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Hold on to your seats: UK Supreme Court ends the argument about the law governing arbitration agreements

22 October 2020. Published by Charles Allen, Partner

Identifying what law governs a contractual term requiring the parties to arbitrate their disputes, rather than taking them to court, can be profoundly important.

For example, depending on which law applies, the clause may be valid or invalid, awards made pursuant to that clause may be enforceable or unenforceable, and particular disputes arising between the parties may or may not be within its scope.

Laymen might roll their eyes and ask why this is an issue at all, noting that the parties could just specify which law governs the clause.

It is a fair point.  Why not just put the question beyond doubt, especially if the law governing the arbitration clause is intended to be different from the law governing the contract as a whole, or the clause specifies arbitration in a third-party jurisdiction chosen because it is deemed safe and neutral?  

Well, they can, and the Hong Kong International Arbitration Centre, for example, has express language in its standard administered arbitration clause to that effect, but still most parties do not take this simple step.

It should be remembered that dispute resolution clauses are generally regarded as "midnight clauses", drafted or inserted after everything else has been agreed, and frequently little or not attention is paid to this point.

Whatever the rights and wrongs, the UK Supreme court has now rendered a majority judgment in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38 which not only ends years of argument on the issue in England, but – because it was decided in accordance with English common law principles, rather than on the basis of EU law – will have implications for the common law world generally, including in Hong Kong and Singapore.

The majority's decision in this case runs to 64 pages (and the minority judgment adds another 49) but a helpful summary of the main principles – reading almost as if it were a restatement - is provided.  These are:
 
  1. The law applicable to the arbitration agreement will be:

    (a) the law chosen by the parties to govern it, or 

    (b) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected.

  2. Whether the parties have agreed on a choice of law to govern the arbitration agreement is ascertained by construing the arbitration agreement and the contract containing it, as a whole,applying the rules of contractual interpretation of English law (or Hong Kong, Singapore etc law) as the law of the forum.

  3. Where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract as a whole will generally apply to an arbitration agreement, which forms part of the contract.

  4. The choice of a different country as the seat of the arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.

  5. Additional factors which may, however, negate such an inference and may in some cases imply that the arbitration agreement was intended to be governed by the law of the seat are: 

    (a) any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration will also be treated as governed by that country’s law; or 

    (b) the existence of a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective. 

    Either factor may be reinforced by circumstances indicating that the seat was deliberately chosen as a neutral forum for the arbitration.

  6. Where there is no express choice of law to govern the contract, a clause providing for arbitration in a particular place will not by itself justify an inference that the contract (or the arbitration agreement) is intended to be governed by the law of that place.

  7. In the absence of any choice of law to govern the arbitration agreement, the arbitration agreement is governed by the law with which it is most closely connected. Where the parties have chosen a seat of arbitration, this will generally be the law of the seat, even if this differs from the law applicable to the parties’ substantive contractual obligations.

  8. The fact that the contract requires the parties to attempt to resolve a dispute through good faith negotiation, mediation or any other procedure before referring it to arbitration will not generally provide a reason to displace the law of the seat of arbitration as the law applicable to the arbitration agreement by default in the absence of a choice of law to govern it.

Of these factors, the most significant are, first, the somewhat obvious, but no less significant for that, point that if the contract as a whole is governed by, say, Hong Kong law, yet the seat of arbitration is identified as Singapore, then the starting point is that the arbitration agreement remains governed by Hong Kong law, and the choice of Singapore as the seat does not in principle change that.

Second, if there is no choice as to the governing law of the arbitration agreement, then the clause will be governed by the law of the place where the seat is located.

Despite the detailed analysis in the majority judgment, these are, ultimately, simple rules to live by.  It still does not excuse the parties from adding a few simple additional words to their contract, for instance "The law of this arbitration clause shall be Hong Kong (or English or Singapore) law".

As the majority judgment in Enka points out, the case got from the High Court to the Supreme Court in breakneck speed.  But think how easily the uncertainty and expense endured by both parties could easily have been avoided by some additional drafting, even if it was at midnight.