In Unicredit Bank GmbH v Ruschemalliance LLC [2024] EWCA Civ 64, the Court of Appeal provided important guidance in determining the governing law of an arbitration agreement where the agreement is silent.
Introduction and comment
- In Unicredit Bank, the Court of Appeal overturned a Commercial Court decision to refuse an anti-suit injunction (ASI) restraining proceedings in Russia. The CA applied the general rule in Enka v Insurance Company Chubb[1] (Enka) and found that, where the governing law of an arbitration agreement was not specified, although providing for ICC arbitration in Paris, English law (being the governing law of the main contract) applied.
- UniCredit Bank is an informative judgment which provides welcome guidance on the application of Enka and removes potential uncertainty introduced by the first instance decision. Of note to practitioners is that The Law Commission has described the law in Enka as “complex and unpredictable” and recommended a default rule that an arbitration agreement will be governed by the law of the seat.[2] The draft Bill for the new English Arbitration Act includes such a provision.
- The judgment also indicates the willingness of the English courts to step in and uphold the spirit and provisions of the New York Convention, which the CA noted has been described as “the single most important pillar on which the edifice of international arbitration rests” and as “perhaps … the most effective instance of international legislation in the entire history of commercial law”. The court showed that in appropriate circumstances it will overrule an ASI granted by the Russian courts under Article 248.1 of the Russian Arbitration Procedural Code (APC) where that ASI prevents a party from exercising its contractual right to arbitrate. Given that the Article 248.1 powers appear to have been used widely by the Russian courts, we may see similar actions brought in England by applicants who have been deprived of their contractual right to arbitrate disputes.
- UniCredit Bank highlights the importance of clear drafting specifying the governing law of an arbitration agreement to reduce the risk of costly, time-consuming satellite litigation. Fladgate’s Dispute Resolution team is experienced in advising clients on the drafting and interpretation of arbitration clauses, as well as in representing parties to substantive arbitration proceedings. Please contact Joel Seager (JSeager@fladgate.com) for further information.
The facts
- Ruschemalliance LLC (RCA), a company incorporated in Russia, attempted to enforce on- demand bonds (Bonds) provided by UniCredit Bank GmbH (UniCredit) in relation to the construction of gas processing facilities in Russia. The Bonds included an English governing law clause and an arbitration clause providing for ICC arbitration in Paris. The law applicable to the arbitration agreement was not specified.
- RCA sought to rely on the Bonds after the German construction contractor halted performance of its contract with RCA following the introduction of EU sanctions against Russia in 2022. UniCredit rejected RCA’s demands under the Bonds on the basis that payment was prohibited by EU sanctions. Accordingly, there was an issue to be decided under English law by ICC arbitration in Paris.
Proceedings in Russia and England
- RCA instead issued proceedings in August 2023 before the Arbitrazh Court, claiming payment of the Bonds on the basis that the EU sanctions relied on by UniCredit violated Russian public policy. RCA argued that the Arbitrazh Court was competent to decide the dispute because the arbitration clause was unenforceable under Article 248.1 APC. Article 248.1 was amended in 2020 to grant the Russian courts exclusive jurisdiction over disputes arising from foreign sanctions. It allows Russians affected by sanctions disputes to apply for an ASI prohibiting proceedings before a foreign court or arbitral tribunal, and to treat an arbitration agreement providing for foreign arbitration as inoperable. On 1 November 2023, the Arbitrazh Court subsequently dismissed a jurisdiction challenge brought by UniCredit in finding that the Russian courts had exclusive jurisdiction and accordingly the arbitration agreement could not be performed.
- On 22 August 2023, UniCredit successfully applied to the Commercial Court for an ASI to restrain the Russian proceedings. At the substantive trial, the CC had to decide (i) whether service could be effected on RCA in or out of the jurisdiction, and (ii) whether to grant a final ASI restraining pursuit of the Russian proceedings. The Judge found in favour of RCA on both issues.
Court of Appeal decision
- Males LJ first considered RCA’s jurisdictional challenge. As RCA has no presence in England, UniCredit had to demonstrate that: (1) there was a serious issue to be tried; (2) there was a good arguable case that the claim falls within one of the relevant gateways; and (3) England was the proper place to bring the claim. UniCredit relied on the gateway that the claim relates to an English law contract.[3] However, the principle of separability meant that UniCredit had to prove that English law applies to the arbitration agreements, rather than the Bonds themselves.
- The key principles determining the law applicable to an arbitration agreement are set out by the Supreme Court in Enka. The applicable law will be either (a) the law chosen by the parties to govern it, or (b) in the absence of a choice, the law with which the arbitration agreement is most closely connected.
- In Enka, the Supreme Court established the general rule that where the law of an arbitration agreement is not specified, the governing law for the contract will also apply to the arbitration agreement. Where a different country is chosen as the seat, this alone is insufficient to negate the general rule. Two possible factors (Exceptions) were identified which “may in some cases imply” that an arbitration agreement was intended to be governed by the law of the seat, such that the general rule is negated:
a) Where a provision of the law of the seat indicates that the arbitration agreement will also be treated as governed by that country’s law.
b) A serious risk that, if governed by the law of the main contract, the arbitration agreement would be ineffective.
- Where a seat was deliberately chosen as a neutral forum for the arbitration, that may be a factor which supports application of the first Exception.
The CA’s interpretation of Enka
- Males LJ, giving the lead judgment, provided a valuable analysis of the application of Enka. He reiterated the importance of the general rule and suggested that the Supreme Court regarded an express choice of the law of the main contract as, in general, an implied choice of the same law to govern the arbitration agreement. Owing to the importance of certainty, consistency and legal coherence to English commercial law, that general rule “should not be displaced lightly”.
- The CA also reflected on the wording of the Exceptions. That wording suggested that the exceptions are “not inflexible” and their application depends on all the circumstances of the case, including the parties’ knowledge of the law of the seat.
- While the Supreme Court, in formulating the first Exception, principally had in mind legislative provisions, a sufficiently clear rule of law would be capable of satisfying the Exception. The court must consider “whether it is a rule of which the parties can fairly be taken to have been aware” such that the general rule is negated.
- The French rule relied on at first instance provided that the law governing an arbitration agreement depends on the parties’ common intention. The CA found this fell considerably short of what the Supreme Court contemplated would be sufficient to satisfy the first Exception. The rule was no different to the Enka principles. The parties’ common intention had to be ascertained from the Bonds, which provided for English law.
- It was unclear when the “reinforcing factor” that a seat was chosen as a neutral venue would apply in practice. Almost all major centres of arbitration are chosen because they offer a neutral seat. The choice of a neutral forum should only be contemplated in reinforcing a provisional conclusion that the law of the seat should apply because of one of the Exceptions.
The appropriate forum
- The appropriate forum was where the case could be suitably tried for the interests of all parties and for the ends of justice. Males LJ referred to Deutsche Bank AG v RusChemAlliance LLC[4] which identified, on materially similar facts, the ends of justice as: “the policy of English law that parties to contracts should adhere to them, and in particular the parties to an arbitration agreement…”
- A key consideration in the CA’s decisions in UniCredit Bank was that, although the French court would not grant an ASI, it would not regard an English ASI as an interference with its jurisdiction. While UniCredit could obtain a remedy of damages and an arbitration award for an order equivalent to an ASI, that would be a lengthy process and the award would likely be unenforceable in Russia. Further to the Arbitrazh Court’s order, without an English ASI RCA could apply to the Russian courts for injunctive relief to prevent UniCredit proceeding with the arbitration.
[1] Enka Insaat Ve Sanayi AS v Insurance Company Chubb [2020] UKSC 38
[2] Review of the Arbitration Act 1996, Final Report, paragraph 12.77
[3] CPR Practice Direction 6B, para 3.1(6)©.
[4] Deutsche Bank AG v RusChemAlliance LLC [2023] EWCA Civ 1144
