On 9 October 2020 the Supreme Court handed down its judgment in Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb [2020] UKSC 38 (Enka v Chubb). It dismissed the Chubb’s appeal by a 3:2 majority – upholding the Court of Appeal’s decision that English law governs the arbitration agreement- but reaching its decision on different grounds.
The case concerned the determination of the applicable law of an arbitration agreement in the context of an international commercial sub-contract where the parties had an arbitration agreement in place but the sub-contract contained no mention of the choice of law governing either the contract nor the arbitration agreement. The main contract was governed by Russian law in accordance with the default rules set out in Article 4 of the Rome 1 regulation.
Background Facts
The Claimant, Enka, subcontracted with CJSC Energoproekt for installation works relating to the construction of the Berezovskaya power plant in Russia. A fire occurred at the plant which caused substantial damage. The power plant owner had an insurance policy with Chubb and following the fire Chubb paid out approximately USD 400 million in damages.
A man who does not plan long ahead will find trouble at his door.”
Confucius
Following the pay-out Chubb initiated claims in the Russian courts against the various subcontractors (Enka included) to recover the amount paid out. Enka commenced High Court proceedings in England seeking an (“anti-suit injunction”) order that Chubb discontinue the Russian proceedings on the basis that the dispute was subject to the arbitration agreement in the sub-contract. The High Court dismissed Enka’s claim. Enka appealed and the Court of Appeal allowed the appeal – granting an anti-suit injunction and preventing Chubb from appealing the Russian court decision. Chubb appealed to the Supreme Court.
There were three main issues the Supreme Court addressed. These were:
- What is the correct approach for determining the governing law of an arbitration agreement?
- What is the relevance of the choice of law under the main contract under Article 4 of the Rome 1 Regulation (choice of law rules in contract)?
- What role does the court in the seat of the arbitration have and when can an English court allow a foreign court to decide if proceedings brought before the foreign court are a breach of an arbitration agreement?
The Majority Decision
Lord Hamblen and Lord Leggatt (with Lord Kerr agreeing) delivered the majority judgment. On the issue of the governing law of the arbitration agreement the majority stated that the correct approach was to apply common law rules rather than the Rome 1 provisions. This is because the Rome 1 Regulation does not apply to arbitration agreements. In accordance with common law rules the correct approach is to determine the law expressly or impliedly chosen by the parties and in the absence of any such choice to apply the law “most closely connected” to the arbitration agreement – even if this differs from the main contract. It also noted that there was no practical difference between the choice being expressed or implied – an implied choice is “just as effective” as an express choice.
It is undisputed that contracting parties are free to determine the system of law that will govern their contract. The first point to establish using contractual interpretation principles is whether or not the parties had agreed on a choice of law to govern the arbitration agreement. It was noted as a general rule that the choice of law clause in a contract would also apply to the arbitration agreement – it was not common for a contract to specifically state the law applying to an arbitration agreement – rather the choice of law to govern the whole contract would also apply to the arbitration agreement.
The Supreme Court disagreed with the Court of Appeal’s presumption that the parties’ choice of law of the seat of the arbitration will govern the arbitration agreement. It also disagreed that The Arbitration Act 1996 allows an inference that parties who choose an English seat of arbitration intend for English law to govern the arbitration agreement.
As in this case, where there was neither an express nor implied choice of law in the subcontract the arbitration agreement was governed by the seat of the arbitration – as this was the law with which the arbitration agreement was most closely connected.
Dissenting judges, Lord Burrows and Lord Sales, considered that the law governing the main contract (in this case Russian law) should be the governing law for the arbitration agreement in the absence of an express or implied choice of law in the subcontract.
This decision will be welcomed as it provides clarity on the test to be applied where no choice of law has been made. It is axiomatic that when drafting contracts, it is best to include an express choice of law to avoid disputes on the applicable law of arbitration agreement.
Link: Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb [2020] UKSC 38
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