Supreme Court clarifies law of arbitration agreements

Supreme Court clarifies law of arbitration agreements

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On 9 October 2020, the UK Supreme Court handed down judgment in the case of Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors. The Supreme Court decision is now the leading authority on (i) the English court’s approach to determining the governing law of arbitration agreements and (ii) the courts’ ability to grant anti-suit injunctions in support of arbitration.

 

Background

In this case, Enka had been one of the sub-contractors building a power plant in Russia. The contract provided for disputes to be resolved by ICC arbitration with London as the place of the arbitration. However there was a massive fire, Chubb paid out insurance monies and brought court proceedings in Moscow against Enka (and others) alleging that faulty performance of the building works caused the fire. Enka applied to the English courts for an anti-suit injunction to restrain the Moscow proceedings.

Our earlier article (available here) sets out the factual background to this case more fully, together with our analysis of the first instance decision.

In our earlier article, we reported on the Court of Appeal’s judgment in Enka v Chubb in which the court determined that the arbitration agreement was governed by English law rather than Russian law. The court held that (i) the governing law of the main contract was Russian law but that was not by express choice and (ii) there was therefore a presumption that the parties had impliedly chosen that the proper law of the arbitration agreement should coincide with the law of its “seat” (the seat being the place where the arbitration is to be legally performed and administered from - although “performance” may not be where the hearings actually take place). In this case, the seat of the arbitration was London and so the Court of Appeal held that the governing law was English law. The Court of Appeal’s decision also confirmed that English courts could grant anti-suit injunctions where the seat of the arbitration is in England and Wales.

The Supreme Court decision

At a Supreme Court hearing in July 2020, Chubb sought to overturn the Court of Appeal’s decision arguing that the arbitration agreement should be governed by the same law as the main contract (i.e. Russian law), notwithstanding that the place of arbitration was London. Enka sought to uphold the Court of Appeal’s decision arguing that although the main contract was governed by Russian law, the arbitration agreement was a separate contract which was subject to the law of the seat i.e. English law.

The Supreme Court noted that, “where an international commercial contract contains an agreement to resolve disputes by arbitration, at least three systems of national law are engaged when a dispute occurs”. These are (i) the law governing the substance of the dispute; (ii) the law governing the agreement to arbitrate; and (iii) the law governing the arbitration process.

The majority of the Supreme Court 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 applying to the main contract, to encourage certainty and consistency that latter choice of law would apply to the arbitration agreement.

The Supreme Court held that the Rome I Regulation does not apply to arbitration agreements and so the English courts must apply common law rules when deciding which law governs the arbitration agreement. According to the common law rules, if the parties have not expressly or impliedly agreed which law should govern the arbitration agreement, then the law “most closely connected” with the arbitration agreement will apply. The Supreme Court held that that the law “most closely connected” to the arbitration agreement would be the law of the chosen seat of the arbitration. This is because (amongst other reasons) the seat is where the arbitration is to be performed (legally, if not physically), this approach is consistent with international law and legislative policy and “is likely to uphold the reasonable expectations of commercial parties who specify a location for the arbitration”.

This contrasted with the approach taken by the Court of Appeal which had determined that there was a “strong presumption” that the law of the seat would govern the arbitration agreement where there was no express choice of law to cover the main agreement.

Applying these common law rules to Enka v Chubb, the Supreme Court held that the parties had not expressly or impliedly agreed which law should govern the main contract, or the arbitration agreement within it. As a result, the Supreme Court held that, applying the “most closely connected test”, the validity and scope of the arbitration was governed by the law of the chosen seat of the arbitration. The seat of the arbitration was London and therefore the governing law was English law.

The Supreme Court agreed with the Court of Appeal’s decision that it would be appropriate for an English court to grant an anti-suit injunction where the English court is the court of the place of the seat of the arbitration chosen by the parties. The Supreme Court noted that the principles governing the grant of an anti-suit injunction in support of an arbitration agreement with an English seat do not differ according to whether the arbitration agreement is governed by English law or foreign law. If the English court were to find that the parties had agreed to proceed by way of arbitration rather than by litigation, the English court could and should enforce that obligation by way of an anti-suit injunction.

Comment

Michael Stocks, managing associate in our commercial litigation team, commented:

“The fact that the judgment of the Supreme Court was split 3:2 in favour of dismissing the appeal highlights the fact that the decision on what law governs an arbitration agreement absent an express choice was not one easily reached. However the decision to dismiss Chubb Russia’s appeal and uphold the findings of the Court of Appeal will be warmly welcomed by the arbitration community, and particularly those who advocate London as an international arbitration centre (and with it the support of English law). The decision highlights the powers the English court is prepared to deploy in determining anti-suit injunctions, and thus the attractiveness of choosing England as a seat for international arbitrations. The Supreme Court was clear in its message that where there is no law chosen to govern the body of the contract nor arbitration agreement, to ensure consistency and legal certainty, and to uphold the reasonable expectations of the contracting parties, the law governing the arbitration agreement would be the law of the seat. In this case: English law”.

“On a practical level the decision of the Supreme Court provides certainty of approach in circumstances where there is no reference to the law applying to the contract (or, as in this case, the reference was inadequate), nor to the arbitration agreement, yet a seat for the arbitration has been identified. Yet the most practical point is perhaps the most obvious, and that is the importance of ensuring clarity of drafting of the governing law provisions of both the body of the contract and the agreement to arbitrate – both of which are often considered at the last minute in the drafting process, or not at all. Whilst the factual background to this case is of course unique, the omissions in drafting are not unfamiliar to practitioners and this case is useful in shining a spotlight (were one needed) on this issue and the problems that can be caused if those omissions are not addressed early on”.

Michael’s comments were also featured in an article in the Law Society Gazette. Click here to read the full article.

 

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