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Governing law of arbitration agreements: cutting the Gordian knot – PLC Magazine

By Tom Snelling & Flore Poloni & Neil Newing & Johnny Shearman

In the November edition of Thomson Reuters’ PLC Magazine, Partners Tom Snelling and Flore Poloni, Counsel Neil Newing and PSL Johnny Shearman discuss the important decision in Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb, and the proper approach to determining the governing law of an arbitration agreement, from both a French and English perspective.

This article first appeared in the November 2020 issue of PLC Magazine. A link to PLC Magazine can be found here.

In an important decision, the Supreme Court has provided unequivocal guidance on the proper approach to determining the governing law of an arbitration agreement. Before this decision, the case had proved to be a Gordian knot for both the parties and judiciary to untie and, in the end, required a three to two majority in the Supreme Court to cut. In terms of practical importance, it is perhaps the areas of common ground between the Justices of the Supreme Court that provide the key takeaways from this decision.

In its important decision in Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb, the Supreme Court has provided unequivocal guidance on the proper approach to determining the governing law of an arbitration agreement ([2020] UKSC 38).

Before the Supreme Court decision, Enka had proved to be a Gordian knot for both the parties and judiciary to untie and, in the end, required a three to two majority in the Supreme Court to cut. The divisiveness of the points of law raised in Enka is also evidenced by the 115-page judgment that was handed down. However, in terms of practical importance, it is perhaps the areas of common ground between the Justices of the Supreme Court that provide the key takeaways from this decision.

The dispute

Enka Insaat ve Sanayi AS, an international construction company, was involved in the construction of a power plant in Russia under a contract that included an agreement for disputes to be referred to International Chamber of Commerce (ICC) arbitration with a London seat. However, the contract did not specify a governing law, either in relation to the contract as a whole or the arbitration agreement.

After a fire at the power plant caused around $400 million of damage, the insurer, Chubb Russia Investments Limited, paid an insurance claim and subrogated the right to pursue any underlying claims against Enka. Chubb Russia later brought proceedings against Enka and several other defendants in Moscow. Enka argued that the Moscow proceedings should be dismissed as Chubb Russia’s claims should be determined by the ICC under the arbitration agreement, rather than by the Russian courts. Enka asked the High Court to grant it an anti-suit injunction.

The main issue in the dispute was whether the claims in the Russian proceedings were tortious and therefore fell outside the scope of the arbitration agreement. Chubb Russia argued that Russian law should govern the arbitration agreement and that, on that basis, claims in tort would fall outside of its scope. Enka argued that English law should apply, so that Chubb Russia’s claims would fall within the scope of the arbitration agreement.

The High Court refused to grant the anti-suit injunction ([2019] EWHC 3568 (Comm); see News brief “Anti-suit injunctions: how relevant is English law?). It held that the English court was not the appropriate forum to determine the underlying dispute.

The Court of Appeal allowed Enka’s appeal ([2020] EWCA Civ 574). It held that English law governed the arbitration agreement as a matter of implied choice, there being no express choice of law and, save on rare occasions, the choice of seat is determinative. Chubb Russia’s claim therefore fell within the scope of the arbitration agreement and the court ordered the anti-suit injunction.

Supreme Court decision

The Supreme Court dismissed Chubb Russia’s appeal. However, while it reached the same outcome as the Court of Appeal, it did so for different reasons. The majority of the court (Lords Hamblen and Leggatt, with whom Lord Kerr agreed) held that, applying English common law rules, the law applicable to the arbitration agreement will be the law chosen by the parties to govern it or, in absence of such a choice, the system of law with which the arbitration agreement is most closely connected (see box “The dissenting judgments).

The court gave the following guidance on establishing the governing law of an arbitration agreement:

  • Where the law applicable to an arbitration agreement is not specified, there is a presumption that a choice of governing law for the main contract is intended to apply to the arbitration agreement (the presumption).
  • The choice of a different country as the seat of the arbitration is not, on its own, enough to negate the presumption.
  • The presumption applies except where the law of the seat expressly states otherwise or where there is a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective. The latter is commonly referred to as the validation principle.
  • Where parties have not chosen the law applicable to the main contract, either expressly or impliedly, and therefore the arbitration agreement, the arbitration agreement will be governed by the law with which it is most closely connected. Generally, this will be the law of the arbitral seat, if specified, even if this differs from the governing law of the main contract.

On the facts, and contrary to the Court of Appeal, the court held that on a proper construction of the main contract there had been no express or implied choice of governing law in relation to either the arbitration agreement or the main contract. Accordingly, the court applied the next limb of its assessment and established that the arbitration agreement is governed by English law, as this is the system of law with which it is most closely connected. The choice of London as the arbitral seat was indicative of this.

Practical implications

The fundamental takeaway from Enka is that, in order to avoid the possibility of a lengthy and costly legal battle, it is best practice to specify the governing law of an arbitration agreement. Indeed, it is critical to do so where it is envisaged that the choice of law governing the arbitration agreement will be different from the governing law of the main contract. Otherwise, the presumption, as the Supreme Court determined unanimously, is that, except in exceptional circumstances, the law chosen (expressly or impliedly) to govern the main contract will also govern the arbitration agreement. While the choice of seat may be indicative if there is no choice of law governing either the main contract or the arbitration agreement, it is not determinative and so should not be relied on in place of a proper governing law clause.

However, the court was unanimous in finding that this did not affect the English court’s jurisdiction as the court of the seat to issue an anti-suit injunction. Therefore, even if the choice of seat does not apply to override the governing law chosen in the main contract, it is still an important choice in terms of the potential relief that may be available from the court of the seat. The court has once again reaffirmed the English court’s willingness to support the arbitration process and uphold valid arbitration agreements.

In Enka, the arbitration agreement was for ICC arbitration with London as the arbitral seat. If the parties had favoured Paris, the home of the ICC, as the choice of seat, the outcome would have been similar but with the arbitral seat being given greater importance. The Paris Court of Appeal recently reaffirmed that the choice of Paris as a seat is sufficient for French law to be applied to the arbitration agreement, without analysing whether it is the law with which it is most closely connected, as French law will be applicable to the validity of the award (Société Kout Food Group v Société Kabab-Ji SAL, RG 17/22943).

In any event, Enka highlights the speed and commitment of the courts of England and Wales in resolving knotty areas of law that really matter to commercial parties. Despite a lack of uniformity of judicial approach at first instance and in the subsequent appeals, it took less than ten months from the initial first instance decision for the case to be heard first by the Court of Appeal and then for the Supreme Court to hand down its judgment.

The dissenting judgments

In their dissenting judgments, Lords Burrows and Sales disagreed with the majority of the Supreme Court on the construction of the main contract and concluded that the parties had made an implied choice of Russian law to govern the main contract. They agreed with the majority’s presumption that, where the law applicable to an arbitration agreement is not specified, there is a presumption that a choice of governing law for the main contract is intended to apply to the arbitration agreement. However, applying this presumption, they concluded that Russian law also applied to the arbitration agreement.

While there was a division in the court over whether there was an implied choice of law for the main contract, the court as a whole agreed on the consequences of that choice of law. The dissenting Lords went further, however, and reasoned that, even if there was no express or implied choice of law for the main contract, there should still be a general presumption that the proper law of the main contract, as determined using common law principles, is also the proper law of the arbitration agreement, being the law with which it is most closely connected.

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