DETERMINING THE APPLICABLE LAW TO THE ARBITRATION AGREEMENT CONCERNING THE RECENT LANDMARK CASE FROM UK

  1. Introduction

In the UK, the Supreme Court has clarified the grounds for determining the applicable law to an arbitration agreement in a recent landmark case of Enka v Chubb, which is left ambiguous regarding the jurisdiction by the contracting parties, as distinguished from the main contract.

With respect to the doctrine of separability, which treats an arbitration clause as a separate agreement from the main contract in means of validity and enforceability, related to internationally executed contracts; the law governing an arbitration agreement may differ from the law that was chosen to govern the main contract that contains the arbitration agreement.

Since that there is no unified regulation within the international law regarding the applicable law to the substantial validity of an arbitration agreement, divergent rulings are to be encountered in different jurisdictions for the same clause. Although it is generally accepted that if there is not any chosen law by the parties to apply to the arbitration agreement, the law of the place of arbitration is the accepted approach, or the law that applies to the main contract. Whereas in Turkey, the laws and regulations concerning the validity of an arbitration agreement are in parallel with international regulations, the relevant provisions can be directly invoked in disputes. Therefore, there would not be any need for a legal debate in respect of the law to be applied to the form and the applicable law need not be discussed. However, in some countries like the UK, the application of an arbitration agreement is determined independently from these rules.

  1. The Background of the Case

On 1 February 2016, a Russian power plant was severely damaged by fire. Chubb Russia, the appellant, is a Russian insurance company which had insured the owner of the power plant, Unipro, against such damage, brought proceedings in Russian courts against 11 companies, including a Turkish subcontractor taking part in the construction of the power plant, Enka. Chubb argued that these companies were liable for the damage caused according to the contract executed between them.

The respondent, Enka, brought a claim in the Commercial Court in London seeking an anti-suit injunction to restrain Chubb from continuing the Russian proceedings. Enka argued that the Russian proceedings had been brought in breach of an arbitration agreement in article 50.1 of the construction contract, which provided for arbitration in London under ICC Rules. Neither the main contract nor the arbitration agreement within the contract included an explicit governing law clause.

At trial, the Commercial Court dismissed Enka’s claim on the basis that the English court was not the competent authority for a decision. Following an expedited appeal, the Court of Appeal considered that “the time has come to seek to impose some order and clarity on this area of the law” and held that, unless there has been an express choice of the law that is to govern the arbitration agreement, the general rule should be that the arbitration agreement is governed by the law of the “seat”, as a matter of implied choice, and allowed Enka’s claim, holding that questions as to whether the English courts were competent were irrelevant, the arbitration agreement was governed by English law and that an anti-suit injunction should be given to restrain the Russian proceedings. Chubb appealed to the Supreme Court.

Even though there were not any dispute on the applicable law concerning the main contract, the contracting parties disagreed on the applicable law governing the arbitration agreement. The central conflict was, whether if the arbitration agreement was governed by Russian law, because the main contract was governed by Russian law, or, the law of the arbitration agreement was that of the seat of the arbitration, namely English law.

  1. The Subject of The Dispute

The main issues to be determined on the appeal are laid out by the Court as; (1) the correct approach to determining the proper law of an arbitration agreement, (2) the relevance of the parties’ choice of law for the main contract under Rome I, and (3)  the role of the court of the seat of an arbitration and in what circumstances is it appropriate or permissible for the English court to permit a foreign court to decide whether proceedings before the foreign court are a breach of an arbitration agreement. So, the central question for the court was; “how the governing law of an arbitration agreement is to be determined when the law applicable to the contract containing it differs from the law of the “seat” of the arbitration, the place chosen for the arbitration in the arbitration agreement?”

Chubb argues that the correct approach to determine the applicable law to the arbitration agreement is that, in the absence of strong indications to the contrary, a choice of law for the contract is a choice of that law to govern the arbitration agreement. In the present case the contracting parties have chosen Russian law to govern the construction (main) contract between them and that the implication that they intended the arbitration agreement included in that contract to be governed by Russian law is not displaced by their choice of London as the seat of arbitration. According to Chubb, “because the arbitration agreement is governed by Russian law, the Russian courts are best placed to decide whether or not the arbitration agreement applies to the claim”, whereas Enka, sought a declaration that Chubb Russia’s claims in the Russian court fall within the scope of the arbitration agreement and damages.

On one side the claim is that;

  • the law that governs a contract should generally also govern an arbitration agreement which, though separable, forms part of that contract.

On the other side;

  • the law of the chosen seat of the arbitration should also generally govern the arbitration agreement.
  1. The Judgment and the Applicable Law

The appeal was dismissed by a 3:2 majority.

The Supreme Court at first-handed, considered the Rome I Regulation; this regulation is the system that the court must apply normally to determine which system of national law governs a contract. However, according to Article 1(2)(e) of the Rome I Regulation, arbitration agreements and agreements on the choice of court are excluded from its scope of application.

Therefore, the court then turned to the common law rules, to decide which system of law governs the validity, scope, or interpretation of an arbitration agreement for determining the law governing contractual obligations. Those rules are that a contract (or relevant part of it) is governed by: (i) the law expressly or impliedly chosen by the parties; or (ii) in the absence of such choice, the law with which it is “most closely connected” to the arbitration agreement.

In either case, the court expressed that, the arbitration agreement and the main contract containing it should be construed by applying the rules of contractual interpretation of English law as “the law of the forum”.

As a result; the court stated that, in case of where the contracting parties have not chosen the applicable law to the arbitration agreement, although they have specified the law to govern the main contract; the choice of law regarding the main contract generally apply to the arbitration agreement. This general rule, according to the Supreme Court, encourages;

  • Legal certainty, by assuring the parties that an agreement as to the governing law will generally be an effective choice in relation to all of their contractual rights and obligations and to all of their disputes,
  • Consistency, by setting forth the same system of law governs all the parties’ rights and obligations, and
  • Coherence, by avoiding complexity, uncertainties, and artificiality.

In addition to that, the Supreme Court stated that, the “strong presumption” verdict that The Court of Appeal gave was wrong assuming that the parties have chosen the law of the seat of the arbitration to govern the arbitration agreement, by implication. Where there is no express choice of law to govern the contract, a choice of the seat of the arbitration does not by itself justify an inference that the contract (or the arbitration agreement) is intended to be governed by the law of the seat.

Applying the Closest Connection Test

Where there is no choice of law applicable to the arbitration agreement, the court stated that it must determine the law with which the arbitration agreement is most closely connected. Generally speaking, the arbitration agreement considered to be the most closely connected with the law of the seat of arbitration.

The considerations that were taken by the court were;

  1. The “seat” was where the arbitration is to be performed (legally, if not physically), the place where the transaction is to be performed is the connecting factor to which the common law has long attached the greatest weight.
  2. This approach was maintaining consistency with international law and legislative policy as embodied in the 1958 New York Convention and other international instruments.
  3. This rule was likely to uphold the reasonable expectations of contracting parties who specify a location for the arbitration without choosing the law to govern the contract.
  4. This approach was providing a recognition for a clear default rule in the interests of legal certainty, allowing parties to predict easily which law the court will apply in the absence of choice.
  5. Conclusion

The central issue in this case was determining the applicable law of the arbitration agreement where the applicable law of the main contract containing it differed from the law of the seat of arbitration. This decision was particularly important for businesses who deliberately execute international contracts and use arbitration clauses in them, as well as for the sake of certainty in English law for arbitration agreements.

Since that the contract in this case does not contain a choice of the law that is intended to govern the contract or the arbitration agreement within it, the Supreme Court decided that in these circumstances the validity and scope of the arbitration agreement is governed by the law of the chosen seat of arbitration, as the law with which the dispute resolution clause is most closely connected. For different considerations that form the connection test; the majority upholds the Court of Appeal’s conclusion that English law governs the arbitration agreement, because of the seat of arbitration is London.

This decision also explicitly demonstrated that, even if there was a longing need for a clarification for determining the law applying to the arbitration agreement, the crucial element is that, the contracting parties must set out clear, express terms in regard of the key clauses in their contracts.

Att. Gokce Ergun

References:

1. Enka Insaat Ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38, On appeal from [2020] EWCA Civ 574, Case ID: UKSC 2020/0091.

2. Tekin, S. E. (2019). Milletlerarasi Tahkim Hukukunda Tahkim Anlasmasinin Esastan Gecerliligine Uygulanacak Hukuk. On İki Levha Yayincilik.

3. Sulamérica Cia Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638; [2013] 1 WLR 102 and C v D [2007] EWCA Civ 1282; [2008] Bus LR 843.