Newcastle upon Tyne, UK

Arbitration: Why a Governing Law Clause in a Commercial Contract Is Vital

By Nichola Evans and Melissa Munday, Ward Hadaway

A lacuna has arisen regarding reciprocity of judgments following the UK’s departure from the EU. Given that there is no impact arising from Brexit on English arbitral awards, with their recognition and enforcement independently secured by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“New York Convention”), there may be greater focus on arbitration and an increase in dispute resolution clauses providing for arbitration in commercial contracts.

The law governing the arbitration agreement has great significance in respect of the arbitrability of disputes and the validity of the arbitration agreement. A recent, and rare, decision by the Supreme Court illustrates why parties, particularly those trading internationally, need to give careful consideration to the drafting and interpretation of dispute-resolution clauses.

The Case of Enka

Enka Insaat ve Sanayi (Respondent) v OOO Insurance Co Chubb (Appellant) [2020] UKSC 38 is a significant arbitration case concerning the governing law of arbitration agreements, particularly where the arbitration agreement is silent on the point, and impacts the English courts’ ability to grant anti-suit injunctions in support of arbitration.

The case concerned an appeal against a decision at trial not to grant an antisuit injunction against a party alleged to be in breach of a London arbitration clause by bringing proceedings in Russia. The underlying construction contract provided for an arbitration seated in London, governed by the rules of arbitration of the International Chamber of Commerce, and Russian law was to govern specific provisions of the contract.

However, the arbitration clause did not expressly provide the law governing the arbitration agreement.

The Court considered the significance to be attached to the choice of London as the seat of the arbitration in determining the proper law of the arbitration agreement where it differs from the main contract law.

Although its approach differed, the majority of the Supreme Court reached the same outcome as the Court of Appeal in holding that the governing law of the arbitration agreement in this case was English law. Rather than set out a general default rule that establishes the governing law of the arbitration agreement by reference to either the seat or the governing law of the main contract, the Supreme Court has favoured a methodical application of established English law principles in determining the governing law of contracts. In essence, the laws to apply will be those most closely connected with the arbitration agreement. Since there was no choice of law governing the contract in this case, the law governing the arbitration agreement had to be determined by applying the closest connection test, and, in that regard, London as the seat of arbitration was considered as a close connection in that determination. Accordingly, English law was determined as the law governing the arbitration agreement.

It should be noted that as to whether an anti-suit injunction should be granted, it would make no difference whether the arbitration agreement is governed by foreign law or English law. The test would be the same: a) has there been a breach of the agreement, and b) in all the circumstances is it just and convenient to restrain that breach by granting an injunction? Further, in terms of timing, the Supreme Court held that English courts did not need to wait for the decision of a foreign court before granting an injunction.

How to Determine the Governing Law

The principles to be followed to determine the law governing the arbitration agreement can be summarisedas shown in the graphic below.

What Are the Key Takeaways from This Case?

The key takeaway from this decision is the need for precision when drafting commercial agreements and, although parties may not think they will fall out, to provide carefully for the position in dispute-resolution clauses. Of particular importance in contracts will be the need to provide for the following: a) the law applicable to the main contract (the substantive law); b) the law governing the agreement to arbitrate; and c) the seat of the arbitration. It is important to make express provision for all three in the agreement. In this case, the parties spent a considerable amount of money taking the dispute to the Supreme Court and yet the matter is still not decided. The parties have also spent a considerable amount of time distracted by unnecessary satellite litigation. The cost and time incurred could have been avoided had all matters been dealt with in the agreement.


Nichola Evans

Nichola Evans

GGI member firm
Ward Hadaway
Law Firm Services
Newcastle upon Tyne, Leeds, Manchester, UK
T: +44 191 204 4000
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W: wardhadaway.com
Melissa Munday

Melissa Munday

GGI member firm
Ward Hadaway
Law Firm Services
Newcastle upon Tyne, Leeds, Manchester, UK
T: +44 191 204 4000
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W: wardhadaway.com


Published: GGI Insider, No. 113, May 2021 l Photo: duncanandison - stock.adobe.com

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