Governing law of arbitration agreements

Many arbitration clauses do not include a separate governing law provision. This is unfortunate because it gives rise to uncertainty when the scope or application of the arbitration agreement is to be considered; which law governs such questions where the arbitration clause itself does not contain a choice of law provision? In the past two years, this question has been considered twice by the UK Supreme Court and once by the French Court of Cassation (Supreme Court).

In this article we summarise status following the UK and French decisions and the likely implications of those decisions under Norwegian law.

When is the governing law of the arbitration agreement relevant?

Arbitration agreements are typically not concluded in separate documents, but rather included as a dispute resolution clause which forms part of a wider agreement substantively regulating a commercial relationship between two or more parties (the ‘main agreement’). These arbitration clauses are still referred to as ‘agreements’ due to the arbitration law ‘doctrine of separability’ whereby the arbitration clause is to be treated as separate agreement from the main agreement and, as such, it survives the termination or invalidity of the main agreement.

Where parties disagree in terms of the validity, scope or effect of the arbitration agreement itself, the courts will have to determine the dispute. This is typically the case where a party oppose the recognition or enforcement of an award under the New York Convention but can also occur where a court is considering applications for interim injunctions pertaining to the arbitration. In reaching a decision, the courts will necessarily have to determine what law governs the arbitration agreement. If the arbitration agreement itself, i.e. the arbitration clause, includes an express choice of law for the arbitration agreement, determining the governing law is straight forward. However, many arbitration clauses do not. The question then becomes how to determine the governing law without an express governing law provision.

The possible determinative elements

There are primarily two elements which are natural to consider when considering the applicable governing law; (i) the chosen seat of arbitration and (ii) the law chosen for the main agreement (expressly or by implication). The discussion in the courts over the past two years primarily revolved around which of these two elements are determinative (when they are in conflict).

Enka v Chubb – UK Supreme Court (2020)

The issue was first considered by the UK Supreme Court in Enka v Chubb. In that case, neither the arbitration agreement nor the main agreement included an express choice of law provision.

The Supreme Court (unanimously) stated that as a main rule the system of law chosen for the main agreement will usually apply where the parties have not made a specific choice of law in the arbitration agreement itself. The Court split (3-2) in terms of whether the main agreement included an implicit choice of Russian law (the majority finding that it did not). The majority further held that if no choice of law has been stated in the arbitration agreement or in the main contract (expressly or implicitly), the system of law most closely connected to the arbitration agreement will apply.

The majority continued to find that in considering which system of law the arbitration agreement is most closely connected to, the law of the seat of arbitration will, as a default rule, apply. In Enka the chosen seat being in England. Thus, the Supreme Court applied English law.

Kabab-Ji SAL v Kout Food Group –UK Supreme Court (2021)

A year after Enka v Chubb, the UK Supreme Court again considered the issue in Kabab-Ji SAL v Kout Food Group. In Kabab-Ji the main agreement provided for an English choice of law, but disputes to be referred to arbitration under the ICC Rules, seated in Paris, France.

The arbitral tribunal, sitting in Paris, handed down an award in favour of Kabab-Ji SAL. In the award, the arbitral tribunal also concluded that (i) French law was applicable to the arbitration agreement as the arbitration was seated in France and (ii) under French law Kout Food Group was encompassed by the arbitration agreement.

Following the award, Kabab-Ji SAL sought enforcement in England. Kout Food Group resisted such enforcement, arguing that the arbitral tribunal had erred in applying French law to the arbitration agreement. Rather English law applied, pursuant to which Kout Food Group would not be encompassed by the arbitration agreement.

The UK Supreme Court reaffirmed its finding in Enka that a choice of law for the main agreement will apply as it provides a sufficient indication of the law to which the parties subjected the arbitration agreement. As such, and in that case, the French seat of the arbitration was of no consequence in determining the governing law for the arbitration agreement. Accordingly, the French award could not be enforced against Kout Food Group, cf. the New York Convention Article V(1)(a) whereby enforcement can be refused where “the arbitration agreement is not valid under the law to which the parties have subjected it”

Kabab-Ji SAL v Kout Food Group –French Court of Cassation (2022)

Independent of the enforcement proceedings in England, Kout Food Group applied for the award to be set aside by the French courts arguing inter alia that the law governing the arbitration agreement was English law and had the arbitration agreement been interpreted in accordance with English law, Kout Food Group would not be encompassed by the arbitration agreement.

The Court of Cassation adopted a contrary approach to that of the UK Supreme Court. It found that the position under French law in determining the governing law is well established and dictates that it is the law of the seat of arbitration that is determinative (where the seat is expressly provided for). As such, and under French law, Kout Food Group was encompassed by the arbitration agreement and the award upheld.

The Norwegian law perspective

The decisions in Kabab-Ji SAL v Kout Food Group show a clear divergence in approach between two major arbitration jurisdictions.

There is currently no Norwegian case law that is directly parallel to the above decisions. In Nordic commercial contracts it is not unusual to use a clause titled “Choice of law and arbitration” which contains separate sub-provisions for both choice of law and arbitration. Whilst this is not an optimal provision for regulating the choice of law for the arbitration agreement, there is a Norwegian Court of Appeal case

(LB-2003-20830) suggesting that the choice of law provision may also govern the arbitration agreement where the choice of law and arbitration clause is contained under the same heading. However, in that particular case the Norwegian Court of Appeal also supported its decision in the seat of arbitration matching the choice of law. As such, no clear guidance may be gleaned from that decision, although we would tend towards reading that decision as supporting an approach like that taken by the UK Supreme Court in Enka.

Since the ruling of the Norwegian Supreme Court in I.M. Skaugen (HR-2017-1932) it is well settled Norwegian law that Norwegian courts must look to foreign sources and international best practice when considering matters of international arbitration. Given the clear divergence in foreign sources there is no clear guidance to be drawn from them and it is uncertain how Norwegian courts will conclude.

As such, the only hard and fast rule on the governing law of arbitration agreements remains; an express choice of law provision in the arbitration agreement will be determinative and ensure certainty and predictability. This is why we consistently recommend including an express choice of law provision in arbitration clauses.

Linnea Cecilia Gule Senior Associate

E: ligul@bahr.no

M: +47 412 99 517

Linnea focuses on post-M&A matters, corporate and shareholders’ disputes and general contractual disputes, often within the marine sector. Recent cases include acting in a post-M&A arbitration (purchase price adjustment) for the buyer of a multi-national offshore supply company and representing a shipowner in a complex litigation concerning a long-term LNG (bunkers) supply agreement. Linnea also has considerable experience assisting clients in mediation, in and out of court.

Mads Schjølberg Managing Associate

E: masch@bahr.no

M: +47 958 82 085

Mads has a wide-ranging practice in commercial arbitration and litigation focusing in particular on marine insurance as well as shipping and offshore related matters. Mads has acted as counsel in numerous international arbitral proceedings under the Norwegian Arbitration Act, both ad hoc and under institutional rulesets (i.a. ICC, OCC and NOMA).

Atle Skaldebø-Rød Head of Dispute Resolution

E: atska@bahr.no

M: +47 922 87 727

Atle is admitted to the Supreme Court and has extensive experience across a broad range of complex commercial disputes. His practice includes post-M&A, directors’ liability, shareholder disputes, company law, financial reporting and marine insurance as well as special forms of judicial proceedings, such as enforcement proceedings, preliminary injunctions and securing of evidence.