The UK Supreme Court has today handed down its judgment in the case of Enka Insaat Ve Sanayi AS v Chubb Russia Investments Limited, a case decided by the Court of Appeal as recently as April, and heard on an expedited basis by the Supreme Court.
In summary, the Supreme Court has decided that the Court of Appeal fell into error in deciding which law governs the arbitration agreement in a contract which specifies the governing law, but got the decision right as to the applicable law where no choice of governing law is made in the contract.
The Supreme Court has set out a straightforward test to be applied in most future cases, namely that an expressly or impliedly chosen governing law of the contract will generally also govern the arbitration agreement, but where no choice is made, the law most closely connected with the arbitration agreement will be the law of the seat or arbitration.
The chink in the armour is that, where there is no express choice of law at all, there may still be scope to argue about whether or not there is an implied choice of governing law which the law of the arbitration agreement should follow.
The lesson remains - make sure you carefully choose and state the governing law and the seat of arbitration in your contracts.
Background to the Case
Enka contracted to carry out works to the Berezovskaya Power Plant in Russia, a massive 800 MW supercritical coal fired plant.
The contract contained an arbitration clause providing for arbitration of disputes in London under the ICC Rules. Unusually, there was no provision which stated the governing law of the contract.
On 1 February 2016 a severe fire caused massive damage to the plant. The owner, Unipro, claimed from its insurer, Chubb. In May 2019 Chubb (who paid out to Unipro and therefore inherited its rights) brought a claim before the Arbitrazh Court (a court, not an arbitration forum) against Enka, alleging that their defective work was the cause of the fire.
In September 2019, Enka applied to the Commercial Court in London for an anti-suit injunction to block Chubb from continuing the Russian court proceedings. The law governing the arbitration agreement was important to this because if the arbitration agreement was governed by Russian law, this would support Chubb's argument that the Russian court should decide whether the Russian proceedings should continue or not.
Decisions of the lower courts
In the Commercial Court, Andrew Baker J decided that he would not make an anti-suit injunction. He did not resolve the question of the law governing the arbitration agreement because, he said, the English court was not in any event the appropriate forum to decide the scope of the arbitration agreement in Enka's contract, and therefore whether it should mean that the proceedings in Russia should be stopped. He did acknowledge that it was "seriously arguable" that the arbitration agreement was governed by Russian law, even though the arbitration would be seated in London.
Andrew Baker also relied on the fact that Enka did not seek an interim order from an arbitral tribunal, and that it did participate to some extent in the Russian court proceedings.
In the Court of Appeal, Andrew Baker's decision was swept aside, and an important factor was the Court of Appeal's view that he had made the wrong decision (insofar as he decided at all) regarding the law governing the arbitration agreement.
The Court of Appeal's decision was essentially in two parts:
- Andrew Baker J should have decided that, as England was indisputably the seat of the arbitration, it was appropriate for the English court to grant an anti-suit injunction if it decided that a party was wrongfully pursuing litigation in breach of the arbitration agreement. It was wrong to refuse to do so on the grounds that the English court was not the appropriate forum - it was because England is the seat of arbitration.
- In order to decide whether to make an anti-suit injunction, the Court would need to decide whether the arbitration clause covered the dispute in question. This required a decision as to what law governed the arbitration agreement. This cannot be decided simply on the basis that the contract provides for the law governing the whole contract, because the arbitration agreement is considered a separate agreement whose governing law might be different (but usually is not). This is particularly possible where the seat of arbitration is different from the governing law, because that opens the way for the argument that it would make more sense for the arbitration agreement to be governed by the law of the place where the arbitration will be seated. Generally there is a presumption that the governing law of the arbitration agreement will be the same as the seat of arbitration.
The Court of appeal therefore concluded in this case that, even if the main contract was governed by Russian law, it made more sense for the arbitration agreement to be governed by the law of England, which the parties had chosen as the seat of arbitration.
Decision of the Supreme Court
The Supreme Court has decided that the appeal would be dismissed. In a judgment given by Lord Hamblen and Lord Leggatt (with which Lord Kerr agreed), the Court confirmed that, under English common law, the law governing an agreement will be either (1) the law expressly or impliedly chosen or (2) the law most closely connected with the agreement. The same approach applies to an arbitration agreement. The rules of English law on contractual interpretation will be applied by the English Court to to decide the issue.
Where the parties have chosen the law to govern the main contract containing the arbitration agreement, that law will also generally apply to the arbitration agreement. This is the case whether the choice of governing law is express or implied, because once the court finds an implied choice, that is "just as much a choice entitled to respect". Even if the parties specify a different seat of arbitration from the place of the governing law of the contract, that will not usually displace the general approach that the governing law will govern the arbitration agreement.
The Court of Appeal was therefore wrong to find that, where a substantive governing law of the contract is specified (or impliedly chosen), but no express separate choice of law governing the arbitration agreement is made, there is a strong presumption that the law of the seat of arbitration also governs the arbitration agreement. In that situation, the law governing the main contract will generally govern the arbitration agreement.
However, where the parties have made no choice of law to govern the contract at all (and the Court therefore decides the governing law by the close connection test), the Court will generally proceed on the basis that the law most closely connected with the arbitration agreement is the law of the place which is the seat of the arbitration. The Court gave several reasons why this general rule will be adopted.
In this case, there was no choice of law to govern the contract as a whole (even if it was decided that Russian law governs the contract other than the arbitration agreement) and the general rule would be applied in that situation so that the law of the seat of arbitration governs the arbitration agreement. Therefore English law governed the arbitration agreement and the Court of Appeal's basis for granting the anti-suit injunction remains sound.
The Supreme Court considered the possibility that, where the law governing the contract also governs the arbitration agreement, this would nullify the arbitration agreement fully or partially. The Court acknowledged the possibility that that might justify a departure from the general rule in order to give effect to the principle that generally, contracts should be construed so as to avoid invalidity.
The Supreme Court also confirmed the Court of Appeal's decision that it was appropriate for the court to consider whether to grant the anti-suit injunction, given that England was the seat of arbitration.
Lord Burrows and Lord Sales partially dissented from the decision - they would have decided that the law most closely connected with the arbitration agreement was the same as the governing law of the contract which had been impliedly chosen as Russian law. They felt that a general rule which distinguishes between the position where the law of the contract is impliedly chosen, and where it is determined by common law principles, would be unhelpful. Their comments can be explored in the judgment by particularly diligent readers.
The history of decisions of the English courts regarding the law governing the arbitration agreement has, in my humble view, not been a particularly proud one.
The problem seems to have been that, rather than adopting a clear, simple rule, the Courts prefer to leave it open to decide that the (not expressly chosen) law governing the arbitration agreement is not the same as the law of the seat, or not the same as the law governing the main contract, as the justice of the case seems to call for. This can then be used in difficult cases where the consequences of a simple rule might be unpalatable.
Alternatively, it might be said that even if the general rule is quite clear, the Court's willingness to depart from it in some cases has undermined the clarity of the rule.
The Supreme Court's decision does not put to bed all of these issues, for example because it distinguishes between a governing law chosen by implication, and one determined by conflict of law rules. That distinction might well provide a new battleground for litigators. However some clarity has been provided as to the winner of the debate over "expressed law of the seat" vs "expressed governing law of the contract" - the governing law has it, for now.