Simplicity over Complexity

UniCredit Bank GmbH -v- RusChem Alliance LLC [2024] UKSC 30 

Keep it simple! That was the unanimous message from the UK Supreme Court when it considered a jurisdiction issue appeal on what was the governing law of the arbitration agreement in performance bonds that were governed by English law but provided for ICC arbitration in Paris.

The beneficiary under the bonds had sought to argue that the governing law of the arbitration agreement should be French law as the parties had chosen Paris (in France) as the seat of arbitration. It submitted that a French Court would apply French law principles to any international arbitration agreement that provided for a French seat.

The Supreme Court rejected this approach, which it believed could lead to complications and a lack of clarity. It preferred the general rule of English common law that the law chosen by the parties to govern their contract will usually also apply to the arbitration agreement in the contract if the arbitration agreement does not expressly provide for a different governing law. Choosing a different country as the seat of arbitration will not, of itself, be sufficient to displace the general rule.

The Supreme Court, therefore, upheld the Court of Appeal’s decision that the arbitration agreements in the bonds were governed by English law. As a result, the English Court had jurisdiction over the issuing bank’s claim for an anti-suit injunction to restrain Russian Court proceedings brought in breach of the arbitration agreements. The Supreme Court upheld the final anti-suit injunction issued by the Court of Appeal.

The background facts

In 2021, a Russian company, RusChemAlliance LLC (RusChem) contracted with two German companies for the construction of LNG and gas processing plants in Russia. Pursuant to the contracts, RusChem made advance payments to the German contractors. A German bank, UniCredit Bank GmbH (UniCredit), issued seven on demand bonds to guarantee the contractors’ performance under the construction contracts.

All seven bonds expressly stated that they were governed by English law and provided for disputes to resolved in ICC arbitration seated in Paris but conducted in English.

Following the invasion of Ukraine in February 2022 and the imposition of EU sanctions on Russia and designated Russian entities and individuals (but not RusChem), the contractors decided that they could no longer continue to perform the construction contracts. RusChem terminated the contracts and sought reimbursement of the advance payments it had made. The contractors declared that they could not repay the advance payments because of the EU sanctions.

RusChem made demands for payment under the bonds, which UniCredit rejected because it believed that the sanctions prevented it from making any payment to RusChem. 

In 2023 RusChem commenced proceedings against UniCredit in the St. Petersburg Arbitrazh Court in Russia, claiming payment under the bonds. Among other things, RusChem relied on provisions of the Russian Arbitrazh Procedural Code (APC) (promulgated in 2020) which confers exclusive jurisdiction on the Arbitrazh Courts over disputes between Russian and foreign parties arising out of foreign sanctions and treats foreign arbitration agreements as inoperable.  The APC allows Russian persons affected by foreign sanctions to apply to the Arbitrazh Court for an anti-suit injunction in relation to foreign court or arbitration proceedings.

UniCredit sought to have the Russian proceedings dismissed on the basis of the parties’ agreement to arbitrate in Paris under the ICC Rules. The Arbitrazh Court concluded that it had jurisdiction and dismissed UniCredit’s application. However, the Arbitrazh Court did adjourn its own proceedings pending the outcome of the English Court proceedings.

The English lower court proceedings

After RusChem commenced the Russian proceedings, UniCredit commenced proceedings in the English Commercial Court seeking an injunction and declaratory relief in relation to RusChem’s breach of the arbitration agreement in the bonds. UniCredit obtained an interim anti-suit injunction (ASI) to restrain the Russian proceedings on a without notice basis.

RusChem subsequently disputed the English Court’s jurisdiction to hear the claim for an ASI, arguing primarily that the claim did not satisfy the contractual gateway under the English civil procedure rules (i.e. contract governed by English law) and that in any event the proper place to bring the claim was the French Courts.

The Commercial Court found it did not have jurisdiction but continued the ASI pending the outcome of an appeal from its order.  The appeal was heard in January 2024.

The Court of Appeal allowed the appeal and granted a final ASI. It concluded that it had jurisdiction over the claim because: (i) the arbitration agreements were governed by English law; and (ii) England and Wales was the proper place to bring the claim. 

In February 2024, RusChem was given permission to appeal to the Supreme Court on the jurisdiction issue – whether the English Court has jurisdiction over UniCredit’s claim.

The caselaw

In Enka Insaat ve Sanayi AS -v- OOO Insurance Company Chubb [2020] UKSC 38, the Supreme Court held that where the parties have not chosen (whether expressly or impliedly) a governing law for the arbitration agreement, the governing law of the underlying contract will also apply to the arbitration agreement. This is so even where the seat of the arbitration is in a country with a different system of law. The majority also held that if there was no choice of law to govern the arbitration agreement but there was a choice of seat, the law of the seat of arbitration should apply.

In Kabab-Ji SAL -v- Kout Food Group [2021] UKSC 48, the Supreme Court applied the principles identified in Enka. In Kabab-Ji, the contract provided for English governing law and for disputes to be resolved in ICC arbitration in Paris. The Court stated that it was clear English law governed the arbitration agreement.

This approach has been adopted by the Supreme Court because it is considered to provide certainty and consistency. 

The Supreme Court decision

The Supreme Court unanimously dismissed the appeal and upheld the Court of Appeal’s findings.

The governing law issue

Once again, the Supreme Court applied the principles set out in Enka. The governing law clause in the bonds was widely framed and there was no reason to find that the arbitration agreement was excluded from its scope. The choice of a different country for the seat of the arbitration did not justify such an exclusion. The arbitration agreement was, therefore, governed by English law.

The Supreme Court heard expert evidence on French law, including to support RusChem’s contention that a French court would find that French law applied to the arbitration agreement because the seat was in France. RusChem also argued that the majority decision in Enka (where there was no choice of governing law but there was a choice of seat) should apply so that the parties could be taken to have intended French law to govern the arbitration agreement.

The Supreme Court rejected these arguments. There was a choice of governing law in this case because the governing law clause in the bonds, properly construed, applied to all the contractual provisions including the arbitration agreement. The fact that the courts of the arbitral seat might take a different view and regard their own law as governing the arbitration agreement was not a good reason to reach a different conclusion.

Proper place

The Supreme Court clarified that where, as here, the parties have contractually agreed on a forum for resolving their disputes, the issue of whether there is a more appropriate forum (‘forum non conveniens’) does not arise. Rather, the English Court will give effect to the chosen forum unless there are strong reasons not to do so. This is equally applicable whether the chosen forum is a court or arbitration.

The fact that the Russian Arbitrazh Court treated a foreign arbitration agreement as inoperable was not sufficiently strong reason for the English Court not to seek to enforce the parties’ arbitration agreement. Under English law, the arbitration agreements in the bonds were valid and RusChem was in breach of them. 

Where the seat of the arbitration was in England, the English Court would not hesitate to grant an ASI against foreign court proceedings to restrain breach of the arbitration agreement. Where the seat was not in England, the English Court would still seek to enforce the parties’ contractual bargain because this would not be inconsistent with comity as regards the foreign court.

The role of the French Court in this case was to supervise the way in which the arbitration proceedings were conducted, not to prevent a breach of the contractual obligation to arbitrate. Furthermore, on the evidence, the French Court could not grant an ASI and therefore the claim for an ASI could not be brought in the French Court. 

While an arbitrator could in principle make such an order, it would not have the coercive effect required because the arbitrator does not have the same powers to enforce performance of an ASI in the way that an English Court could.

The Supreme Court concluded that there was no other appropriate forum and England was the proper place to bring the claim for the ASI. The final mandatory ASI was upheld.

Comment

An Arbitration Bill is currently before the UK Parliament which incorporates an amendment to the Arbitration Act 1996 to provide that the arbitration agreement is governed by the law of the seat unless the parties expressly provide otherwise. 

This amendment was made on the recommendation of the Law Commission, following its review of the Arbitration Act 1996 and in view of feedback it had received during the consultation period which suggested that the law as stated in Enka was “complex and unpredictable.”

The Supreme Court in this case declined to reconsider the applicable principles while draft legislation is before Parliament. 

In the meantime, those who are concerned about the risks and costs of a dispute concerning the governing law of their arbitration agreement should clearly define the governing law of the arbitration agreement.

More generally, the Supreme Court’s decision reflects the English Courts’ continued support of international arbitration and traditional stance of enforcing arbitration agreements and granting ASIs (where appropriate) to restrain breaches of such agreements.