This post was originally published on Practical Law Arbitration blog and is reproduced with the permission of Thomson Reuters.
The Supreme Court’s much-anticipated judgment in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb addresses the correct approach under English law to determining the governing law of an arbitration agreement. The judgment seeks to promote certainty and enforceability of arbitration agreements, by providing that:
- The parties’ choice of law in the governing law clause should generally also be interpreted as an express choice of law governing their arbitration agreement.
- Parties should generally, as a matter of implied choice, be taken to have chosen a system of law to govern their arbitration agreement under which it would be valid.
- In the absence of any express or implied choice by the parties, the governing law of an arbitration agreement will generally be that of the seat of the arbitration.
The court’s judgment also reaffirms that, where English law is the law of the seat, the English courts generally have jurisdiction to grant anti-suit injunctions to restrain breaches of the arbitration agreement, even where that agreement is not itself governed by English law.
Background to the appeal
Enka was a Turkish engineering company that had been engaged as a subcontractor in the construction of a power plant in Russia. The contract between Enka and the plant owner contained:
- No governing law clause. Although an “applicable law” clause provided for the incorporation of Russian law in some circumstances.
- An arbitration agreement providing for ICC arbitration with a London seat.
In 2016, following a fire at the power plant, the plant owner’s insurer paid an insurance claim by the owner and was subrogated to the owner’s rights under the contract. The insurer then commenced a claim against Enka in Russia, alleging that the fire had been caused by Enka’s negligence. Enka responded by bringing an application in England for an anti-suit injunction, contending that the arbitration agreement was governed by English law and that the insurer’s claim was in breach of that agreement. The insurer objected to the application on the basis that the arbitration agreement was governed by Russian law, under which it argued the insurer’s claim fell outside the agreement’s scope.
The issues before the Supreme Court were:
- What was the proper approach to determining the governing law of the arbitration agreement.
- In light of the law governing the arbitration agreement, what was the proper approach to determining whether to grant an anti-suit injunction.
Correct approach to determine governing law of arbitration agreement
Under English conflicts of laws rules, a court determining the governing law of an arbitration agreement is required to undertake a three stage enquiry:
- Have the parties made an express choice of law for the arbitration agreement?
- If not, is there an implied choice of law?
- If not, with what system of law does the arbitration agreement have the “closest and most real connection”?
However, the case law over several decades has provided varied guidance on how the courts should approach their task in answering these questions, in particular, in circumstances where the law specified in the governing law clause in a contract differs from the law of the seat specified in the arbitration agreement. The task of the Supreme Court was to provide clarity in this complex and tangled area of the law.
Have the parties made an express choice of law for the arbitration agreement
The Supreme Court held that a governing law clause should generally be interpreted as an express choice determining the governing law of the arbitration agreement. The Supreme Court stated that this result was consistent with the reasonable expectations of commercial parties, most of whom would regard the arbitration agreement as part of the main contract in which it was contained and therefore within the scope of its governing law clause. In addition, the court noted that this approach would promote commercial certainty and consistency.
The Supreme Court’s decision departs from the Court of Appeal’s judgment, which held that, given that an arbitration agreement is separable from the contract which contains it, express wording would be required in one or the other to conclude that the governing law clause extended to the arbitration agreement. Absent such wording, on the Court of Appeal’s approach, there would be no express choice of law and the court would be required instead to search for an implied choice.
Have the parties made an implied choice?
The Supreme Court again disagreed with the Court of Appeal, which had held that there was a “strong presumption” that, in the absence on an express choice of law, the parties had impliedly intended the law of the seat to govern the arbitration agreement.
The Court of Appeal had based its conclusion largely on the fact that there is considerable overlap in the provisions of the Arbitration Act 1996 (AA 1996) between those addressing the procedure adopted in the arbitration and those addressing the parties’ substantive rights and obligations under the arbitration agreement. The court had reasoned that in these circumstances one would generally expect parties to intend the same law to govern both the procedural law of the seat and the substantive law of the arbitration agreement. The Supreme Court rejected this argument on the basis that section 4(5) of the AA 1996 provided that all but a few of the provisions highlighting the overlap were non-mandatory, and would be disapplied in the event that the parties had decided on a foreign law to govern their arbitration agreement. In these circumstances, no inference could be drawn that, by choosing English law as the law of the seat, parties were also impliedly choosing English law to govern their arbitration agreement.
The Supreme Court was also not prepared to accept that a choice of a particular seat indicated a general preference for the law of that seat, such as to imply a choice of that law to govern the arbitration agreement. In particular, the court reasoned that in the modern commercial world, the parties chose arbitration with a London seat because they considered this an attractive forum in which to resolve disputes. However, this did not mean they necessarily had a general preference for English law.
The Supreme Court did, however, endorse decisions in previous cases to the effect that parties should be taken impliedly to have chosen a governing law pursuant to which their arbitration agreement would be valid. Hence, the court noted that the Court of Appeal in Sulamerica v Enesa Engenharia had concluded that, where a contract was governed by Brazilian law, the arbitration agreement was nonetheless governed by English law as the law of the seat in circumstances where, had the clause been governed by Brazilian law, it would have been invalid.
With what system of law does the arbitration agreement have the “closest and most real connection”?
The majority of the Supreme Court (a minority of two dissenting) held that an arbitration agreement would generally have the closest and most real connection with the law of the seat. It gave several reasons for reaching this conclusion, noting, among other things, that this approach:
- Reflected the status of the seat as the place where the arbitration was legally to be performed.
- Was consistent with the approach taken by international law, in particular the New York Convention.
- Would uphold the reasonable expectations of contracting parties who specified a seat without choosing a law to govern their main contract.
- Would promote certainty by allowing parties to predict easily which governing law would apply in the absence of party choice.
Decision on the facts
The majority of the Supreme Court (a minority of two again dissenting) concluded that, as a matter of interpretation, the parties had made no express and no implied choice of law to govern either the main contract between them or their arbitration agreement. Accordingly, applying the “closest and most real connection” test, the arbitration agreement was governed by English law as the law of the seat.
Proper approach to determine whether to grant anti-suit injunction
The Supreme Court held that where an arbitration agreement specified English law as the law of the seat, the English courts had jurisdiction to grant an anti-suit injunction as part of the supervisory role accorded to them as the courts of the seat. There was thus no need for the arbitration agreement additionally to be governed by English law before the courts could grant an anti-suit injunction.
Unlike its decision with respect to the correct approach to determining an arbitration agreement, the Supreme Court’s decision in this respect did not break new ground, but rather reaffirmed the orthodox approach which had been stated by the Court of Appeal and previously stated, for example, by the House of Lords in West Tankers Inc v RAS Riunione Adriatica di Sicurtà SpA (The Front Comor).
On the facts, the Supreme Court accordingly agreed that the Court of Appeal had jurisdiction to grant an anti-suit injunction as a consequence of the parties’ arbitration clause providing for a London seat.
The Supreme Court’s decision with respect to the proper approach to determining the governing law of an arbitration agreement provides a measure of certainty in an area of the law which has long been unclear. In particular, the court’s ruling that a choice of law in a governing law clause will generally determine the governing law of the parties’ arbitration agreement will provide certainty of outcome and reduce the potential for disputes in many cases.