- Introduction
In Enka Insaat ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38, the UK Supreme Court dismissed Chubb’s appeal, affirming the Court of Appeal’s conclusion that the arbitration agreement (contained in an underlying agreement) was governed by English law (as the applicable curial law), not by Russian law (which Chubb argued was the law applicable to the underlying agreement). However, the Supreme Court reached this conclusion applying an entirely different line of reasoning and, in doing so, reversed the Court of Appeal’s default rule applicable to the determination of the applicable law to the arbitration agreement.
As mentioned in our previous article on the Court of Appeal decision, there are two main candidates for the law applicable to the arbitration. This can either be (i) the applicable law of the underlying contract containing the arbitration agreement, or (ii) the law of the seat of arbitration specified in the arbitration agreement (i.e., the curial law).
In a split decision (3/2), the Supreme Court confirmed by majority that the law governing the underlying agreement containing the arbitration agreement will, absent certain very specific indications, also govern the arbitration agreement. Absent a governing law choice in respect of the underlying agreement, the validity and scope of the arbitration agreement will be governed by the law of the chosen seat of arbitration, as the law with which the arbitration / dispute resolution clause is most closely connected.
2. Facts and decisions of the lower courts
The claimant / respondent (Enka Insaat ve Sanayi AS (“Enka“)) is a Turkish company engaged in the construction and engineering business, with substantial presence and history in Russia. It was engaged as a subcontractor by CJSC Energoproekt, the general contractor (“Energoproekt“), under a contract dated 27 June 2012 “Contract“), to provide works relating to the boiler and auxiliary equipment installation in respect of a power plant located in Russia. The arbitration agreement, contained in Clause 50 of the Contract, provided for ICC arbitration seated in London, England. The contract of assignment dated 21 May 2014, whereby Energoproekt assigned its rights against Enka to the ultimate employer (PJSC Unipro (“Unipro“)), reiterated the arbitration agreement in the Contract.
A fire broke out in February 2016 at the plant, causing substantial damage. Between November 2016 and May 2017, Unipro’s insurer (OOO Insurance Company Chubb, “Chubb“) paid out c. US$400 million under an insurance policy, thereby becoming subrogated to Unipro’s rights as against Enka. On 25 May 2019, Chubb (defendant / the appellant in the English proceedings) commenced legal action against Enka before the Moscow Arbitrazh Court (“Moscow Claim“), blaming Enka to have caused the fire due to its defective fuel oil pipelines. Enka denied liability, on the basis that the works alleged to have caused the fire were excluded from the scope of works and were performed by another subcontractor. This was seemingly conceded by Unipro in its correspondence with Enka during the aftermath of the fire.
Enka filed its claim with the English Commercial Court on 16 September 2019, seeking (i) a declaration that Chubb was bound by the arbitration agreement in the Contract and that such agreement applied to the Moscow Claim and (ii) an injunction to restrain Chubb from continuing the Russian proceedings in breach of the arbitration agreement and to require it to discontinue the said proceedings.
Andrew Baker J, at first instance [[2019] EWHC 3568 (Comm)], dismissed Enka’s request for an anti-suit injunction on the grounds of forum non conveniens, i.e., that the Russian Court was best placed to decide whether to stay its own proceedings in favour of arbitration. He stopped short of deciding the law applicable to the arbitration agreement, but noting that it was “well arguable that the arbitration agreement is governed by Russian law or, which is more strictly pertinent, that ICC arbitrators would so rule” [72].
Enka appealed against that decision. The judgment of the Court of Appeal was handed down by Popplewell LJ (with whom Flaux and Males LJJ concurred). Guided by the doctrine of separability of arbitration agreements, the Court of Appeal held that as a general rule, in the absence of an express choice of law governing the arbitration agreement, the curial law would apply to the arbitration agreement, as a matter of implied choice (paras 91 to 92 of the Court of Appeal judgment). Accordingly, the Court of Appeal decided that English law was the proper law governing the arbitration agreement contained in the Contract.
Chubb appealed the decision to the Supreme Court. The case was heard by a 5 member panel, comprised of Lords Kerr, Sales, Hamblen, Leggatt and Burrows on 27 and 28 July 2020, and the judgment handed down on 9 October 2020.
3. The Supreme Court’s judgment
In concluding that the law applicable to the arbitration agreement would usually be the law applicable to the underlying agreement containing it, the majority judgment of Lord Hamblen and Lord Leggatt (with whom Lord Kerr agreed) reasoned as follows.
Given that the Rome I Regulation on the law applicable to contractual obligations ((EC) 593/2008) does not apply to arbitration agreements, the issue falls for determination pursuant to the English common law rules (para. 27). Accordingly, in determining whether the parties have made an express or implied choice of law in respect of an arbitration agreement, the English courts would need to apply English law principles of contractual interpretation as the law of the forum (paras. 29 to 34). Applying those principles, the Supreme Court concluded that:
“Where the contract also contains an arbitration clause, it is natural to interpret [the governing law clause in the contract], in the absence of good reason to the contrary, as applying to the arbitration clause for the simple reason that the arbitration clause is part of the contract which the parties have agreed is to be governed by the specified system of law.” (emphasis added, para. 43)
In doing so, the Supreme Court rejected the Court of Appeal’s separability analysis and reversed the latter’s ruling that, absent an applicable law stipulation in the arbitration agreement itself, the choice of a seat of arbitration in the arbitration agreement is evidence of an implied choice of the curial law as the law applicable to the arbitration agreement. The Supreme Court, by majority, endorsed the much more straightforward position that a general governing law clause will serve as an express choice of governing law to the arbitration agreement, “even where the law chosen to govern the contract differs from that of the place chosen as the seat of arbitration” (para. 53).
In the Supreme Court’s view, the focus on the law applicable to the underlying agreement provides for a greater degree of legal certainty and consistency, as well as avoiding the artificiality of a strict application of the principle of separability in like circumstances. In particular, the Court noted:
“The principle that an arbitration agreement is separable from the contract containing it is an important part of arbitration law but it is a legal doctrine and one which is likely to be much better known to arbitration lawyers than to commercial parties. For them a contract is a contract; not a contract with an ancillary or collateral or interior arbitration agreement. They would therefore reasonably expect a choice of law to apply to the whole of that contract.” (emphasis added, para. 53 (iv)).
The Supreme Court considered the Court of Appeal to have unnecessarily elevated the principle of separability of the arbitration agreement to a high ranking position, holding that “it does not follow from the separability principle that an arbitration agreement is generally to be regarded as “a different and separate agreement” from the rest of the contract or that a choice of governing law for the contract should not generally be interpreted as applying to an arbitration clause” (para. 61).
The Supreme Court further noted that “the curial law which applies to the arbitration process is conceptually distinct from the law which governs the validity and scope of the arbitration agreement” (para. 69).
An essential element of the Supreme Court’s reasoning in rejecting the Court of Appeal’s analysis was their rejection of the “overlap argument”. The overlap argument suggests that English curial law (i.e., the Arbitration Act 1996, the “1996 Act“) deals with questions of substance (applicable to the arbitration agreement) and procedure (applicable to the arbitration itself). As a result, the Court of Appeal had held that “the overlap between the scope of the curial law and that of the [arbitration agreement] law strongly suggests that they should be the same” (para. 96). The Court of Appeal had reasoned that, in light of the fact that the selection of a seat of arbitration (and by extension, the curial law) is an express choice by the parties, it is natural to regard the choice of seat as an implied choice of the law applicable to the arbitration agreement and there should be a strong presumption to this effect (paras 101 and 105(3)).
The Supreme Court did concede that “there is a close relationship between provisions of the Arbitration Act concerned with the arbitration agreement and provisions of the Act concerned with the arbitration process and that the distinction between them is not always clear or easy to draw” (para. 73). However, it rejected the overlap argument on a close construction of the provisions of the 1996 Act, section 4(5) in particular, which states:
“The choice of a law other than the law of England and Wales or Northern Ireland as the applicable law in respect of a matter provided for by a non-mandatory provision of this Part is equivalent to an agreement making provision about that matter.
For this purpose an applicable law determined in accordance with the parties’ agreement, or which is objectively determined in the absence of any express or implied choice, shall be treated as chosen by the parties.”
The Supreme Court saw this provision as one intended to address the situation in which the provisions of the law governing the arbitration agreement conflict with the “substantive” provisions of the 1996 Act, which may be applicable to the arbitration agreement (provided they are non-mandatory). In the event of a conflict, the non-mandatory provisions of the 1996 Act applicable to the arbitration agreement are disengaged in favour of the relevant provisions of the law governing the arbitration agreement (para. 80). The Supreme Court therefore concluded that the 1996 Act cannot be said to “justify the general inference that parties who choose an English seat of arbitration thereby intend their arbitration agreement to be governed by English law.” (para. 82).
The majority did reaffirm, however, the invalidity principle expressed in Sulamerica v Enesa Engenharia [2012] EWCA Civ 638, pursuant to which a selection of an arbitral seat may be viewed as an implied choice of governing law of the arbitration agreement in circumstances where the arbitration agreement would be invalid or unenforceable under the law governing the underlying contract (para. 109). Similarly, the law of the seat of arbitration may apply to the arbitration agreement where there is any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration will also be treated as governed by that country’s law (para. 170(vi)).
Where the underlying agreement lacks an express (or implied) choice of law stipulation , however, the Supreme Court accepted that in such circumstances there would be a presumption in favour of the law of the seat of arbitration, on the basis that such would have the closest connection to the arbitration agreement (paras 118 to 120).
At paragraph 170, the Supreme Court set out the steps that now need to be followed in order to determine the law applicable to the arbitration agreement. We have summarised these in a flowchart below:
On the facts, the Supreme Court held, by majority, that the parties had failed to expressly or impliedly choose a governing law for the Contract (paras 148-155). They decided that the Contract was governed by Russian law by operation of the “close connection” test contained in the Rome I Regulation, which does not extend to arbitration agreements, and not by virtue of any choice of the parties to that effect (paras 156-161). The Court therefore held that English law (as the curial law) applied to the arbitration agreement, as it is the law with the closest connection to the arbitration agreement (para. 171). Accordingly, the Supreme Court reached the same end but via a different route.
Finally, it is striking and noteworthy that the Supreme Court held that the entire dispute resolution clause (providing for a multi-step dispute escalation procedure via negotiation and senior management discussions) constituted the “arbitration agreement”, such agreement being governed by English law.
Further noteworthy points from the Supreme Court judgment:
- The dissent: On the question of the law applicable to the arbitration agreement, Lords Burrows and Sales dissented on points of fact and law (see para. 261 for a helpful summary of their reasoning). On the facts, the dissenting judges considered that the parties had in fact impliedly chosen Russian law to apply to the Contract, and that this implied choice extended to the arbitration agreement (applying the same principle expressed by the majority). In the alternative, even if Russian law was applicable by virtue of the Rome I Regulation as having the closest and more real connection (as the majority held), the dissenting judges still considered that Russian law should apply to the arbitration agreement by extension, as opposed to the law of the seat. As such, the dissenting judges considered that there should be no exception to the general rule that the proper law of the main contract is also the proper law of the arbitration agreement.
- Principles relating to anti-suit injunctions: The Supreme Court unanimously affirmed the orthodox position on anti-suit injunctions set out by the Court of Appeal, namely that the governing law of the arbitration agreement is not directly relevant to the question of whether an anti-suit injunction should be granted. In exercising their supervisory jurisdiction, the English courts should focus on whether the foreign proceedings have been brought in breach of the relevant arbitration agreement. Where the arbitration agreement is governed by a foreign law, it may, in certain circumstances, be appropriate to defer on the question of breach to the relevant foreign court. However, deference to the foreign court should generally give way to the “importance of upholding the parties’ bargain and restraining a party to an arbitration agreement from doing something it has promised not to do” (paras 183, 261).
4. Commentary
The default rule that the law of the underlying agreement applies also to the arbitration agreement contained within it certainly brings some certainty, simplicity, clarity and wholesome-ness. The curial law (i.e., the law of the seat of arbitration) is unlikely to step in to govern the arbitration agreement unless:
- (1) the arbitration agreement would be invalid under the governing law of the underlying agreement, or,
- (2) the parties fail to choose (expressly or impliedly) a governing law for the underlying agreement,
There is also some force in the Supreme Court’s reasoning that aligning the laws applicable to the underlying agreement and the arbitration agreement contained within it are likely to match the expectation of most commercial parties, who may be unfamiliar with the concept of separability. However, it may also be said that commercial parties select a seat not solely for arbitration procedure related reasons, and expect the courts of the seat to rule on matters relating to the arbitration agreement, in whose laws and experience some degree of trust is placed.
The Supreme Court’s judgment serves as a stark reminder to those drafting arbitration agreements contained in an underlying agreement to give particular thought to the above issues and consider the pros and cons of subjecting the validity of the arbitration to the general law applicable or the law of the seat of arbitration, if different. In such cases, it may be advisable to include an express applicable law choice in the arbitration agreement, which certainly calls for a case-by-case analysis.
