Which Law Is It? Enka Insaat Ve Sanayi As v OOO Insuranc­­­e Company Chubb

Which Law Is it? Enka Insaat Ve Sanayi As v OOO Insuranc­­­e Company Chubb

Abigail Korbin

What law governs an arbitration agreement when the law applicable to the contract containing it differs from the law of the seat of the arbitration?

In Enka Insaat Ve Sanayi As v OOO Insuranc­­­e Company Chubb[1] (“Enka”), the UK Supreme Court (“UKSC”) held that if the parties to a contract have not expressly or impliedly specified the law that governs their arbitration agreement, then the law governing the main contract will apply.[2] This occurs even where the law of the arbitral seat differs from the law governing the contract.[3] However, if the parties have not expressly or impliedly specified a proper law of contract, then the arbitration agreement will be governed by the law most closely connected to it.[4] In general, this will be that of the arbitral seat.

Background

Prior to Enka, the English approach to determining the governing law of an arbitration agreement was inconsistent. In Sulamerica CIA Nacional de Segustor SA v Enesa Engenharia SA[5] (“Sulamerica”), the Court of Appeal set a three-stage test to determine the law governing an arbitration agreement: (i) an express choice of law; (ii) an implied choice or (iii) the law with the closest and most real connection with the arbitration agreement.[6] Sulamerica left open whether an express choice of law governing the main contract amounted to an implied choice of law governing the arbitration agreement, or whether the law of the arbitral seat would govern the arbitration agreement absent a separate choice of law specific to the arbitration agreement. In Enka, where the UKSC provided much needed clarification of the English choice of law test for arbitration agreements. 

Facts

On 1 February 2016, a Russian power plant was severely damaged by a fire. The appellant (“Chubb Russia”) is a Russian insurance company that had insured the owner of the powerplant. Once they had paid for the damage, Chubb Russia assumed ownership rights, seeking compensation from third parties who, they argued, were responsible for the fire. Previously, the owner had contracted with a construction company to carry out work at the plant. That construction company had then sub-contracted with the respondents (“Enka”), a Turkish engineering company.

The contract between Enka and the construction company included an agreement on the “Bermuda Form”, which called for application of New York law but ad hoc arbitration in London. Chubb Russia brought a claim against Enka in Russian court and Enka responded by applying to the High Court in London for an anti-suit injunction against the Russian proceedings, on the basis that Chubb Russia had breached the arbitration agreement.

At first instance, the High Court dismissed Enka’s claim on forum non conveniens grounds, finding that Russia was the appropriate forum and thus that Russian Law governed the agreement. The Court of Appeal (“EWCA”) overturned, finding that the arbitration agreement was governed by English law, which mandated a broad interpretation of the scope of the arbitration agreement. Accordingly, the EWCA the anti-suit injunction. Chubb Russia further appealed that decision to the UKSC.

Majority Judgment

By a 3-2 majority, the UKSC upheld the EWCA’s decision that English law governed the arbitration agreement. However, it did so on different reasoning.

The EWCA found that English law applied as a matter of implicit choice of law based on the parties’ choice of England as the arbitral seat. The UKSC found that there was no choice of law whatsoever, explicit nor implicit. Instead, English law applied as the law with the closest connection to the agreement.

The majority gave directions and criteria as to how the law governing arbitration agreements should be determined:

            (1) If the parties have expressly chosen the law governing the arbitration agreement, then this law will govern.[7]

(2) If the parties have chosen the law governing the main contract but not separately chosen a law to govern the arbitration agreement, then the law governing the contract is deemed to be an implied choice of law for the arbitration agreement contained therein.[8] Choosing a different place for the arbitration does not displace this implied choice of law.[9]

However, there are two exceptions:

(a) If the arbitration agreement is likely to be rendered invalid by the law chosen by the parties, then another law should apply to the arbitration.[10] This is the so-called validation principle, which the court in Enka v Chubb adopted into English law for the first time.

(b) If the law of the seat of the arbitration mandates that arbitrations occurring in that jurisdiction are subject to its law, then the arbitration will also be treated as being governed by that law. [11]

(3) If the parties have not chosen any law, expressly or impliedly, the courts will look to the law with the closest connection to the arbitration agreement. In general, this is the law of the seat of the arbitration.[12]

After finding that there was no choice of law made by the parties to govern either the arbitration agreement or the overarching contract, the UKSC looked to what jurisdiction was most closely connected to the arbitration agreement, which it held will normally be the seat of arbitration.[13] . Here, the chosen seat was London; therefore, the arbitration agreement was governed by English law. Ultimately, this meant that the EWCA had properly granted the anti-suit injunction.[14]

Dissent

The dissenting opinion was concerned with whether an express or implied choice had been made and the default position in the absence of that choice. The dissenters agreed that if the parties had chosen the law governing the contract, then that law would apply to the arbitration agreement.[15] However, they disagreed on what the approach should be if there was no express or implied choice of law for the arbitration agreement.

Rather than seeking out the jurisdiction that is most closely connected to the arbitration agreement, the dissent suggested that the courts should look for the legal system that is most closely connected to the main contract, because it is that contract that contains the arbitration agreement.[16] On the whole, parties are likely to assume that if they choose a law to govern their contract, it will govern all aspects of the relationship between them, including any arbitrations arising from that relationship.

The dissent felt that the parties had agreed by implication that Russian law would govern the contract and therefore the arbitration agreement as well.[17] Accordingly, the dissent would have referred the question back to the English commercial court.[18]

Conclusion

The Supreme Court’s decision in Enka clarifies how English courts will determine which system of law governs an arbitration agreement. While this decision only develops English arbitration law, all international parties negotiating contracts containing arbitration clauses should include clear and express choices of law for governing both the contract and the arbitration clauses. Failing to specify both can lead to disputes and extensive litigation. Furthermore, when choosing the seat of the arbitration, parties should be aware if the law of the seat requires that the arbitration will be governed by that jurisdiction’s laws. With Enka, there is now greater certainty as to how such disputes will be resolved.

CJCA blog posts represent the individual opinions and perspectives of their authors. The Canadian Journal of Commercial Arbitration does not maintain or publish a collective or institutional view on any legal or political issue.