Among the issues in the Enka case was this: which system of law governs the validity and scope of an arbitration agreement when the governing law of the contract containing it differs from the law of the nominated seat? The Supreme Court’s decision neatly summarises the approach to be taken in such circumstances.
The Supreme Court departed from the reasoning of the Court of Appeal in its decision in the same case of just a few months ago. The Supreme Court ruled that where parties have not specified what law governs the arbitration agreement, but have specified the law governing the contract containing the arbitration agreement, that choice will generally apply to the arbitration agreement even if a different country or national system of laws has been nominated as the “seat” of the arbitration. Where, as in the Enka case, the parties have not expressly or impliedly chosen any law to govern the contract, the arbitration agreement will be governed by the law with which it is most closely connected, and typically this would be the law of the seat.
Whatever your industry, the choice of law to govern not just the contract but also the arbitration agreement is worthy of consideration. So is the express choice of the seat of the arbitration. As the Enka case has shown, the choice of England as the seat, even without English law as the law governing the contract, meant that English law governed the arbitration agreement. The English court was thus able to intervene by exercising its supervisory powers to restrain Russian legal proceedings by means of an anti-suit injunction.
The fact that the Supreme Court was divided in its judgment may result in a continuation of the debate among arbitration professionals and commentators as to whether the majority’s decision was right. Meanwhile, for the foreseeable future, the majority’s decision is binding in law.
What actually happened between Enka and Chubb?
Enka Insaat ve Sanayi A.S. (Enka) was a subcontractor for the construction of a power plant in Russia. The applicable contract contained an arbitration agreement which provided for ICC arbitration with its seat in London, but did not specify the law governing the arbitration agreement. Importantly, the parties’ contract did not expressly specify the governing law for the contract itself.
In 2016, a fire occurred at the power plant and OOO “Insurance Company Chubb” (Chubb) paid out US$400 million to its insured in respect of damage caused by the fire. Chubb became subrogated to the insured’s rights and asserted that the fire had been caused by Enka’s defective works.
On 25 May 2019, Chubb filed claims against Enka and 10 other parties with the Moscow Arbitrazh Court (Russian Proceedings). Chubb’s claims were accepted by the Moscow Arbitrazh Court on 3 September 2019.
On 16 September 2019, Enka issued proceedings in the English Commercial Court, seeking an anti-suit injunction restraining Chubb from continuing the Russian Proceedings and requiring it to discontinue those proceedings. Additionally, Enka (a) sought a declaration that Chubb was bound by the arbitration agreement which covered Chubb’s claims and (b) filed a motion with the Moscow Arbitrazh Court on 17 September 2019, seeking dismissal of Chubb’s claims on the basis of the arbitration agreement.
At the first instance, the trial judge, Mr Justice Baker (Baker J), declined to grant an anti-suit injunction to restrain Chubb from pursuing the Russian Proceedings. His reasoning was that the English court was not the “proper forum” to determine the scope of the arbitration agreement and its applicability to the Russian Proceedings.
Within several months, the Court of Appeal reversed Baker J’s decision and granted an anti-suit injunction restraining Chubb from pursuing the Russian Proceedings. The Court of Appeal held that since the parties had chosen England as the seat of the arbitration, the English court had supervisory power over the arbitration and could therefore grant an anti-suit injunction in aid of the arbitration and to restrain Chubb from pursuing remedies in Russia. The Court of Appeal also held that in the absence of an express choice of law and subject to any powerful countervailing factors, there is a strong presumption that the parties had impliedly chosen the law of the seat to also govern the arbitration agreement.
What did the Supreme Court decide and why?
The law applicable to an arbitration agreement
The Supreme Court confirmed that in determining whether parties have agreed on the law governing the arbitration agreement, the English court will apply English common law principles of interpretation, as the law of the forum, to interpret the contract and the arbitration agreement contained therein as a whole.
The Supreme Court departed from the reasoning of the Court of Appeal. It explained that where parties have agreed on the governing law for a contract but have not expressly identified the law governing an arbitration agreement contained therein, the governing law clause for the contract will generally be deemed to extend to the arbitration agreement. This results from the process of interpreting the contract containing the arbitration agreement as a whole.
Meanwhile, nominating a different country or national system of laws as the seat of the arbitration would not, in and of itself, displace the inference that the choice of a particular law to govern the contract is intended to also apply to the arbitration agreement. This inference may, however, be displaced by factors such as a serious risk that the arbitration agreement would be ineffective if it were governed by the same law as the main contract, or any provision of the law of the seat that where an arbitration is subject to that country’s law, the arbitration agreement will also be treated as being governed by that same country’s law.
Where, as in the Enka case, the parties have not expressly or impliedly chosen any law to govern their contract, their arbitration agreement is governed by the system of law with which the arbitration agreement is most closely connected. In such situations, the starting point is a logical assumption that all of the terms of the contract, including the arbitration clause, are governed by the same system of law. If the parties have selected a seat for the arbitration, this selection will not by itself justify an inference that the contract or arbitration agreement is intended to be governed by the law of this seat. That said, the law with which the arbitration agreement is most closely connected will generally be the law of the seat, even if this differs from the law governing the parties’ substantive contractual obligations.
On the facts of the Enka case, the Supreme Court concluded that the applicable contract did not contain any express choice of law for the contract or the arbitration agreement. It further held that the validity and scope of the arbitration agreement were governed by the law of the nominated seat, being the law with which the arbitration agreement was most closely connected. The Supreme Court therefore affirmed, albeit for different reasons, the Court of Appeal’s conclusion that English law was the law applicable to the arbitration agreement.
Anti-suit injunction
The Supreme Court confirmed that in choosing England as the seat of the arbitration, parties choose to submit to the supervisory jurisdiction of the English court. This therefore includes the English court’s powers to grant injunctive relief to restrain a party from commencing or pursuing competing court proceedings, in breach of obligations under the arbitration agreement. The majority of the Supreme Court members said that it is irrelevant whether the arbitration agreement is governed by English law or a “foreign” law. In all cases, regardless of what law governs the main contract and the arbitration agreement, if the seat is England, the English court simply considers whether there has been a breach of the arbitration agreement and whether it is just and convenient to restrain that breach by granting an anti-suit injunction. Considerations of forum conveniens and comity are irrelevant. The English court will uphold the parties’ agreement to submit disputes to arbitration in the absence of a strong reason to the contrary.
On the facts of the Enka case, since the seat was England, and since the parties agreed that the arbitration agreement was valid, the Supreme Court upheld the Court of Appeal’s decision to grant an anti-suit injunction to restrain the Russian Proceedings.
Is this decision relevant to you?
In the Enka case, the underlying contract was a contract for the construction of a power plant. However, the decision is relevant across all industries and businesses that adopt international arbitration as their choice for the resolution of disputes in cross-border agreements. If your company uses arbitration, then this decision is of relevance and as a minimum highlights the importance of considering and addressing questions about what law governs the arbitration agreement and what the seat (or supervisory jurisdiction for any arbitration) should be. It is relevant that the courts in some supervisory jurisdictions (like in this case England) will take a robust approach to arbitral autonomy and use powerful tools such as anti-suit injunctions to preserve and protect arbitration agreements from being breached.
As for the legal approach to deciding what law governs your arbitration agreements, the following summarises our understanding:
- If the arbitration agreement in your contract expressly specifies the law which governs the arbitration agreement, this law governs the arbitration agreement.
- If the arbitration agreement in your contract does not specify the applicable governing law, the English court will apply common law principles of interpretation to interpret the contract (including the arbitration agreement) as a whole. Generally speaking, the law governing the main contract will also govern the arbitration agreement.
- If neither the arbitration agreement nor the main contract expressly identifies governing laws, the contract and the arbitration agreement will be governed by the laws with which they are most closely connected. In this instance, the inference arising is that the law of the seat will govern the arbitration agreement.
- If you have nominated England as the seat for your arbitration, the English court is prepared to exercise its supervisory powers to grant an anti-suit injunction against any attempt to circumvent the arbitration agreement by commencing and pursuing court proceedings. It will do so irrespective of the law governing the main contract or indeed the arbitration agreement.
About Reed Smith’s international arbitration practice
Reed Smith is strongly positioned to provide the highest level of service in dispute resolution to our clients. With offices in the world’s leading arbitral centres, including London, Paris, New York, Singapore, Hong Kong, Dubai, Miami, and Houston, we have one of the largest and most diverse international arbitration practices in the world, with the ability to represent clients in every significant arbitral center and seat around the globe.
We are a recognised leader in international arbitration, and are ranked in the elite GAR 30, Global Arbitration Review’s ranking of the world’s leading international arbitration practices.
We have substantial experience representing both claimants and respondents, and a strong track record of obtaining successful results. Our deep knowledge of industry sectors including energy, natural resources, life sciences, transportation, telecoms, insurance, and banking enables us to understand the industry-specific factors and environments affecting our clients’ disputes. This combination of deep arbitration experience, our lawyers’ advocacy skills, and industry knowledge gives us a competitive advantage when representing our clients.
- [2020] UKSC 38
Client Alert 2020-561
