International arbitration – which system of law applies?

International construction contracts commonly provide for arbitration as the dispute resolution mechanism. Arbitration is perceived as potentially allowing for a tribunal with more industry expertise (and potentially more independence) than the local courts.

But which system of law governs the arbitration agreement, in particular, its validity and scope? The Supreme Court’s recent decision in Enka vs Chubb has brought some certainty in English law on this tricky question.

In June 2012 Enka was employed as a subcontractor in the construction of a power plant in Russia. Russian law governed the subcontract (albeit there was no express governing law clause). Importantly, while the subcontract provided for disputes to be resolved by arbitration, it failed to specify the law governing the arbitration. However, it did state that “the place of arbitration shall be London, England”.

Following a fire in February 2016, which left the power plant severely damaged, Chubb, as the owner’s insurer, paid out around $400,000,000. Chubb brought subrogated proceedings against Enka in Russia alleging liability for the fire.

Enka subsequently issued separate proceedings in England, seeking an order that Chubb discontinue the Russian proceedings as the dispute was subject to the arbitration agreement in the subcontract.

Arbitration provisions in international contracts such as these are treated as, in effect, a contract within a contract. This raises the possibility of three systems of law coming into play. Firstly, the law governing the dispute under the contract, secondly the law governing the arbitration agreement, and thirdly the law governing the arbitral process. The latter is often referred as the law of the “seat” of the arbitration and is the law governing procedural issues such as rights of appeal, and so on­­­.

Arbitration provisions in international contracts are treated as, in effect, a contract within a contract. This raises the possibility of three systems of law coming into play

The importance of which law governed how the arbitration agreement should be construed was that Chubb argued that if it was Russian law, the claim it was pursuing fell outside the scope of the arbitration agreement and so the Russian courts could determine it.

The Supreme Court held (by a majority) that as the contract and the arbitration agreement within it contained no choice of law clause, the validity and scope of the arbitration agreement was governed by the law of the chosen seat of arbitration (English law) rather than the law that governed the contract (Russian law). It therefore upheld Enka’s injunction restraining Chubb from proceeding against Enka in Russia.

In making this decision, the Supreme Court set a number of principles regarding the determination of the governing law applicable to arbitration agreements:

• The law applicable to the arbitration agreement may be different from that which governs the other parts of the contract.
• The law applicable to an arbitration agreement will be either the law chosen by the parties, or in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected.
• Where there is no express choice of law to govern the arbitration agreement, an express choice of law governing the contract to which the arbitration agreement forms part will generally apply.
• The choice of a different country as the seat of the arbitration is not (by itself) sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.
• However, there are factors which may negate such an inference and imply that the arbitration agreement was intended to be governed by the law of the seat of the arbitration, such as: any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration agreement will also be treated as governed by that country’s law; the existence of a serious risk that, if governed by the same law as the contract, the arbitration agreement would be ineffective; or if there is evidence that the seat was deliberately chosen as a neutral forum for the arbitration.
• Where there is no express choice of law to govern the contract, a clause providing for arbitration in a particular place does not by itself mean that the contract (or the arbitration agreement) is intended to be governed by the law of that place.
• In the absence of any express choice of law to govern the contract or the arbitration agreement, the arbitration agreement shall be governed by the law with which it is most closely connected. If the parties have chosen a seat of arbitration, this will generally be the law of that seat, even if this differs from the law applicable to the parties’ substantive contractual obligations.

Despite the clarity that this decision brings to the principles governing which system of law governs an arbitration agreement, it also serves to emphasise the importance of expressly addressing these points in the contract and the arbitration agreement. Otherwise, significant amounts of money can be spent arguing about what is the most appropriate forum to determine the dispute – unless of course you like spending time in the Russian courts.

Steven Carey is head of the construction, engineering and projects team at Charles Russell Speechlys