Background
RusChemAlliance LLC (“Appellant”), a Russian company entered into two construction contracts in mid-2021 with German companies (“the Contractor”) for building LNG and gas processing plants in Russia. The performance of the Contractor’s obligations was guaranteed through demand bonds, of which 7 had been issued by UniCredit Bank GmbH (“Respondent”), a German Bank. All these bonds provided English Law as Governing Law and a Paris seated arbitration under the rules of the International Chamber of Commerce (“ICC Rules”).
The Contractor refused to perform its obligations in lieu of the European Union’s sanctions on Russia, post Russia’s invasion of Ukraine in 2022. The Appellant terminated the contracts and sought refund of advance payments from the Contractor. However, the Contractor refused to return the advance stating EU sanctions. Subsequently, the Appellant demanded payment under the bonds from the Respondent. However, the Respondent also refused to pay on the ground that the payment was prohibited by EU Sanctions.
Russian Proceedings
The Appellant initiated proceedings before the Arbitrazh Court in St. Petersburg, Russia, invoking Article 248.1 of the Russian Arbitrazh Code, which provides exclusive jurisdiction to Russian courts over disputes involving foreign sanctions and to treat foreign arbitration agreements as inoperable.
In response, the Respondent made an application to the Arbitrazh Court to dismiss the Appellant’s claim since the disputes arising out of the Bonds were agreed to be subjected to arbitration in Paris under the ICC Rules. However, the Respondent’s application was rejected by the Arbitrazh Court holding that it had exclusive jurisdiction and the arbitration agreement cannot be enforced. The Arbitrazh Court stayed further proceedings till the disposal of the present proceedings before the Supreme Court of the United Kingdom.
Present Proceedings
In the meanwhile, the Respondent approached the Commercial Court in London, seeking an anti-suit injunction (“ASI”), which the Appellant disputed, contending that the English court does not have jurisdiction to hear the Respondent’s claim. Initially, the English Commercial Court granted interim-ASI, but after an expedited trial, the English Commercial Court declined having jurisdiction. Although, the English Commercial Court continued the interim ASI till the process of appeal is exhausted.
On appeal, the Court of Appeal reversed the decision, granting a final ASI against the Appellant. It also held that the English court has jurisdiction over the claim because the arbitration agreements in the Bonds were governed by English law, and England & Wales was the proper place to bring the claim. Consequently, the Appellant sought permission to appeal the decision of the Court of Appeal, which was granted by the Supreme Court, but limited to the issue of jurisdiction.
Issue and Decision
What is the governing law of the arbitration agreement in the bonds?
The Appellant argued that the arbitration agreements in the Bonds were governed by the law of the seat of the arbitration, i.e., French law and not English law. It submitted that the general rule established in the case of Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb [2020] (“Enka”), that the law which governs the main contract also governs the arbitration agreement, does not apply to this case.
Relying on Enka para 170(vi)(a), the Appellant contended that an exception to the general rule exists where the law of the arbitral seat treats the arbitration agreement as governed by its own law. As French law (the law of the seat) applies “substantive rules of international arbitration” to such agreements and does not require express choice, the Appellant claimed it can be inferred that the parties intended the arbitration agreements to be governed by French law.
On the contrary, the Respondent contended that the arbitration agreements are governed by English law because the choice of English law in clause 11 as the governing law of the Bonds applies to clause 12 (the arbitration clause) as well as all the other clauses of the contract.
Moreover, the Respondent argued that the choice of French law does fall within the exception provided in Enka para 170(vi)(a). It submitted that the “substantive rules of international arbitration” applied by French courts are not tied to France being the seat of arbitration. Instead, French courts apply these rules to determine the validity and scope of arbitration agreements, regardless of the arbitral seat.
Consequently, the Respondent claimed that French law lacked any provision which linked the governing law of the arbitration agreement to the seat, and as such, the general rule should apply. Therefore, the arbitration agreement shall be governed by English law, i.e., the law chosen by the parties to govern the main contract.
Relying on the principles laid down in Enka and reaffirmed in Kabab-Ji SAL v Kout Food Group [2021] (“Kabab-Ji”), the Supreme Court restated that the law governing an arbitration agreement is either the law chosen by the parties, or in the absence of such choice, the law with which the agreement is most closely connected.
In line with Kabab-Ji, the Court emphasized that where a contract contains both a governing law clause and an arbitration clause, the natural inference, absent contrary intention, is that the governing law applies to the entire contract, including the arbitration clause. The Bonds in question contained a broad governing law clause, applying to “all non-contractual or other obligations arising out of or in connection with it.” The Court held that this language naturally includes the arbitration clause (Clause 12).
There was nothing in the contractual wording to exclude the arbitration clause from the chosen English law. Following Enka, the Court reaffirmed that choosing a different country (France) as the seat of arbitration does not override or displace the parties’ choice of governing law. Thus, the arbitration agreements were held to be governed by English law.
Further, the Court clarified that the language used in para 170(vi)(a) of Enka suggesting that the law of the seat “may” imply a choice of governing law for the arbitration agreement was permissive, not prescriptive. That is, it cannot be inferred from the mere selection of a seat that the parties intended to adopt the law of the seat as the governing law of the arbitration agreement. It noted that there is nothing within the English curial law that supports an inference that choosing England as the seat necessarily implies English law governs the arbitration agreement. Therefore, Enka should not be read as establishing such a rule.
Moreover, turning to Carpatsky Petroleum Corp v PJSC Ukrnafta [2020] (“Carpatsky”), the Court scrutinized and ultimately rejected the reasoning that had supported an inference that the law of the seat (Sweden) governed the arbitration agreement, in the absence of a governing law clause in the contract.
Applying this to the current facts, the Appellant argued that by choosing Paris as the seat, the parties must have intended French substantive rules of international arbitration to govern the arbitration agreement. However, the Court disagreed, stating that such reasoning involves unrealistic legal foresight and would introduce undue complexity. The Court concluded that the logic in Carpatsky was flawed and, to the extent that para 170(vi)(a) of Enka suggested otherwise, it should now be disregarded.
Unlike Carpatsky, where there was no proper governing law clause covering the arbitration clause, the Bonds in this case contain a standard, widely framed governing law clause applying to the entire bond, including the arbitration clause. Thus, there is no scope to infer a different governing law based on the seat. The mere fact that French courts might apply French international arbitration rules is not a good reason to depart from the contractual choice of English law.
Therefore, the Court rejected the Appellant’s contention that French law governs the arbitration agreements. Relying on Enka and Kabab-Ji, and applying English rules of contractual interpretation, it held that the parties clearly agreed to English law as the governing law of the arbitration agreements in the Bonds.
What is proper place to bring the claim?
On England not being the proper place for the claim, the Appellant advanced a two-pronged argument challenging the jurisdiction of the English courts. First, it maintained that by selecting Paris as the seat of arbitration, the parties had submitted to the supervisory jurisdiction of the French courts. Therefore, any claim alleging breach of the arbitration agreement, including one for anti-suit relief, should be determined by the French courts, not the English courts. Alternatively, the Appellant argued that the proper forum for the Respondent’s claim was arbitration under Clause 12 of the bonds. Since arbitrators have powers to grant interim and final relief, the Respondent should have sought redress through arbitration proceedings in Paris rather than invoking English court jurisdiction.
The Court addressed the issue of whether it should exercise jurisdiction when a defendant argues that a more appropriate forum exists for trying the case. Relying on Spiliada Maritime Corp v Cansulex Ltd [1987] (“Spiliada”), the Court reiterated that English courts would decline jurisdiction if another available forum is plainly more appropriate for all parties and the ends of justice (This is popularly known as the doctrine of forum non conveniens.) However, the Supreme Court noted that in Spiliada, the House of Lords did not concern a situation where the parties had agreed upon a forum. In such situation, the party need not establish that the contractual forum is the most appropriate and Spiliada test becomes irrelevant. This is because contractual exclusivity alone displaces any forum non conveniens inquiry, as has been held in Turner v Grovit [2001] and Donohue v Armco [2001].
Further, the court opined that when the agreed forum is arbitration, the policy favouring enforcement becomes even stronger. This is underpinned by the 1958 New York Convention (“NYC”), particularly Article II(3), which mandates courts of contracting states to refer disputes to arbitration where a valid arbitration agreement exists unless the agreement is null, void, inoperative, or incapable of being performed.
Although the Russian Federation is a party to the NYC, its domestic legislation, i.e., Article 248.1 of the Russian Arbitrazh Code, prevents Russian courts from enforcing certain arbitration agreements. However, this national restriction does not affect the position of the English court, nor does it impact the validity of the arbitration agreements under English law, which governs it in this case.
Under English law, the arbitration agreements contained in the Bonds are valid, and Appellant’s claim for payment falls squarely within their scope. Therefore, Appellant’s action in the Russian courts constitutes a clear breach of contract. Consequently, given this breach, the Court opined, relying on Aggeliki Charis Cia Maritima SA v Pagnan SpA (The Angelic Grace) [1995], that if the parties had chosen an English seat of arbitration, the English court would have clear authority to issue an ASI restraining the Appellant. However, as England is not the seat of the arbitration, the proper question to be addressed is whether the court should enforce the parties’ bargain and uphold the contractual commitment to arbitrate wherever a defendant is amenable to process.
Consequently, the Court emphasised that granting an ASI does not offend comity when there is a substantial connection to the forum, as held in Airbus Industrie v Patel [1999], and where personal jurisdiction over the defendant is not tenuous, as clarified in IPOC International Growth Fund v CT-Mobile [2007]. Here, with English law governing the contractual rights of the parties, the connection to England is clear and substantial. Additionally, under Article II(3) of the NYC, French and Russian courts being signatories, are expected to respect arbitration agreements, thus reducing any risk of comity concerns.
The Court further clarified that enforcing an arbitration bargain via an ASI is not incompatible with the arbitration agreement itself. Drawing on AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] (“AES Ust-Kamenogorsk”), the Court held that the source of the power to grant an ASI lies not in Section 44(2)(e) of the 1996 Arbitration Act, but in Section 37 of the Senior Courts Act 1981, which gives the High Court a general and independent power to grant injunctions, whether or not arbitration proceedings are on foot or proposed.
The two-prong contention raised by the Appellant with respect to the proper forum, was rejected by the Court. Relying on West Tankers Inc v Ras Riunione Adriatica di Sicurtà SpA (The Front Comor) [2007], and AES Ust-Kamenogorsk, the Court reaffirmed that the English courts have jurisdiction to grant ASIs, not as a matter of supervisory jurisdiction but as a facet of their general equitable powers under Section 37 of the Senior Courts Act 1981. The seat of arbitration (Paris) does not preclude English courts from intervening to enforce the arbitration agreement.
Pertinently, the French courts lacked jurisdiction to entertain the Respondent’s claim as first, there was no link between the parties or the dispute and France, apart from being the seat; second, the Appellant had not undertaken to submit to French jurisdiction and, in fact, claimed that doing so would violate Russian law; and last, French courts are powerless to issue ASI, and would not entertain a contractual enforcement claim of this nature. Thus, the French courts were not merely an inappropriate forum, they were not even an available forum.
Additionally, the Court held that substantial justice to the Respondent could not be done through arbitration as claimed by the Appellant because the Appellant’s conduct of asserting arbitration as the proper forum while simultaneously invoking Russian courts, amounted to an abuse of process and any award granting anti-suit relief would be unenforceable in Russia owing to its national law and would lack any coercive force.
Outcome
The Court thus held that only the English courts could offer the Respondent a real and effective remedy. Even if one applied a forum conveniens test (which the Court considered inappropriate here), England would still be the proper forum. The Supreme Court thereby dismissed the appeal, affirming the Court of Appeal’s decision. It upheld the mandatory injunction requiring the Appellant to discontinue the Russian proceedings.
Case Details
Citation Codes: [2024] UKSC 30
Date of Judgement: 18 September 2024
Court: Supreme Court of the United Kingdom
Coram: Lord Reed (President), Lord Sales, Lord Leggatt, Lord Burrows & Lady Rose
Author(s)
Shimit Patni
Student at NLU, Jodhpur