Brick Court puts focus on “Enka”

30/11/22

GAR has reported (here) on the important issues covered at the Brick Court Chambers commercial law conference, and in particular on the need to reform the Arbitration Act 1996 in the wake of the UK Supreme Court’s decision in Enka – an issue also covered by Lord Hoffmann in his Gaillard Lecture of last week (also reported by GAR on 28 November here).

The solution proposed by Lord Hoffmann, Sir Richard Aikens, Ricky Diwan KC and Salim Moollan KC (amongst others) is to introduce a statutory rule that the law of the seat will govern the arbitration agreement save where an agreement to the contrary has been made in the arbitration agreement itself. The rationale for such a reform is clear, and it will be important for all actors in the field to express their views on it in responses to the Law Commission’s consultation paper (due by 15 December); and in particular to dispel the apparent misapprehension that this is an issue which can be addressed in arbitration rules rather than in the Act itself.

That suggestion is made in para. 11.9 of the Law Commission’s Consultation Paper (https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2022/09/Arbitration-Consultation-Paper.pdf), by reference to Article 16.4 of the LCIA Rules 2020 and rule 6(a) of the LMAA Terms 2021. It is, with respect, misconceived.

The manner in which the rule in Enka operates is that the parties’ choice of substantive law will now automatically be treated as an implied choice of law for the arbitration agreement. In other words, and to take a concrete example, in an LMAA arbitration with a choice of foreign substantive law (say Ruritanian law), there will be a clash between (i) the default choice of English law as the law governing the arbitration agreement under rule 6(a) of the LMAA Terms and (ii) that implied choice of Ruritanian law. The latter will be expected to prevail given (a) that it is a specific choice in the contract itself (albeit implied) and (b) that rule 6(a) is expressly stated to apply “[i]n the absence of any agreement to the contrary”. The same would apply to an LCIA arbitration (as Article 16.4 also does not apply where “the parties have agreed in writing on the application of other laws or rules of law”).

The Consultation Paper in fact recognises this expressly, albeit in the context of its (short) analysis of the Scottish legislation, where it notes the following (at para. 11.11): “Scottish legislation has a default rule that, absent any specification in the arbitration agreement, then the law of the arbitration agreement is the law of the seat, “unless the parties agree otherwise”. But, to repeat, Enka v Chubb says that where the parties expressly or impliedly chose the law of the main contract, that is also an implied choice of law for the arbitration agreement; it is “an agreement otherwise”. To avoid that consequence would require a rule that the law of the arbitration agreement is the law of the seat with the only exception being where the arbitration agreement itself expressly chooses a different law.”

This applies a fortiori to a default rule in institutional rules, such as the LMAA Terms or the LCIA Rules.

It is thus necessary to have a statutory rule that the law of the seat will govern the arbitration agreement save where an agreement to the contrary has been made in the arbitration agreement itself. For the reasons given by the Law Commission itself, such a provision in generic institutional rules would be displaced by the specific implied choice of foreign law (Ruritanian law, in the above example).

What is more, even if the issue could be dealt with in institutional rules (quod non), it does not seem realistic to expect global institutions like the ICC or UNCITRAL to amend their global rules to deal with what is a peculiarly English problem.

Salim Moollan KC