Enka v. Chubb in the Supreme Court: Which Law is it Anyway?

Ian McDonald and George Spalton |

Introduction

Where the law governing a contract containing an arbitration agreement differs from the law of the nominated “seat” of the arbitration, which law – absent any express choice – governs the arbitration agreement itself? That was the question that the Supreme Court had to grapple with in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38, in which judgment was handed down on 9 October 2020. George Spalton and Ian McDonald of 4 New Square consider the decision.

The Facts

In February 2016 a massive fire broke out at a power plant in Berezovskaya, Russia, causing severe damage. In May 2019, Chubb – the Russian insurer of the plant’s owner – commenced proceedings in Russia against Enka, a Turkish subcontractor involved in construction work at the plant, alleging liability for the damage. In response, Enka began an arbitration claim in England, arguing that the dispute was subject to an arbitration agreement in the relevant contract[1] – which provided for arbitration in London under ICC Rules – and seeking an anti-suit injunction to restrain Chubb from pursuing the Russian proceedings.

Procedural History

In December 2019 the Commercial Court dismissed Enka’s arbitration claim, primarily on the grounds that the appropriate forum to determine the validity and scope of the arbitration agreement was Russia rather than England.

In April 2020 the Court of Appeal allowed Enka’s appeal, finding that – unless there has been an express choice of law for an arbitration agreement – the general rule is that the arbitration agreement will be governed by the law of the “seat”. As there was no such express choice in this instance, the arbitration agreement was governed by English law as the law of the “seat” and it was appropriate to grant the anti-suit injunction.

Chubb appealed to the Supreme Court.

The Issue for the Supreme Court

The main issue for the Supreme Court, then, was which law governs the validity and scope of an arbitration agreement where the law applicable to the main contract – which, in this case, was Russian law, by virtue of the Rome I Regulation – differs from the law of the agreed “seat” of the arbitration – which, in this instance, was English law.

The Supreme Court’s Decision

By a 3-2 majority, the Supreme Court dismissed Chubb’s appeal. Lords Hamblen and Leggatt gave the majority judgment, with which Lord Kerr agreed. Lords Burrows and Sales wrote dissenting judgments.

The Majority

The majority observed that English Courts must apply common law rules when deciding which law governs an arbitration agreement, because the Rome I Regulation does not apply to arbitration agreements.

According to those rules, the law applicable to an arbitration agreement is (1) the law expressly or impliedly chosen by the parties; or, (2) absent such a choice, the law “most closely connected” to the arbitration agreement. In ascertaining whether there has been such a choice, the English Courts should apply the ordinary rules of contractual interpretation found in English law as the law of the forum.

The majority stated that, generally speaking, where the parties have not expressly or impliedly chosen the law which governs the arbitration agreement, but they have chosen the law applicable to the main contract, that latter choice of law would apply to the arbitration agreement. This was said to encourage certainty; achieve consistency; avoid complexities, uncertainties, and artificiality; and ensure coherence (see [53]).

Turning to the decision below, the majority concluded that the Court of Appeal was wrong to hold that there is a “strong presumption” that, by nominating the “seat” of the arbitration, the parties have impliedly chosen that the law of that “seat” should govern the arbitration agreement. They recognised that whilst a choice of “seat” could, in certain cases, support this inference, the Arbitration Act 1996 does not justify any general inference where the “seat” is England (see [94]).

Instead, where there is no choice of applicable law in terms of the arbitration agreement, the English Courts should determine, “objectively and irrespective of the parties’ intention”, the law with which the arbitration agreement has its “closest connection”, which – unlike the identification of an express or implied choice of law – is purely a question of law (see [118]).

However, the majority further found that, generally speaking, an arbitration agreement will be most closely connected with the law of the “seat” of the arbitration, given that:

  • The “seat” is the place where – legally, if not physically – the arbitration agreement is to be performed (see [121]);
  • This approach accords with international law, as embodied in the New York Convention, and legislative policy (see [141]);
  • This rule is likely to uphold the reasonable expectations of contracting parties who have chosen to settle their disputes by arbitration in a specified place without choosing the law to govern their contract (see [142]); and,
  • This approach provides legal certainty, allowing parties easily to predict which law, in the absence of choice, the English Courts will apply (see [144]).

The majority therefore concluded that – as the relevant contract, properly construed, contained no express or implied choice of Russian law – the arbitration agreement was governed by the law of the “seat” of the arbitration, being the law with which it was most closely connected. As that “seat” was London, the majority upheld the Court of Appeal’s decision that English law governed the validity and scope of the arbitration agreement (albeit for different reasons).

The Dissenting Judgments

Although Lords Burrows and Sales agreed with the majority that, where parties have expressly or impliedly chosen the law of a contract containing an arbitration agreement, this choice applies to the arbitration agreement, they dissented on what the position should be in the absence of any such express or implied choice.

In this scenario, Lords Burrows and Sales considered that it should be the law that applies to the main contract that should govern the arbitration agreement, as it is this law with which that agreement has its closest connection. Here, that was Russian law: the relevant contract, after all, was to be performed in Russia; its primary language was Russian; and the contractual price was to be paid, in Russian currency, to a Russian bank account.

Observations

The Supreme Court’s decision essentially represents a presumption that – unless parties have expressly or impliedly chosen which law governs a contract containing an arbitration agreement – that agreement will generally be governed by the law of the nominated “seat” of the arbitration.

Despite the fact that the Justices were divided, it is difficult to disagree with the majority’s conclusion that this approach provides welcome legal certainty in an area which has vexed the Courts and commentators alike for a number of years – not least because it provides that an express or implied choice of law will govern the arbitration agreement (i.e., in the first instance, the law of the main contract (if any) or, alternatively, in the absence of an agreement in relation to the main contract, the law of the “seat”) by comparison with a scenario whereby the law governing the main contract is treated as governing the arbitration agreement notwithstanding (1) the lack of an agreed governing law for the main contract and (2) the existence of an agreed “seat” for the arbitration

Such certainty, however, could have been achieved by other means, and Lords Burrows and Sales do make persuasive arguments for preferring the law applicable to the main contract, as opposed to that of the “seat”, when determining the governing law of an arbitration agreement:

  • If an arbitration agreement is treated in the same way as all other clauses of a contract, the general rule would be that the same law governing the main contract would apply across the board;
  • Whilst an arbitration agreement is generally regarded as severable from the main contract, this is to ensure that the former remains effective notwithstanding the non-existence, invalidity, termination, or recission of the latter. It does not follow that the law governing an arbitration agreement should be identified without reference to the main contract;
  • Drawing such a line between an arbitration agreement and the main contract may cause practical problems. For example, an English Court might be required to consider pre-contractual negotiations in interpreting the main contract (if it is governed by a foreign law which regards such negotiations as admissible), but to exclude them, if the “seat” is England, when interpreting the arbitration agreement (as English law dictates that such negotiations should not be taken into account). Such problems are avoided if the law of the main contract applies throughout;
  • Although the “seat” is a reliable indicator of the procedural law which was intended to apply, it is not necessarily a statement of the law which should govern the validity of the contract by means of which the arbitration agreement was (or was not) made; and,
  • By analogy, the law which governs a jurisdiction clause is normally the same as the law applicable to the contract in which the clause is contained. Why, then, should the approach to the proper law of an arbitration agreement be any different?

Further, following the Supreme Court’s ruling it remains open to parties to argue, in the first instance, whether a law has in fact been expressly or impliedly chosen to apply to the main contract, in which case it will be that law which ordinarily applies to the arbitration agreement (without consideration of the law of the “seat” of the arbitration).

Accordingly, when negotiating the terms of international contracts containing arbitration agreements, parties would be wise to include a clear and express choice of law, both in respect of the main contract and the arbitration agreement. Should they fail to do so, but nominate England as the “seat” of the arbitration, it will most likely be English law that applies to any questions about the validity and scope of the arbitration agreement.

Finally, one other notable feature of this case was that the proceedings before the Commercial Court, the appeal to the Court of Appeal, and the appeal to the Supreme Court were all heard within just over seven months. As Lords Hamblen, Leggatt, and Kerr put it, this was a vivid demonstration of the speed with which the English Courts can act – even amidst the Covid-19 pandemic – when necessary.

George Spalton and Ian McDonald, 4 New Square

g.spalton@4newsquare.com, i.mcdonald@4newsquare.com

14 October 2020

Disclaimer: this article is not to be relied on as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.

© George Spalton and Ian McDonald, October 2020.

[1] i.e. the contract between Enka and CJSC Energoproekt (the company responsible for the design and construction of the power plant). In this regard, Energoproekt transferred its rights under the contract to the owner of the power plant in May 2014 and Chubb brought the proceedings against Enka as subrogee to the owner’s rights under the contract.