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This article was originally published in Lawyer Monthly and can be accessed here

Russell Strong, Senior Solicitor 

Supreme Court and the law governing arbitration agreements

The UK Supreme Court recently brought much anticipated clarity to an issue often before the English Courts in International disputes: the English Court’s approach to the principles that should be applied to determine the law governing an arbitration agreement. By a majority of 3-2, the Supreme Court delivered its judgment in Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb1.

In setting out the approach to be taken in future, it delivers what Lord Hamblen and Lord Leggat called a “vivid demonstration of the speed with which the English courts can act when the urgency of a matter requires it.”

Background

The dispute arose following a fire at a Russian power plant. The insurer of the plant’s owner, Chubb Russia (Chubb), filed a claim in the Moscow Commercial Court against Enka and ten other defendants - sub-contractors working on the power plant - whom it claimed were jointly liable for the damage caused by the fire.

Enka began proceedings in England contending that the dispute was subject to an arbitration agreement in the contract under which it had performed the works, and seeking an order that Chubb discontinue the Russian Proceedings (an anti-suit injunction). Enka’s application was dismissed at first instance by Justice Andrew Baker.

The Court of Appeal (CoA) reversed that decision and Enka was granted an anti-suit injunction which restrained Chubb from continuing proceedings in Russia.  In considering the law that governed the arbitration agreement, it placed great weight on the parties’ choice of an English seat, holding that there was a strong presumption in the absence of an express choice of law governing the arbitration agreement that the curial law (the law of the seat) had impliedly been chosen by the contracting parties.

Chubb then appealed to the Supreme Court, arguing the parties had chosen Russian law to govern their contract; that this should also govern the arbitration agreement; and, that the Russian courts were best placed to decide whether or not the arbitration agreement had been breached Chubb’s commencement of proceedings in Russia.  

Identifying the law governing an arbitration agreement

So what is the legal background? The law governing an arbitration agreement may be different from that governing the wider contract to which the arbitration agreement forms a part. Determining which law governs the arbitration agreement can be crucial to the determination of the arbitration agreement’s validity and enforceability. Parties therefore need to be very careful in ensuring that arbitration agreements in their commercial contracts are clearly drafted and that and express governing law choice is included.

Previous English court decisions determining the law applicable to an arbitration agreement had not always been consistent. Indeed, prior to Enka, there had been conflicting CoA approaches to identifying the principles to be applied law governing an arbitration agreement.

In Sulamérica Cia Nacional de Seguros SA v. Enesa Engenharia SA [2012] EWCA Civ 638, the CoA held that in the absence of an express choice of law for an arbitration agreement, but where there was a choice of law clause for the wider contract, this was impliedly also the parties’ choice of law for the arbitration agreement. So, unless it stated otherwise in the contract, the same jurisdiction would apply.

This directly contradicted the approach taken in C v D [2007] EWCA Civ 1282; [2008] Bus LR 843. In this judgment, although there was a choice of law clause in respect of the wider contract, the CoA held that there was no consequential implied choice of law for the arbitration agreement, and therefore the test for identifying the governing law for the arbitration agreement was one of “closest connection”.

In Enka v Chubb, the CoA held that, in the absence of an express choice of law for the arbitration agreement, there was a strong presumption that the parties’ implied choice was the law of the seat “subject only to any particular features of the case demonstrating powerful reasons to the contrary.”

Supreme Court sets out test

As a reflection of the complexity of the issues it had to consider, the Supreme Court’s judgment ran to 115 pages. It held that the CoA was right to affirm the three-stage test in Sulmarica to determine the law governing the arbitration agreement; however, its reasoning differed markedly to that of the CoA, especially concerning the weight to be attached to the curial law.  It held that the test to be applied is as follows:

1. Have parties expressly or impliedly chosen the law to govern the arbitration agreement?

2. If yes, the parties’ choice is the applicable law. If no, have the parties expressly or impliedly chosen the law to govern the contract?

3. If yes, there is a rebuttable presumption that this is the choice of law for the arbitration agreement. If no, it is the law of closest connection with the arbitration agreement. This will usually be the law of the seat.

Test applied in Enka v Chubb

The Supreme Court found that there was no choice of law by the parties in respect of the contract or the arbitration agreement. When applying the test, the applicable law was therefore the law with which the arbitration agreement had the closest connection, which was determined to be the law of the seat. Albeit via significantly different reasoning, it therefore reached the same decision as the CoA: that English law governed the arbitration agreement, and that the anti-suit injunction was correctly granted. The appeal was accordingly dismissed.

The judgment also addressed the following question: In an English-seated arbitration, if it is a foreign law that governs the arbitration agreement, should the English court defer to the foreign court to decide whether proceedings before the foreign court are in breach of the arbitration agreement?

One of Chubb’s arguments in challenging the CoA’s authority to issue an anti-suit injunction was that Russian law governed the arbitration agreement, and that accordingly, the Russian court was the appropriate forum to decide whether the claim should be referred to arbitration or litigation, and it was not for the English court to issue an anti-suit injunction.

Although it was not necessary for the Supreme Court to decide this question, having found that English law governed the arbitration agreement, it did provide useful commentary. In summary, the Judgment concluded that even if the law governing the arbitration agreement had been Russian law, in an English-seated arbitration, this would make no difference to the English court’s ability to exercise its discretion on whether to issue an anti-suit injunction - based on the application of the appropriate law governing the arbitration agreement.

Comment

This Judgment should be welcomed by international arbitration users and parties who continue to elect at the time they enter into contracts to choose London as their arbitral seat.  As is so often true however, the cautionary tale is to ensure when drafting commercial contracts that care is taken expressly to state the parties’ intentions.  In the present case, that is not only where an arbitration should be seated, but also which law should apply to the arbitration agreement.  

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