UK Supreme Court Clarifies Proper Approach to Determining the Applicable Law

The UK Supreme Court recently handed down its much-anticipated judgment in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38. The law applicable to an arbitration agreement will be the law chosen by the parties to govern it. By a majority of 3-2, the Court confirmed that in the absence of such agreement, it will be the law with which the arbitration agreement is most closely connected, which will generally be the law governing the underlying contract itself. However, there may be times when the applicable law of the arbitration agreement is that of the seat of the arbitration, including where there is no express applicable law of the underlying contract.

The judgment provides clarity on determining the correct applicable law of arbitration agreements. This is particularly welcome given the confusion that can arise where a contract, or arbitration agreement, fails to state expressly which applicable law governs it.

Background

Under English law, clauses agreeing to arbitration are treated as separate agreements severable from the underlying contracts whose disputes they govern. As such, where a contract contains an agreement to arbitrate, there are at least three distinct applicable laws engaged: (1) the law governing the substance of the dispute, (2) the law governing the arbitration process, and (3) the law governing the arbitration agreement itself.

All three laws may be the same, but often there will be differences (by accident or design). If the parties end up in a formal dispute, the governing law of the arbitration agreement will be important in determining whether the agreement to arbitrate is a valid one and whether the dispute falls within the scope of the arbitration agreement.

Enka and Chubb’s dispute

Enka was a subcontractor in the construction of a power plant in Russia. The contract governing Enka's engagement had no governing law clause, but it did contain a dispute resolution clause (the Arbitration Agreement) which provided that disputes were subject to “the Rules of Arbitration of the International Chamber of Commerce” with London as the seat of the arbitration. The Arbitration Agreement did not specify the law applicable to it.

In 2016, a fire broke out at the power plant. In May 2019, Chubb, as insurer of the plant and having exercised its rights of subrogation, filed a claim in the Moscow Commercial Court (the Russian Proceedings) against Enka and other defendants who, Chubb claimed, were liable for the damage caused by the fire.

In September 2019, Enka filed a motion in the Russian Proceedings to dismiss Chubb's claim. Enka also commenced proceedings in the High Court in London, contending that the dispute was subject to the Arbitration Agreement and should be resolved by arbitration in London. Enka therefore sought an antisuit injunction requiring Chubb to discontinue the Russian Proceedings. After losing at first instance in the High Court, Enka succeeded on appeal to the Court of Appeal, which granted the antisuit injunction and held that the Arbitration Agreement was governed by English law. Chubb appealed that decision.

The Decision

The Supreme Court dismissed Chubb's appeal and agreed that the Arbitration Agreement was governed by English law but disagreed with the Court of Appeal's reasoning. The Supreme Court's judgment clarifies the proper approach to determining the applicable law of an arbitration agreement. In short, it will be the law chosen by the parties to govern it; in the absence of agreement, it will be the law with which the arbitration agreement is most closely connected:

• The starting point is to identify which law, if any, the parties have chosen to govern their arbitration agreement. To ascertain whether parties have agreed on such a choice of law, the Court should construe the arbitration agreement and the contract containing it as a whole, applying the English common law rules of contractual interpretation.
• Where the law applicable to the arbitration agreement is not specified, it is generally to be inferred that the law chosen to govern the underlying contract should also apply to the arbitration agreement.
• However, factors that may negate such an inference and may imply that the arbitration agreement is governed by the law of the seat are:
  • any provision of the law of the seat which indicates where an arbitration is subject to that law, it will also be treated as governed by that country’s law; or
  • the existence of a serious risk that the arbitration agreement would be ineffective if governed by the same law as the main contract (e.g., if the law of the main contract required the compliance with certain contractual formalities to give effect to arbitration, such as naming specific arbitrators in the arbitration agreement, which had not been complied with).
• The choice of a different country as the seat of the arbitration is not, without more, sufficient itself to negate the inference that the applicable law governing the underlying contract should also apply to the arbitration agreement.
• Finally, where there is no express choice of governing law for the underlying contract (as was the case in Enka v Chubb), a clause providing for arbitration in a particular place will not by itself justify an inference that the contract (or the arbitration agreement) should be governed by the law of that place. Rather, the arbitration agreement is governed by the law with which it is most “closely connected.” However, where the parties have chosen a seat of arbitration, this will generally be the law of the seat, even if this differs from the law applicable to the underlying contract.

Chubb did not dispute that if the Arbitration Agreement was governed by English law then the antisuit injunction should remain in place; once the Court determined that, the question of whether the injunction ought to remain in place fell away. Despite this, the Supreme Court emphasized that the English Courts are ready to use their supervisory jurisdiction (including antisuit injunctions) to uphold any agreement to arbitrate. Had the Arbitration Agreement been governed by Russian law, the English courts would not have simply declined jurisdiction in favor of the Russian courts. Rather, the English courts would have determined the validity and scope of the agreement as a matter of Russian law and granted an injunction if appropriate. 

Impact

The judgment clarifies an issue which the Supreme Court described as having “long divided courts and commentators” while reaffirming the English courts’ commitment to facilitating arbitration.

Although the judgment provides clarity on determining the applicable law of an arbitration agreement, the case demonstrates the risks of not expressly stating what law governs the contract. The question of the whether or not the parties have chosen a specific law to govern their contracts can be factually complex. Indeed, in their dissenting judgments, Lord Burrows and Lord Sales found that the applicable law of the contract and the Arbitration Agreement was Russian law, demonstrating the factual complexity in this case. As such, although the legal test is now clear, there may remain considerable uncertainty in how it is applied to the facts of each case where express governing law clauses are absent. Although governing law and jurisdiction provisions of commercial contracts are often considered to be “boilerplate” clauses, commercial parties should nonetheless ensure that the governing law of their contracts and any agreement to arbitrate are carefully considered and appropriately documented.

Finally, the English proceedings moved from commencement to the Supreme Court’s judgment (via a trial in the High Court and a hearing in the Court of Appeal during the disruption caused by COVID-19) in just over a year. As the judgment notes, the English courts can and will move quickly to determine such issues urgently if so required. This may be an important consideration for parties when choosing a jurisdiction (e.g., the English courts; arbitration under the ICC rules) in which to resolve their disputes. It may also indicate the limited opportunities for tactical delay in the English Courts by taking such points on governing law and jurisdiction.