Introduction

In Enka Insaat Ve Sanayi AS (“Enka”) v OOO Insurance Co Chubb (“Chubb Russia”) (2020) UKSC 38, the UK Supreme Court (“SC”) considered the applicable law of an arbitration agreement. The Judgment (9 October 2020) will be of particular relevance to arbitration agreements with an international dimension, where there are questions regarding the system of national law that governs an arbitration agreement distinct from the governing law applicable to the main contract.

The case

Enka was an engineering business contractor completing works at a Russian power plant insured by Chubb Russia. Following a fire at the plant, Chubb Russia brought a claim against Enka in Moscow, seeking damages under the terms of the construction contract (“the contract”) governing the works.

In this case, the contract provided for disputes to be arbitrated in England, yet other provisions had to be governed by Russian law. Further, while the arbitration clause referred to England, the parties made no express choice of law to govern the Arbitration Agreement distinct from the contract.

The parties’ positions in respect of the governing law that should apply to the Arbitration Agreement was English law (in the case of Enka) and Russian law (Chubb Russia).

The decision

The claim brought by Enka in England to seek a declaration in support of its position was first heard in the Commercial Court, and dismissed as the Judge regarded that another court in Russia was better suited to hear the damages case.

On appeal, the Court of Appeal subsequently determined that the Commercial Court was wrong in its earlier judgment, reasoning that the English Courts controlled the place of the arbitration and that therefore they were the right Court to determine matters. In the eyes of the Court of Appeal, while there was no express choice of law for the Arbitration Agreement, there was a strong presumption that the parties had impliedly chosen English law because of their choice of England as the place of arbitration.

Appeal to the Supreme Court

The question of applicable law in such circumstances subsequently proceeded to the most senior court in England, being the Supreme Court (“SC”), who on a split majority of 3 to 2 judges determined that the Court of Appeal was wrong to find that in choosing the place of arbitration there was a “strong presumption” that the law of that seat was intended by the parties to apply to it.

The SC instead suggested a general proposition: where the parties have not specified the law applicable to the Arbitration Agreement, but there has been a choice of law as to the main contract, the parties’ choice will “in the absence of good reason to the contrary” also apply to the Arbitration Agreement.

If there is no choice of law as to either the main contract or the Arbitration Agreement, one might ask how then an English Court ought to determine the law governing the Arbitration Agreement?

The SC’s response is that the English Court must determine objectively and irrespective of the parties’ intention the system of law with which the Arbitration Agreement has its “closest connection.

Defining ‘closest connection’

Generally, the law with which the Arbitration Agreement is most closely connected is the law of the seat of the arbitration.

The SC commented that this rule has many benefits, including giving effect to the commercial purpose that parties to contracts are to be taken as having thought about, and wanting to apply at the outset. Accordingly, in this case, English law was determined to apply to the Arbitration Agreement, as this was the law with which it was most closely connected.

Practical points for drafting Arbitration Agreements

In light of the above, your arbitration agreements should either include provisions to address the following or should be drafted on the basis of certain considerations:

  1. The parties should elect and state an express choice of law to govern both the contract and the arbitration agreement.
  2. Where the parties have not made an express choice of law to govern the contract, they could still make an express choice of law to govern the arbitration agreement.
  3. The law of the seat of arbitration will decide whether there is a choice of law to govern the arbitration agreement.
  4. Care should be taken over the choice of the seat of any arbitration. If it is to be England and the English Courts are unable to find an express or implicit choice of law within the main contract or the arbitration agreement, the default position, at least in England, is that the law most closely connected i.e. English law will be applied to the arbitration agreement.

Commercial considerations in choosing jurisdiction

The speed with which the Enka v Chubb case was resolved by three courts, and ultimately determined by the SC, demonstrates the efficiency and ultimate reliability of the English Courts as opposed to courts of other jurisdictions – the first trial, appeal and SC determination were all heard in just over seven months. This demonstrates how quickly the English Courts could deal with an urgent matter, which, of itself, should be a matter for contracting parties to have in mind as a commercial imperative when agreeing contractual provisions.

For further information on this or a related matter, please contact Philip Sewell (philip.sewell@shepwedd.com) or your usual Shepherd and Wedderburn contact.

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