontractor to provide works under a June 2012 contract relating to construction of the Berezovskaya power plant. Chubb was the subrogated insurer of Unipro, the employer for the project. Chubb paid out after a fire at the plant in 2016 and filed a claim in the Russian courts, alleging the fire and consequent damage was caused by Enka’s defective work. Enka applied for an anti-suit injunction in the English Commercial Court to restrain the Russian proceedings. Importantly, Enka’s contract contained a London seat arbitration clause. There was a choice of Russian law, but the Court of Appeal considered this was not in very clear terms and not a general express choice of Russian law for the entire contract.[8]

Two main questions arose for the Court of Appeal:

  1. Do forum non conveniens principles apply to the question of enforcement of a London-seated arbitration agreement by an anti-suit injunction?
  2. What is the proper law of the arbitration agreement?

As to the first question, it was held that the English court, as the court of the seat of arbitration, is necessarily an appropriate court to grant an anti-suit injunction, and that forum conveniens considerations do not arise.[9] As to the second question, the Court of Appeal modified the approach in Sulamérica. Popplewell LJ restated the law in holding that there is a strong presumption in favour of the law of the seat absent express choice of the proper law of the arbitration agreement.[10] Kabab-Ji was confined as a decision on its own facts concerned with the first stage of the Sulamérica test.[11]

By way of brief comment (developed further in Part B), there is a strong link between the reasoning on the anti-suit injunction question and on the proper law question. The supervisory role of the law and the courts of the seat clearly influenced the proper law analysis. Further, the third stage of the Sulamérica test – i.e. closest and most real connection – was treated as being of residual importance. It was probably also not strictly necessary for Popplewell LJ to deal with the proper law question as fully as he did given his conclusion that the express provisions in the contract did not amount to “an express general choice of Russian law.”[12] The contest of potential proper laws was thus arguably less pronounced than in Sulamérica or Kabab-Ji.  

Singapore cases

Singapore law follows the Sulamérica approach. Sulamérica was first considered in Singapore in First Link Investment Corp Ltd v GT Payment Pte Ltd [2014] SGHCR 12 (“First Link”), a Registrar’s decision of the High Court. The Registrar adopted the three-stage test in Sulamérica but found the law of the seat should be the presumptive implied law. Amongst the Court’s reasoning was that businessmen must intend an award to be enforceable and so would focus on the law of the seat and whether that law recognises and enforces the arbitration agreement.

This not only imputes too much to businessmen, it is also misguided. Awards are likely to be enforced in jurisdictions outside the seat, so the law of the seat, while important, is not the only law of relevance. Further, this ignores that the NY Convention and the UNCITRAL Model Law on International Commercial Arbitration (“the Model Law”) provide for presumptive validity of the arbitration agreement, subject only to internationally accepted grounds of invalidity[13]. A NY Convention and Model Law seat is required to give effect to arbitration agreements, subject only to limited exceptions, and to accord maximum validity to the arbitration agreement.

Also, the NY Convention and the Model Law[14] recognise the parties’ express and implied choices of proper law of the arbitration agreement. Therefore, Singapore law, as the law of the seat, only applies in the absence of indication of an express or implied choice.

First Link was effectively overruled by a decision of a High Court judge in BCY v BCZ [2016] SGHC 249 (“BCY”). BCY adopted the Sulamérica test, agreeing there is a presumption the implied law of the arbitration agreement, contained in a contract, was the law of the main contract. The Court held that parties are assumed to have intended the whole of their relationship to be governed by the same system of law and the choice of a seat different from the law of the main contract would not in itself be sufficient to displace this. The law of the main contract would only be displaced if this would negate the arbitration agreement despite the parties’ clear intention to arbitrate. In a freestanding arbitration agreement, the law of the seat was likely to be the proper law of the arbitration agreement. The Court of Appeal approved BCY in BNA v BNB [2019] SGCA 84 (“BNA”)[15], confirming the Sulamérica approach as law in Singapore.

In BNA, the High Court[16] applied the Sulamérica/BCY three-stage test in finding the law of the main contract was displaced by the law of the seat because it would have invalidated the arbitration agreement. The Court found the law of the seat was the implied choice (therefore taking a similar position to Popplewell LJ in Enka and a different position from Moore-Bick LJ in Sulamérica, where the law of the seat was applied as the law with the closest and most real connection).

France

The Paris Court of Appeal arrived at a different conclusion from the English Court of Appeal on the proper law of the arbitration agreement in Kabab-Ji, upholding the award which the English Court refused to enforce. The Paris Court found:

  1. The proper law of the arbitration agreement was French law. Being separable from the contract within which it is contained, the proper law of the arbitration agreement is to be determined according to mandatory rules of French law and international public policy, according to the will of the parties, without reference to any national law. The express choice of English law in the substantive contract did not establish the common will of the parties to subject the arbitration agreement to English law. As there was no express agreement on the proper law of the arbitration agreement, French law, being the law of the seat of the arbitration, was the proper law of the arbitration agreement.
  2. The respondent was bound by the arbitration agreement under French law, without being a signatory to the contract within which it is contained, because it had accepted the arbitration agreement by its conduct with regard to the main contract. It was not, however, permissible for the Court to consider whether the respondent could have acceded to the substantive contract under English law (being the proper law of the substantive contract), as that would amount to a review of the merits of the case.

The outcome is that the English Court of Appeal refused to recognise and enforce a French award on grounds that the Paris Court of Appeal rejected. This ‘conflict’ is reminiscent of the decisions of the apex French and English courts in Dallah and may be, in part, why the Supreme Court recently gave leave to appeal.

[1]      At p 357F.

[2]      [12]–[16].

[3]      [25].

[4]      [32].

[5]      [26].

[6]      [31].

[7]      [25].

[8]      [106]–[107].

[9]      [42].

[10]     [91].

[11]     [88].

[12]     [107].

[13]     Article II of the NY Convention and article 8 of the Model Law.

[14]     Article V(1)(a) of the NY Convention and articles 34(2)(a)(i) and 36(1)(a)(i) of the Model Law.

[15]     The decision of the High Court and Court of Appeal in BNA is discussed in more detail in the article by Steven Lim, Revisiting the Proper Law of the Arbitration Agreement, in the May 2020 edition of this newsletter (https://1f2ca7mxjow42e65q49871m1-wpengine.netdna-ssl.com/wp-content/uploads/2020/05/2020-05-39-Essex-Chambers-Commercial-and-Construction-Newsletter.pdf).

[16]     BNA v BNB [2019] SGHC 142.

Steven Lim, Ben Olbourne, Niraj Modha, Philippe Kuhn

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Author: Steven Lim
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Author: Ben Olbourne
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Author: Niraj Modha
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Author: Philippe Kuhn