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Case Review: Arbitration Agreements

21 October 2020

The UK Supreme Court has provided certainty on the law applicable to an arbitration agreement absent express choice. Read our review of the latest case law.

Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38

On 9 October 2020, the UK Supreme Court provided certainty on the law applicable to an arbitration agreement absent express choice. This is relevant to international arbitration users as it could affect the validity, enforceability and applicability of an arbitration agreement.

Prior to this judgement, the leading authority on this issue was Sulamerica, where a three-stage process for determination of the law of an arbitration agreement was considered:

  • Express Choice: the first consideration is whether the parties have clearly stated the governing law of the arbitration agreement (which need not be the same as the substantive or curial law (i.e. the law of the seat of arbitration));
  • Implied Choice: absent an express statement the courts should consider whether there is an implied choice of law; and
  • Closest and Most Real Connection with the arbitration agreement: if neither of the above clarifies the situation, the courts should consider to which law the arbitration agreement has the closest and most real connection (this is very similar to the Implied Choice consideration). 

Importantly, as per Sulamerica, the starting assumption was that the governing law of an arbitration agreement was the same as the substantive law.  This, however, was only an assumption and the courts were free to depart from it. In fact, in Sulamerica, the courts concluded that the curial law was the law of the arbitration agreement (consistent with the principle that "the contract should be interpreted so that it is valid rather than ineffective").

Following Enka v Chubb, in circumstances where the parties have chosen a substantive law governing their contract by either an express choice or implication, that substantive law will govern the arbitration agreement.

The judgment considered the law applicable to the arbitration agreement absent a choice of substantive law of the contract. By a narrow majority, the Supreme Court ruled that the seat of the arbitration should decide which law applies to the arbitration agreement because: (i) it is the place of performance of the arbitration agreement; (ii) this approach is consistent with international law and policy; (iii) this approach gives effect to the commercial purpose of the arbitration agreement; and (iv) provides legal certainty.

The minority decision agreed that where the parties expressly or impliedly chose the substantive law of the contract that choice should be applied to the arbitration agreement. Absent this, the courts should presume that the substantive law applicable to the contract (by relying on the Rome I Regulation or the English common law), should govern the arbitration agreement. This presumption could be rebutted if the validation principle is engaged or (in very rare cases) if it was clear that the parties intended the curial law to govern the arbitration agreement.    

Background

In May 2011, PJSC Unipro ("Unipro") entered into a construction contract ("Contract") with CJSC Energoproekt ("Energoproekt") for the design and construction of a power plant at Berezovskaya in Russia ("Facility"). In June 2012, Energoproekt sub-contracted Enka Insaat Ve Sanayi AS ("Enka"), to install equipment at the Facility. 

The Contract contained an arbitration agreement at Clause 50.1 ("Arbitration Agreement"). The Arbitration Agreement provided for ICC arbitration with a London seat. Neither the Contract nor the Arbitration Agreement contained an express governing law clause.

On 1 February 2016, the Facility was damaged by fire. Russian insurers, OOO Insurance Company Chubb ("Chubb"), insured the Facility for Unipro and paid approx. US $400m to Unipro as a result. Chubb became subrogated to Unipro's rights against third parties in respect of fire damage to the Facility. 

Russian Court Proceedings

In May 2019, Chubb brought a claim against Enka (and ten other defendants) in the Moscow Arbitrazh Court. Chubb and Enka contested inter alia: (i) whether the Arbitration Agreement was governed by English law or Russian law; (ii) the scope of the Arbitration Agreement (if Russian law applied). It is important to note that under Russian law, the tortious regime is different and (appears to be less favourable to Enka).

In March 2020, the Russian Court dismissed both: (i) Chubb's claims against all defendants (on the merits); and (ii) Enka's application to refer the dispute to arbitration. Chubb and Enka both filed appeals to this judgment. 

English Court Proceedings

First Instance

 In September 2019, Enka applied to the English Commercial Court for an anti-suit injunction. Enka requested that Chubb's Russian Court proceedings against Enka be restrained because it was in breach of the Arbitration Agreement.

In the court of first instance, Enka's claim that the English Court should dismiss Russian proceedings on the grounds of forum non conveniens was dismissed. The English Court held that the Russian Court was entitled to determine the scope and proper law of the Arbitration Agreement. Enka appealed.

Court of Appeal  

The Sulamerica approach was criticised by Popplewell, LJ: "[t]he current state of authorities does no credit to English commercial law which seeks to serve the business community by providing certainty".

The Court of Appeal in Enka v Chubb held that the starting assumption, absent a contrary express choice of law by the parties, was that the law of the arbitration agreement was the same as the curial law. The court stated that only powerful reasons to the contrary would interfere with this assumption as:

  • Insignificance of the law of the main contract: due to the separability of the arbitration agreement (a key principle of international arbitration), the substantive law only relates to the terms of the main contract. Therefore, the substantive law of the contract has little bearing on the law of the arbitration agreement;
  • Overlap between the curial law and the arbitration agreement: two systems of law should not apply to one set of arbitration proceedings. Generally, the rights of the parties to a valid arbitration agreement and the appropriate courts to hear a dispute will be decided by the courts of the seat of arbitration; and
  • An issue of "Implied Choice" not "Closest and Most Real Connection": the Implied Choice test of Sulamerica should be preferred over the Most Real Connection test. Where parties choose the curial law, it should be implied that they wanted the same law to apply to the arbitration agreement. 

On this basis, Enka succeeded in establishing that English law (as the law of the seat) applied to the arbitration agreement, and the English Courts granted Enka an anti-suit injunction restraining Chubb from continuing proceedings in the Russian Courts. Unsurprisingly, Chubb appealed. 

Supreme Court 

The Supreme Court, by a 3-2 majority, 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 Judgment 

The majority found that the Rome I Regulation does not apply to arbitration agreements. The correct law to determine the law of an arbitration agreement is English common law.

According to English Law, an arbitration agreement is governed by: (i) the law expressly or impliedly chosen by the parties; or, in the absence of such choice, (ii) the law with which it is most closely connected.

The majority opinion in the Supreme Court rejected the conclusion of the Court of Appeal although it arrived at the same outcome. The Supreme Court did not agree that a strong presumption exists that the law of the seat should govern an arbitration agreement.

The Supreme Court held that, as a general rule, if the parties have chosen the governing law of the main contract, the same choice of law would also apply to the arbitration agreement within the contract. This approach was necessary: (i) to provide certainty to commercial parties; (ii) to promote consistency across judgments; (iii) to avoid unnecessary complexities, uncertainties and 'artificiality'; and (iv) promote coherence in the legal system.

In the absence of an express or implied choice of law applicable to the arbitration agreement, the majority held that courts must determine "objectively and irrespective of the parties' intention" which system of law the arbitration agreement has the "closest connection" to. This test is a question of law and not an exercise in contractual interpretation.

Based on this, the Supreme Court concluded that the law of the Arbitration Agreement was the same as that of the seat because:

  • The Contract contained no express (or implied) choice of the governing law. Therefore, it was not possible to rely on the governing law of the Contract to establish the law governing the arbitration agreement.
  • The seat of the arbitration represented the place where "legally, if not physically" the arbitration agreement was to be performed.
  • The approach accorded with international law, as embodied in the 1958 New York Convention and other international instruments, as well as the national law giving effect to the New York Convention in England and Wales.
  • The approach was likely to uphold the reasonable expectations of contracting parties who chose to settle their disputes in a specified place without choosing the law to govern their agreement.
  • The approach provided legal certainty allowing the parties to predict which law would apply to an arbitration agreement in the absence of choice by default.

The Dissenting Opinions

Lords Burrows and Sales agreed with the majority view that where parties expressly or impliedly selected the governing law of a contract that should apply to the arbitration agreement. Where they dissented, however, was that, on the facts, it was sufficiently clear that Russian law was actually implied as the substantive law of the Contract.

Pursuant to this, the minority considered that Russian law should equally apply to the Arbitration Agreement. Further, even if the substantive law was not implied into the Contract, the substantive law of the Contract (whether arrived at by application of the Rome I Regulation, or, the closest and most real connection test) should extend to the Arbitration Agreement. This is subject only to the 'validation principle' being engaged (i.e. that the substantive law arrived at by the application of the Rome I Regulation or the closest and most real connection test would render the Arbitration Agreement invalid) or if it was clear that the parties intended the curial law to apply instead. 

Comment

The minority's view that the parties made an implied choice of law may be reconciled with the conclusion that was reached. However, it is difficult to reconcile how (if ever), there would be a circumstance where it is clear that the parties intended for the curial law to apply without triggering the application of an express or implied term tests. 

Had the minority view of the Supreme Court prevailed in this case, it would have been interesting to observe how it would have impacted 'host nation' contracts such as those seen in the energy or infrastructure sectors, where a party reluctantly accepts the substantive laws of the host nation on a 'take it or leave it' basis. 

While a party may be content with accepting the risk of substantive performance of its contractual obligations under the host nation's laws, it is unlikely to want to accept that its access to dispute resolution (at the point where there has been a falling out between the parties) is also resolved under the host nation's laws. There are a number of examples, such as in Sulamerica, where the arbitration agreement would only potentially be invalid or may (as in Enka v Chubb) have other relevant consequences. For this reason, we believe the majority view of the Supreme Court is a welcome development of English law. 

Clearly, the most important 'takeaway' for legal professionals preparing contracts, is the need to draft an express choice of law into contracts in respect of both the main contract and any arbitration agreement (if this is to be different from the substantive law of the contract).

Authors: Slava Kiryushin, James Fox, Joshua Coleman-Pecha, Nicole Leahy and Alina Akhmetova.

Further Reading

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