The question of how to determine as a matter of English law the governing law of an arbitration agreement has been at the forefront of debate in the UK arbitration community since the Supreme Court’s decision in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38. Enka is a complex decision, and a divisive one, demonstrated by the 3-2 split within the Supreme Court.
In one of a recent series of cases testing Enka, the English Court of Appeal in UniCredit Bank GmbH v RusChemAlliance LLC [2024] EWCA Civ 64 was asked to determine whether the English courts have jurisdiction to grant an anti-suit injunction to restrain the pursuit of court proceedings in Russia when the parties’ contract was: (i) governed by English law; and (ii) provided for arbitration seated in Paris under the ICC Rules. The ability of the court to issue an injunction depended – in part – on whether the proper law of the arbitration agreement was English law (under which an anti-suit injunction is available) or French law (under which an anti-suit injunction is not available).
What is the principle of separability of the arbitration agreement?
The conundrum of the law applicable to an arbitration agreement arises as a result of the legal principle of separability. The principle of separability means that an agreement to arbitrate is treated separately from the commercial agreement in which it is contained: in other words, it is essentially a ‘contract within a contract’.
Existing under English law, as well as that of many other jurisdictions, it prevents one party from advancing arguments that attack the validity of a commercial agreement as a whole to deny the jurisdiction of the arbitral tribunal and thereby provide that party with an alternative forum in which to bring proceedings.
On adopting this principle, the question then arises as to the proper governing law of the arbitration agreement (the ‘contract within a contract’), a legal question that is rarely, if ever, seriously considered by commercial parties. Dispute resolution clauses are often negotiated very late in the negotiation process, with commercial parties often likely to assume that the law applying to the entire commercial agreement also applies to the arbitration agreement.
What was the Enka decision?
Enka had unique facts because the agreement as a whole in that case contained no express choice of law. On ultimate appeal, the Supreme Court had to determine not only the proper law of the arbitration agreement, but also that of the contract as a whole. By a 3-2 majority, the Supreme Court decided that the law governing the arbitration agreement is:
- The law expressly or impliedly chosen by the parties to govern the arbitration agreement.
- In the event no choice has been made with respect to the arbitration agreement, the applicable law is that which is “most closely connected” to the arbitration agreement.
- Where the parties have expressly chosen the law applying to the main commercial agreement, it will be implied that the parties chose that law to govern the arbitration agreement.
The Court then stated that choice of a different jurisdiction as the seat of the arbitration does not, in itself, negate the inference that the choice of law to govern the contract was intended to apply to the arbitration agreement. However, there are exceptions to that rule. Additional factors may imply that the arbitration agreement was intended to be governed by the law of the seat, including where the chosen law would render the arbitration agreement invalid or defeat the commercial purpose of the arbitration clause. For the purpose of this article, we refer to this as the “Enka exception.”
How was the Enka decision applied recently?
In UniCredit Bank v RusChemAlliance, the Court of Appeal rejected the application of the Enka exception that had been applied at first instance in the High Court.
RusChemAlliance (RCA) is a company incorporated under the laws of Russia and had entered into two Engineering, Procurement, and Construction (EPC) contracts with German contractors for the construction of LNG facilities in Russia. The contractors were required to provide on-demand bonds guaranteeing the performance of their construction obligations. The Italian bank, UniCredit, provided seven of the bonds, the rest of which were issued by other banks. Notably, each of the bonds provided for English law as the express applicable law, with disputes to be resolved through ICC arbitration seated in Paris. However, no law was explicitly stated to govern the arbitration clause in the bonds (‘the contract within the contract’).
The EU imposed sanctions on Russia following the invasion of Ukraine in February 2022. Consequently, the construction contractors of the LNG facilities halted performance under the construction contracts on the basis of applicable sanctions.
Thereafter, RCA sought to terminate the construction contracts on the grounds that the contractors were in material breach by halting performance. Following the termination of the contracts, RCA made demands on UniCredit for payment under the bonds. UniCredit rejected those demands, relying on international sanctions, which it argued prevented it from making payment to RCA.
Instead of bringing proceedings in an ICC arbitration seated in Paris, RCA initiated proceedings in the Russian courts on the purported basis that they were competent to determine the dispute because the arbitration clause contained in the bonds was unenforceable as a matter of Russian law. Russian law conferred exclusive jurisdiction on Russian courts over disputes between Russian and foreign persons arising from foreign sanctions.
As a result of the claims initiated in Russia by RCA, UniCredit sought an anti-suit injunction in London to restrain the Russian proceedings, in support of an ICC arbitration seated in Paris.
What was the initial decision by the English High Court?
Sir Nigel Teare (sitting as a High Court judge) refused to grant a permanent injunction on the ground that “in choosing France as the seat of the arbitration, the parties can fairly be taken to have intended that the arbitration would be governed by those principles.”
The judge held that the general rule in Enka (namely, that English law was the law governing the arbitration agreement by a matter of implication) was negated because there was a provision of the law of the seat (French law) which provides that an arbitration agreement will be governed by French law where the seat of the arbitration is Paris.
On that basis, Teale J applied the ‘Enka exception’, holding that the arbitration agreement was governed by French law. Applying French law, Teale J noted that an anti-suit injunction is not available to prevent breach of an arbitration agreement and instead parties must seek damages as the sole available remedy. UniCredit’s application was denied.
Why did the Court of Appeal overturn this decision?
The Court of Appeal reversed Teale J’s decision, holding that:
- The presumptive position from Enka is that English law would apply to the arbitration agreement, as the law expressly chosen to govern the commercial agreement as a whole.
- That presumption was not negated here through the parties choosing Paris as the seat of the arbitration. As such, the ‘Enka exception’ did not apply.
In support of that holding, the Court of Appeal noted that “the suggestion that substantial justice could be obtained by UniCredit in France, whether in court or in arbitration, is an illusion… it is abusive for RCA to rely on the availability of substantial justice in France as the seat of arbitration while simultaneously seeking to pursue proceedings in Russia on the basis that the arbitration clause is unenforceable.”
An appeal against the Court of Appeal’s decision is pending before the Supreme Court, with a hearing scheduled for 17 April this year. The arbitration community will be closely following the Supreme Court’s decision, particularly in view of its previous decision in Enka and the Law Commission’s proposed amendments to the Arbitration Act.
What do commercial parties need to consider in commercial and arbitration agreements?
Commercial parties are clearly concerned that legal proceedings are brought in the forum that they have expressly agreed. The UniCredit case shows how the question of the law governing the arbitration agreement – i.e. the question of choice of law – is often intertwined with jurisdictional questions – i.e. the proper forum.
Although somewhat complicated, Enka is the current law of the land. In its recent report on amendments to the Arbitration Act, the Law Commission described the test created by the majority’s decision in Enka as “complex and unpredictable”. The Law Commission has proposed simplification of the choice of law principles used to determine the governing arbitration agreements. The Law Commission has recommended an amendment to the Arbitration Act that will state that, in the absence of an express choice of law, the default law of the arbitration agreement will be the law of the seat.
One irony to note is that, under the Law Commission’s proposal, the UniCredit appeal would be decided differently and Teale J’s decision upheld, because French law – as the law of the seat – would apply to the arbitration agreement. UniCredit would not be able to obtain an injunction because that remedy is not available in France. Instead, it would have to accept damages as its sole remedy.
Given the complexities in this area under current law, and with legislative change on the horizon, commercial parties should take particular care when drafting commercial contracts and are best advised to expressly state the law governing the arbitration agreement.