UK Supreme Court clarifies proper approach to determining governing law of arbitration agreement

26 November 2020

Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38

In a landmark decision, the UK Supreme Court in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb has clarified how the governing law of an arbitration agreement is to be determined when the law applicable to the contract containing it differs from the law of the seat of the arbitration.

Prior to this decision, this issue had been the subject of two competing lines of authority: (1) that the law that governs a contract should generally also govern an arbitration agreement which, though separable, forms part of that contract, and (2) that the law of the chosen seat of the arbitration should also generally govern the arbitration agreement.

The majority of the Supreme Court held that:

• Where the parties have not specified the law applicable to the arbitration agreement, but have chosen the law to govern the contract containing the arbitration agreement, this choice will generally apply to the arbitration agreement.
• Where the parties have made no choice of law to apply to the arbitration agreement, either specifically or by choosing the law to govern the contract as a whole, the court would determine the law which the arbitration agreement has its closest connection with. Generally, the law with which the arbitration agreement is most closely connected is the law of the seat of arbitration.

Facts

In 2016, a power plant in Russia was damaged by fire. The appellant insurance company (“Chubb Russia”) had insured the owner (“Unipro”) of the power plant against such damage. Unipro had engaged a company (“Energoproekt”) to design and construct the power plant in 2011. In turn, Energoproekt engaged the respondent (“Enka”) as one of several subcontractors for the project. The contract concluded between Energoproekt and Enka in 2012 (“construction contract”) contained a dispute resolution clause which provided among other things that disputes “shall be referred to international arbitration” and that “the place of arbitration shall be London, England” (“arbitration agreement”). The construction contract however did not contain a choice of governing law clause.

In 2014, Energoproekt transferred its rights and obligations under the construction contract to Unipro pursuant to an assignment agreement. After the fire, Chubb Russia paid an insurance claim by Unipro and thereby became subrogated to any rights of Unipro to claim compensation from third parties, including Enka, for the damage caused by the fire.

In 2019, Chubb Russia filed a claim in the Russian courts against Enka for the damage caused by the fire. Enka subsequently brought an arbitration claim in the Commercial Court in London seeking an anti-suit injunction to restrain Chubb Russia from further pursuing the Russian proceedings on the ground that this was in breach of the arbitration agreement. Enka’s claim was dismissed by the Commercial Court on the basis that the appropriate forum to decide whether Chubb Russia’s claim against Enka fell within the arbitration agreement was the Russian court.

The English Court of Appeal allowed Enka’s appeal and granted the anti-suit injunction, holding that unless there has been an express choice of the law that is to govern the arbitration agreement, the general rule should be that the arbitration agreement is governed by the law of the seat, as a matter of implied choice, subject only to any particular features of the case demonstrating powerful reasons to the contrary. Chubb Russia appealed to the Supreme Court.

Decision of the Supreme Court

The Supreme Court stated that an English court which has to decide which system of national law governs a contract would normally apply the provisions of the Rome I Regulation. However, since the Rome I Regulation excludes arbitration agreements from its scope, the common law rules for resolving conflicts of laws apply. The common law rules provide that the law applicable to the arbitration agreement will be (1) the law expressly or impliedly chosen by the parties, or (2) in the absence of such choice, the law with which it is most closely connected.

The majority of the Supreme Court held that where parties have not specified the law applicable to the arbitration agreement, but have chosen the law to govern the contract containing the arbitration agreement, this choice will generally apply to the arbitration agreement. Such an approach promotes certainty, consistency and coherence while avoiding complexity and artificiality. In so holding the majority rejected the Court of Appeal’s decision that there is a strong presumption that the arbitration agreement is governed by the law of the seat.

In cases where the parties have not chosen the law applicable to the arbitration agreement, either specifically or by choosing a system of law to govern the contract as a whole (including the arbitration agreement), the proper approach is for the court to determine which system of law the arbitration agreement has its closest connection with. The majority held that as a general rule, the law with which the arbitration agreement is most closely connected is the law of the seat of arbitration. This general rule is justified on the following grounds: (1) as states have an interest in regulating transactions taking place within their territory, it can naturally be assumed that the law of the territory in which a transaction is taking place will govern it in the absence of a contrary indication; (2) it is consistent with international law and legislative policy; (3) it is likely to uphold the reasonable expectations of contracting parties who have chosen to settle their disputes by arbitration in a specified place but made no choice of law for their contract; and (4) it promotes legal certainty by enabling parties to predict easily which law the court will apply by default.

The majority held that the construction contract contained no choice of law that was intended to govern the construction contract or the arbitration agreement within it. In the circumstances, the validity and scope of the arbitration agreement was governed by the law of the chosen seat of arbitration, as the law with which the dispute resolution clause was most closely connected. Since London was the seat of arbitration, English law applied. The decision of the Court of Appeal to grant the anti-suit injunction was upheld.