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Court of Appeal clarifies the law in relation to important issues for London seated arbitrations

13 May 2020
On 29 April 2020 the Court of Appeal handed down judgment in Enka v Chubb [2020] EWCA Civ 574, now the leading authority on jurisdiction for applications for anti-suit injunctions and ascertaining the law to be applied to an arbitration agreement. A copy of the judgment is available here.

The judgment brings some welcome clarity and gives businesses even more reason to prefer London as a seat for any potential arbitration. It also highlights the importance of accurate and specific arbitration agreements. 

In this article, we give a brief summary of the Court of Appeal's key findings and examine the possible consequences that may arise from them.

Basic Concepts 

To understand the importance of the judgment it is first necessary to appreciate a few basic points about potential conflicts of law in an arbitration and the often confused labels assigned to the various types of law involved.

First, the arbitration clause within a contract is treated as a separate and distinct agreement to the main contract. The most obvious embodiment of this is Section 7 of the Arbitration Act 1996 ("the Arbitration Act") which stipulates that if the main contract is deemed ineffective then the arbitration agreement will remain unaffected. 

Second, the arbitration agreement and the main contract can be governed by different laws. For example, the main contract could be subject to the laws of Russia and the arbitration agreement subject to the laws of England and Wales.

Third, there is a distinction between curial (colloquially referred to as procedural law, but this is an over simplification) and proper law. 

Curial law is in fact the law of the place of the seat of the arbitration. For example, if an arbitration is seated in London the curial law will be the laws of England and Wales. Curial law does indeed encompass procedural rules and regulations, however in many jurisdictions it also encompasses aspects which determine substantive rights. For example, Section 5 of the Arbitration Act requires that the arbitration agreement be in writing, a purely "procedural" requirement. However, unless the arbitration agreement is in writing the Arbitration Act does not apply, including the provisions relating to enforcement. This is a point now expressly recognised in paragraph [96] of Enka v Chubb. 

Proper law is, broadly speaking, the law that will apply to the interpretation and application of an agreement and the substantive legal questions relating to a dispute. 

Finally, it is important to understand what is meant by the seat of the arbitration. Parties will often misunderstand this concept and believe that the seat is simply where the arbitration is to take place.

Whilst a clause stating that "the place of the arbitration will be X" will be interpreted as "the seat of the arbitration will be X", it is common practice that hearings take place in countries other than the seat itself. The choice of the seat is a legal concept which determines the curial law; it is distinct from the geographical venue at which hearings take place. Choosing the seat of the arbitration is a significant and important decision that should be grounded in a consideration of the laws of that potential seat, rather than the convenience of the location.  

The Facts

The Claimant, Enka, is a Turkish construction company. The Defendant, Chubb Russia, is part of the well known Chubb insurance group.

Enka was engaged as a subcontractor during the construction of a power plant in Russia.

There was an arbitration agreement contained in the main contract. Importantly there was no choice of law clause in relation to the arbitration agreement. The main contract did contain a defined term of "Applicable Law", referring to Russian law when the term was used, however it did not contain an express choice of law clause.

In February 2016 there was an extensive fire at the plant. Chubb, as the insurer for the project, paid out over 26.1 billion Roubles (c. US$400million) because of the fire. Chubb filed a claim in the Moscow Arbitrazh Court ("the Moscow Claim") alleging, inter alia, that the fire had been caused by poor workmanship on the part of Enka. 

Enka issued an Arbitration Claim Form in the Commercial Court in London seeking:

1) a declaration that Chubb was bound by the arbitration agreement and that it applied to the Moscow Claim; and

2) an anti-suit injunction pursuant to s.37 of the Senior Courts Act 1981.

Chubb resisted the claim in London on the grounds that the arbitration agreement was governed by Russian law and that the Moscow Claim did not fall under the scope of the arbitration agreement. It was accepted between the parties that if the governing law of the arbitration agreement was English law the claims fell within its scope and an injunction should be granted unless there was strong reason not to.

Key Judgment

The Court of Appeal held that the proper law of the arbitration agreement was the law of England and Wales and granted an injunction. In doing so the Court of Appeal set out two key principles:

1) If England (or Wales) is the seat of an arbitration then the courts of England and Wales will have jurisdiction to hear applications for anti-suit injunctions in support of that arbitration.

2) The correct approach to determining the governing law of the arbitration agreement is to apply the 3 stage test set out in Sulamerica Cia Nacional De Seguros SA and others v Enesa Engenharia SA [2012] EWCA Civ 638:

(i) Is there an express choice of law?
(ii) If not, is there an implied choice of law?
(iii) If not, with what system of law does the arbitration agreement have its closest and most real connection?

Where no express choice of law is made in relation to the arbitration agreement then the general rule is that there is a strong presumption that the parties have chosen the law of the seat of the arbitration unless there are powerful countervailing factors in the relationship between the parties or the circumstances of the case. 

Why is this important to you?

The importance of Enka v Chubb is twofold. 

Firstly, the Court of Appeal has very clearly set out that the choice of a particular seat is an express submission to the curial jurisdiction of that seat. This is a welcome clarification, but not a new legal concept. The value in the decision is that there is now clear authority for where an application for an anti-suit injunction should be brought. For example, if an arbitration agreement stipulates that London is to be the seat of a potential arbitration and proceedings are issued in Russia any application to restrain the party that brought those proceedings should be made in London and not the Russian court seized of the proceedings.

Secondly, the Court of Appeal has clearly set out the importance of the seat of the arbitration in relation to any potential conflict of law. In a situation where a main contract specifies that the proper law of that contract was to be the law of Russia and that the arbitration was to be seated in London, there was previously some scope to argue that the proper law of the arbitration agreement should also be Russian law. In many cases, this proved to be inconvenient. In some cases it allowed a party to escape liability altogether. However, in all cases, as is always the case with satellite litigation, it increased costs. Now, in the absence of an express choice of law, there is a strong presumption that the proper law of the arbitration agreement will be the law of the place of the seat of the arbitration.

Consequences 

The decision has provided some well needed clarity and is, in our view, correct. 

The additional certainty the decision has provided in relation to the powers of the courts of England and Wales when supporting arbitrations seated in this jurisdiction will only help increase its popularity as a seat. The law of England and Wales is well developed and in the hands of what is widely viewed as very high quality and consistent judiciary. Increasing the certainty that English curial law will apply affords greater certainty and predictability to potential parties to an agreement. 

As is often the case, careful and specific drafting emerges as the key lesson to be learned. Had the original contract contained a specific choice of law clause and provision for the proper law of the arbitration agreement a great deal of litigation may have been avoided. 

For any future agreement, it is well worth simply stipulating what law should apply to both the main contract and the arbitration agreement. For any agreements that have already been executed, we would suggest that it is well worth it to review them and, if necessary, briefly amend them to include this specification; doing so may save significant cost in the future.

Finally, the decision emphasises the importance of considering the potential consequences of selecting a particular seat. The curial law that will apply should always be considered and not viewed as merely procedural. 

Can we help?

The Barristers at DWF Advocacy have extensive arbitration experience. As well as being instructed on a more substantial basis, we often review contracts with a view to advising on the drafting of arbitration agreements. We also have experience with arbitrations seated in multiple jurisdictions and can advise on the (dis)advantages of a variety of options.

Often, costly litigation can be avoided by prudent planning and review.

Please do not hesitate to contact one of our experts for more information.

Further Reading

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