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UK Supreme Court Rules on the Law Applicable to Silent Arbitration Agreements

  • 04 December 2020 04 December 2020
  • UK & Europe

  • Marine

Enka Insaat Ve Sanayi AS v OOO Insurance Co Chubb (2020)

The UK Supreme Court has clarified a long disputed area regarding the law applicable to an arbitration agreement where parties are silent on their choice of law, in the recent decision Enka Insaat Ve Sanayi AS v OOO Insurance Co Chubb (2020). The Supreme Court held that, where the parties chose the law governing the main contract, the same system of law would generally apply to the arbitration agreement, in the absence of a good reason to the contrary. However, if the parties did not elect which law governed the main contract or the arbitration agreement, then the law governing the arbitration agreement would be the law of the seat of the arbitration, this generally being the law most closely connected to the arbitration agreement.  

Facts

OOO Insurance Co Chubb ("Chubb") insured a power plant in Berezovskaya, Russia, which was severely damaged by a fire. Chubb brought a subrogated claim, in the Moscow Arbitrazh Court, against Enka Insaat Ve Sanayi ("Enka"), a sub-contractor for the construction of the plant.

Enka filed a motion in the Russian proceedings to have Chubb’s claim dismissed on the basis that the claim fell within the scope of the arbitration agreement contained in the construction contract. The Russian court refused to grant Enka's motion. Enka then brought an arbitration claim in the Commercial Court in London, seeking an anti–suit injunction, to restrain Chubb from pursuing Russian proceedings on the basis that doing so was a breach of the arbitration agreement. The question before the English court was whether the arbitration agreement was governed by Russian law or English law, the latter being the law of the seat of the arbitration.

The court of first instance refused an anti-suit injunction stating that the appropriate forum to decide the scope of the arbitration agreement was the Moscow Arbitrazh Court, not the English Commercial Court. The Court of Appeal overturned this decision, and granted an anti-suit injunction on the basis that there was a strong presumption that the parties had impliedly chosen the law of the seat of the arbitration to govern the arbitration agreement. Chubb appealed to the Supreme Court.

Supreme Court Decision

This case caused a divide in the Supreme Court; however, the majority of judges held that the arbitration agreement was governed by the law of the seat but for the different reasons than those given by the Court of Appeal.

The Supreme Court found that the starting point was that the parties' choice of law in relation to the main contract would also apply to the arbitration agreement. However, in the absence of an express or implied choice of law in the main contract, the majority of the judges held that the arbitration agreement should be governed by the law that it was most connected to. In the view of the majority, this would generally be the law of the seat of the arbitration.

On the facts of this case, the Supreme Court found that the parties did not make an express or implied choice of law in the main contract. Therefore, applying the presumption discussed above, the Court decided that the arbitration agreement was governed by English law as the law of the seat of arbitration.

The dissenting minority of judges were of the view that there was an implied choice of Russian law in the main contract, so that Russian law was the proper law of the arbitration agreement. Even if that was not the case, they argued that since the main contract had the closest connection with Russian law, this was also the law most closely connected to the arbitration agreement. The dissenting minority found no exception to the general rule that the proper law of the main contract was also the proper law of the arbitration agreement, regardless of how the proper law of the contract had been determined. Whilst one could see the advantages of this argument, the majority of the Supreme Court did not agree.

Comment

This Supreme Court judgment settles the longstanding debate over the determination of the law applicable to arbitration agreements where this has not been expressly provided for by the parties. In the absence of an express or implied agreement on the choice of law in the main contract or in the arbitration agreement, English courts are now likely to find that the latter is governed by the law of the seat of the arbitration. The decision in Enka does not in any way restrict or interfere with the freedom of contract between parties, but rather offers certainty in situations where the parties did not provide for the governing law of an arbitration agreement.

The decision further underscores the importance of using clear wording in governing law clauses in main contracts. It is strongly advisable to specify the choice of law for the arbitration agreement itself. The Supreme Court judges made powerful arguments in favour of choosing either the law of the main contract (minority view) or the law of the seat (majority view) to govern arbitration agreements, and parties should consider these arguments carefully when deciding which law they wish to choose to govern their arbitration agreement.

Importantly, the Supreme Court judges unanimously agreed that where the seat of arbitration was England, English courts would still be the right forum to determine the validity and scope of an arbitration agreement even if the agreement was ultimately governed by foreign law. Accordingly, English courts would still be in a position to grant an anti-suit injunction in support of an arbitration agreement governed by foreign law. The Enka Supreme Court judgment serves to strengthen England's position as a pro-arbitration jurisdiction and provides much needed certainty to the parties who choose it as the seat of arbitration.

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