English Supreme Court Settles Rules on Laws Governing Arbitration Agreements

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Moshiuzzaman
Moshiuzzaman holds a 2:1 LL.B degree from BPP University (UK). He is currently pursuing the CFA chartership and working as an independent legal researcher at the American Society of International Law (ASIL)

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The United Kingdom Supreme Court in Enka v Chubb ruled on the English law approach to determining the law governing an arbitration agreement. The decision of the Supreme Court settled a vexed question of law that had given rise to numerous conflicting English Court of Appeal judgments. 

Background

The dispute in question involved Enka, a subcontractor, working on the construction of the Berezovskaya power plant in Russia. It was deemed that Enka, along with ten other defendants, were jointly responsible for a massive fire that damaged the power plant in 2016. Although the contract between Enka and the head-contractor, Energoproekt included an arbitration agreement providing for a London seated arbitration; it did not expressly mention a governing law, either of the substantive contract or the arbitration agreement. 

Energoproekt had assigned all its rights and obligations for the contract to PJSC Unipro, owner of the power plant. As a result of the fire, Chubb Russia, insurers to Unipro, paid 26.1 billion Russian roubles under the insurance policy and thereby became subrogated to any rights of Unipro to claim compensation from third parties for the damage caused by the fire. Later in 2019, Chubb Russia commenced proceedings in the Moscow Arbitrazh Court. Enka filed an application in the Russian proceedings to have Chubb’s claims dismissed and asserted that the claim fell within the scope of the arbitration agreement in the contract. On 18th March 2020, the Moscow Arbitrazh Court refused to grant Enka application to refer the claim to arbitration and dismissed Chubb’s claims. Both Enka and Chubb subsequently appealed to this decision. 

On the 16th of September 2019, Enka filed an arbitration claim in the English Commercial Court in London seeking an anti-suit injunction to restrain Chubb from proceeding with the Russian lawsuit on the ground that it was a breach of the arbitration agreement in the contract. On 15th October 2019, Carr J refused to grant the injunction but directed an expedited trial. On 20th December 2019, the English Commercial Court dismissed Enka’s claims and considered that the appropriate forum to decide on whether Chubb’s claims fell within the scope of the arbitration agreement was the Moscow Arbitrazh Court. Enka appealed the ruling, and on the 29th of April 2020, the Court of Appeal allowed the appeal and issued an anti-suit injunction restraining Chubb Russia from continuing with the Russian lawsuit. On the 5th of June 2020, Chubb appeal against the Court of Appeal’s decision. 

 

The Position Prior to Enka v Chubb  

The English Court of Appeal’s decision was a notable departure from its previous decision in Sulamérica Cia Nacional de Seguros SA v Enesa Engenharia SA [2012], where the court held that while determining the law governing the arbitration, parties are presumed to have intended the whole of their relationship to be governed by the same system of laws, and in the event that there was not an express choice of law relating to the arbitration agreement, the parties are presumed to have intended the arbitration agreement to be governed by the law of the contract. The Court of Appeal in Enka found the approach from Sulamérica to be inconsistent with a prior Court of Appeal case, namely, C v D [2007], and preferred the “seat approach” – arbitration agreement follows the seat of arbitration. 

 

The United Kingdom’s Supreme Court

All the judges sitting, in this case, agreed in their judgment that the question of which law applies to an arbitration agreement in the absence of a clear choice of law is one which the courts and commentators alike have long grappled on either side of the issue.

The Supreme Court was divided: Lord Hamblen and Leggatt (with whom Lord Kerr agreed) delivered for the majority; Lord Burrows gave a dissenting judgment (with whom Lord Sales agreed), and Lord Sales also gave a judgment of his own. The judgements primarily debated the relative merits of the “main contract approach” (whereby the law of arbitration agreement follows the main contract) and the “seat approach” (where the law of arbitration agreement follows that of the seat of arbitration). 

On the face of it, the majority (Lords Hamblen, Leggatt and Kerr) stated that they would apply English law as the law of the forum to determine whether or not the parties had made a choice of law. On the basis of this, the majority disagreed with the Court of Appeal’s view that an English court should apply the rules of the law of the main contract to determine whether the parties have made a choice of law. Moreover, the majority also stated that there was a distinction between an express and implied choice of law, which is not necessarily a “sharp” one, and that in each case, it is a question of interpretation whether the parties have agreed on a choice of law as a matter of interpretation.

The majority held that, in deciding which system of law governs an arbitration agreement, an English court must apply common law rules because the Rome I Regulation expressly excludes arbitration agreements from its scope. Applying English common law rules, an arbitration agreement – like other contracts – is governed by: (a) the law chosen by the parties: or (b) in the absence of such choice, the law with which the contract is “most closely connected”.

In regards to the parties’ choice of law, the court held that where the parties have not specified the law applicable to the arbitration agreement but have chosen a set of laws governing the contract containing the arbitration agreement, this choice will in the clear absence of “good reason to the contrary”, also apply to the arbitration agreement. The majority held that this was a case of simple reasoning: the arbitration agreement is contained within the contract. The law that applies to the contract, by inference, becomes applicable to the arbitration agreement. The majority also held that this approach was consistent with several other common law and civil law jurisdictions, including India, Pakistan, Germany, Singapore, and Austria. 

However, the majority also identified two factors that may rebut this inference of the “main contract approach”. These factors may also be reinforced by circumstances indicating that the seat was deliberately chosen as a neutral forum for the arbitration. Firstly, the general inference may be overcome where there is a serious risk that, if governed by the same law as that of the main contract, the arbitration agreement would be ineffective. This was referred to as the “validation principle”. Stating that this form of interpretation was a form of purpose interpretation, the majority held that this rule is to ensure parties’ intentions are given effect. Secondly, the general inference may be overcome if any provision of the law of the seat indicates that, where the parties have chosen that country as the seat of the arbitration, the arbitration agreement will also be treated as governed by the country’s law. The majority cited s.48 of the Swedish Arbitration Act and s.6 of the Arbitration (Scotland) Act 2010. The majority expressed a strong dissent to the Court of Appeal’s finding that there was a “strong presumption” that the parties have impliedly chosen the law of the seat to govern the arbitration agreement. 

In regard to the “closest connection” principle, the majority held that where there is no express or implied choice of law to govern the arbitration agreement, the system of law “most closely connected” to the arbitration will apply. The majority held that in general, the arbitration agreement will be most closely connected with the law of the seat of the arbitration. The majority cited multiple reasoning for this conclusion: (a) the seat is where the arbitration is to be performed (legally, if not physically) and by agreeing to a seat of arbitration the parties submit themselves to the jurisdiction of the courts of that place for the purposes of deciding any issue relating to the validity or enforceability of their arbitration agreement;(b) this approach is consistent with both legislative policy and international law, including Article V(1)(a) of the New York Convention; (c) this rule is likely to uphold the reasonable expectations of the contracting parties who specify a location for the arbitration without choosing the law to govern the contract and (d) this approach provides the legal certainty of a clear default in the absence of choice. 

Applying these principles to the facts, the majority held that it was common ground for parties to not specify a law to govern their arbitration agreement. The majority found that the parties’ contract did not contain a choice of law to govern the contract and held that the validity and scope of the arbitration agreement were to be determined by the “closest connection” test. The majority rejected the argument by Chubb Russia that the existence of the arbitration agreement within a multi-tier dispute resolution provision meant that the arbitration agreement was inextricably bound up with the rest of the contract and thereby governed by the same law. Instead, it was held that the entire multi-tiered dispute resolution provision would be governed by the law governing the arbitration agreement, in this case under English law.

Accordingly, the majority held that English law governed the arbitration agreement and affirmed the decision of the Court of Appeal to grant an anti-suit injunction to restrain the Russian lawsuit. The majority also noted that it makes no difference whether the arbitration agreement is governed by English or foreign law, as the inquiry in both cases remains the same: whether there has been a breach of the agreement and, if so, whether it is just and convenient to grant an injunction to restrain that breach. The majority rejected Chubb Russia’s argument that it was more appropriate to await a decision by the Russian courts before issuing an injunction, noting that such considerations of comity have little role to play when English courts issue an anti-suit injunction to enforce an arbitration agreement. 

Dissenting, Lords Burrows and Lord Sales parted ways with the majority of three key issues. Firstly, Lord Burrows found that the validation principle should not apply to disputes concerning the interpretation or scope of the arbitration agreement, rather than disputes concerning the validity of the arbitration agreement. Secondly, Lord Burrows reasoned that absent an express choice of law for the arbitration agreement, there should be a general presumption that the proper law of the main contract (whether expressly chosen or not) is also the proper law of the arbitration agreement. Thus, having found that Russian law was the proper law of the main contract impliedly chosen by the parties, Lord Burrows reasoned that the law governing the arbitration agreement should be Russian law as a matter of implied choice. Thirdly, Lord Sales took the view that an arbitration agreement has its closest and most real connection with the proper law of the main contract in which it is contained, rather than with the law of the seat and that less weight should be placed on Article V(1)(a) of the New York Convention when considering the enforcement of an arbitration agreement. The dissent also expressed misgiving about the approach of the majority. In the dissenting judges’ view, the majority approach would produce “undesirable practical and unprincipled consequences” by forcing the same contract to be governed by different sets of laws.

 

Impact of the Decision

The Supreme Court’s decision provides much-needed clarification regarding the English courts’ approach to determining the governing law of an arbitration agreement. Although the majority ultimately upheld the Court of Appeal’s decision, it did so by taking a different route and affirmed the choice of law approach set forth by the Court of Appeal in the Sulamérica case. The Supreme Court also displayed remarkable sensitivity to the provisions of the New York Convention and demonstrated admirable receptivity to international authorities, with both the majority and dissents relying on an expansive range of international commentary and judicial decisions.

The dissenting opinions of Lords Burrows and Sales demonstrate that there is some support at the highest level for arguments: (a) the law governing the main contract, even absent a choice of law provision, should presumptively apply to the arbitration agreement; or (b) that an arbitration agreement is in fact most closely connected with the law of the main contract. The law of these points could further develop in a different direction in the future.

Click here to view the original judgement


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