Developments in contract: Arbitration clauses

Since publication of this article the Supreme Court has published its judgment. Our commentary on that decision can now be found here.

Principles

• An arbitration clause is a separate agreement from the contract in which it appears. It can therefore be subject to a different governing law from the rest of the contract.
• The governing law of the arbitration agreement will be determined by applying the three-stage approach under English common law conflict of law rules.
  • First, if the parties have made an express choice of law for the arbitration agreement, that law applies.
  • Secondly, if there is no express choice of law, where the parties have selected a seat of arbitration, there is a “strong presumption” that the parties intended to imply that the arbitration agreement be governed by the law of the seat. This presumption may be displaced but only if there are “powerful countervailing factors” pointing to another law.
  • Thirdly, if no seat is selected, the court will determine with which system of law the arbitration agreement has its closest and most real connection.

Recent developments

• The risks of not choosing an express governing law of the arbitration agreement were illustrated by a recent decision of the Paris Court of Appeal relating to an arbitration between Kabab-Ji and Kout Food Group. This upheld an arbitral award, despite a finding by the English Court of Appeal in January that the defendant Kout was never a party to the arbitration agreement.
• The parties, one of which later became a subsidiary of Kout, had chosen English law to govern the contract and Paris as the seat of any arbitration. The English Court of Appeal held that English law governed the arbitration, under which Kout was not bound by the arbitration. However, the French court held that French law applied and that Kout was bound by the award.
• More recently, in Enka v Chubb, a differently-constituted panel of the Court of Appeal delivered judgment on a similar issue. They sought to impose “clarity and order” to the process of determining the proper law of the arbitration agreement. The dispute arose from Enka’s application for an anti-suit injunction to restrain Chubb from pursuing court proceedings in Russia in circumstances where the parties had agreed to arbitration.
• The Court in Enka v Chubb had to determine two issues. First, whether the English Court was the appropriate forum to grant an anti-suit injunction. Secondly, what law governed the arbitration agreement.
• On the first issue, the Court of Appeal was unequivocal that the English Court as the court of the seat was necessarily an appropriate court to grant anti-suit relief and questions of forum conveniens did not arise.
• On the second issue, the Court observed that the “current state of the authorities does no credit to English commercial law, which seeks to serve the business community by providing certainty.” They sought to provide clarity by saying that there was a “strong presumption” that, in the absence of an express choice of law, the law of the seat would govern the arbitration agreement.
• The decision in Enka v Chubb is reported to have been appealed to the Supreme Court, so definitive guidance may be provided in the near future.

What this means

• Contracts should always have an express choice of law for the arbitration agreement. This should be separate and in addition to the choice of law governing the main contract.
• For parties who have already entered into their contracts but have not made an express choice of law for the arbitration clause, in most cases the arbitration agreement will be governed by the law of the seat.

For a more detailed analysis of the Enka Court of Appeal decision, see here.

On 8 July 2020, the UK Supreme Court granted permission for Kabab-Ji to appeal the decision not to enforce the arbitral award against Kout Food Group. We will bring you an update when that appeal is heard.