Author: Lucia Bizikova
What’s all the fuzz about?
In the recent decision in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb  UKSC 38 (Enka v Chubb), the Supreme Court set out a clear test for determining the law applicable to an arbitration agreement. The Supreme Court unanimously found that where the parties have chosen the law that governed the contract containing an arbitration agreement, such choice would generally apply to that arbitration agreement. However, the majority also found that where the main contract between the parties did not contain an express or implied choice of the governing law, the arbitration agreement would be governed by law with which it had the closest and most real connection. In most cases, this was likely to be the law of the seat of arbitration.
The importance of this decision cannot be understated as determining the law applicable to the arbitration agreement can have far-reaching consequences for the parties in dispute, and in some cases, it may mean the difference between a successful claim and losing a case. For example, it will determine whether pre-contractual negotiations may be taken into account when construing the arbitration agreement’s meaning and scope and whether such an agreement may be varied orally. Also, it will also determine the initial validity and scope of the arbitration agreement; whether third parties may become parties to the arbitration (in English law, for instance, this may be the case in certain circumstances under the Contracts (Rights of Third Parties) Act 1999); or whether tort claims may be arbitrated.
The latter was an important issue in Enka v Chubb. According to Chubb, Russian law governed the arbitration agreement, which meant that the proceedings, which was a claim in tort, fell outside its scope. But, if English law were to govern the arbitration agreement (which the Supreme Court ultimately found was the case), the claim would be within the scope of the arbitration agreement.
The facts and (brief) procedural history
The facts are relatively straightforward: In February 2016, a power plant in Russia was severely damaged by fire. The owner of the plant had taken insurance against such damage from Chubb. Besides, the plant owner had entered into a contract for the plant’s design and construction with another company, which in turn subcontracted parts of this work to Enka. The contract between the head-contractor and Enka included an agreement that disputes would be determined through arbitration proceedings in London. However, it did not have any express law governing the main contract, despite several references to Russian law.
In May 2019, Chubb filed a claim in the Moscow commercial court against Enka and ten other defendants as the plant owner’s subrogee, alleging that they were jointly liable for the damage caused by fire. In response to this, in September 2019, Enka brought an arbitration claim in the High Court in London, arguing that the Russian proceedings were in breach of the arbitration agreement, and seeking an anti-suit injunction against Chubb’s claim in Russia. At first instance, the High Court dismissed Enka’s claim on forum non conveniens grounds, although Chubb itself had not raised this argument. The Court of Appeal overturned this decision and found that unless there has been an express choice of the law governing the arbitration agreement, there was a strong presumption in favour of the law of the seat to apply, even if a different substantive law governed the main contract. Because the parties selected London as the seat of arbitration, English law applied to the arbitration agreement. On that basis, the Court of Appeal granted the anti-suit injunction against Chubb’s court proceedings in Russia.
Chubb appealed against the Court of Appeal’s decision to the Supreme Court.
The decision of the Supreme Court
On 9 October 2020, the Supreme Court dismissed Chubb’s appeal and upheld the anti-suit injunction to restrain the insurer from proceeding against Enka in Russia. However, the Supreme Court departed from the Court of Appeal’s reasoning and found that the arbitration agreement was subject to English law, which was the most closely connected law with the arbitration agreement.
By doing so, the Supreme Court provided much-needed clarity over-interpreting arbitration clauses, especially where there is no clear choice of the law governing the main contract. It has been widely praised for doing so by the arbitration community and predicted to strengthen London’s reputation as one of the most popular arbitration seats.
In particular, the Supreme Court found that:
- The arbitration agreement and conflict of laws
The law applicable to the arbitration agreement is not necessarily the same as the law governing the rest of the contract. Because Article 1(2)(e) of the Rome I Regulation No 593/2008 (Rome I) expressly excludes arbitration agreements and other forum selection clauses from its scope, the English common law rules rather than Rome I should be applied to determine the law applicable to an arbitration agreement.
According to English common law rules, an arbitration agreement should be governed either by i) the law expressly chosen by the parties; ii) the law impliedly chosen by the parties (both of which should be determined by construing the arbitration agreement and the contract containing it by applying English law rules of contractual interpretation); alternatively, by iii) the law which is the most closely connected with such arbitration clause.
- Determining the law governing an arbitration agreement if the parties have not specified the law applicable to it, but have selected a law governing the main contract
Where the parties have not specified which law applies to the arbitration agreement (whether expressly or impliedly), the default position is that the law governing the contract will apply to the arbitration agreement. Because arbitration agreement forms part of the same contract, this approach encourages legal certainty, consistency, and coherence and avoids complexity and artificiality. In addition, this is also said to be the approach taken by many other common law and civil law jurisdictions.
In this sense, the Supreme Court held that the Court of Appeal was wrong in finding that the parties’ choice of the seat constituted a “strong presumption” in favour of the law of the seat as the governing law of the arbitration agreement. The choice of the seat alone is not enough to negate the inference that a choice of law governing the contract was intended to apply to the arbitration agreement.
However, the situation is slightly different if the parties have not specified the law governing the main contract.
- Determining the law governing an arbitration agreement if the parties have not specified the law applicable to it, nor have they selected a law governing the main contract
If the main contract between the parties does not contain any applicable law provision, the law that is the most closely connected with the arbitration agreement will govern the arbitration agreement. As explained above, this may be different than the law applicable to the main contract, which in itself will have to be determined by reference to Articles 3 and 4 of Rome I.
Notably, the nature of this exercise varies considerably from the normal process of contract interpretation, whereby the court tries to establish what was the parties’ intention behind express – or implied choice of the law governing the arbitration agreement (see above, steps i) and ii) under the English common law rules). When analysing the third and last limb of the test, i.e., the most closely connected law with the arbitration agreement, the intention of the parties is irrelevant, and the court must identify objectively the system of law with which the arbitration agreement has its closest connection. In other words, the court will assess what a reasonable man, in the same position as the parties, would have understood by the language used in the contract. This might be the case even if the parties thought that they selected, or intended to apply a different law.
In general – but not always, the arbitration agreement will be the most closely connected with the law of the seat of arbitration. This is because i) the seat is where the arbitration is legally performed; ii) this approach maintains consistency with international law and legislative policy, and iii) is likely to uphold the parties’ reasonable expectations; iv) allow them to predict more easily which law the court is likely to apply in the absence of choice; and v) give effect to commercial purpose.
Ultimately, by dismissing Chubb’s argument, the Supreme Court found that a multi-tiered dispute resolution clause, which provided for several steps to be taken before the parties could resort to arbitration (such as imposing a requirement of negotiation or mediation) was in itself not sufficient to displace the law of the seat of arbitration as the law applicable to the arbitration agreement.
- In any event, determining the law applicable to an arbitration agreement did not have any direct implications on deciding whether an anti-suit injunction should be granted in aid of arbitration
It is also worth noting that the Supreme Court sided with the Court of Appeal and found that determining whether the arbitration clause between Enka and Chubb was governed by English law or by Russian law did not change the position on granting of an anti-suit injunction by the English courts, as the courts of the arbitration seat. In particular, the Supreme Court said that it was facing the same enquiry, namely whether there has been a breach of the agreement and if so, whether it was just and convenient to grant an injunction to restrain that breach.
- The dissenting judgment
Lord Burrows and Lord Sales delivered persuasive dissenting judgments. While agreeing with the majority on the position that applied if the parties have selected a governing law of the main contract, they disagreed on the approach to be taken if there was no such selection. In particular, Lord Burrows found that the law of the main contract, and not the seat of the arbitration, was the most closely connected contract that should govern the arbitration agreement. The very fact that the Supreme Court justices themselves were divided, delivering a 3-to-2 majority judgment, coupled with the High Court’s and Court of Appeal’s following of entirely different reasoning further reveals the divisive nature of this issue and the significance of the Supreme Court’s establishing of a clear test to be followed by the parties in the future.
A commentary or why is Enka v Chubb relevant?
In addition to formulating a clear approach to determining the law of arbitration agreements, the Enka v Chubb decision is significant due to a number of different reasons. In particular:
- Enka v Chubb is a formidable example of the ability of English courts to do justice without undue delay. It took only thirteen months between Enka first submission of its request for an anti-suit injunction in September 2019, and the Supreme Court’s handing of its final judgment in October 2020. This in itself shows English courts and their supportive powers of arbitration proceedings, in an incredibly positive light.
- The Supreme Court did not shy from referring to conflicts of law and international arbitration legal writing. In particular, the Supreme Court cited Gary Born’s “monumental work” on international commercial arbitration; Redfern and Hunter; Lew & Mistelis; Dicey, Morris & Collins; and referred to Albert Jan van den Berg as a “leading authority on the New York Convention. While this is not without its precedent, the English judges tend to be more conservative compared to their colleagues in civil law countries and usually refrain from an excessive citing of academic publications in their decisions.
- But most important of all, Enka v Chubb is an important reminder of the unintended consequences that unclear drafting of arbitration clauses (and of the applicable law clauses in general) may have for the parties. Anecdotal evidence suggests that arbitration and dispute resolution clauses are often overlooked by the commercial parties, which tend to incorporate these clauses in their contracts at the late stages of their negotiation. As a result, the parties should always be advised to indicate in clear terms which law they intend to apply to the main contract and which to the arbitration agreement, in particular, if these are not the same, or if the law applicable to the arbitration agreement is different than the seat of arbitration. Surprisingly, none of the model clauses of any major arbitral institution, including the ICC, the LCIA, the PCA and the SCC recommend to incorporate the law of the arbitration agreement in the drafting (and only the LCIA SCC’s model clauses recommend to add a sentence on the governing law of the contract), and as such, both the parties and in particular their legal advisers shall be particularly careful when drafting these clauses and seek further legal advice, if necessary.
- Rather unusually, this is not the only Supreme Court case related to arbitration that members of the Chubb Group have been facing in recent months. A Bermudan member of the same group, Chubb Bermuda Insurance Ltd is a defendant in another widely anticipated case in Halliburton v Chubb, that was heard by the Supreme Court last November 2019. In that case, the Supreme Court has been asked to consider when an arbitrator should disclose circumstances that may give rise to justifiable doubts as to his impartiality. Given the relatively common practice of challenging arbitrators by the parties and the difficulty with addressing the arbitrator conflict of interests, it is fair to say that Halliburton v Chubb is another case that is likely causing much noise and excitement in the arbitration community and beyond!
ABOUT THE AUTHOR
Lucia Bizikova is a PILAGG Fellow, co-editor of casebooks “Global Private International Law: Adjudication without Frontiers” and “Le Tournant Global en Droit International Privé: Jurisprudence sans Frontières”. She works in the arbitration team in a City law firm in London. She is an alumna of Sciences Po Law School (Cum laude), University of Cambridge, and Harvard Law School.
The views and opinions expressed in this article are those of the author alone and do not necessarily reflect the official policy or position of her law firm.