[co-author: Alex Mizgajski]
In UniCredit Bank GmbH v. RusChemAlliance LLC,[1] the UK Supreme Court confirmed the general common law rule that a choice of governing law for a contract as a whole will apply to an arbitration agreement within the contract, even when a different country has been chosen for the seat of the arbitration. This was important in the circumstances of the case because it meant that English – as opposed to French – law applied, which in turn gave the English courts jurisdiction to grant an injunction to restrain RusChemAlliance from litigating the dispute in Russian courts in breach of the parties’ agreement to arbitrate.
Background
The underlying dispute between the parties concerned UniCredit’s refusal to make payments under bonds it had issued to RusChem, on the grounds that any such payment would breach European Union sanctions.
The bonds contained a governing law clause which provided that, ‘This Bond and all non-contractual or other obligations arising out of or in connection with it shall be construed under and governed by English law.’ The bonds further provided that all disputes arising out of or in connection with the bonds should be referred to International Chamber of Commerce (ICC) arbitration, seated in Paris.
In breach of the arbitration agreement, RusChem issued proceedings before the Arbitrazh Court in Russia seeking payment from UniCredit. In doing so, RusChem relied on provisions of the Arbitrazh Procedural Code that conferred exclusive jurisdiction on Russian Arbitrazh Courts over disputes between Russian and foreign persons arising from foreign sanctions, and treated agreements providing for arbitration of such a dispute outside the territory of the Russian Federation as inoperable.
UniCredit promptly sought an anti-suit injunction from the English Commercial Court. The Commercial Court found that it did not have jurisdiction to hear the claim. UniCredit successfully appealed to the Court of Appeal, which held that it did have jurisdiction over the claim and granted a final anti-suit injunction. RusChem was given permission to appeal to the Supreme Court on the question of whether the English court had jurisdiction over the anti-suit claim.
The Supreme Court’s decision
To determine whether the English courts had jurisdiction, the Supreme Court had to address two issues:
- Were the arbitration agreements in the bonds governed by English law (‘the governing law issue’)?
- Were the courts of England and Wales the proper place to bring this claim (‘the proper place issue’)?
Lord Leggatt delivered the unanimous judgment of the court, deciding in the affirmative in respect of both issues.
The governing law issue
The starting point for any analysis of the governing law of an arbitration agreement is the Supreme Court’s judgment in Enka Insaat ve Sanayi AS v. OOO Insurance Company Chubb.[2] In that case, the court unanimously held that ‘a choice of law to govern the contract should generally be construed as applying to an arbitration agreement set out (or incorporated by reference) in a clause of the contract’, and ‘that this is so even where the parties have chosen a place with a different system of the law as the seat of the arbitration’.
Lord Leggatt noted that the governing law clause in the bonds was drafted particularly widely, and that even if the obligations created by the arbitration agreement were separate from the bond contract, they would undoubtedly fall within ‘obligations arising out of or in connection with’ the contract. However, he was at pains to emphasise that that additional wording was not necessary, and that he would have come to the same conclusion without it: The wording ‘this Bond’ in the governing law clause was reasonably understood to mean the whole bond, including the arbitration clause. There was no wording within the bonds that would indicate that the governing law clause was not intended to apply to the arbitration agreement.
Lord Leggatt then turned to RusChem’s argument that Enka itself was authority for its argument that there was an exception to the general rule where the law of the seat treats the arbitration agreement as governed by that country’s law. In that situation, it may be inferred that the arbitration agreement was intended to be governed by the law of the seat. RusChem submitted that this was precisely the situation in the present case, as French law would treat the arbitration agreement as being governed by French law on the basis that it was seated in Paris.
Lord Leggatt noted that the reference in Enka to a possible exception to the general rule was made in light of the High Court decision in Carpatsky Petroleum Corpn v. PJSC Ukrnafta,[3] in which a Swedish-seated arbitration had been held to be governed by Swedish law rather than the law governing the rest of the contract. He explained that the Supreme Court in Enka had not had to engage in an analysis of Carpatsky because the facts of the cases were clearly distinguishable. Considering the decision in more detail, Lord Leggatt concluded that Carpatsky was wrongly decided, and that taking such an approach would require an analysis of the law of the seat in every dispute, which would be ‘very unsatisfactory’.
The proper place issue
Lord Leggatt noted that if the seat of the arbitration had been England rather than Paris, the court would not have hesitated to issue an injunction to restrain RusChem from continuing the court proceedings in Russia. This would be in line with the English courts’ policy of securing compliance with the parties’ contractual bargain, as underpinned by its obligation as a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’).
The question the Supreme Court had to consider in this case was whether it made any difference that England was not the seat of the arbitration. It determined that it did not. Lord Leggatt did not consider that it would be right to accept that there is only one court that would have jurisdiction over a party to prevent it from breaking its agreement to arbitrate – it was clearly desirable that parties should be held to their contractual bargain by any court before which they are properly brought. Further, the issue of comity (i.e., one court encroaching on the jurisdiction of another) did not arise where all the relevant jurisdictions – Russia, France and England – were parties to an international agreement that requires them to refer the dispute in question to arbitration.
The Supreme Court rejected RusChem’s argument that by agreeing that the seat of the arbitration would be Paris, the parties had agreed that the French courts alone would have jurisdiction over any dispute relating to the arbitration. While it was correct that the French courts would be the only appropriate forum to supervise and support the process of the arbitration once commenced, they were not the only courts that could prevent a party breaking its contract to arbitrate at all. Further, the English courts would quite patently not be encroaching on the French courts’ powers to grant anti-suit injunctions: Under French law, the French courts do not have jurisdiction to grant an anti-suit injunction against foreign defendants, such as RusChem, with whom they have no link beyond the fact that the arbitration is seated in France.
The Supreme Court also rejected RusChem’s alternative argument that the proper place to bring the anti-suit claim was in an arbitration commenced under the arbitration agreement. While arbitrators do have the power to make an award ordering a party to terminate court proceedings, the court agreed with the Court of Appeal that this power was ‘an illusion’ in this case. First, such an award would not be enforceable in Russia in light of the provisions of the Arbitrazh Procedural Code granting exclusive jurisdiction to the Russian courts. Second, unlike court orders, which are backed up by sanctions for contempt of court, arbitral awards only create a contractual obligation – to which RusChem was likely to pay no heed.
Takeaway
As Lord Leggatt commented, ‘it is rare for the law governing an arbitration agreement to be separately specified’. There is no good reason for this, and this case – and Enka before it – should serve as a cautionary tale as to the time and expense that can be wasted as a result.
As noted in the judgment, the Arbitration Bill currently before Parliament introduces a new provision in the Arbitration Act that the governing law of arbitration agreements shall be the law of the seat of the arbitration, unless the parties expressly agree otherwise. While this will (if approved) bring more certainty to the outcome of disputes such as these in the English courts, contracting parties can simply avoid any risk of dispute by being explicit.
[1] [2024] EWCA Civ 64.
[2] [2020] UKSC 38.
[3] [2020] EWHC 769 (Comm).
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