By 20 November, 2020 0 Comments Read More →

Enka v Chubb 2.0: the Proper Law of an Arbitration Agreement

In a landmark decision in Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors [2020] UKSC 38, the U.K. Supreme Court clarified the applicable principles for determining governing laws of an arbitration agreement in the absence of the parties’ express choice.

The court upheld the appeal staying parallel court proceedings in Russia but disagreed with the approach taken by the Court of Appeal in determining the applicable law of the arbitration agreement.

The decision brings coherence and clarity to this important area of arbitration law. It provides valuable points of reference for determining the law applicable to arbitration agreements: where there is no express or implied choice of governing law of the contract, the arbitration clause is presumed to be governed by the law with which it has the closest and most real connection, that is the law of the seat.

The Supreme Court confirmed the Court of Appeal’s decision to issue an anti-suit injunctions

As previously reported on CIS Arbitration Forum, the Court of Appeal has explicitly confirmed that the English court as the court of the seat of the arbitration was necessarily an appropriate court to grant an anti-suit injunction and the question of forum non conveniens did not arise.

At the same time, on the question of applicable law, the Court of Appeal ruled that the law of the arbitration agreement would reflect the lex arbitri (law of the seat) as a matter of implied choice, except when certain particular features of the case demonstrate powerful reasons to the contrary.

Although the U.K. Supreme Court reached the decision as the Court of Appeal that English law governed the arbitration agreement in the case at bar, it arrived at it, however, via a very different route.  Using alternative reasoning, it concluded that lex arbitri was the law with which the arbitration agreement had its closest and most real connection, in the absence of an express choice of law in the contract.

The governing law of the arbitration agreement

Where the parties have not expressly or impliedly chosen the law governing the arbitration agreement, the court must determine objectively which system of law has the closest connection with the arbitration agreement. In that regard the U.K. Supreme Court provided the following guidelines:

  • Where the parties have not expressly or impliedly agreed on a choice of law to govern the arbitration agreement, but the main contract contains a governing law clause, the same law will generally apply to the arbitration agreement;
  • In the absence of a governing law clause in the main contract, however, the lex arbitri (law of the seat) will be presumed to be the law most closely connected with the arbitration agreement.

The court based its decision on the following considerations: firstly, the seat of arbitration determines which court has supervisory jurisdiction over the arbitration proceedings, secondly, such approach fosters certainty in commercial transactions and is likely to uphold the reasonable expectations of parties who have chosen to resolve their disputes by means of arbitration in a specified place but have not chosen a governing law for their contract. Lastly, the approach avoids complexities and unpredictability, and, thus, serves the best interests of legal certainty.

The Supreme Court’s reasoning and position differ from the Court of Appeal’s, which found the parties’ strong presumption of implied choice of the law of the seat of the arbitration to govern the arbitration agreement, subject only to any particular features of the case demonstrating powerful reasons to the contrary. The legal basis for the Court of Appeal’s approach was the doctrine of separability, under which the arbitration agreement is a provision that is separable from the rest of the contract. Further, when the parties have expressly chosen a specific seat of arbitration, the court deemed it natural to regard lex arbitri as their implied choice of the law applicable to the arbitration agreement.

The Supreme Court, however, disagreed and noted that the doctrine of separability was overestimated by the lower courts. The principle of separability does not imply the arbitration agreement’s entirely distinct nature from the main contract. Neither it implies that the governing law clause of the contract should not apply to the arbitration clause. In this regard, the U.K. Supreme Court referred to the reasoning in Sulamerica case, in particular, that the concept of separability

simply reflects the parties’ presumed intention that their agreed procedure for resolving disputes should remain effective in circumstances that would render the substantive contract ineffective. Its purpose is to give legal effect to that intention, not to insulate the arbitration agreement from the substantive contract for all purposes.

Thus, the Supreme Court ruled that, when the parties have not expressly agreed on the law of the arbitration agreement, their choice of law governing the main agreement will generally apply to the arbitration agreement.

The approach is not without exceptions, albeit very few

The Supreme Court noted several exceptions to the above-described general approach. In particular, the courts might sidestep from the rule in cases where substantial risks exist that the arbitration agreement would be invalid if governed by the same law as the underlying contract, or in certain other exceptional cases.

If, in determining whether the parties have agreed on a choice of governing law, a putative governing law would render all or a part of the contract ineffective, including the arbitration clause, the Supreme Court reminded of a “validation” principle of general English contract law. The principle might be explained by the maxim “the contract should be interpreted so that it is valid rather than ineffective”.

As such, if a party raises the argument that an arbitration agreement is void and null under the substantive governing law, there will be “a very powerful inference that such a meaning could not rationally have been intended” by the parties. Accordingly, the courts will have to apply the law of the seat in such cases.

Concluding remarks

This judgment has brought greater clarity regarding an important issue of conflict of laws in arbitration. As a leading authority under English law to determine the proper law governing arbitration agreements, the decision provides the much-anticipated guidance for the arbitration community.

About the Author:

Rinat Gareev holds common law and civil law degrees, and he is currently seeking admittance to the New York Bar. He obtained a Master of Laws (LL.M.) in International Trade and Dispute Resolution from the University of Illinois College of Law, and a Bachelor of Laws (LL.B.) from the Higher School of Economics in Moscow. He worked as a research assistant at the Higher School of Economics and later joint the UK-based legal-tech firm, where in his role as a junior associate he assisted the legal team in representing the interests of air-passengers before the EU State courts and in ADR proceedings. His professional and academic interests include international commercial arbitration, consumer arbitration, and cross-border litigation.

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