Enka v Chubb: U.K. Supreme Court Rules on Law Governing Arbitration Agreements

Enka v Chubb: U.K. Supreme Court Rules on Law Governing Arbitration Agreements

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On 9 October 2020, the U.K. Supreme Court in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38 ruled on the English law approach to determining the law governing an arbitration agreement. The Supreme Court’s decision (available here) settles a vexed question of law that has given rise to conflicting English Court of Appeal authority. 

In summary, the majority held that:

  • Applying English common law rules, the arbitration agreement will be governed by (i) the law expressly or impliedly chosen by the parties; or (ii) in the absence of such choice, the law with which the contract is most closely connected.
  • Where the parties have not specified the law applicable to the arbitration agreement but have chosen the law to govern the contract containing the arbitration agreement, parties will be presumed to have intended that such law would apply to the arbitration agreement, and the choice of a different seat does not, of itself, displace such a presumption. 
  • Any presumption that the parties chose the law of the contract to govern the arbitration agreement could be overcome where there is a “serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective” or by provisions of the law of the seat stating specifically to the contrary. 
  • Where the parties have not chosen a law to apply to the arbitration agreement (either expressly or impliedly), the law of the seat will generally be most closely connected to the arbitration agreement and will therefore apply. 

The Supreme Court’s thorough judgment, which looked extensively to international commentators and authorities, including Gary Born’s and Professor Albert Jan van den Berg’s treatises, provides welcome certainty as to how English courts will determine the law governing the arbitration agreement in future cases. The decision is also noteworthy for its express endorsement of the validation principle as applied to the law governing the arbitration agreement (citing the second edition of Gary Born’s International Commercial Arbitration (2014)). The background to the decision and the key points emerging from the Supreme Court’s ruling are expanded upon below.

Background

The underlying dispute arose out of allegations that faulty works by Enka, a subcontractor involved in the construction of the Berezovskaya power plant in Russia, were partially responsible for a massive fire that damaged the plant in 2016. The contract between Enka and the head-contractor included an arbitration agreement providing for London-seated arbitration. The contract did not expressly provide for a governing law, either of the contract or the arbitration agreement.

Chubb Russia, insurers of the assignee head-contractor, filed a claim in the Moscow Arbitrazh Court in the summer of 2019 alleging that Enka and ten other defendants were jointly liable for the fire. In response, Enka filed a motion to dismiss in the Russian courts and brought suit in the English High Court on 16 September 2019, seeking: (i) a declaration that Chubb Russia was bound by the arbitration agreement in the contract and that it applied to the Russian claim; and (ii) an anti-suit injunction pursuant to s.37 of the Senior Courts Act 1981 restraining Chubb Russia from continuing the Russian proceedings.

In the English High Court, the dispute centered, among other things, on the question of the law that governed the arbitration agreement. Enka contended that it was governed by English law; Chubb contended that it was governed by Russian law. Although Baker J did not resolve the question of the proper law governing the arbitration agreement, he rejected Enka’s argument that the parties’ choice of seat was a choice of law for the arbitration agreement.1 Baker J ultimately dismissed Enka’s claim on the grounds that questions of the scope of the arbitration agreement and its applicability to the Moscow claim were more appropriately to be determined by the Moscow Arbitrazh Court in the Russian proceedings.2

The English Court of Appeal overturned the High Court’s decision, holding that there is a strong presumption that parties have chosen the law of the seat as the law governing the arbitration, unless there are “powerful countervailing factors” in the parties’ relationships or in the circumstances of the case.3 On the facts of the case, there being no express choice of law, the arbitration agreement was governed by English law as a matter of implied choice. Accordingly, the Court of Appeal held that Chubb Russia’s claim fell within the scope of the clause and that it was appropriate to grant an anti-suit injunction to restrain Chubb Russia from pursuing the Russian claim. 

The Position Prior to Enka 

The Court of Appeal’s decision was a notable departure from its previous decision in Sulamérica Cia Nacional de Seguros SA v. Enesa Engenharia SA [2012] EWCA Civ 638 on the approach to determining the law governing the arbitration. In Sulamérica, the Court of Appeal held that parties are presumed to have intended the whole of their relationship to be governed by the same system of law, and that absent an express choice of law for the arbitration agreement, parties are presumed to have intended the arbitration agreement to be governed by the law of the contract.4 The Court of Appeal in Enka v. Chubb found the approach in Sulamérica to be inconsistent with a prior Court of Appeal case, C v D [2007] 2 All ER (Comm) 557, and preferred the approach taken in the latter case.5 Thus, prior to the Supreme Court’s decision in Enka, the English courts’ approach to the law governing arbitration agreements was not entirely settled and difficult to predict. 

The Supreme Court’s Decision

At the outset, the majority (Lords Hamblen, Leggatt and Kerr) noted that it would apply English law as the law of the forum to determine whether or not the parties had made a choice of law.6 In this respect, the majority disagreed with the Court of Appeal’s view that an English court should apply the rules of the law of the main contract to determine whether the parties have made a choice of law.7 The majority also observed that the distinction between an express and implied choice of law is not necessarily a “sharp” one, and that in each case, it is a question of interpretation whether the parties have agreed on a choice of law as a matter of interpretation.8 

The majority then held that, in deciding which system of law governs an arbitration agreement, an English court must apply common law rules because the Rome I Regulation expressly excludes arbitration agreements from its scope. Applying English common law rules, an arbitration agreement – like other contracts – is governed by: (i) the law chosen by the parties; or (ii) in the absence of such choice, the law with which the contract is “most closely connected.”9

Parties’ Choice of Law 

Where the parties have not specified the law applicable to the arbitration agreement but have chosen the law to govern the contract containing the arbitration agreement, the majority found that this choice will, in the absence of a “good reason to the contrary,” also apply to the arbitration agreement.10 The majority held that this was “for the simple reason that the arbitration clause is part of the contract which the parties have agreed is to be governed by the specified system of law.”11 The majority further noted that this approach was consistent with English law authority and principle, as well as the approach taken in several other common and civil law jurisdictions, including Singapore, India, Pakistan, Germany and Austria.12

The majority identified two factors that may overcome an inference that the parties intended the law governing the contract to also govern the arbitration agreement, and which may in some cases imply that the parties intended the arbitration agreement to be governed by the law of the seat.13 These factors may also be reinforced by circumstances indicating that the seat was deliberately chosen as a neutral forum for the arbitration. 

First, the general inference may be overcome where there is a serious risk that, if governed by the same law as that of the main contract, the arbitration agreement would be ineffective. This majority referred to this as the “validation principle.”14 The majority reasoned that this was a form of purposive interpretation to give effect to the parties’ intentions, and that an “interpretation which would without doubt mean that an arbitration clause is void and of no legal effect at all gives rise to a very powerful inference that such a meaning could not rationally have been intended.”15  

Second, the general inference may be overcome if any provision of the law of the seat indicates that, where the parties have chosen that country as the seat of the arbitration, the arbitration agreement will also be treated as governed by that country’s law. The majority cited as examples section 48 of the Swedish Arbitration Act and section 6 of the Arbitration (Scotland) Act 2010.16

Importantly, the majority expressly rejected the Court of Appeal’s finding that there was a “strong presumption” that the parties have impliedly chosen the law of the seat to govern the arbitration agreement.17 The majority did not accept the reasoning of the Court of Appeal that the close relationship between the provisions of the Arbitration Act 1996 and the arbitration agreement justified a finding that a choice of an English seat of arbitration was an implied choice that the arbitration agreement will be governed by English law.18 The majority also declined to draw any inference from the possibility that issues concerning the validity or scope of the arbitration agreement might have to be decided by courts at the English seat.19

Closest Connection

Where there is no express or implied choice of law to govern the arbitration agreement, the system of law ‘most closely connected’ to the arbitration agreement will apply. The majority held that in general, the arbitration agreement will be most closely connected with the law of the seat of the arbitration. The majority cited multiple reasons for this conclusion: (i) the seat is where the arbitration is to be performed (legally, if not physically) and by agreeing to a seat of arbitration the parties submit themselves to the jurisdiction of the courts of that place for the purposes of deciding any issue relating to the validity or enforceability of their arbitration agreement; (ii) this approach is consistent with both legislative policy and international law, including Article V(1)(a) of the New York Convention; (iii) this rule is likely to uphold the reasonable expectations of contracting parties who specify a location for the arbitration without choosing the law to govern the contract; and (iv) this approach provides the legal certainty of a clear default rule in the absence of choice.20

The majority also noted obiter dicta that there may be circumstances where an exception to the general rule might apply because the arbitration agreement would be invalid under the law of the seat but not under the law governing the rest of the contract (citing the second edition of Gary Born’s International Commercial Arbitration (2014) in support).21 However, the majority found that it unnecessary to decide this issue on the facts of the case.

Application to the Facts

It was common ground that the parties did not specifically choose a law to govern their arbitration agreement. The majority found that the parties’ contract did not contain a choice of law to govern the contract and held that the validity and scope of the arbitration agreement was to be determined by the “closest connection” test.22

The majority rejected the argument by Chubb Russia that the existence of the arbitration agreement within a multi-tier dispute resolution provision meant that the arbitration agreement was inextricably bound up with the rest of the contract and thereby governed by the same law.23 The majority held that the entire multi-tiered dispute resolution provision would be governed by the law governing the arbitration agreement, in this case English law.24 

Accordingly, the majority held that English law governed the arbitration agreement and affirmed the decision of the Court of Appeal to grant an anti-suit injunction to restrain the Russian proceedings. The majority also noted that it makes no difference whether the arbitration agreement is governed by English or foreign law, as the inquiry in both cases remains the same: whether there has been a breach of the agreement and, if so, whether it is just and convenient to grant an injunction to restrain that breach. The majority rejected Chubb Russia’s argument that it was more appropriate to await a decision by the Russian courts before issuing an injunction, noting that such considerations of comity have little role to play when English courts issue anti-suit injunctions to enforce an arbitration agreement.25

Dissenting Opinions

Lord Burrows and Lord Sales dissented. Their dissents parted ways with the majority on three key points. 

First, Lord Burrows found that the validation principle should not apply to disputes concerning the interpretation or scope of the arbitration agreement, rather than disputes concerning the validity of the arbitration agreement.26 Second, Lord Burrows reasoned that, absent an express choice of law for the arbitration agreement, there should be a general presumption that the proper law of the main contract (whether expressly chosen or not) is also the proper law of the arbitration agreement.27  Thus, having found that Russian law was the proper law of the main contract impliedly chosen by the parties, Lord Burrows reasoned that the law governing the arbitration agreement should be Russian law as a matter of implied choice.28 Third, Lord Sales took the view that an arbitration agreement has its closest and most real connection with the proper law of the main contract in which it is contained, rather than with the law of the seat, and that less weight should be placed on Article V(1)(a) of the New York Convention when considering the enforcement of an arbitration agreement.29 

The dissent also expressed misgivings about the approach of the majority. In the dissent’s view, the majority’s approach would produce “undesirable practical and unprincipled consequences” by forcing the same contract to be governed by different laws and giving too much weight to the seat of arbitration.30

Implications

The Supreme Court’s decision provides much-needed clarification regarding the English courts’ approach to determining the governing law of an arbitration agreement. Although the majority ultimately upheld the Court of Appeal’s decision, it did so by a taking a different route and affirmed the choice-of-law approach previously set forth by the Court of Appeal in Sulamérica. The Supreme Court also displayed remarkable sensitivity to the provisions of the New York Convention and demonstrated admirable receptivity to international authorities, with both the majority and dissents relying on an expansive range of international commentary and judicial decisions. That said, the dissenting opinions of Lords Burrows and Sales demonstrate that there is some support at the highest level for arguments: (i) that the law governing the main contact, even absent a choice-of-law provision, should presumptively apply to the arbitration agreement; or (ii) that that an arbitration agreement is in fact most closely connected with the law of the main contract. The law on these points could yet develop in a different direction in the future. 
 
 

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