English Courts Issue Key Decision on Law Governing Arbitration Agreements
Note: This post is an update of an earlier post on the CJCA blog, which was written before the release of the UK Supreme Court’s decision in Enka v Chubb.
In Enka v Chubb, the English courts have updated the rules for determining the law governing arbitration agreements, overturning what had been the dominant approach in England & Wales. the English Court of Appeal granted an injunction restraining a Russian party from litigating in Russia (Enka v Chubb and ors  EWCA Civ 574) in breach of an ICC arbitration agreement. On appeal, he UK Supreme Court ( UKSC 38) upheld the decision of the Court of Appeal, by a majority, whilst fundamentally disagreeing with key aspects of its reasoning. This blog post first considers the Court of Appeal’s decision, and then explains the Supreme Court’s ruling.
The applicant (Enka) was party to a contract to install equipment at a Russian power plant. Following fire damage, the customer claimed $400 million from its insurer, Chubb, which became subrogated to its claims against Enka.
Chubb sued Enka in Russia, despite Enka’s contract with its customer (into whose shoes Chubb had stepped for the purpose of bringing the claim) providing for ICC arbitration in London. Enka’s application for an anti-suit injunction was rejected by the English High Court, including on forum conveniens grounds, stating that it was for the Russian Court to determine the scope and applicable law of the arbitration agreement, and whether the Russian proceedings breached it. The High Court also noted that whilst Enka contended that arbitration in London was the proper forum for any such dispute, Enka had taken no steps to commence such an arbitration, and this was a “very significant factor” counting against it.
The Court of Appeal’s decision
The Court of Appeal (Flaux, Males and Popplewell LJJ) disagreed with the High Court’s decision. It held that forum conveniens was irrelevant, because England was “necessarily” an appropriate forum to hear an application for an anti-suit injunction relating to a London-seated arbitration agreement.
The Court of Appeal also disagreed that Enka’s failure to commence arbitration in London was a “very significant factor” in deciding whether or not to grant an injunction – on the contrary, it was not relevant at all. The Court emphasised that the jurisdiction to grant an anti-suit injunction in support of an arbitration agreement arises whether an arbitration is already ongoing, merely in contemplation, or will never be brought, because “an arbitration agreement contains the independent negative promise not to commence proceedings anywhere in the world”. That negative promise could be enforced whether or not the party also wished to invoke the positive obligation to submit to arbitration.
On the question of whether the Russian litigation amounted to a breach of the arbitration agreement, the Court of Appeal disagreed with the High Court on its deference to the Russian Court, stating it was for the curial court to determine whether the foreign proceedings breached the arbitration agreement.
That would involve determining the law of the arbitration agreement (the “AA law”). Noting the inconsistencies in some of the past authorities in this area, Popplewell LJ stated that “the time has come to impose some order and clarity” on this issue.
His test (paragraph 105) focused first on whether there is an express or implied choice of AA law. If not, the second stage was to ask whether the choice of law in the main contract should be treated as a choice of the AA law as a matter of construction, and applying the principles of construction of the main contract law (however, he noted at paragraph 90 that it would only be “the minority of … cases” that this test would be met). Otherwise, in the third stage there would be a strong presumption that the curial law should be the AA law, but even this general rule “may yield to another system of law governing the arbitration agreement where there are powerful countervailing factors in the relationship between the parties or the circumstances of the case”.
On the facts of this case, the Court found that there was no express choice of AA law, this was not “one of those rare cases” where the proper law of the substantive contract was also the AA law, and therefore the AA law should coincide with the curial law, i.e. English law. On that basis, it found that the Russian litigation was pursued in breach of the arbitration agreement, and that Enka should have its anti-suit injunction.
The judgment is available here.
The UK Supreme Court’s decision
Whilst the Court of Appeal was perhaps correct in identifying the need for “order and clarity”, its own attempt to meet that need did not last very long.
Whilst the UK Supreme Court decided by a bare 3-2 majority to dismiss the appeal, all five judges were unanimous in disagreeing with Popplewell LJ’s formulation of the relevant test. They found that when the parties have chosen a law to apply to the contract as a whole, that choice will generally apply to the arbitration agreement as well. This approach has the virtue of providing certainty and consistency with the presumptive intention of parties who enter into a choice of law agreement, while avoiding complexity and artificiality. As such, the Court of Appeal was wrong to find that there is "a strong presumption” that a choice of seat could trump a choice of law in the contract that contains the arbitration agreement.
By contrast, the Supreme Court noted, when the parties have made no choice of law to govern the agreement, it was necessary to choose the law with which the contract was most closely connected (and this test had to be applied separately to the main contract and to the arbitration agreement). Only in these situations would the law of the seat be most closely connected, such that it would generally govern the arbitration agreement.
On the facts of the case, the majority held that there was no express or implied choice of law in the main contract, so (upholding the Court of Appeal’s conclusion for different reasons) English law applied to the arbitration agreement as the law of the seat, and the anti-suit injunction should accordingly be maintained.
Enka v Chubb is not the only recent case in which the English courts have considered these issues. In Kabab-Ji S.A.L. v Kout Food Group  EWCA Civ 6, the Court of Appeal refused to enforce an ICC Award issued by a tribunal seated in Paris. The main contract contained a choice of English law clause and a choice of Paris as the seat of arbitration. The respondent resisted enforcement on the basis that English law applied to the arbitration agreement, and under an English law analysis it never became party to the arbitration agreement; the claimant contended that the law of the seat should govern the arbitration agreement, with the effect that the respondent was bound.
Whilst the decision was handed down before the Court of Appeal’s decision in Enka, and thus did not have the benefit of Popplewell LJ’s formulation of the test for determining the AA law (still less the Supreme Court’s reformulation), one member of the Court (Flaux LJ) sat on both panels. Kabab-Ji is consistent with the Supreme Court’s decision in Enka, since the express choice of English law in the main contract covered the arbitration agreement as well, and thus English law determined whether the respondent was a party to it.
However, that is not the last word on the matter. It has been reported that the Paris Court of Appeal handed down a decision in June 2020, dismissing the respondent’s set-aside application, and holding that there was no choice of law applicable to the arbitration agreement. In contrast to the UK Supreme Court’s decision in Enka, the Paris Court held that the tribunal had been right to apply the law of the seat as the AA law, and thus that the respondent was properly a party to it.
The Canadian perspective
As Canadian centres become ever-more-popular seats for arbitration specified in cross-border commercial contracts, issues such as those arising in Enka and Kabab-Ji are increasingly likely to present themselves in Canadian courts.
The question of what law should govern an arbitration agreement is of course not new to Canada, as it can arise in both the international and the inter-provincial context (see, e.g., Re O’Brien and Canadian Pacific Railway (1972), 1972 CanLII 807 (SK CA), 25 D.L.R. (3d) 230 at 233-35 (Sask. C.A.) However, as the discussion in Enka makes clear, the past authorities have evolved over time and should be handled with care, and more recent decisions have given greater recognition to the idea that an arbitration agreement should be treated distinctly from the main contract. However, past case law has occasionally sent mixed signals as to the relative importance of (a) the substantive law of the main contract and (b) the choice of seat in determining the AA law (where there is no express or implied choice). The analysis in Enka should therefore be of strong persuasive value to parties considering litigating similar issues in Canada.