Trojan Horses in International Commercial Arbitration Agreements

“69. The dispute in this case raises the question of the relative weight to be given to the curial law of the arbitration agreement and the main contract law, where they differ, in determining the AA law. It is a question on which it would be idle to pretend that the English authorities speak with one voice. It would appear that there are also differences of approach between other jurisdictions in international arbitration generally...

70. The English conflict of law rules are not themselves in doubt…”

-Per Justice Popplewell, [2020] EWCA Civ 574

THE PREFACE

Many might recall the fancy rhyme that they'd perhaps have last heard in their childhood:

For the want of a nail the shoe was lost,

For the want of a shoe the horse was lost,

For the want of a horse the rider was lost,

For the want of a rider the battle was lost,

For the want of a battle the kingdom was lost,

And all for the want of a horseshoe-nail

Not infrequently, this is how parties can, to their horror, find their contracts unraveling in dispute settings. Quite often the rhyme serves to sum up what dispute resolution lawyers are wont to feel while examining case-briefs for clients. And quite often, the absence of a single word or a term can overwhelm all the language that’s otherwise present in a contract. Finally, quite often terms and expressions thoughtlessly or negligently employed or implanted in contracts can function like Trojan Horses that can wreak havoc when war erupts.

The Lorenzian Butterfly Effect in litigation can spell doom for the unwary of causal connections that law traces, and trivial errors, discrepancies, superfluities, omissions tend to get exponentially magnified and amplified over time, assuming a shape, size, character and effect that none foresaw or bargained for.

LAND AHOY ?

Close to the end of last month, the UK Supreme Court concluded hearing an appeal that involves questions of significant legal moment and import in relation to international commercial arbitration, anti-injunction suits, determination of proper law of arbitration et al. The much-awaited decision promises significant clarification of some of these pressing legal issues and aspects.

In particular, the Supreme Court will focus on answering the following issues:

1. What is the correct approach to determining the proper law of an arbitration agreement?
2. What is the relevance of the parties’ choice of law for the main contract under Rome I?
3. What is the role of the court of the seat of an arbitration and in what circumstances is it appropriate or permissible for the English court to permit a foreign court to decide whether proceedings before the foreign court are a breach of an arbitration agreement?

THE SETTINGS: ARBITRATION AGREEMENT

First things first.

To all those interested in interpreting and resolving the legal tangle as a "do-it-yourself" exercise, here is the arbitration agreement that appears within clause 50.1 of the Contract and that constituted the fertile playground for the parties and the courts.

"Resolution of disputes

50.1. The Parties undertake to make in good faith every reasonable effort to resolve any dispute or disagreement arising from or in connection with this Agreement (including disputes regarding validity of this agreement and the fact of its conclusion (hereinafter – "Dispute") by means of negotiations between themselves. In the event of the failure to resolve any Dispute pursuant to this Article within 10 (ten) days from the date that either Party sends a Notification to the opposite Party containing an indication of the given Dispute (the given period may be extended by mutual consent of the Parties) any Party may, by giving written notice, cause the matter to be referred to a meeting between the senior managements of the Contractor and Customer (in the case of the Contractor senior management should be understood as a member of the executive board or above, in the case of Customer, senior management shall be understood as general directors of their respective companies). The parties may invite the End Customer to such Senior Management Meeting. Such meeting should be held within fourteen (14) calendar days following the giving of a notice. If the matter is not resolved within twenty (20) calendar days after the date of the notice referring the matter to appropriate higher management or such later date as may be unanimously agreed upon, the Dispute shall be referred to international arbitration as follows:

•  the Dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce,
• the Dispute shall be settled by three arbitrators appointed in accordance with these Rules,
• the arbitration shall be conducted in the English language, and
• the place of arbitration shall be London, England.

 50.2. Unless otherwise explicitly stipulated in this Agreement the existence of any Dispute shall not give the Contractor the right to suspend Work...

50.5. All other documentation such as financial documentation and cover documents for it must be presented in Russian."

THE FIRST SALVO & CHUBB’S RUSSIAN PROCEEDINGS

The disputes at hand in the proceedings below mentioned emerged years after a massive fire had broken out at the Berezovskaya power plant in Russia when Chubb Russia (a Russian company and part of the well-known Chubb insurance group), the insurers of the plant’s owners brought proceedings in Russia against ENKA INSAAT VE SANAYI A.S (a Turkish company carrying on an international construction and engineering business based in Turkey but with a substantial presence and history of operations in Russia), a subcontractor, seeking damages in relation to the fire.

THE COUNTER-BLAST: ENKA’S ANTI- SUIT INJUNCTION BROUGHT IN ENGLAND

Enka instituted an anti-suit injunction in England contending that the dispute was subject to an arbitration agreement in the contract under which it had performed the works, and seeking an order that Chubb Russia discontinue the Russian Proceedings. Enka’s claim was dismissed by the High Court at first instance at an expedited trial.

THE RIDDLES OF THE SPHINX

Notably, for reasons that would become apparent upon a careful consideration of the Arbitration Clause, supra, the issues framed by the High Court had included the following:

Is the proper law of the Arbitration Agreement in the Enka Contract English law or Russian law? In this respect:

• Was there an express choice of the applicable law?
• Was there an implied choice of the applicable law?
• If there was no express or implied choice, what law is the system of law having the closest connection to the Arbitration Agreement?

Is the claim brought in the Russian Proceedings within the scope of the Arbitration Agreement?

Can and should anti-suit injunctive relief be granted against Chubb Russia and if so what relief?

·     Including:

• Is the proper law of the Arbitration Agreement relevant to the English Court’s jurisdiction to grant an anti-suit injunction against Chubb Russia and if so how?
• Would it be an affront to comity for the Court to grant anti-suit injunctive relief in the circumstances of this case (and hence should such relief be refused)?
• Should an anti-suit injunction be granted against Chubb Russia as a matter of discretion or are there strong reasons not to grant such relief?

THE HIGH COURT REASONS AGAINST REASON

To be able to appreciate the decision of the Court of Appeals rendered in April 2020, one might wish to follow the path to the dismissal of Enka’s anti-suit injunction that was traversed thus by the High Court:

In this case, in my judgment, everything points against it being appropriate for this court to take over from the Moscow Arbitrazh Court the question of the scope of clause 50.1:

(1) I have already concluded that if I were deciding the issue, the choice of arbitral seat in this case, being the only hook upon which any attempt even could be made to suggest that clause 50.1 is governed by English law, does not convey a choice of governing law.

(2) Chubb Russia, given its view in good faith that the Moscow Claim does not fall within the scope of clause 50.1, behaved reasonably in bringing that claim, all the more so given Enka’s failure to engage at all, let alone suggest that clause 50.1 might apply, in response to RDP’s letter before action in April, which in turn came against the background of RDP’s original claim letter in September 2017 and the Russian state commission investigation.

(3) Having not unreasonably acted upon the basis of its bona fide view as to the scope of clause 50.1, Chubb Russia has secured two significant juridical advantages before the Moscow Arbitrazh Court. First, it has Enka’s concession there that the Contract is governed by Russian law as a matter of express choice. There is nothing in the Russian law evidence I received to suggest that there is anything that might be regarded as odd internationally, or even parochially in England, about Russian choice of law rules that may have required that concession before a Russian court if it would not be sound before an English court or before ICC arbitrators. It would be unfair to Chubb Russia in the circumstances of this case to consider granting an anti-suit injunction unless it could be justified upon the basis of that concession, but (i) though the point was raised at trial, Mr Béar QC was not instructed to make the same concession before me – in fact his submission was that it was “obviously wrong” to suggest that the Contract contained an express general choice of Russian law, and indeed that the Contract terms, even leaving aside clause 50.1, were positively inconsistent with it – and (ii) if the concession were made, then the anti-suit claim would fall to be considered on the basis that Russian law indeed governed the question of the scope of clause 50.1. Second, Chubb Russia has secured in effect a small degree of favourable provisional consideration by the Moscow Arbitrazh Court of the merits of its contention that it has a viable claim formulated in tort so as at least to begin its argument that its claim does not have to be arbitrated under clause 50.1. That second is a less weighty point than the first, but it is not wholly without force.

(4) On the basis, then, that the real issue between these parties, the scope of clause 50.1, either is governed by Russian law, or at any rate, were I to decide it, could only be treated as so governed to be fair to Chubb Russia, it is plainly more appropriate for that issue to be determined by the Moscow Arbitrazh Court than by this court. I am content to assume in Mr Béar QC’s favour that if I found that Chubb Russia had no arguable case on the issue under Russian law that might affect the assessment: (a) ex hypothesi I would then be finding that there was no point requiring serious consideration that it might be better in principle for a Russian court to decide; and (b) the reasonableness of Chubb Russia’s conduct in joining Enka to the Moscow Claim at all might then be called into question. I do not make that finding, however.

(5) There is, ironically, even a sense in which it may favour Enka to have the scope of clause 50.1, and as the first step in that its governing law, decided in Moscow. For on the evidence, there seems to me to be more room for argument there than I have concluded there would be here if I had to decide the point that (a) an express choice of a general governing law for a contract that does not explicitly extend to the arbitration clause within it does not so extend; and (b) absent a choice of governing law explicitly for the arbitration clause, it will be treated as governed by the law of the seat where a seat is specified, irrespective of the governing law of the contract more generally. I see no reason in the evidence to suppose that, if the Moscow Arbitrazh Court now concludes that clause 50.1 is governed by English law, then Chubb Russia will not accept that it must arbitrate (and that Enka’s motion for dismissal without consideration must succeed). Indeed, I understood the burden of the expert evidence of Russian law before me to be that, in that case, the Moscow court would be bound to and would so dismiss the claim. There was a difference between the experts over how likely it was that Enka would be joined in a third-party capacity, either on application by another party or of the court’s own motion, to ensure findings would bind it as against or in favour of the other parties sued, even though ex hypothesi no claim would or could then be being pursued against it there by Chubb Russia. But that is an irrelevance at this trial. It was plain to me, and I find, that the prospects of Enka being required to have some involvement, but without Chubb Russia pursuing a claim against it, will be no different, Chubb Russia having initially pursued a claim that was dismissed without consideration under the New York Convention, than if it had never brought a claim because it accepted the obligation to arbitrate throughout.

(6) I do not overlook the complaint by Mr Béar QC that, as things now stand, the Moscow Claim is proceeding to, it may be, a species of rolled-up hearing, as he called it, where there will be at least some degree of consideration of the ultimate substantive merits at the same time as the court now deals with the motion to dismiss in favour of arbitration. The submission is that that is obviously unsatisfactory. In my judgment, however, firstly, in the particular circumstances of this case that has substantially been visited upon Enka by its failure to act promptly and more appropriately in response to the Moscow Claim, if its response was to be a claim in this court for relief by way of injunction in the hope of avoiding having to become entangled in the Russian proceedings. Secondly, it is important to bear in mind, again in the particular circumstances of this case, that there is a specific complexity to the arguments that arise as to arbitrability before the Russian court if Chubb Russia persuades it to find that the arbitration agreement is governed by Russian law. The need, in those circumstances, to arrive at an accurate characterisation of the claim as pursued by Chubb Russia, which on the evidence of the experts is not or may well not be limited to a consideration of how Chubb Russia has chosen to seek to characterise it in its Russian statement of claim, may well require a degree of understanding of what are the issues on the merits or what they would be as between the parties, so as to assess the nature of the claim and how it arises so as then to determine whether it falls within the scope of the arbitration agreement if governed by Russian law. In those (it may be unusual) circumstances it is not so outrageous or obviously unsatisfactory as it might in other circumstances be for the Moscow Arbitrazh Court in the event not to have dealt entirely separately and initially with the motion to dismiss without consideration of the merits.

THE CRUCIFIXION: ENKA’S LOW POINT IN THE HIGH COURT

Pursuant to the reasoning adverted to above, Justice Andrew Baker of the High Court had concluded as follows in his decision of 20th December 2019:

110. The result, for the reasons I have given, is that Enka’s claims fail and are dismissed, save that, strictly, as regards Chubb Switzerland, the order will be that its challenge to jurisdiction succeeded and the proceedings against it are set aside.

111. Far from being a straightforward application of Angelic Grace orthodoxy requiring that an anti-suit injunction should be granted, this is almost a converse set of facts. Chubb Russia has sued Enka in what is, subject to any question of an obligation to refer to arbitration, the obvious and natural forum for its claim. It did so in the belief, held in good faith on reasonable grounds, whether or not that belief will ultimately be vindicated, that there is no relevant arbitration obligation. It takes the view that on any view the Contract as a whole is governed by Russian law as a matter of express choice, and that any question whether the obligation to arbitrate extends to the claim it has brought would and should be determined under Russian law.

112. Enka expressly agrees the first part of that, and initially in substance accepted the second part of it too, before the Russian court, whose choice of law rules do not appear to be materially less favourable to Enka, if it wanted to contend for the application of English law, than those that might apply in this court. Enka however comes to this court to pursue arguments inconsistent with that case, and as a result amends its position before the Russian court at all events on the second part of what I just said; and, on the asserted strength of those inconsistent arguments, asks this court to interfere by injunction in what is otherwise set to occur in the ordinary course of the proceedings in Russia.

113. Standing back, I find Enka’s position on this trial to lack any substantial merit. On balance, in the particular circumstances of this case, I would have concluded that Enka’s delay, failure to pursue arbitration and participation in Russia, were sufficient strong reason to refuse to grant an anti-suit injunction. But my preferred and primary ground for dismissing Enka’s claims is that this court is not the appropriate forum, again in all the circumstances of the case, in which to determine finally the real issue between the parties, which is whether the acknowledged obligation to arbitrate disputes extends to the dispute over Enka’s liability as alleged by Chubb Russia in the Moscow Claim. The appropriate forum for that determination is the Moscow Arbitrazh Court, pursuant, as things stand, to Enka’s application pending before it for dismissal without consideration of the claim against it in those proceedings. Enka will enjoy the ability ultimately to arbitrate by ICC Rules arbitration whether it is so liable, if it succeeds on that motion.

In its interpretative journey, the High Court had, inter alia, taken into consideration the following legal propositions:

• In principle, different parts of a single contract may be governed by different systems of law.
• The separability of an arbitration agreement makes it a natural candidate for at least the possibility that it might be governed by a system of law different to that which governs the contract generally.
• An express choice of seat may, but need not, convey or imply a choice of governing law for an arbitration clause. 

THE RESURRECTION: THE REVERSAL BY THE COURT OF APPEAL

Subsequently, vide a decision dated 29th April 2020 authored by Justice Popplewell (in which Justice Flaux and Justice Males had concurred), the Court of Appeal found that the High Court’s approach was simply wrong in principle and allowed Enka’s appeal, thus granting the anti-suit injunction and restraining Chubb Russia from appealing the decision of the Russian court. Chubb Russia has appealed against this decision and it is in this appeal that the hearing has been recently concluded and judgment awaited.

While doing so, Justice Popplewell categorically noted that the time has come to seek to impose some order and clarity on this area of the law, in particular as to the relative significance to be attached to the main contract law on the one hand, and the curial law of the arbitration agreement on the other, in seeking to determine the arbitration agreement law. The current state of the authorities does no credit to English commercial law which seeks to serve the business community by providing certainty.

Thence, upon a consideration of the relevant practises, precedents and authorities, Justice Popplewell proceeded to summarise the principles applicable to determining the proper law of an arbitration agreement, when found in an agreement governed by a different system of law, as follows:

1. The law of the arbitration agreement is to be determined by applying the three-stage test required by English common law conflict of laws rules, namely

• is there an express choice of law?
• if not, is there an implied choice of law?
• if not, with what system of law does the arbitration agreement have its closest and most real connection?

2. Where there is an express choice of law in the main contract it may amount to an express choice of the law of the arbitration agreement. Whether it does so will be a matter of construction of the whole contract, including the arbitration agreement, applying the principles of construction of the main contract law if different from English law.

3. In all other cases there is a strong presumption that the parties have impliedly chosen the curial law as the law of the arbitration agreement. This is the general rule, but may yield to another system of law governing the arbitration agreement where there are powerful countervailing factors in the relationship between the parties or the circumstances of the case.

JUDGMENT DAY BECKONS

The decision of the Court of Appeals has already caused a massive flutter. And there’s no gainsaying that regardless of the outcome of the appeal heard last month, the UK Supreme Court decision is expected to have deep and significant ramifications, inter alia, for the business and legal communities.

Pandemic or not, this is certainly going to be one to watch out for.