English Court of Appeal: Test To Determine the Proper Law of Arbitration Agreement

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When it comes to International Commercial Arbitrations, an entire gamut of laws attains relevance. Amongst these some of the predominant ones are proper law of arbitration, proper law of the underlying contract and law of seat i.e. the Curial Law. Consider a situation where the proper law of the arbitration is undefined/absent. In that situation, the trajectory of principles governs the ascertainment of proper law of arbitration under English Law (and inturn in many common law jurisdictions) which are as follows:-

  • is there an express choice of proper law of the arbitration?
  • if not, is there an implied choice of proper law of the arbitration?
  • if not, with what system of law does the arbitration agreement have its closest and most real connection?

However, the academia, scholars and judges are evenly distributed amongst two broad categories on this issue as follows:-

  • in the absence of any defined proper law of the arbitration and in the absence of any indication to the contrary, the proper law of underlying contract is the proper law of arbitration.[1]
  • in the absence of any defined proper law of the arbitration, it is the choice of seat which is being treated as the choice of proper law of arbitration.[2]

Finally, the English Court of Appeal has solved the flux created in these two broad streams of thoughts in Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors (Rev 1) [2020] EWCA Civ 574 (‘Enka v Chubb’).

In Enka v Chubb , Unipro has contracted some work in a power plant construction project to a general contractor named Energoproekt, who inturn, sub-contracted it to a series of contractors and sub-contractors amongst the likes of Enka. Clause 50 of the contract between Unipro and Energoproekt contained a dispute resolution clause which stipulated a London seated arbitration under the aegis of ICC. Subsequently, Energoproekt, Unipro and Enka entered into an assignment of rights and obligations by which Energoproekt assigned to Unipro all rights against Enka resulting from the contract. The assignment agreement essentially reiterated the arbitration agreement between Unipro and Energoproekt which has now became a contract between Unipro and Enka due to assignment agreement.

Subsequently, a fire broke out in the power plant and Enka filed its claim to its insurer, Chubb Russia who paid the claim and attained subrogation rights from Unipro.  Chubb Russia then filed a claim against Enka and other sub-contractors in Moscow Arbitrazh Court (‘Moscow Proceedings’) for low quality of work performance which entailed occurrence of losses to Enka and inturn to Chubb. On the other hand, Enka filed application before the English High Court seeking an anti-suit injunction against the Moscow Proceedings which was rejected in the first instance and resulted in the appeal in the present case before the English Court of appeal. Following pictorial representation helps to understand the contractual matrix in an easier way

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The entire debate in the case was inter alia on the proper law of arbitration agreement. Chubb inter alia argued that since the proper law of the arbitration agreement is not defined expressly, the governing law of the underlying contract will be the proper law of arbitration agreement. Pertinently, the term ‘Applicable Law’ in the underlying contract was defined to include ‘Law of the Russian Federation’. Enka argued that in absence of any express choice of arbitration agreement, it is the curial law i.e. the law of seat which was stipulated as London will be the proper law of arbitration agreement.

Thus, as stated in the opening statement, this case presents a classic clash of two schools of thoughts, which has been decided by the English Court of Appeal as under:-

  • The proper law of an arbitration agreement is to be determined by applying the three stage test required by English common law conflict of laws rules, namely

    • is there an express choice of law?
    • if not, is there an implied choice of law?
    • if not, with what system of law does the arbitration agreement have its closest and most real connection?
  • Where there is an express choice of law in the main contract it may amount to an express choice of the proper law of an arbitration agreement. Whether it does so will be a matter of construction of the whole contract, including the arbitration agreement, applying the principles of construction of the main contract law if different from English law.

  • In all other cases there is a strong presumption that the parties have impliedly chosen the curial law as the proper law of an arbitration agreement. This is the general rule, but may yield to another system of law governing the arbitration agreement where there are powerful countervailing factors in the relationship between the parties or the circumstances of the case.

In nutshell, Enka has consolidated and channelized the long line of authorities on this issue however, much would depend on construction of the terms of the underlying contract applying the laws of interpretation and conflict of law rules as provided under the proper law of underlying contract.

Applying the above principles, the Court of Appeal observed that albeit the term ‘Applicable law’ is defined in the underlying contract to mean the Russian law, this is not applied to the contract terms by any clause of the kind “This Agreement is governed by the Applicable law”.

On the contrary the term “Applicable Law” is used in a limited number of specific provisions rather than expressed to apply generally. Typical is Article 4.1(b) which provides that Enka shall ensure performance of the work in accordance with the Applicable Law. This is a common technique in international construction contracts where quite apart from the governing law of the contract, which can be chosen by the parties, there are particular local laws and regulations which are mandatorily applicable, such as those governing planning, health and safety, labour laws, taxes and customs. The technique is to define such applicable laws and impose an obligation to comply with them separately from any choice of governing law of the contract as a whole.[3]

The definition of Applicable Law is accordingly drafted in suitably wide terms to cover not just Russian law as such but so as to have a particular focus on regulatory requirements. It only specifically applies to certain obligations in the contract where the definition is used, in each case in a way which fulfils this function of compliance with mandatory local regulations. There is nothing to suggest an express general choice of Russian law as governing law.

Disclaimer: The views expressed in this post are mine and do not reflect the views of the organisation(s) I am engaged with

[1]  Sulamerica Cia Nacional de Seguros SA v Enesa Engelharia SA [2013] 1 WLR 102 at [11]; Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334; Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1981] 2 Lloyd’s Rep 446; Sonatrach Petroleum Corpn (BVI) v Ferrell International [2002] 1 All ER (Comm) 627 per Colman J at [32]; Sumitomo Heavy Industries Ltd v Oil and Natural Gas Commission [1994] 1 Lloyd’s Rep 45 per Potter J at p. 57; Liebinger Stryker Trauma GmbH [2006] EWHC 690 (Comm); Dicey Morris & Collins on The Conflict of Laws 14th ed at paragraphs 16-016, 16-017; and Mustill & Boyd on Commercial Arbitration 2nd ed at p. 63, XL Insurance Ltd v Owens Corning [2001] 1 All ER (Comm) 530 and C v D [2008] Bus LR 843; Arsanovia Ltd v Cruz City 1 Mauritius Holdings [2013] 2 All ER (Comm) 1; Habas Sinai Ve Tibbi Gazlar Istihsal Endustrisi AS v VSC Steel Co Ltd [2014] 1 Lloyd’s Rep 479 at [101]; Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] 1 Lloyd’s rep 269

[2] Hamlyn & Co v Talisker Distillery [1894] AC 20; XL Insurance Ltd v Owens Corning [2001] 1 All ER (Comm) 530 at p. 543b; C v D [2007] 2 All ER (Comm) 557 at [50]; Shashoua v Sharma [2009] 2 All ER 477 at [29]

[3] Baker Mellors Chalmers and Lavers on FIDIC Contracts, Law and Practice at 2.126, 2.140, 2.145

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