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Enka v. ChubbThe Supreme Court Rules on the Proper Law of the Arbitration Agreement

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On 9 October 2020, the Supreme Court handed down its judgment in Enka v. Chubb [2020] UKSC 38.It dismissed the appeal by a 3:2 majority (with Lord Sales and Lord Burrows dissenting) and upheld the Court of Appeal’s finding that English law governed the arbitration agreement.  It arrived at this conclusion, however, by adopting a different analysis to that applied by the Court of Appeal.  

The main findings of the Supreme Court are analysed in this Client Alert.  For an analysis of the Court of Appeal’s decision, please find our comments here.

Background To The Appeal

(i) Factual Background

The Respondent, Enka Insaat Ve Sanayi AS (“Enka”), was the subcontractor under a subcontract for works relating to the boiler and auxiliary equipment installation on the Berezovskaya power plant in Russia (the “Subcontract”).  The owner of the power plant had taken out a primary insurance policy with Chubb Russia Investments Limited (“Chubb”). Following a fire at the power plant on 1 February 2016, the owner of the power plant claimed and received from Chubb approximately USD 400 million in damages. 

The Subcontract contained an arbitration agreement which provided that all disputes arising from or in connection with the Subcontract were to be resolved by arbitration seated in London, England, under the Rules of Arbitration of the International Chamber of Commerce (the “ICC Rules”).  Both the Subcontract and the arbitration agreement did not specify the governing law.

In May 2019, Chubb filed proceedings against Enka with the Moscow Arbitrazh Court claiming the fire and ensuing damage had been caused by defects for which Enka was responsible. Enka applied to the English court for (i) a declaration that Chubb was bound by the arbitration agreement in the Subcontract, and (ii) an anti-suit injunction to restrain Chubb from continuing the Russian court proceedings. 

(ii) The Court of First Instanceand Court of Appeal decisions3 

The Court of First Instance declined to determine the proper law of the arbitration agreement suggesting only that it was “seriously arguable” that the arbitration agreement was governed by Russian law and dismissed Enka’s claim on forum non conveniens grounds. Andrew Baker J held that the English court was not the appropriate forum to hear these issues and that questions relating to the scope of the arbitration agreement and its applicability to the proceedings in Russia were more appropriately to be determined by the Moscow Arbitrazh Court.

The Court of Appeal reversed Baker J’s decision and found that the proper law of the arbitration agreement was English law.  The Court of Appeal held that where the main contract contains an express choice of law, it will be a matter of construction of the whole contract, including the arbitration agreement, whether that choice of law also applies to the arbitration agreement. In all other cases, as a general rule, there is a presumption that the parties have impliedly chosen the seat of the arbitration as the law of the arbitration agreement, subject to any particular features of the case demonstrating “powerful reasons” to the contrary.

The Supreme Court Decision

The Supreme Court, by a 3:2 majority, disagreed with the Court of Appeal’s reasoning but upheld its conclusion that English law governs the arbitration agreement.

Lord Hamblen and Lord Leggatt (with whom Lord Kerr agreed) delivered the main judgment and summarised the key issue as follows: 

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. They are: the law governing the substance of the dispute; the law governing the agreement to arbitrate; and the law governing the arbitration process. […] The central issue on this appeal concerns which system of national law governs the validity and scope of the arbitration agreement when the law applicable to the contract containing it differs from the law of the seat of the arbitration.4  

The majority held that English common law rules apply to the question of determining the governing law of the arbitration agreement given that the Rome I Regulation expressly excludes arbitration agreements from its scope.5 In applying those common law rules, the Supreme Court held that a contract (or relevant part of it) 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.6  

The Supreme Court further observed that whether a choice is described as express or implied is not a distinction on which any legal consequence turns, “an implied choice is still a choice which is just as effective as a choice made expressly”.7  

(i) Determining the governing law of the arbitration agreement 

a. The law expressly or impliedly chosen by the parties

It is incontrovertible that the parties to a contract are free to choose the system of law which is to govern their agreement.  The starting point, therefore, is to determine whether the parties had agreed on a choice of law to govern the arbitration agreement.  To do so, the principles of contract interpretation will apply.   

The majority noted that it is uncommon for a contract to specifically identify the law governing an arbitration agreement. A contract is more likely to contain a clause specifying the law which is to govern the contract as a whole without specific reference to the arbitration clause contained within it.8 Where the parties have not specified the governing law of the arbitration agreement itself, as a general rule and in the absence of good reason to the contrary, a choice of law for the contract will generally also apply to the arbitration agreement.9 Even where the law chosen to govern the contract differs from the seat of the arbitration, the choice of law clause will also apply to the arbitration agreement.  

The majority considered this general rule – that the choice of law clause in the contract will also apply to the arbitration agreement – to be consistent with English law principles and supported by a significant body of English case law.10 It is also reasonable as it would provide the parties with legal certainty, consistency and coherence, whilst avoiding complexity, uncertainties and artificiality.11 The dissenting judges agreed with the majority on this point. 

The Supreme Court’s position contrasts with that of the Court of Appeal, which considered that there is a strong presumption that the parties have impliedly chosen the law of the seat of the arbitration to govern the arbitration agreement, “subject only to any particular features of the case demonstrating powerful reasons to the contrary”.12 The Court of Appeal’s finding was based on the doctrine of separability, according to which the arbitration agreement is a provision that is separable from the rest of the contract.13 It was also based on the presumption that by choosing England as the seat of arbitration, the parties have chosen the application of the Arbitration Act 1996. The Court of Appeal reasoned that under the 1996 Act, the substance and process of arbitration “are closely intertwined” and that the 1996 Act “contains various provisions which could not readily be separated into boxes labelled ‘substantive arbitration law’ or ‘procedural law’, because that would be an artificial division”.14 The Court of Appeal considered that, given this overlap and the fact that the curial law which regulates the arbitration process is a matter of choice that comes with an express choice of seat, it seems “natural to regard” a choice of seat as an implied choice of the law applicable to the arbitration agreement.15

The Supreme Court disagreed. It found that the Court of Appeal had put the doctrine of separability “too high”.16 It does not follow from the separability principle that the arbitration agreement is to be regarded as “a different and separate agreement” distinct from the rest of the contract.  It also does not follow that the governing law clause of the contract should not apply to the arbitration clause.17 Referring to the Sulamérica case (at para 26), the majority agreed with the position summarised by Moore-Bick LJ in that the concept of separability “simply reflects the parties’ presumed intention that their agreed procedure for resolving disputes should remain effective in circumstances that would render the substantive contract ineffective. Its purpose is to give legal effect to that intention, not to insulate the arbitration agreement from the substantive contract for all purposes”.18

In addition, the majority considered that “agreeing a seat is to agree that the law and courts of a particular country will exercise control over an arbitration which has its seat in that country to the extent provided for by that country’s law”.19 This means that the seat of the arbitration, or the curial law, which applies to the arbitration process is “conceptually distinct from the law which governs the validity and scope of the arbitration agreement”.20 

The Supreme Court also disagreed that the provisions of the Arbitration Act 1996 justify a general inference that parties who choose an English seat of arbitration intend their arbitration agreement to be governed by English law.21 The majority considered that almost all the provisions of the 1996 Act relied on to support the overlap argument are non-mandatory and, where the arbitration agreement is governed by a foreign law, by reason of section 4(5), the non-mandatory provisions of the 1996 Act which concern arbitration agreements do not apply to it.  Thus, although the 1996 Act contemplates and specifically provides for a situation in which the arbitration agreement will be governed by a foreign law even though English law governs the arbitration process, no necessary inference can be drawn that, by choosing an English seat and with it English law as the curial law, parties are also impliedly choosing English law to govern their arbitration agreement.22 

b. The closest connection test

The majority held that where there is no express or implied choice of law to govern the arbitration agreement, the court must determine the system of law with which the arbitration agreement is most closely connected.  The majority held that as a general rule, in the absence of choice, the law of the seat of arbitration will apply by default as the law most closely connected with the arbitration agreement.23  

The majority relied on several justifications for its finding, including:24  

(i) The place of performance. The seat of the arbitration is where the arbitration agreement is to be performed (legally, if not physically). It is well established under English common law that the place where the transaction is to be performed is the connecting factor that has the greatest weight. The majority considered that the place of performance of the substantive obligations under the contract is irrelevant for the purpose of determining the law applicable to the arbitration agreement as the subject matter and purpose of an arbitration agreement are different from those of the contract in which it is incorporated.

(ii) Consistency with international law and legislative policy. The general rule that an arbitration agreement is governed by the law of the seat of the arbitration in the absence of choice accords with international law as embodied in the 1958 New York Convention and other international instruments, as well as with the national law which gives effect to the New York Convention in England and Wales.

(iii) Giving effect to commercial purpose. The general 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.

(iv) Legal certainty. The general rule provides legal certainty, allowing parties to predict easily which law the court will apply by default in the absence of choice. 

Applying the above test to the facts of the case, the majority held that the Subcontract contained no express or implied choice of law and, therefore, the validity and scope of the arbitration agreement was governed by the seat of the arbitration as the law with which the clause was most closely connected. 

Lord Burrows and Lord Sales agreed with the majority finding that if the parties have chosen the law of the contract, either expressly or impliedly, this choice would also apply to the arbitration agreement.25 They departed from the majority view, however,  on what the default position should be in the absence of such choice. In their opinion, they considered the law with which the main contract is most closely connected to be the law that should govern the arbitration agreement.26  

Lord Burrows and Lord Sales also disagreed with the majority finding that the parties in Enka v Chubb had not chosen a governing law for the Subcontract.  They considered that the parties had impliedly chosen Russian law to govern the Subcontract and also, therefore, the arbitration agreement.27

(ii) Anti-suit injunction 

The Supreme Court confirmed the Court of Appeal’s decision that by choosing London as the seat of the arbitration, the parties agreed to submit to the supervision and jurisdiction of the English courts, including its jurisdiction to grant an anti-suit injunction. The Supreme Court noted that on  the question of whether to grant an anti-suit injunction, in principle, it should make no difference whether the arbitration agreement is governed by English law or foreign law – in both cases the enquiry remains the same: (i) has there been a breach of the arbitration agreement, and (ii) if so, is it just and convenient to grant an injunction to restrain that breach.28  

Comment

The English courts have long grappled with the thorny question of determining the governing law of the arbitration agreement.  It was hoped that the Supreme Court would finally provide clarity and certainty to an area of law that has been the source of much confusion and debate. 

The Supreme Court’s finding that an express or implied choice of law clause in the contract will generally also apply to the arbitration agreement will be welcomed by practitioners as pragmatic and principally sound. Lord Burrows’s and Lord Sales’s disagreement with the majority with respect to (1) whether there was an express or implied choice of law governing the contract on the facts of Enka v Chubb; and (2) the general rule to be applied when there is no express or implied choice of law, demonstrates the complexities of this area of law that are likely to need further clarification.  We expect future cases in this area to turn on whether the governing law has been impliedly (if not expressly) chosen by the parties.  

In the meantime, parties should be careful when drafting their contracts and are minded to include an express choice of law clause to minimise the risk of disputes regarding the applicable law of the arbitration agreement.  

1 Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38.
2 [2019] EWHC 3568 (Comm).
3 [2020] EWCA Civ 574.
4 Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38 at 1 – 2.
5 Id. at 25 – 28.
6 Id. at 27.
7 Id. at 35.
8 Id. at 43.
9 Id. at 43 – 52.
10 Ibid.
11 Id. at 53.
12 Id. at 59.
13 Id. at 61.
14 Id. at 65. 
15 Id. at 66.
16 Id. at 61.
17 Id. at 61.
18 Id. at 63.
19 Id. at 68.
20 Id. at 69.
21 Id. at 94.
22 Id. at 73.
23 Id. at 120.
24 Id. at 121 – 144.
25 Id. at 266.
26 Id. at 256; 259 – 260; 281 – 292.
27 Id. at 228.
28 Id. at 121 and 177.

 

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