The proper law of an arbitration agreement – the Law Commission revisits Enka v Chubb

The Law Commission has published a second consultation paper on three areas of possible reform to the Arbitration Act 1996 (‘the Act’): the proper law of the arbitration agreement; challenges to awards under Section 67 on the basis that the tribunal lacked jurisdiction; and discrimination in the context of arbitration.

The first issue was not covered in the Law Commission’s first consultation paper on reform to the Act, but it has been the subject of much debate following the decision of the Supreme Court in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, and responses to the first consultation paper encouraged review of this area.

The decision in Enka v Chubb

In Enka v Chubb, the Supreme Court considered how the proper law of an arbitration agreement should be determined. The question has arisen on a number of occasions, because parties do not expressly identify the proper law of an arbitration agreement nearly as often as they expressly identify the law governing the main agreement. In the absence of an express choice of law for the arbitration agreement, the courts have been left to decide whether the parties have impliedly chosen the proper law and, if not, what law should apply.

The Supreme Court held that if there is a choice of law, express or implied, directed to the arbitration agreement, then, unless that chosen law is contrary to public policy, it will govern the arbitration agreement. If there is no such choice, but there is a choice of law, express or implied, for the matrix agreement, then that choice of law will also apply. That choice may be displaced if, for example, the law of seat provides that the arbitration agreement is governed by the law of the seat, or the law of the matrix agreement might render the arbitration agreement invalid, or non-binding, or the choice of seat together with reference to a local association or practice point towards the law of the seat. If there is no choice of law at all, the law applicable to the arbitration agreement will be that with which it has the closest and most real connection. The majority held that this would be the law of the seat of the arbitration; the minority took the view that it would be the law governing the matrix contract.

The Law Commission’s proposal for reform

This process outlined by the Supreme Court in Enka v Chubb leaves much scope for argument in many cases, and the Law Commission is proposing that a new rule be introduced into the Act to the effect that the law of the arbitration agreement is the law of the seat, unless the parties expressly agree otherwise in the arbitration agreement itself. This proposal would certainly introduce some clarity and certainty. It would also ensure that elements of English arbitration law, which are non-mandatory but regarded as desirable by English law and attractive to parties, would not be ousted without the parties expressly electing ouster.  

For example, Section 7 of the Act provides that, unless otherwise agreed by the parties, an arbitration agreement is treated as being distinct from the matrix agreement for the purposes of invalidity. This principle of separability has the advantage that if a party alleges invalidity and a tribunal determines that the matrix contract is indeed void, the arbitration clause and, therefore, the decision of the tribunal still stands. The separability principle is a feature of many but not all foreign laws.

English law is also relatively generous in terms of arbitrability and the scope of an arbitration agreement, making it more likely that the parties’ choice of resolving their disputes by arbitration seated in England is likely to be upheld.

Finally, arbitrations are, by default, private and confidential as a matter of English law (Halliburton Co v Chubb Bermuda Insurance Ltd [2020] UKSC 48), although the boundaries of the principle are unclear and there are exceptions. The Law Commission considered introducing provisions dealing with confidentiality into the Act, but concluded in its first consultation paper that the Act should not include provisions dealing with confidentiality because the necessary exceptions would mean that the provisions would leave little concrete guidance. The Law Commission felt that confidentiality is best left to the courts to develop the law on confidentiality on a case-by-case basis.

As a practical matter, it might well be said that the parties are most likely impliedly choosing the law of the seat when they choose a seat. If parties choose an arbitration seated in London, many would argue that it seems likely that they want English law, including its principles of separability, arbitrability and confidentiality, to govern the arbitration agreement. They are, after all, selecting supervision by the English courts, which will apply the mandatory sections of the Act, so they are selecting at least some aspects of English arbitration law. The parties might be surprised to discover that they are not necessarily benefitting from these other aspects of English arbitration law.   

The contrary argument is that the natural inference is that the parties expect the same law to govern both the arbitration agreement and the matrix agreement unless they have expressly chosen otherwise. The Supreme Court observed, in Enka v Chubb, that although different obligations in the same contract may be governed by different laws, there were few cases in which such a situation did exist and that “it is generally reasonable to assume that parties would intend or expect their contract to be governed by a single system of law.” The Supreme Court held that construing a choice of law for the matrix contract as extending to the arbitration agreement would provide certainty, consistency and coherence and avoid complexity and artificiality.

However, as the Supreme Court also noted, an arbitration clause may more readily than other clauses be governed by a different law because its purpose is not establishing the substantive rights and obligations of the parties but providing a mechanism by which a dispute will be resolved, and because the separability doctrine does distinguish the two agreements for the purposes of validity. The decision to extend the law of the matrix agreement to the arbitration agreement ignores the fact that the parties have selected the curial law of the seat for certain aspects of the supervision of their chosen dispute resolution mechanism. Although the Supreme Court considered that the separability doctrine is a legal doctrine unlikely to be well known to commercial parties, it is perhaps equally unlikely that the distinction between the curial law and the law governing the scope and validity of the arbitration agreement is well understood by commercial parties. It is conceivable that commercial parties simply distinguish between their substantive rights and obligations and their chosen dispute resolution mechanism, and that they conflate a choice of seat with a choice of law for the arbitration agreement.   

Another argument against the proposed reform is that a divergence between the proper law of the matrix contract and the law of the arbitration clause can cause problems, particularly for determining who is party to an agreement. 

The Law Commission also suggests in its consultation paper that the proposed reform might create the perception that English law, by extending its generous approach to arbitrability and scope, would be helping to circumvent public policy restrictions on arbitration in other laws. However, English law does include public policy defences and public policy, including limits on arbitrability, may, in any event, be raised at the enforcement stage (Article V of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards).

The Law Commission’s proposal would bring English law in line with the law of many civil jurisdictions (while causing a divergence with other jurisdictions, including Singapore). For example, in both France and Sweden, the law of the seat governs an arbitration agreement. (Other countries, such as Switzerland and the Netherlands, will treat an arbitration agreement as valid if it would be valid under the law of the seat or the law of the matrix agreement or any chosen law.) 

The proposal would also bring the English law position closer to the position under Scottish law.  Section 6 of the Arbitration (Scotland) Act 2010 provides that where an arbitration agreement provides for a Scottish seat and does not specify the law which is to govern the arbitration agreement, unless the parties otherwise agree, the arbitration agreement is to be governed by Scots law. The Law Commission’s proposal would not completely align the two positions because it would require express agreement (c.f. the Scottish position) to rebut the applicability of the law of the seat, eliminating the scope for argument as to whether there is an implied agreement that the proper law will be other than that of the seat.

Finally, the Law Commission proposal would bring the English law position in line with the position under the rules of the London Court of International Arbitration, the most preferred English arbitral institution for cross-border disputes, according to Queen Mary University’s 2021 international arbitration survey. The rules were drafted by arbitration practitioners, are popular with commercial parties and may contribute to a perception abroad that it is a principle of English law that the law applicable to the arbitration agreement is that of the seat unless agreed otherwise. 

Drafting considerations

Whatever the outcome of the Law Commission’s consultation on its proposal to reform the law as regards the proper law of arbitration agreements, the recent spate of cases on the proper law of an arbitration agreement and the consultation are reminders that parties should expressly record which law they wish to govern their arbitration agreement and/or specify which rules they would like to apply to any arbitration, as well as identifying the seat of the arbitration. When selecting the governing law of an arbitration agreement, it is important that parties consider what features of arbitration are important to them, and which governing law and/or which institution’s set of rules is most likely to deliver those features. 

If confidentiality is important to the parties (and 87 per cent of respondents to the Queen Mary University 2018 international arbitration survey stated that they believed it to be important), parties may, in addition to or as an alternative to selecting a law and/or rules which impose obligations of confidentiality, wish to incorporate express obligations of confidentiality into their arbitration agreements.  

Conclusion

International arbitration is a hugely significant form of dispute resolution that seems likely to grow as international trade expands. It is important that English arbitration law continues to be refined by statute and by the courts. The opportunity for discussion of the question of the proper law of an arbitration agreement, which can have significant implications for arbitrating parties, is to be welcomed.

Jennifer Haywood is an arbitrator at Serle Court
serlecourt.co.uk