English Court of Appeal Issues Key Decision on Law Governing Arbitration Agreements

 

by Donny Surtani (Surtani Arbitration and Mediation, Toronto / Crown Office Chambers, UK)

 

The English Court of Appeal has granted an injunction restraining a Russian party from litigating in Russia (Enka v Chubb and ors [2020] EWCA Civ 574) in breach of an ICC arbitration agreement. The judgment is one of a number of recent high authorities on the issue of what law governs arbitration agreements. This tricky but often underappreciated issue continues to generate controversy and inconsistent judicial treatment, both between and within jurisdictions.

 

Background

The applicant (Enka) was party to a contract to install equipment at a Russian power plant. Following fire damage, the customer claimed $400 million from its insurer, Chubb, which became subrogated to its claims against Enka.

Chubb sued Enka in Russia, despite Enka’s contract with its customer (into whose shoes Chubb had stepped for the purpose of bringing the claim) providing for ICC arbitration in London. Enka’s application for an anti-suit injunction was rejected by the English High Court, including on forum conveniens grounds, stating that it was for the Russian Court to determine the scope and applicable law of the arbitration agreement, and whether the Russian proceedings breached it.  The High Court also noted that whilst Enka contended that arbitration in London was the proper forum for any such dispute, Enka had taken no steps to commence such an arbitration, and this was a “very significant factor” counting against it.

 

The Court of Appeal’s decision

The Court of Appeal (Flaux, Males, and Popplewell LJJ) disagreed with the High Court’s decision.  It held that forum conveniens was irrelevant, because England was “necessarily” an appropriate forum to hear an application for an anti-suit injunction relating to a London-seated arbitration agreement.

The Court of Appeal also disagreed that Enka’s failure to commence arbitration in London was a “very significant factor” in deciding whether or not to grant an injunction – on the contrary, it was not relevant at all.  The Court emphasised that the jurisdiction to grant an anti-suit injunction in support of an arbitration agreement arises whether or not an arbitration is on foot or in contemplation, because “an arbitration agreement contains the independent negative promise not to commence proceedings anywhere in the world”. That negative promise could be enforced whether or not the party also wished to invoke the positive obligation to submit to arbitration.

On the question of whether the Russian litigation amounted to a breach of the arbitration agreement, the Court of Appeal disagreed with the High Court on its deference to the Russian Court, stating it was for the curial court (the court of the seat of arbitration) to determine whether the foreign proceedings breached the arbitration agreement.

That would involve determining the law of the arbitration agreement (the “AA law”), according to which matters relating to the validity and interpretation of the arbitration agreement must be decided.  Noting the inconsistencies in some of the past authorities in this area, Popplewell LJ stated that “the time has come to impose some order and clarity” on this issue. 

His test (paragraph 105) focuses first on whether there is an express or implied choice of law for the AA specifically, as distinct from the main contract.  If not, the second stage is to ask whether a choice of law in the main contract should be treated as a choice of AA law as a matter of construction, applying the principles of construction of the main contract law. (However, he noted at paragraph 90 that it would only be “the minority of … cases” that this test would be met.)  Otherwise, in the third stage there would be a strong presumption that the curial law (the law of the seat) should govern the AA, but even this general rule “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”.

On the facts of this case, the Court found that there was no express choice of AA law, that this was not “one of those rare cases” where the proper law of the substantive contract was also chosen to be the AA law, and therefore that the AA law should coincide with the curial law, i.e. English law. On that basis, it found that the Russian litigation was pursued in breach of the arbitration agreement, and that Enka should have its anti-suit injunction.

The judgment is available here. (Note: Chubb has obtained permission to appeal to the UK Supreme Court, which is due to hear the case in late July 2020.)

 

Contrasting decisions

Interestingly, Enka is not the only recent English Court of Appeal decision to have considered these issues. In Kabab-Ji S.A.L. v Kout Food Group [2020] EWCA Civ 6, the Court of Appeal refused to enforce an ICC Award issued by a tribunal seated in Paris. The contract contained an English choice of law clause and a Paris seat. The respondent resisted enforcement on the basis that English law applied to the arbitration agreement, and under an English law analysis it never became party to the arbitration agreement, whilst the claimant contended that the law of the seat should govern the arbitration agreement, with the effect that the respondent was bound.

Whilst the decision was handed down just a few months before Enka, and thus did not have the benefit of Popplewell LJ’s formulation, one member of the Court (Flaux LJ) served on both panels. The decision does not contradict Enka, since the Court found on the wording of the particular agreement that the express choice of English law covered the arbitration agreement as well as the main contract (effectively one of the “rare cases” in stage 2 of the Enka test), and thus that the respondent was not made a party to it.

However, that is not the last word on the matter. It has been reported that the Paris Court of Appeal handed down a decision in June 2020, dismissing the respondent’s set-aside application, and holding that there was no express choice of law in the arbitration agreement. Consistently with stage 3 of the Enka test, it held that the tribunal had been right to apply the law of the seat as the AA law, and thus that the respondent was properly a party to it.

 

The Canadian perspective

As Canadian centres become ever-more popular seats for arbitration specified in cross-border commercial contracts, issues such as those arising in Enka and Kabab-Ji are increasingly likely to present themselves in Canadian courts.

The question of what law should govern an arbitration agreement is of course not new to Canada, as it can arise in both the international and the inter-provincial context (see, e.g., Re O’Brien and Canadian Pacific Railway (1972), 1972 CanLII 807 (SK CA), 25 D.L.R. (3d) 230 at 233-35 (Sask. C.A.) However, as the discussion in Enka makes clear, courts’ perspective has evolved over time, so the older Canadian precedents should be handled with some care. More recent decisions have (properly) given greater recognition to the idea that an arbitration agreement should be treated distinctly from the main contract. However, past case law has occasionally sent mixed signals as to the relative importance of (a) the substantive law of the main contract, and (b) the choice of seat, in determining the AA law (where there is no express or implied choice). Popplewell LJ’s analysis in Enka (should it survive the upcoming Supreme Court appeal) should therefore be of strong persuasive value to parties considering litigating similar issues in Canada.