Which Law Governs An Arbitration Agreement Under English Law? What Do You Need To Know?

The doctrine of separability under English law means that an arbitration clause is separate from the underlying agreement. In turn, this means that the law governing the obligations of the underlying contract can be different to the law governing the arbitration agreement. The English law position on which law governs the arbitration agreement was determined in the Supreme Court decision of Enka Insaat vs Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38. However, the law looks like it will be reformed following the Law Commission's Review of the Arbitration Act 1996. This article addresses the key things you need to know in the context of the governing law of an arbitration agreement: the current law, the reasons for reform and the likely position in the future.

1. Enka v Chubb – The current position

Absent a choice of a governing law for the arbitration agreement, the principles that determine the law applicable to that agreement are currently those set out in Enka v Chubb. An overview of this landmark decision can be found in our previous article: Arbitration agreements: Governing law.In summary:

• Absent an express choice by the parties, the governing law of the arbitration agreement:
  
  
  • will be the parties' choice of law to govern the main contract; or
    
    
  • if there is no choice of law for the main contract, the arbitration will be governed by the law with which it is most closely connected, which will usually be the seat of the arbitration.

Therefore, in essence, Enka v Chubb puts the parties' choice of governing law for the main contract over that of the seat of the arbitration.

2. What is the problem with the status quo?

The Enka v Chubb decision was welcomed at the time; practitioners and businesses alike thought it would bring certainty to a previously uncertain area of law. However, in reality, the Enka v Chubb principles are complex, can be confusing, and can lead to an inconsistency between the law governing the arbitration clause itself and the law of the seat. This latter point, in particular, can cause problems under English law. For instance:

• The Arbitration Act 1996 applies where the seat of arbitration is in England and Wales or Northern Ireland. Section 4(5) states that "[t]he choice of law other than the law of England and Wales or Northern Ireland as the applicable law in respect of a matter provided for by a non-mandatory provision of this Part is equivalent to an agreement making provision about that matter". Therefore, where the seat of an arbitration is England, but the arbitration agreement is governed by foreign law (as it may under the principles of Enka v Chubb), that means foreign law will apply in respect of any non-mandatory provision (which is substantive rather than procedural in nature), even though the parties have chosen to seat the arbitration in England.
  
  
• The above means that parties may find themselves subject to foreign law in respect of key matters that would otherwise be governed by the Arbitration Act 1996. For instance:
  
  
  • Section 7 of the Arbitration Act 1996 establishes the principle of separability but, as this is a non-mandatory substantive provision, it will be disapplied if an arbitration agreement is governed by foreign law. The doctrine of separability can be crucial, as it protects an arbitration agreement forming part of a wider contract from being declared "invalid, non-existent or ineffective" in circumstances where the underlying contract is held to be void. It will therefore survive to resolve any dispute in relation to the underlying contract.The relevant foreign law implied into the arbitration agreement may not always have a similar concept of separability.
    
    
  • English law takes a wide view as to the principles of arbitrability and scope. However, a foreign law may consider that certain types of disputes, or particular aspects of an individual dispute, cannot be resolved via arbitration and instead need to be litigated in the courts of that foreign jurisdiction. Therefore, if the foreign law applicable to the arbitration agreement takes a more limited approach to arbitrability and scope, the parties may lose the ability to arbitrate despite such ability being permitted in their chosen seat of England.
    
    
  • A further significant implied term of an arbitration agreement under English law is confidentiality. However, foreign jurisdictions may take a different approach to confidentiality. This could cause uncertainty and concern for parties whose decision to choose England as their arbitral seat was strongly influenced by the protection that this implied term affords.

3. Welcoming reform and an important reminder

The issues outlined above have caused many to call for reform of the law, as well as stoking fear that a failure to reform could threaten the stability of London as a reputable and trustworthy arbitration seat. The Law Commission is currently conducting a review of the Arbitration Act 1996 in order to determine whether it is fit for purpose. The Law Commission's first consultation paper in September 2022 did not propose any reform in relation to the law governing an arbitration agreement. However, 31 responses to the first consultation paper (including that from Travers Smith) asked for the issue to be reconsidered.

It is therefore not surprising that the Law Commission's second consultation paper provisionally proposes that a new rule be introduced into the new Act that the governing law of an arbitration agreement is the law of the seat (unless the parties exercise their preserved autonomy to expressly agree otherwise in the arbitration agreement). The proposed reform would therefore much reduce the risk of parties having an English seated arbitration with the arbitration agreement governed by a foreign law (and the resultant problems caused by section 4(5) of the Arbitration Act 1996). The Law Commission's revised proposal is sensible and, in our view, should be much welcomed.

In the meantime, and regardless of the outcome of the Law Commission's consultation, the issues above highlight an important reminder for parties negotiating international contracts: they should actively consider the law they wish to govern the arbitration agreement and ensure that there is no ambiguity in that regard.

Originally published by 13 July, 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.