Executive Summary
The substantive dispute concerns performance bonds issued by UniCredit in favour of RusChem. The bonds were issued in relation to the construction of gas facilities in Russia by two German contractors. The performance bonds were governed by English law and provided for disputes to be settled by ICC arbitration seated in Paris. When UniCredit refused to pay RusChem under the performance bonds because of the EU sanctions regime, RusChem commenced proceedings before the Russian Arbitrazh Courts. In response, UniCredit applied to the English court for an anti-suit injunction.
Two key issues arose as regards the English court's jurisdiction to grant the anti-suit inunction:
- What was the governing law clause of the relevant arbitration agreement; and
- Whether the English courts were the appropriate forum.
Applying the principles established in Enka v Chubb, the Court of Appeal held that the governing law of the relevant arbitration agreement was English law.
The Court of Appeal also found that the English courts were the appropriate forum. Among a number of factors, the Court of Appeal considered the fact that an anti-suit injunction was not available from the French court and that an arbitration award would not be enforceable against RusChem in Russia.
Having established jurisdiction, the Court of Appeal went on to grant the final anti-suit injunction. Whilst expressing caution that an anti-suit injunction may not always be appropriate in respect of a foreign seated arbitration, the Court of Appeal relied on the following when granting the final relief:
- The relevant arbitration agreement being governed by English law gave the English court sufficient interest in or connection to justify granting the anti-suit injunction;
- The policy of English law that those who agree to arbitration should adhere to their bargain; and
- The evidence that the French court would not regard an English court anti-suit injunction to be an interference with its jurisdiction.
As a practical measure, we would always recommend that an express governing law clause is included in an arbitration agreement. The willingness of an English court to grant injunctive relief in support of a foreign seated arbitration (where it has jurisdiction to do so) should be considered as a relevant factor when deciding which governing law to choose.
Factual Background
RusChemAlliance LLC ("RusChem") is a company incorporated in Russia. In 2021, it engaged two German contractors to construct LNG (liquefied natural gas) and GPP (gas processing plant) facilities in Russia under the terms of EPC contracts.
The contractors provided certain performance bonds to RusChem (the "Performance Bonds") through, in this case, Unicredit Bank GmbH ("UniCredit"). The Performance Bonds are governed by English law and contained an arbitration agreement (the "Arbitration Agreement") which specified that:
- Disputes were to be settled by ICC arbitration;
- The seat of the arbitration would be Paris; and
- The language of the arbitration would be English.
There was no express governing law of the Arbitration Agreement.
As a result of the EU sanctions regime introduced in 2022, the German contractors halted performance under the EPC contracts and, in response, RusChem terminated those contracts and made demands under the Performance Bonds. UniCredit rejected those demands on the grounds that the EU sanctions regime prohibited payment and that refusal resulted in the substantive dispute between the parties.
Procedural Background
RusChem commenced proceedings in August 2023 against UniCredit before the Arbitrazh Court in Russia.
RusChem's submission, which the Russian court accepted, was that the Arbitration Agreement was unenforceable as a result of Article 248.1 of the Russian Arbitration Procedural Code. Article 248.1 confers exclusive jurisdiction to the Russian Arbitrazh Courts over disputes arising from foreign sanctions. With the substantive trial before the Russian Arbitrazh Court fixed for 27 September 2023, on 22 August 2023 UniCredit obtained an interim anti-suit injunction on an ex parte basis to restrain the Russian proceedings. The hearing for final relief was held on 22 September 2023.
Legal Principles - Test for Jurisdiction
As RusChem is not domiciled in England or Wales and has no presence there, the jurisdiction of the English court depended on whether service can be effected on RusChem out of the jurisdiction. This requires three tests to be satisfied:
- There is a serious issue to be tried;
- There is a good arguable case that the claim falls within one of the relevant gateways in Practice Direction 6B, in this case that the contract was governed by English Law (the "Gateway Test"); and
- England is the proper place in which to bring the claim (the "Appropriate Forum Test").
There was no dispute between the parties that there was a serious issue to be tried. The key issues in the case concerned the Gateway Test and the Appropriate Forum Test.
First Instance Judgment
In his extempore judgment, Sir Nigel Teare found that UniCredit had not met either the Gateway Test or the Appropriate Forum Test and, accordingly, the English court did not have jurisdiction over RusChem.
Gateway Test at First Instance
As a result of the doctrine of separability, the Arbitration Agreement is treated as a separate agreement from the Performance Bonds. Accordingly, the relevant contract for the purposes of the Gateway Test is the Arbitration Agreement.
As to the governing law of an arbitration agreement generally, Sir Nigel Teare set out the guidance from the leading Supreme Court judgment of Enka v Chubb [2020] UKSC 38.
The starting point under Enka v Chubb is that where, as was the case in the Performance Bonds, the arbitration agreement does not specify a choice of law, a choice of English law for the main contract will generally also apply to the arbitration agreement.
Notwithstanding this starting position, Sir Nigel Teare found that this was negated by a non-statutory principle of French law under which the existence and effectiveness of an arbitration agreement is to be determined in accordance with the parties' common intention.
In his judgment, by choosing Paris as the seat of the arbitration, the parties can be taken to have been aware of this principle of French law, thereby negating the starting point under Enka v Chubb. Sir Nigel Teare found that the governing law of the Arbitration Agreement was French law and as a result UniCredit did not satisfy the Gateway Test.
Appropriate Forum Test at First Instance
As to the Appropriate Forum Test, Sir Nigel Teare found that the appropriate forum was ICC arbitration, through which damages for breach of the Arbitration Agreement would be available to UniCredit. In his judgment, this was the case notwithstanding:
- an anti-suit injunction is not available from a French court; and
- an award in damages may be difficult to enforce in Russia.
UniCredit therefore did not satisfy the Appropriate Forum Test.
Continuation of the Interim Anti-Suit Injunction
Notwithstanding the refusal of final relief, the interim anti-suit injunction remained in place pending UniCredit's appeal. In the meantime, the Russian Arbitrazh Court suspended the Russian substantive proceedings pending the appeal to the Court of Appeal.
Court of Appeal Judgment
Gateway Test in the Court of Appeal
The Court of Appeal stated that the principle of French law relied upon by Sir Nigel Teare does not go so far as to mean that having Paris as the seat of the arbitration must mean that the arbitration agreement is governed by French law. Rather, this all depends on the parties' common intention and is therefore no different to the position under English law.
Accordingly, this principle was not enough to negate the starting position under Enka v Chubb. It was held that the governing law of the Arbitration Agreement was English law, and the Gateway Test was thus satisfied.
Appropriate Forum Test in the Court of Appeal
Referring to the case of Vedanta Resources Plc v Lungowe [2019] UKSC 20, the Appropriate Forum Test may involve two factors. The first is which is the natural forum and the second is whether there is a real risk that justice will be unobtainable in that forum.
It was this second factor that was critical in this case, it being noted that the court of the seat (the French court, in this case) has primary responsibility for supervising any arbitration. Nevertheless, the Court of Appeal found that the English court was the appropriate forum for the interests of the parties and the ends of justice for the following reasons:
- An anti-suit injunction was not available from the French court;
- The French court would not regard an anti-suit injunction granted by the English court to be an interference with its jurisdiction;
- An arbitration award for damages and/or requiring RusChem to terminate Russian court proceedings would not be enforceable in Russia;
- It is likely that the Russian court would itself grant an injunction to prevent UniCredit from pursuing arbitration in Paris;
- Without an English court anti-suit injunction in place, it must be highly likely that a judgment from the Russian court in favour of RusChem could be obtained in short order;
- It is abusive for RusChem to: (i) rely on the availability of substantial justice in France as the seat of arbitration; but (ii) at the same time argue that the Arbitration Agreement is unenforceable.
In short, the Court of Appeal said it was "an illusion" to suggest that substantial justice could be obtained by UniCredit in France. As a result, the English court was found to be the appropriate forum.
Should a Final Anti-Suit Injunction be Granted?
Having concluded that the English court has jurisdiction, the Court of Appeal then considered whether a final anti-suit injunction should be granted.
Caution was expressed regarding the English court granting an anti-suit injunction in circumstances where the seat of the arbitration is abroad. It may not be appropriate if, for example, the court of the seat would regard the injunction as an unwarranted interference with its own jurisdiction.
Nevertheless, the Court of Appeal stated that there is no reason in principle why the English court should not grant an injunction where it has jurisdiction over a defendant pursuant to an English law contract. In reaching its decision to grant final relief, the Court of Appeal relied on:
- The fact that the Performance Bonds and the Arbitration Agreement were governed by English law. This provided the English court with sufficient interest in or connection to justify granting the anti-suit injunction;
- The evidence that the French court would not regard an English court anti-suit injunction to be an interference with its own jurisdiction; and
- The policy of English law that those who agree to arbitration should adhere to their bargain.
Impact of the Law Commission's Review of the Arbitration Act 1996
Of interest, and as referred to by Lord Justice Males in his judgment, the Law Commission has suggested that the law in Enka v Chubb is "complex and unpredictable" and recommends that a default rule be introduced to the effect that an arbitration agreement will be governed by the law of the seat.
The new arbitration act is currently going through parliamentary approval and is expected to receive royal assent during the early part of this year. Under the new arbitration law as drafted, the governing law of the Arbitration Agreement would be French law, which would have resulted in a very different outcome in this case.
Practical Guidance
As Lord Justice Males noted, notwithstanding the Law Commission's recommendations, the current law is as stated by the Supreme Court in Enka v Chubb. In advance of a new arbitration act coming into effect, to avoid any argument, we would recommend that arbitration agreements include an express governing law clause. When deciding which governing law to choose, the parties should consider the willingness of the English court to grant relief (where it has jurisdiction) in order to hold parties to their agreement to arbitrate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
