English disputes: Enka v Chubb and the proper law of international arbitration agreements
The Supreme Court recently issued its much anticipated decision in Enka v Chubb.
It addressed the question of which law governs the validity and scope of an arbitration agreement where the governing law of the main contract containing the arbitration agreement (Russian law) differs from the law of the agreed seat of the arbitration (English law), in the absence of any express choice.
The Supreme Court held that where parties have agreed a choice of law for the main contract, this should generally also be treated as a choice of law for the arbitration agreement.
However, in the absence of such choice in relation to the main contract, the default rule, subject to certain exceptions, is that the arbitration agreement is governed by the law of the chosen seat.
Background to Enka v Chubb case
Enka was subcontracted to provide services in relation to the construction of a power plant in Russia. The contract contained an arbitration agreement providing for ICC arbitration with its seat in London. The arbitration agreement did not specify which law was to govern the arbitration, nor did the wider contract specify an applicable law.
In 2016, there was an enormous fire at the power plant causing extensive damage and the defendant insurer, Chubb, paid out US $400 million to the owner of the plant in relation to the damage caused by the fire. Chubb, having been subrogated the plant owner’s rights, commenced proceedings in Moscow against Enka, alleging that the fire was as a result of Enka’s defective works.
Enka issued proceedings in the English Commercial Court for anti-suit injunction, restraining Chubb from pursuing its claim in Russia, and for declaration that Chubb was bound by the arbitration agreement. Chubb argued that the arbitration agreement was governed by Russian law on the basis that, under the Rome I Regulation, the law applicable to the main contract was Russian law. The Commercial Court dismissed Enka’s application on the basis that the appropriate forum to determine the validity and scope of the arbitration agreement was Russia, rather than England.
Enka appealed to the Court of Appeal. The Court of Appeal found in Enka’s favour, holding that in the absence of an express choice of law for an arbitration agreement specifically, the general rule is that the arbitration agreement will be governed by the law of the chosen seat – in this case, English law. The Court of Appeal therefore considered it appropriate to grant the anti-suit injunction.
Chubb appealed to the Supreme Court.
Supreme Court’s Decision on Enka v Chubb
The Supreme Court dismissed Chubb’s appeal by a 3-2 majority, holding that English law is the law applicable to the arbitration agreement.
The Supreme Court disagreed with the Court of Appeal that there should be a ‘strong presumption’ that, in choosing the seat of the arbitration, the parties have impliedly chosen the law of that seat as the law applicable to the arbitration agreement. Rather, the Supreme Court held that English common law principles of interpretation apply to interpret the contract (containing the arbitration agreement) as a whole.
The Supreme Court’s decision clarifies the position in respect of two potential circumstances:
1. Where there is an express choice of law in relation to the main contract, but the arbitration agreement is silent in respect of applicable law
The starting point is to consider whether the parties have made an express choice of law in relation to the arbitration agreement. However, where parties have expressly agreed on the governing law for a contract, but have not expressly agreed on a governing law in relation to an arbitration agreement contained within that contract, the Supreme Court held that English common law principles should be applied to interpret the contract and arbitration agreement as a whole.
In those circumstances, the governing law clause for the contract will generally be deemed to extend to the arbitration agreement.
If the parties choose a different country as the seat of the arbitration, this is not, in and of itself, sufficient to displace the inference that the law expressly chosen as the law applicable to the main contract is the proper law applicable to the arbitration agreement.
2. Where there is no express choice of law in relation to the main contract or the arbitration agreement
Where, such as in the Enka case, the parties had not expressly or impliedly chosen any applicable law (in respect of the main contract or the arbitration agreement) the Supreme Court held that the arbitration agreement is governed by the system of law with which the arbitration agreement is most closely connected.
The Supreme Court held that in such circumstances the default rule, subject to certain exceptions, is that the arbitration agreement is governed by the law of the chosen seat.
As such, the Supreme Court concluded that the arbitration agreement in the Enka contract was governed by English law. The main contract, although governed by Russian law as a result of international private law rules, did not contain any choice of Russian law, whereas the arbitration agreement did specifically provide that the chosen seat was London. Chubb’s appeal was accordingly dismissed.
Four key takeaways from Enka v Chubb
There seem to be four key lessons from the Supreme Court’s decision:
- The Supreme Court decision clarifies that where parties have agreed a choice of law for the main contract, this should generally also be treated as a choice of law for the arbitration agreement. However, in the absence of such choice in relation to the main contract, the default rule, subject to certain exceptions, is that the arbitration agreement is governed by the law of the chosen seat.
- The case reinforces the importance of clearly drafting arbitration agreements and, more generally, applicable law clauses in contracts, and the risks of failing to do so. The costs involved in litigating this matter all the way to the Supreme Court will have been significant – and there is still the arbitration to go. This might have been avoided had the parties expressed a choice of law in the arbitration agreement. Although we now have authority on this point, these issues are factually complex and so it remains to be seen how this case will be applied in future. Carefully considered governing law provisions and dispute resolution clauses are of crucial importance.
- Where England is chosen as the seat of the arbitration, the English court has supervisory jurisdiction to protect and uphold an agreement to arbitrate, including antisuit injunction. The Supreme Court emphasised that the English court is ready to exercise its supervisory powers and will do so irrespective of the governing law of the contract or arbitration agreement. Where the governing law is not English law, but the seat of the arbitration is in England, the English court will determine the validity and scope of the arbitration agreement in accordance with the applicable law and will, if appropriate, grant antisuit injunction in England.
- These proceedings raced from commencement to Supreme Court judgment in just over a year, even with the disruptions caused by COVID-19. This is an impressive display of the English courts’ ability to quickly determine important issues where required. This is an important consideration for parties in choosing jurisdiction and applicable law (whether or not in conjunction with arbitration).
You can read the Supreme Court’s full judgment on Enka v Chubb here.
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