Determining the Proper Law of Arbitration Agreement: English Court of Appeal Decides

There are three main systems of laws applicable to an international arbitration: (a) proper law of the contract, i.e. the law governing the substantive rights and obligations of parties under the main contract; (b) proper law of arbitration agreement, i.e. the law governing issues such as the validity, interpretation and existence of the arbitration agreement; and (c) curial law, i.e. the law governing the procedural aspects of arbitration. Curial law is the law of the seat of arbitration. Ordinarily, international contracts stipulate the proper law of the main contract and the seat of arbitration (and thus, the curial law). However, parties rarely choose the proper law of arbitration agreement.

Against this background, an issue that arises frequently, across jurisdictions, is the test for determining the proper law of the arbitration agreement. Where the parties do not choose either the proper law of contract or the proper law of arbitration agreement and only designate the seat, it is the curial law which is invariably held to be the proper law of arbitration agreement. The complexity arises when parties choose the proper law of contract and a different curial law (by designating the seat or otherwise). In such case, determining the proper law of arbitration agreement involves a choice between the proper law of the contract and the curial law (French law and Swiss law offer two other sui generis solutions). The English Court in a magnificent decision in Enka v. Chubb has sought to put the issue to rest. In this post, I discuss the findings of the Court of Appeal on this issue. I adopt the terminology of the Court in Enka and will refer to the proper law of contract as ‘main contract law’ and the proper law of arbitration agreement as ‘AA law’.

Prior to Enka, a 2008 decision of the Court of Appeal in C v. D had accorded primacy to the curial law for deciding the AA law. The Court held that the test to determine the AA law is to “discover the law with which the agreement to arbitrate has the closest and most real connection” and “it would be rare for the law of the (separable) arbitration agreement to be different from the law of the seat of the arbitration.” Subsequently, the Court of Appeal in Sulamérica Cia Nacional de Seguros SA v Enesa Engelharia SA discarded the C v. D test. The Court held that the AA law is to be determined by undertaking a three-step inquiry into (i) express choice, (ii) implied choice and (iii) closest and most real connection. Where the arbitration agreement forms a part of the main contract, “[a] search for an implied choice of proper law to govern the arbitration agreement is therefore likely (as the dicta in the earlier cases indicate) to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract, unless there are other factors present which point to a different conclusion.

In Enka, the Court of Appeal engaged in a comprehensive analysis of the existing authorities on this issue and restored the primacy of curial law in determining the AA law. The facts of the case are these: the contract contained an arbitration agreement designating London as the seat of arbitration and the parties agreed that the main contract law was Russian law. The first respondent (‘Chubb’) filed proceedings before the Moscow Arbitrazh Court against Enka (and 10 other parties), which, according to the appellant (‘Enka’), were in breach of the arbitration agreement. Enka instituted proceedings before the High Court of Justice seeking an anti-suit injunction against Chubb and its associate companies. The High Court refused to grant the injunction relying on forum non conveniens. In Enka’sappeal, two issues fell for the Court of Appeal’s consideration.

The first issue was whether an English court has the jurisdiction to grant an anti-suit injunction to restrain foreign court proceedings initiated in breach of a London arbitration clause. Popplewell LJ held that a London arbitration clause empowers English courts to exercise all powers under law, and not merely supervisory jurisdiction under the English Arbitration Act, 1996. (Interestingly, the Court termed the English court’s jurisdiction as ‘curial jurisdiction’ and rejected the often-used phrase – ‘supervisory jurisdiction’ – to more accurately indicate the scope of its powers). Consequently, this includes the power to grant anti-suit injunctions.

The second and more crucial issue (for the purposes of this post) was whether the AA law in this case was Russian law or English law. The Court held that the AA law is to be determined in accordance with the three-step enquiry under English common law as held in Sulamerica, viz. (i) express choice; (ii) implied choice; (iii) closest and most real connection. Where the arbitration agreement does not expressly provide for the AA law, “there is a strong presumption that the parties have impliedly chosen the curial law as the AA law.” This general primacy of curial law may yield to the main contract law only if there are“powerful countervailing factors” in the facts of a given case. Two bases of the Court’s reasoning are particularly noteworthy.

First, the Court held that the presumption of AA law being the same as the curial law is a matter of implied choice and not – as was held in C v. D – an application of the closest and real connection test. Enka, therefore, envisages a stronger link between the seat of arbitration and the AA law than what was contemplated in C v. D.

Second, the overlap between the scope of curial law and that of AA law “strongly suggests” that the two should be the same. The Court noted that the provisions of the [English] Arbitration Act, 1996, which would apply where the seat of arbitration is London, do not merely affect the procedural rights of parties. They govern substantive aspects such as the formal validity of the arbitration agreement as well. In each case where parties choose London as the seat of arbitration, there will be an overlap between the scope of curial law and of AA law. Interestingly, and rightly, the Court found that this overlap is not unique to English law, since the English legislation is modeled on the UNCITRLA Model Law on International Commercial Arbitration. Given this scenario, parties must be intended to have chosen the same system of law to apply to “two closely related aspects of their relationship”.

It is submitted that parties’ presumed intention of subjecting the arbitration agreement and curial law to the same legal system is also reflected in the Convention on Recognition and Enforcement of Foreign Arbitral Awards, 1958. Article V(1)(a) of the Convention, which is the choice of law provision governing the validity of the arbitration agreement, directs the enforcement court to apply the curial law where parties have failed to choose the AA law. Determining the validity of the arbitration agreement in accordance with curial law would align the methodology of curial courts and the arbitral tribunal along with that of enforcement courts. This is not to suggest that the outcome would necessarily be the same in the two instances (the Dallah case is a classic example of the curial court and the enforcement court arriving at opposite conclusions). It would nonetheless diminish the possibility of inconsistent results at the two stages of arbitration.

Consequently, Enka rightly tilts the scale back in favour of the curial law for determining the AA law. It also reinforces the distinction between two distinct features of an international contract, i.e. the rights and obligations of parties as to the substance of the dispute on one hand and all aspects relating to the dispute settlement mechanism on the other.

Published by Sharad Bansal

Advocate, Bombay High Court

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