WHAT IS THE "DEFAULT" LAW OF THE ARBITRATION AGREEMENT IN THE ABSENCE OF ANY EXPRESS CHOICE OF LAW?
One of the more vexing issues in international arbitration is the issue of what should the governing law of the arbitration agreement be in the absence of any specific choice of law by the parties. In the United Kingdom Supreme Court decision of Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 (“Enka v OOO”), this issue led to a split decision by the United Kingdom Supreme Court.
Three systems of law. When it comes to an agreement to arbitrate, there are three potentially different systems of law that are engaged:
1. The law governing the substance of the dispute, which is in general the law applicable to the contract from which the dispute arose;
2. The law governing the agreement to arbitrate, which deals with the validity and scope of the arbitration agreement; and
3. The law governing the arbitration process, which is generally the law of the seat of the arbitration.
Each of those systems of law may differ from each other. Thus, some parties make clear in the contract which system(s) of law they are adopting to avoid any potential ambiguities.
However, sometimes the parties omit to designate what is the system of law governing the agreement to arbitrate. This is by no means rare.
This may lead to disputes over whether the law governing the agreement to arbitrate should be the law governing the contract, or whether the law governing the agreement to arbitrate should be the law governing the seat of the arbitration.
This situation can be further complicated if there is no choice of governing law of the main contract. And that is what occurred in Enka v OOO.
The majority approach in Enka v OOO. In Enka v OOO, the majority judgment delivered by Lord Hamblen and Lord Legatt (with whom Lord Kerr agreed) decided that in general, the law governing the validity and scope of the arbitration agreement should follow the law of the seat of arbitration if there is no choice of law governing the contract or the arbitration agreement. The approach is summarised at [171] Enka v OOO, which we excerpt below:
“170. It may be useful to summarise the principles which in our judgment govern the determination of the law applicable to the arbitration agreement in cases of this kind:
i) Where a contract contains an agreement to resolve disputes arising from it by arbitration, the law applicable to the arbitration agreement may not be the same as the law applicable to the other parts of the contract and is to be determined by applying English common law rules for resolving conflicts of laws rather than the provisions of the Rome I Regulation.
ii) According to these rules, 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.
iii) 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 as the law of the forum.
iv) Where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract.
v) 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.
vi) 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.
vii) 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.
viii) 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.
ix) 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.
171. Applying these principles, we have concluded that the contract from which a dispute has arisen in this case contains no choice of the law that is intended to govern the contract or the arbitration agreement within it. In these circumstances the validity and scope of the arbitration agreement (and in our opinion the rest of the dispute resolution clause containing that agreement) is governed by the law of the chosen seat of arbitration, as the law with which the dispute resolution clause is most closely connected. We would therefore affirm - albeit for different reasons - the Court of Appeal’s conclusion that the law applicable to the arbitration agreement is English law.”
(our emphasis added in bold)
It is important to note that the majority specifically disagreed with the England and Wales Court of Appeal that there should be a “strong presumption” that the parties would have impliedly chosen the law of the seat of the arbitration to govern the arbitration agreement ([60] Enka v OOO).
The minority approach. Lord Burrows and Lord Sales dissented. However, it bears highlighting that Lord Burrows (with whom Lord Sales agreed) made clear there are a number of clear and undisputed points: while we do not set them out in full here, they are set out in [193] Enka v OOO.
To start, while the majority found that there was no choice of law governing the main contract or the arbitration agreement ([171] Enka v OOO), Lord Burrows (with whom Lord Sales agreed) found that Russian law governed the main contract ([228] Enka v OOO).
Lord Burrows found that “[a]lthough the decision as to the proper law of the arbitration agreement turns on the interpretation of the main contract and the arbitration agreement, there are a number of general reasons (ie reasons that do not turn on the interpretation of these particular contracts) which support the view that, absent an express choice of law in the arbitration agreement, there is a presumption (or general rule) that the proper law of the main contract is also the proper law of the arbitration agreement; and there is no such presumption (or general rule) that the law of the seat is the proper law of the arbitration agreement. In short, these are reasons for favouring the “main contract” rather than the “seat” approach.” ([229] Enka v OOO).
Lord Burrows summarised the approach at [257] Enka v OOO, which we set out below for ease of reference:
“257. The reasoning above enables me to state the common law on the proper law of an arbitration agreement (contained in a main contract) in the following straightforward and principled way which (had this view found favour) would have been easy to apply and would have been one way of providing the clarity that Popplewell LJ was rightly seeking:
(i) The proper law of the arbitration agreement is to be determined by applying the three stage common law test. Is there an express choice of law? If not, is there an implied choice of law? If not, with what system of law does the arbitration agreement have its closest and most real connection?
(ii) Where there is an express proper law clause in the arbitration agreement (which is rare) that will be determinative.
(iii) Where there is no such clause, there is a presumption or general rule that the proper law of the main contract is also the proper law of the arbitration agreement. That presumption or general rule can assist the enquiry at any of the three stages of the common law approach. (It is most appropriate to use the language of a presumption where one is considering the parties’ choice at the first two stages of the enquiry - ie it is a presumption of the parties’ intentions - and to use the language of a general rule where one is considering the third stage of the closest and most real connection.)
(iv) That presumption may most obviously be rebutted, or there is an exception to that general rule, where the standard “validation principle” (of the English conflict of laws) applies ie where the law of the seat (or another relevant jurisdiction) would treat the arbitration agreement as valid whereas the proper law of the main contract would treat the arbitration agreement as invalid (or, as in the Sulamérica case, not binding on one of the parties). In very rare cases that presumption would also be rebutted where it is clear that the parties have chosen the law of the seat as the proper law of the arbitration agreement even though there is no express proper law clause in the arbitration agreement.”
(our emphasis added)
Lord Sales also gave a separate dissenting judgment. Lord Sales expressly agreed with Lord Hamblen and Lord Legatt that “[w]here the main contract includes a provision stating the proper law of that contract, I agree with Lord Hamblen and Lord Leggatt that the ordinary effect of the provision is that this indicates that the parties have chosen the same proper law for the arbitration agreement” ([266] Enka v OOO), and that there is “not necessarily a sharp division between an express choice of law and an implied choice of law” for these purposes ([267] Enka v OOO).
However, Lord Sales disagreed with the majority’s approach in using the common law three-stage analysis ([280] Enka v OOO). Lord Sales also stated that “… the powerful points which Lord Hamblen and Lord Leggatt make … regarding the expectations of businesspeople to the effect that their contractual arrangements should have internal coherence (so that if the parties have chosen the proper law of the main contract they would ordinarily expect the same proper law to apply in relation to an arbitration agreement contained within it) also apply … where the circumstances mean that it is clear what the proper law of the main contract is... The main contract carries with it the legal system which governs its interpretation and application. Accordingly, the need for and expectation that there will be coherence between the main contract and the arbitration agreement contained within it means that the arbitration agreement has its closest and most real connection with the legal system which constitutes the proper law of the main contract in which it is contained.” ([286] Enka v OOO; our emphasis added).
Observations. In Enka v OOO, both the majority and minority decisions referred to the Singapore decisions of BCY v BCZ [2017] 3 SLR 357; [2016] SGHC 249 (“BCY v BCZ“) and BNA v BNB [2020] 1 SLR 456; [2019] SGCA 84 (“BNA v BNB“).
It is important to note that as set out in BCY v BCZ, the Singapore High Court was not dealing with a situation where there was no express choice of the governing law of the main contract. We also set out [49] – [65] BCY v BCZ for completeness.
“49 I agree with Moore-Bick LJ’s approach in Sulamérica that the implied choice of law for the arbitration agreement is likely to be the same as the expressly chosen law of the substantive contract. This presumption is supported by the weight of authority and is, in any event, preferable as a matter of principle.
…
65 Therefore, where the arbitration agreement is part of the main contract, I would hold, adopting Sulamérica, that the governing law of the main contract is a strong indicator of the governing law of the arbitration agreement unless there are indications to the contrary. The choice of a seat different from the law of the governing contract would not in itself be sufficient to displace that starting point.”
Similarly, as set out in [61] – [62] BNA v BNB, the situation before the Court of Appeal was not a situation where there was no express choice of law governing the main contract:
“61 In our judgment, the approaches of the courts in BCY and Sulamérica reveal that an express choice of the proper law of the main contract does not, in and of itself, also constitute the proper law of the arbitration agreement. Instead, because it is possible for parties to expressly provide for a proper law of the arbitration agreement (BCY at [59]), and because it is only a “natural inference” – and not a legal conclusion in and of itself – that in the absence of such specific provision the law governing the substantive contract is also presumed to govern the arbitration agreement (Sulamérica at [11]), the express choice of the proper law of the main contract is only a “strong indicator of the governing law of the arbitration agreement unless there are indications to the contrary”: BCY at [65].
Issue 2: Did the parties make an implied choice of proper law?
62 As we have observed above at [44]–[47], the parties accepted that the starting point at this stage of the BCY framework is that PRC law, as the governing law of the Takeout Agreement, is also the governing law of the arbitration agreement in Art 14.2. This starting point can, however, be displaced. The choice of a seat that is different from the place of the law of the governing contract is not by itself sufficient to displace the starting point: BCY at [65].”
(formatting as per original)
And in the recent decision of BBA and others v BAZ and another appeal [2020] 2 SLR 453; [2020] SGCA 53, the Singapore Court of Appeal again made clear at [66] that in Singapore law, the governing law of the agreement is merely to be taken as a starting point that could be displaced for the purposes of determining the law governing the arbitration agreement.
None of the Singapore decisions referred to in Enka v OOO specifically deal with the situation where a court is called upon to decide the law governing the arbitration agreement in the absence of an express choice of law for the law governing the arbitration agreement and the law governing the main contract.
Thus, it remains to be seen if the Singapore courts will follow either the majority or minority approach, or chart out its own approach, in light of Enka v OOO. But from the cases, it seems that the Singapore courts may favour the minority approach in terms of the starting “presumption“.
What is clear, however, is that there appears to be a “consensus“ that if the parties did not choose the law governing the arbitration agreement, but did choose the law governing the main contract, there will be a “presumption” that the law of the main contract will apply to the arbitration agreement.
Drafting considerations. While this may seem trite, it is prudent for parties who intend to enter into international arbitration agreements to make an express choice of law in respect of (a) the law governing the main contract, (b) the law governing the arbitration agreement, and (c) the law governing the arbitral process. Otherwise, there is a risk that the situation in Enka v OOO may occur.
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