Arbitration Act Reforms and the Governing Law of Arbitration Agreements – A Welcome Clarification?

On 6 September 2023, the Law Commission of England and Wales published its final report recommending some limited reforms to the Arbitration Act 1996 (“the Arbitration Act”).¹ This final report follows a lengthy review process, which started in March 2021. We reported on some of the proposed changes last year.

Overview of recommended reforms

Ultimately, the Arbitration Act has aged well, as demonstrated by the reasonably limited number of amendments now recommended by the Law Commission, which include the following:

• in relation to Section 67 (challenges to an arbitral award based on a lack of jurisdiction), a clarification that new objections and new evidence should only be put to the courts when the objecting party can show that it could not, with reasonable diligence, have advanced the same points or material before the arbitral tribunal;
• the codification of an arbitrator’s continuing legal duty to disclose matters that might reasonably give rise to justifiable doubts as to their impartiality;
• confirming that arbitral tribunals have the power (on the application of a party) to render awards on a summary basis where an issue has “no real prospect of success”; and
• an express confirmation that the courts can make orders in support of arbitration under Section 44 against third parties.

More significantly, the Law Commission also recommends a new section addressing the governing law of arbitration agreements, recommending a change to the current English law position. We discuss this change in position, and possible impacts in more detail below.

Current English law on the governing law of arbitration agreements

The current test to determine the governing law of arbitration agreements was prescribed by the UK Supreme Court in Enka v Chubb.² The Supreme Court determined that: ³ where the law of the arbitration agreement is not specified, but there is an express choice of governing law for the contract, the governing law would also apply to the arbitration agreement contained within the contract. However, in the absence of any choice of law to govern the contract, the arbitration agreement is governed by the law with which it is most closely connected. Where parties have chosen a seat of arbitration, the governing law of the arbitration agreement will generally be the law of the seat, even if it differs from the law applicable to the parties’ substantive contractual obligations.

The decision in Enka v Chubb is the result of a complex set of facts. OOO Insurance Company Chubb (“Chubb”) was seeking to overturn the decision of the Court of Appeal, which had precluded Chubb from pursuing a subrogation claim in the Russian courts and determined that the Russian court claim was brought in breach of the arbitration agreement in the main contract. Neither the main contract nor the arbitration agreement included an explicit governing law clause. However, the contract provided for English-seated arbitrations, and Russian law governed specified provisions in the main contract.

The Supreme Court ultimately reached the same decision as the Court of Appeal, that English law governed the arbitration agreement, however, the two courts differed in their reasoning. Whilst the Court of Appeal had focused on the separability doctrine and had advocated a strong presumption that by nominating a seat of the arbitration the parties had impliedly chosen that the law of the seat should govern the arbitration agreement, absent “powerful countervailing factors”. Instead, the Supreme Court moved away from the separability doctrine and, despite upholding that the law governing the arbitration agreement was the same as the seat in that particular case, it made clear that if there were an express governing law of the contract, that would usually also be the law of arbitration agreement.⁴

This is significant, as it placed the decision in Enka v Chubb at odds with other legal systems. Notably, these conflicting approaches were at the center of Kabab-Ji v. Kout Food case.⁵

English v French law approach: the Kout Food saga

The Kout Food saga arose out of a franchise development agreement. The agreement was governed by English law, and provided that any dispute would be referred to ICC arbitration with a Paris seat. There was no express governing law of the arbitration agreement. When a dispute began and the arbitral tribunal’s jurisdiction was challenged, the arbitral tribunal held that as the seat of the arbitration was Paris, French law governed the arbitration agreement. After the award, parallel proceedings commenced: Kabab-Ji sought to have the award recognized and enforced before the English courts, which was challenged by Kout Food on the grounds that it was not party to the arbitration agreement and that the arbitration had been conducted on the basis of an invalid arbitration agreement. In parallel, Kout Food also sought to have the award annulled at the seat, in France.

The English enforcement proceedings ultimately reached the Supreme Court, which refused to recognize and enforce the award. Consistent with the findings in Enka v Chubb, the Supreme Court held that the choice of English law as the governing law of the agreement extended to the law governing the arbitration agreement, including its validity. The French courts, however, reached a different conclusion. The Cour d’Appel, followed by the Cour de Cassation, reaffirmed the long-standing French law position that absent an express choice from the parties, the substantive rules of the seat govern the arbitration clause — therefore finding it to be governed by French law.⁶

An approach that combines the tests under English and French law is taken under Singaporean law, as set out in BCY v BCZ and BNA v BNB,⁷ and confirmed by the Singapore Court of Appeal in Anupam Mittal v Westbridge Ventures II.⁸ Pursuant to the three-step test:

1. where there is an express choice of law of the arbitration agreement, the Singapore courts will give effect to that law;
2. where there is no express choice, the Singapore courts will look at the parties’ implied choice using the governing law of the main contract.⁹ However, this presumption is rebuttable if there is sufficient indication to suggest otherwise. For example, in Anupam Mittal, the non-arbitrability rules under the governing law of the main contract (in that case Indian law) effectively negated the parties’ agreement to arbitrate;¹⁰
3. finally, the Singapore courts will look at the law with the closest and most real connection, which is often the law of the seat. As a result, in Anupam Mittal, the Singapore Court of Appeal determined that the law of the seat should apply (the law of Singapore).¹¹

The test in Enka v Chubb has been seen by some as unsatisfactory and led to practical inconsistencies with the approach taken by different jurisdictions, as seen in the Kout Food saga.

The Law Commission’s recommended reform

As introduced above, the Law Commission recommends introducing a new section to the Arbitration Act that would state, “[t]he law applicable to an arbitration agreement is—(1) the law that the parties expressly agree applies to the arbitration agreement; or (2) where no such agreement is made, the law of the seat of the arbitration in question.”¹² This new section effectively overrules Enka v Chubb and aligns the English law position with that of other jurisdictions, such as France.

However, and interestingly, the Law Commission’s Final Report states that “[t]he new rule would apply whether the arbitration was seated in England and Wales, or elsewhere.”¹³ (emphasis added). This clarification raises two points for consideration.

First, as the Arbitration Act applies to arbitral proceedings “seated in England and Wales or Northern Ireland”,¹⁴ it is unlikely that parties with a contract specifying the seat of arbitration outside England and Wales would seek the English courts’ opinion on the governing law of the arbitration agreement pre-action, on the question of the validity and scope of the arbitration agreement or in the context of interim measures. However, the new provision should provide some certainty, for example, in enforcement proceedings, such as in Kout Food where an award by an arbitral tribunal seated outside of England and Wales is challenged on enforcement in the English courts.

Second, this change might still create some difficulties with other jurisdictions. For example, in China Railway (Hong Kong) Holdings Limited v Chung Kin Holdings Company Limited,¹⁵ the Hong Kong court (following Enka v Chubb) held that “generally an express choice of law clause applicable to the main contract will also apply to the [dispute resolution] clause”. A scenario similar to Kout Food could still arise where a contract is governed by English law but provides for Hong Kong as the seat of arbitration: pursuant to the (reformed) Arbitration Act, the arbitration agreement would be governed by Hong Kong law, but, by contrast, the Hong Kong courts would likely find that the governing law of the arbitration agreement is English law.

Whilst the new section to the Arbitration Act provides welcome clarification on the applicable governing law of arbitration agreements, some practical complexities remain. To ensure certainty, it is best practice to specify what governing law should apply to the arbitration agreement. Parties considering having a governing law different from the arbitration seat should seek advice on the ramifications of that choice on the governing law of the arbitration agreement.

¹ Law Commission, Review of the Arbitration Act 1996, Final Report and Bill (Law Com No 413. 2023) (Final Report). The full final report is accessible at https://www.lawcom.gov.uk/project/review-of-the-arbitration-act-1996/.

² Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, [2020] 1 WLR 4117 9.

³ Ibid [170].

⁴ Ibid [53(iv)].

⁵ Kabab-Ji SAL v Kout Food Group [2020] EWCA Civ 6 at [81] and Cour d’appel de Paris, pôle 1 – ch. 1, 23 Juin 2020 (n° 17/22943) (June 23, 2020).

⁶ Cass., 1ère ci., 28 Septembre 2022, n° 20-20.260 (Sept. 28, 2022).

⁷ BCY v BCZ [2017] 3 SLR 357; BNA v BNB and another [2020] 1 SLR 456.

⁸ Anupam Mittal v Westbridge Ventures II Investment Holdings [2023] SGCA 1.

⁹ Ibid [62].

¹⁰ Ibid [73]–[74].

¹¹ Ibid [75].

¹² Final Report para 12.78.

¹³ Final Report para 12.75.

¹⁴ Arbitration Act 1996, s 2.

¹⁵ [2023] HKCFI 132.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.