How to ascertain the proper law of an arbitration agreement: The UK Supreme Court weighs in

12 October 2020

1. In Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb [2020] UKSC 38, the UK Supreme Court (“UKSC”) had occasion to consider the correct approach to determining the proper law of an arbitration agreement.

2. In a well-drafted contract, there are 2 primary possible candidates: the law of the seat, or the law designated by the choice of law clause in the underlying contract.

3. The exact legal position is unclear.  On the one hand, there are authorities supporting the notion that the proper law is the law designated by the choice of law clause:-

(a) In Sulamerica v Enesa Engenharia [2013] 1 W.L.R. 102,[1] the English Court of Appeal held that (at §§11, 26):-

“It has long been recognised that in principle the proper law of an arbitration agreement which itself forms part of a substantive contract may differ from that of the contract as a whole, but it is probably fair to start from the assumption that, in the absence of any indication to the contrary, the parties intended the whole of their relationship to be governed by the same system of law. It is common for parties to make an express choice of law to govern their contract, but unusual for them to make an express choice of the law to govern any arbitration agreement contained within it; and where they have not done so, the natural inference is that they intended the proper law chosen to govern the substantive contract also to govern the agreement to arbitrate.”

“In the absence of any indication to the contrary, an express choice of law governing the substantive contract is a strong indication of the parties' intention in relation to the agreement to arbitrate. 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.”

(b) A similar approach has been adopted in Arsanovia Ltd v Cruz City 1 Mauritius Holdings [2013] 1 C.L.C. 1040.

(c) The position has been neatly summarized by Habas Sinai [2014] 1 Lloyd’s Rep 479, at §101 (See also Russell on Arbitration (24th edn., 2015), at §2-120):-

“(1) Even if an arbitration agreement forms part of a matrix contract (as is commonly the case), its proper law may not be the same as that of the matrix contract.

(2) The proper law is to be determined by undertaking a three-stage enquiry into (i) express choice, (ii) implied choice and (iii) the system of law with which the arbitration agreement has the closest and most real connection.

(3) Where the matrix contract does not contain an express governing law clause, the significance of the choice of seat of the arbitration is likely to be “overwhelming”. That is because the system of law of the country seat will usually be that with which the arbitration agreement has its closest and most real connection.

(4) Where the matrix contract contains an express choice of law, this is a strong indication or pointer in relation to the parties’ intention as to the governing law of the agreement to arbitrate, in the absence of any indication to the contrary.

(5) The choice of a different country for the seat of the arbitration is a factor pointing the other way. However, it may not in itself be sufficient to displace the indication of choice implicit in the express choice of law to govern the matrix contract.

(6) Where there are sufficient factors pointing the other way to negate the implied choice derived from the express choice of law in the matrix contract the arbitration agreement will be governed by the law with which it has the closest and most real connection. That is likely to be the law of the country of seat, being the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective.”

4. On the other hand:-

(a) There is academic support in Hong Kong which supports the proposition that if an agreement contains a choice of law clause and identifies a seat of arbitration, the Hong Kong court should conclude that the arbitration agreement is governed by the law of the seat of arbitration: See Graeme Johnston and Paul Harris SC, The Conflict of Laws in Hong Kong (3rd Edition), page 676, §10.007. 

(b) Thus, in the UK Supreme Court decision of AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] UKSC 35; [2013] 1 W.L.R. 1889, it was common ground between the parties, for the purpose of the hearing before the Supreme Court, that the London arbitration was governed by English law, even though the underlying contract was expressed to be governed by Kazakh law (at §6; Joseph QC, Jurisdiction and Arbitration Agreements and their Enforcement (3rd edn., 2015), at §6.35).

5. The Supreme Court unanimously held that if the parties have expressly or impliedly chosen the law of the contract, then the chosen law applies to the arbitration clause therein.

6. The five Justices of the Supreme Court were however unable to agree on what the default position should be in the absence of such an express or implied choice.

7. The majority (Lords Hamblen, Leggatt and Kerr) took the view that the court must determine the law with which the arbitration agreement is most closely connected; in contrast, the minority took the view that the court has to determine the law with which the contract itself is most closely connected.

8. The UK Supreme Court’s decision is consistent with the earlier HK decisions in Klöckner Pentaplast GMBH & Co. KG v. Advance Technology (HK) Co. Ltd:-

(a) See Klöckner Pentaplast GMBH & Co. KG v. Advance Technology (HK) Co. Ltd [2011] 4 HKLRD 262 (holding that the wording of the contract containing the arbitration agreement indicated that the agreement was governed by the governing law of the contract (German law), not the law of the seat of the arbitration (PRC law)).

(b) In Klöckner Pentaplast, the first instance judge relied on the proposition that “If there is an express choice of law to govern the contract as a whole, the arbitration agreement will also normally be governed by that law: this is so whether or not the seat of the arbitration is stipulated, and irrespective of the place of the seat” (at §24). 

(c) Tang V-P (as Tang N.P.J then was), in refusing leave to appeal, expressly agreed with this approach (Klöckner Pentaplast GmbH & Co KG v Advance Technology (HK) Co Ltd (HCMP 1836/2011, 19 October 2011), at §8).

9. Of course, one still has to consider if the Tribunal would apply the English or Hong Kong choice of law principles in the first place. Nonetheless, The UK Supreme Court has provided welcome clarity to the state of the law.

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[1] On the facts, the Court of Appeal preferred to apply English law (the law of the seat), rather than Brazilian law (the law governing the contract), because (inter alia) Brazilian law might affect the validity of the arbitration agreement (at §30).

This article is authored by José-Antonio Maurellet SC and Tom Ng.

 

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