14 Oct 2020
When no choice of law governing an arbitration agreement is expressly given, how is the governing law of that arbitration agreement determined? Under English law, can either the law of the seat or the law of the underlying contract be said to govern if one has been expressly chosen? The UK Court of Appeal attempted to clarify the analysis for answering these questions in its judgment in Enka on 29 April. While the UK Supreme Court upheld the Court of Appeal’s ultimate finding last week, it applied fundamentally different reasoning, adding a new dimension to the sometimes-murky analysis on this significant issue in international arbitration practice.
For UK courts, the analysis to determine the law of the arbitration agreement absent an express choice is the test laid out in the Sulamerica case. The Sulamerica test asks: (1) whether there an express choice of law applicable to the arbitration agreement; (2) if not, then whether there is an implied choice of law; and (3) if not, then with what system of law does the arbitration agreement have its closest connection? In trying to clarify the application of this test in Enka, the Court of Appeal’s judgement by Lord Justice Popplewell added a “strong presumption” that when an express choice of law to govern the arbitration agreement is absent, the law of the seat should be seen as the parties’ choice, absent evidence to the contrary. Such a clear presumption would have laid to rest much of an area that has long been the subject of much debate and interpretation. However, in a 3-2 decision, the Supreme Court dismissed the appeal, agreeing with the outcome of the lower court’s decision, while at the same time overturning Lord Justice Popplewell’s attempt to simplify the application of the Sulamerica test. Yet in doing so, a ray of clarity has still been shone on this vital but historically grey area.
In a 115-page judgement by Justices Lord Hamblen and Lord Leggatt, the Supreme Court’s analysis of an arbitration agreement silent as to the choice of governing law first looked to whether a choice of law governing the underlying contract was made. If expressly stated, it said that this choice of law can be presumed to apply to the law governing the arbitration agreement as part of, though also separable from, the contract. However, in the event that the parties specified neither a governing law for the contract nor a law applicable to the arbitration agreement, the analysis returns to the third prong of the Sulamerica test – which system of law has the closest connection to the arbitration agreement. Note that in this situation, the law of closest connection to the underlying contract is no longer part of the analysis.
The Supreme Court’s reasoning in its opinion shifts the Court of Appeal’s strong presumption from the law of the seat to the law underlying the contract as the governing law of the arbitration agreement in the absence of an express choice. Only when there is no identifiable law governing the contract can the choice of law be the law of the seat. Even then, the law of the seat can only be presumed to apply to the arbitration agreement after the closest connection test has been established. The Supreme Court found that a blanket presumption that the law of the seat applies is not warranted under the English Arbitration Act 1996, even though in cases such as the one at hand, applying the law of the seat is the correct outcome. The Supreme Court noted that the more detailed analysis on the choice of seat is necessary as there can be exceptions to such a presumption.
In Enka, the Supreme Court provided some much-needed clarity to the analysis applied in situations where the parties have not stated a law governing the arbitration agreement. Such situations are quite frequent and seen as recently as the Kabab-ji v. Kout Foods case (see Spring 2020 Resolver, p 15). While the Court of Appeal’s attempt to establish a presumption in favour of the law of the seat would have given practitioners a new bright line standard, the nuanced approach the Supreme Court has chosen extends parties the opportunity to argue that an implied choice of governing law was made or that there is a closer connection to a legal system other than the seat. One clear point of certainty that Enka has given us is that when drafting international commercial contracts, parties would be well served in taking time and trouble to choose and include express governing law in their arbitration agreements.
Mercy McBrayer MCIArb, Research and Academic Affairs Manager, CIArb