This article explores the English Court of Appeal's judgment in the case of UniCredit Bank GmBH v. RusChem Alliance LLC. It explores the court's interpretation of the law applicable to the parties' arbitration agreement and the loopholes within the same. This issue, while a classical tug of war between the law of the seat and the law of the main contract, poses fresh challenges as it arose with respect to the jurisdictional competence of English courts to grant an anti-suit injunction against the Respondents from pursuing proceedings before the Russian Arbitrazh Court, in light of their agreed upon Paris seated arbitration. This issue becomes complicated due to the newly imposed sanctions upon Russia and its response to the same, by virtue of which, exclusive jurisdiction for disputes with such sanctioned entities has come to vest exclusively in the Arbitrazh Court. While the Court of Appeal granted the said injunction, there appear to be multiple gaps in the reasoning employed by it in reaching their conclusion. This piece aims to analyse these loopholes and, in the process, attempts to justify why French law, as the law of the seat, should have at least been considered for application in this case.
I. Brief Facts Of The Dispute
RusChem Alliance LLC (RCA), a Russian company, had concluded Engineering Procurement and Construction contracts (EPC Contracts) with German Contractors in 2021 for construction of certain facilities in Russia. Under these RCA was to provide on-demand bonds guaranteeing the performance of its obligations. Seven of these bonds (Four guaranteeing the performance and three securing the repayment of the sum paid in advance) were issued by UniCredit Bank (UniCredit), a German entity. Each of these bonds provided for English law as its governing law and an arbitration seated in Paris under the International Chamber of Commerce (ICC).1
Following Russia's invasion of Ukraine in 2022, the European Union (EU) imposed sanctions on Russia,2 due to which, the Contractors halted performance. RCA then terminated these EPC Contracts and demanded payment under all seven bonds from UniCredit, who then refused to pay stating that such payment was prohibited by the EU sanctions.3
Instead of commencing arbitration, RCA initiated proceedings against UniCredit before the Russian Arbitrazh Court, claiming payment of the total value of the bonds with interest. It claimed that the Arbitrazh Court had exclusive jurisdiction to hear the dispute as the arbitration clause contained in the bonds was unenforceable on account of Articles 248.1 and 248.2 of the Arbitration Procedural Code of the Russian Federation.4
These provisions, inserted in 2021 itself, confer exclusive jurisdiction on the Arbitrazh Court in disputes between Russian and foreign persons/entities, arising from foreign sanctions. They enable Russian persons/entities affected by such sanctions to apply to the Arbitrazh Court for an injunction prohibiting the other party from initiating or continuing proceedings before a foreign court or international arbitration tribunal located beyond the territory of the Russian Federation.5
It was to counter these proceedings that UniCredit applied for an antisuit injunction in England. This however, gave rise to the very significant question of whether the English Courts possessed jurisdiction to grant such an injunction considering the fact that the parties' contract while being governed by English law, provided for arbitration in Paris as per the ICC Rules.
A crucial and yet classical question thus emerged: in the absence of a defined choice of law for the arbitration agreement, which law would be deemed as the governing law of the arbitration agreement: law of the seat (French) or law of the main contract (English)?
This article aims to analyse the decision of the English Court of Appeal (CoA) as it sought to allow the injunction applying English law, while overruling the High Court judgment.
Dismissing an appeal made to the Supreme Court of the United Kingdom (UKSC) by RCA, the UKSC, through an order held that the injunctive reliefs granted by the CoA must remain in force. While a detailed judgment explaining the UKSC's reasoning is awaited, in the meanwhile, we undertake to examine the CoA's judgment giving way to this outcome.
II. Summary Of The Court Of Appeal's Reasoning
The CoA entirely relied on the nine conflict of law rules framed by the UKSC in Enka v. Chubb to identify the applicable law of the arbitration agreement within the Bonds.
It first resorted to principles (ii), (iii) and (iv) at [170]:
"(ii)According to these rules, the law applicable to the arbitration agreement will be (a) the law chosen by the parties to govern it or (b) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected.
(iii) Whether the parties have agreed on a choice of law to govern the arbitration agreement is ascertained by construing the arbitration agreement and the contract containing it, as a whole, applying the rules of contractual interpretation of English law as the law of the forum.
(iv) Where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract."6
Evidently as this exercise was in furtherance of a lack of express intention as to the applicable law of the arbitration agreement, the CoA used principle (iii) to read the contract as a whole and attempted to determine if there was any implied choice of law.
Referring to principle (iv), the CoA concluded that the said principle was in fact the very statement of express choice of law applicable to the arbitration agreement. This was in disregard of the fact that no such express statement of applicable law existed within the arbitration clause itself. The CoA therefore, attempted to fill the void of an express choice by construing that principle (iv) in fact reflected that choice of the parties to apply the law of the main contract to the arbitration agreement.7
Having found the governing law, the only onus upon the court remaining was to negate the possibility of the application of the law of the seat, made permissible under principles (vi) of Enka, which RCA had plead:
"(vi) Additional factors which may, however, negate such an inference and may in some cases imply that the arbitration agreement was intended to be governed by the law of the seat are: (a) any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration agreement will also be treated as governed by that country's law; or (b) the existence of a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective. Either factor may be reinforced by circumstances indicating that the seat was deliberately chosen as a neutral forum for the arbitration."8
The CoA dismissed application of this exception to the general principle of applying the law of the contract embodied in principle (iv).
Further, RCA attempted to rely on principles (viii) to urge the application of the law of the seat:
"(viii) In the absence of any choice of law to govern the arbitration agreement, the arbitration agreement is governed by the law with which it is most closely connected. Where the parties have chosen a seat of arbitration, this will generally be the law of the seat, even if this differs from the law applicable to the parties' substantive contractual obligations."9
The CoA denied the application of this principle too, presenting flawed reasoning, stating that given the presence of a choice of law within the main contract, this principle was negated and that therefore, the general presumption under (iv) shall continue to apply.10
III. Apparent Gaps In Reasoning
Although this decision offers certainty as to the path that English law has taken while interpreting the validity of an arbitration agreement in the absence of an express choice of law, the reasoning adopted by the CoA in its judgment, contains some gaps that need to be looked at:
A. Non-utilisation of principle (ii)(b).
Principles (ii)(b) from Enka provides that in the absence of a choice of law, the applicable law of the arbitration agreement shall be, "the system of law with which the arbitration agreement is most closely connected."11
While acknowledging the lack of an express choice, the CoA proceeded to assume that principle (iv) embodied that choice of the parties to apply the law applicable to the main contract. Whether they deemed it an express or an implied choice remains unclear, as they note, at [35] and [45] that "the distinction between an express and implied choice in this context is not a sharp one."12
Considering that the contract definitely did not contain any express choice of law delineating the applicable law for the arbitration agreement, it is strange how the CoA took a precedential principle to embody the parties' choice of the law of the main contract and treated it as if it were a choice adopted by the contract itself. The parties silence upon the choice of law for the arbitration agreement therefore, was filled in and supplanted by the default principle of the law of the contract, as if it were the choice of the parties themselves, whereas, they had made no indication of the same.
The separability of an arbitration clause is a fiction, but an established principle of law that must be respected in theory, and in practice. It means that an arbitration clause, while forming part of the main contract, is independent and separate from it in the sense that it survives even the termination of the contract or any challenge to its validity.13
The manner of interpretation adopted by the CoA not only defeats the separability principle but also party autonomy, a principle that international commercial arbitration rests on.14
In completely refusing to consider principle (ii)(b) requiring it to look at the clause's closest and most real connection in the absence of a choice of law, the CoA effectively rendered pointless, even the existence of such an approach, which had in fact been identified and utilised effectively in Sulamérica v. Enesa as well.15
B. Disallowing application of the exception in principle (vi).
Separability of the arbitration agreement is an age old and an inherent principle of French law and jurisprudence and is cemented within Article 1447 of the French Code of Civil Procedure.16 French courts over the years have consistently established their preference for the application of the law of the seat as the governing law of an arbitration agreement as against the extrapolation of the law of the main contract.
In numerous cases consisting of French seated arbitration, French courts have held that the governing law of the arbitration agreement depends upon the common intent of the parties and must be read without reference to the law governing the contract or other national law.17 The UKSC had even acknowledged this as "part of French law".18
Considering that there exists complete clarity on the manner in which French law construes the law applicable to an arbitration agreement, and that it does not require national law to construe the same, it is not extremely presumptuous in this day and age, where commercial contracts are made with heavy reliance and involvement of legal counsel, to state that the parties would have been unaware that their agreement would be read under the supervision of French law, as they clearly chose Paris as their seat. That they may have deemed it unnecessary to specify a governing law in light of the seat already chosen, intending French law to apply, is a possibility that merits consideration.
When the CoA decided to negate the application of the exception under principle (vi) in the present case, it did so on the pretext that the Dalico ruling19 (which RCA had argued as the relevant provision to be read under the exception as the applicable statement of law) does not ipso facto provide for the application of the French law merely because Paris has been chosen as the seat, and that the choice of the applicable law is to be based on the parties' "common intention" instead. The CoA then stated that this was same as the approach utilised by English law and that such standard of "common intention" "falls considerably short"20 of what the UKSC in Enka envisaged would suffice to displace the general presumption, without explaining its reasoning or the threshold for holding this to be a less than sufficient standard. The CoA also did not attempt to analyse whether any common intent was present amongst parties as to the applicable law.
However, as mentioned before, French law does not require the specification of a national law and interprets common intention from the arbitration agreement itself based on its strong abidance of the separability principle. In light of this, it is incorrect to state that English and French laws apply the same principles while assessing common intention of the parties. While the former does so by supplanting the main law of the contract to the arbitration agreement, the latter does not deem this necessary and takes the choice of the law of the seat as a sufficient indication of the common intention of the parties.
Logically seen, the absence of an express choice law for the arbitration agreement does not by itself allow the application of the law of the contract to it. There is absolute lack of consensus on the subject of the application of the law of the main contract to the arbitration agreement between the parties as nothing has been mentioned with regard to this. Following from this, and considering the fact that a common choice of seat exists, there seems to be more consensus over the seat than over the application of the law of the contract; the parties' common intent can be seen as siding with the law of the seat more than it does with the law of the contract.
This gives reason to examine the "common intention" of the parties and it does not suffice to state that the requirement of "common intention" is different from an express legal position requiring the application of French law.
C. Flawed reading of principle (viii).
Principle (viii) specifically alludes to the absence of a choice of law to govern the arbitration agreement. The CoA however, interpreted this to apply only in cases where there is an absence of an express choice of law governing the main contract by stating that, "when there is such an express choice of the law governing the main contract, there will be no scope for a principle which depends on 'the absence of any choice of law to govern the arbitration agreement'.21
This is an inherently flawed approach to reading the said principle. The principle does not refer to the law of the main contract and in fact, its purpose seems to be to allow the displacement of the law of the contract to yield to the law of the seat to operate as the governing law for the arbitration agreement where none is specified but a different law of the seat as against the law for the substantive contractual obligations has been chosen. Nonetheless, the CoA, without stating reasons for believing so, held that it shall apply only when there is a lack of an express choice of law within the main contract.
This is not a practically viable reading of the said principle in today's day and age. It is hard to imagine that a contract is concluded between parties without decision as to the applicable law over the contractual obligations held within it. Almost every contract, whether it expresses a choice of law for the arbitration agreement or not, does nonetheless specify a choice of law for the main contract. If the CoA's reasoning is to be accepted, principle (viii) is rendered practically of no use, as in every case with an absence of agreement as to the governing law of the arbitration agreement, automatically the law of the contract shall apply, never leaving any scope for the application of the law of the seat.
The principle has already accommodated within it the presence of a choice of law for the substantive obligations of the main contract and nonetheless recommends the adoption of the law of the seat as the governing law of the arbitration agreement when the latter differs from the former. Despite this clear wording of the principle, the CoA has read this as an exception to the general presumptive rule of applying the law of the main contract. Such a reading, effectively bars all use and purpose for principle (viii) and goes against the very language and spirit of the principle.
IV. Conclusion
This case presents a new and unique challenge for courts across the world in light of the new amendments to the Russian Code of Arbitration Procedure. While there is no consensus nor concrete jurisprudence as to the recourses in such a scenario, has been interesting to see how the English courts have handled this challenge.
The decision of the CoA in determining the law of the main contract as the applicable law to the arbitration agreement, while loyal to English interpretative principles on the subject, lacks continuous and concrete reasoning.
Not only does the approach adopted by the CoA reflect a disregard for the principle of separability, it adopts tautological reasoning in certain places. Even though this decision offers consistency and predictability as to the English approach, it is difficult to ascertain if it completely upholds the actual intention held by the parties while choosing a seat different from the law applicable to the substantive obligations of the contract. This is especially relevant in light of the fact that this declaration and injunction granted (and now upheld by the UKSC) would have no binding value in the Russian Arbitrazh Court, which would have no obligation upon it to injunct itself from continuing the proceedings instituted by the RCA; they hold exclusive jurisdiction to hear the said dispute as per Russian law.
This dichotomy underscores the need for parties to meticulously draft their arbitration agreements with clarity on the applicable law so as to avoid such pitfalls at the time of enforcement and/or interpretation. Additionally, following from Kabab-Ji SAL v. Kout Food Group22 and many other such line of decisions, including this one, the paramount lesson is clear: parties must take extreme care and caution and exercise utmost diligence in the drafting of their arbitration agreements. It has become abundantly evident, from a series of cases over the years that a failure to clearly delineate applicable laws works solely to the detriment of the parties. They must not therefore, not allow interpretative factors to decide and determine the law applicable to their arbitration agreement and should expressly and clearly state their choice of law while drafting the same. While this practice may not be able to weave around the constraints imposed by Russian law, it is nonetheless a necessary lesson and serves as a safeguard against potential future ambiguities for all entities and must be followed.
In essence therefore, it is inevitable that challenges posed by conflicting legal frameworks will continue to create ambiguities, proactive and clear drafting of the arbitration agreements remains pivotal.
Footnotes
1. UniCredit Bank GmBH v. RusChem Alliance LLC [2024] EWCA Civ 64 [5-9].
2.Council Regulation 328/2022 of Feb. 25, 2022 amending Regulation No. 833/2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine [2022] OJ L 49/1.
3. Council Regulation (EU) 833/2014 of Jul. 31, 2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine artt. 3b(2)(b), 11(1) [2014] OJ L229/1.
4. Arbitrazhno Protsessualnyi Kodeks Rossiiskoi Federastii [APK RF] [Code of Arbitration Procedure], artt. 248.1, part 1, 248.2 [hereinafter "APK RF"].
5. APK RF, art. 248.1, part 3(2).
6. Enka Insaat Ve Sanayi AS v. OOO Ins. Co. Chubb [2020] UKSC 38 [170].
7. UniCredit Bank GmBH v. RusChem Alliance LLC, [2024] EWCA Civ 64 [45] states, "an express choice of the governing law for the main contract will generally be understood as including an express choice of the law applicable to an arbitration agreement which forms part of that contract."
8. Enka Insaat Ve Sanayi AS v. OOO Ins. Co. Chubb, [2020] UKSC 38 [170].
9. Ibid.
10. UniCredit Bank GmBH v. RusChem Alliance LLC [2024] EWCA Civ 64 [69] (Eng.).
11. Id.
12. UniCredit Bank GmBH v. RusChem Alliance LLC, [2024] EWCA Civ 64 [35], [45].
13. Alan Redfern and Martin Hunter, Law & Practice of International Commercial Arbitration (7th edn. Oxford University Press 2021).
14. Ibid.
15. Sulamérica CIA Nacional de Seguros S.A. v. Enesa Engenharia S.A., [2012] EWCA (Civ) 638, [25].
16. Code Civil [C. civ.] [Civil Code] art. 1447 (Fr.).
17. Cour de cassation [Cass.] [supreme court for judicial matters] 1e civ., Dec. 20, 1993, Bull. Civ. I, No. 91-16.828 (Fr.); Christophe von Krause, 'Existence and Validity of an Arbitration Agreement: The French Supreme Court Confirms that the Validity of an Arbitration Agreement Depends Primarily on the Common Intent of the Parties' (Kluwer Arbitration Blog, Jan. 27, 2010) https://arbitrationblog.kluwerarbitration.com/2010/01/27/existence-and-validity-of-an-arbitration-agreement-the-french-supreme-court-confirms-that-the-validity-of-an-arbitration-agreement-depends-primarily-on-the-common-intent-of-the-parties/ accessed 02 August, 2024.
18. Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46 [15].
19. Cour de cassation [Cass.] [supreme court for judicial matters] 1e civ., Dec. 20, 1993, Bull. Civ. I, No. 91-16.828 (Fr.).
20. UniCredit Bank GmBH v. RusChem Alliance LLC, [2024] EWCA Civ 64 [63].
21. UniCredit Bank GmBH v. RusChem Alliance LLC, [2024] EWCA Civ 64 [69], [45].
22] Kabab-Ji SAL v. Kout Food Group [2021] UKSC 48.
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