Enka v Chubb

Introduction

The Supreme Court has brought welcome clarity to the English law approach to determining the law governing an arbitration agreement in its judgment in Enka Insaat Ve Sanayi A.S. (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38. In summary, the Supreme Court ruled that if parties to a contract have not expressly or impliedly specified the law that governs their arbitration agreement, then the governing law of the contract (if specified) would apply. This is the case even if the seat is different to the governing law of the contract. But if the governing law of the contract is not specified, whether expressly or impliedly, then the arbitration agreement will be governed by the law most closely connected with the arbitration agreement. In general, that will be the seat of the arbitration. This article considers the reasoning of the Supreme Court judges as they worked through what has been an academically and practically contentious area of English law. This judgment was eagerly anticipated and reflecting that it was resolved on an expedited basis, with the appeal proceeding via both the Court of Appeal and the Supreme Court in a matter of months.    

Key prior cases

The English law approach to determining the governing law of an arbitration agreement has, since the Court of Appeal judgment in Sulamerica CIA Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638, been determined by reference to a three stage test: (i) an express choice of law; (ii) an implied choice or (iii) the law with the closest and most real connection with the arbitration agreement. In the years following Sulamerica, courts and practitioners alike have differed in analyses of points (ii) and (iii). A key dividing question has been whether an express choice of the law governing the substantive contract could amount to an implied choice of the law governing the arbitration agreement, or whether the law of the seat of arbitration would, as the law most closely connected, govern the arbitration agreement. 

This line of authority was further developed in the recent 2020 Court of Appeal judgment of Kabab-Ji S.A.L. v Kout Food [2020] EWCA Civ 6. The Court of Appeal held that a governing law clause reading “[t]his Agreement shall be governed by and construed in accordance with the laws of England” was also an express choice of law governing the arbitration agreement as a matter of construction of the particular terms of the contract and the arbitration clause in that case. 

Facts 

The claimant, Enka Insaat Ve Sanayi AS (Enka), entered into a subcontract with CJSC Energoproekt for certain works relating to the construction of a power plant in Russia. The subcontract contained an arbitration agreement requiring all disputes in respect of the subcontract to be referred to international arbitration seated in London and conducted under the ICC Rules. However, the subcontract contained no express choice of law governing the substantive contract nor the arbitration agreement.

A fire erupted at the Plant causing significant damage. The owner of the Plant received 21.6 billion Roubles with respect to the damage under its insurance policy with the first defendant, OOO “Insurance Company Chubb” (Chubb). By doing so, Chubb became subrogated to any rights the owner had against Enka or others in respect of liability for the fire. Chubb argued that Enka was responsible for the fire due to allegedly low-quality of works provided by Enka. In 2019, Chubb commenced proceedings in the Moscow Arbitrazh Court against Enka and 10 co-defendants. As a result of this, Enka issued an Arbitration Claim in the Commercial Court in London seeking a declaration that Chubb was bound by the arbitration agreement in the subcontract, and sought an anti-suit injunction restraining Chubb from continuing the Russian Proceedings on the basis that they violated the arbitration agreement. Enka asserted that the arbitration agreement was governed by English law.

At first instance, the Commercial Court held that the Moscow Arbitrazh Court was the appropriate forum to determine the scope of the arbitration agreement and refused the injunction on forum non conveniens grounds. The Court of Appeal overturned that decision and held that, in the absence of an express choice of governing law of the arbitration agreement, the governing law is the law of the seat – the choice of seat also amounting to an implied choice of governing law of the arbitration agreement – and granted the anti-suit injunction. In his reasoning, Popplewell LJ referenced the Kabab-Ji case, and sought to achieve clarity by setting out a default rule. Firstly, he noted that an express choice of the law of the arbitration agreement may be found in the arbitration agreement itself, alternatively in the express choice of law governing the substantive contract, or in a combination of such express choice with the terms of the arbitration agreement, properly construing the contracts. In all other cases, the governing law of the arbitration agreement is the law of the seat “as a matter of implied choice, subject only to any particular features of the case demonstrating powerful reasons to the contrary” ([2020] EWCA Civ 574, para 91). 

The Supreme Court, in a split decision of 3:2, disagreed with Popplewell LJ’s reasoning, interpretation of the authorities and default rule, and substituted their own versions of clarity in this long disputed area of law. 

The majority judgment

The dissenting judgment

Given the narrow majority, it is also worth briefly covering the dissenting judgment. Lord Burrows delivered the dissenting judgment with whom Lord Sales agreed. Lord Burrows agreed with the majority that where parties have expressly or impliedly chosen the law of the contract then that choice applies to the arbitration agreement. His dissent concerned how and when an express or implied choice had been made, and the default position in the absence of an express or implied choice. 

Lord Burrows agreed that where there has been no express choice of law governing the arbitration agreement the starting point for the analysis should be to assess the law with which the arbitration agreement is most closely connected. He held that the law with which the arbitration agreement is most closely connected must be the law with which the substantive contract is most closely connected. 

Unlike the majority, Lord Burrows started by applying the Rome I Regulation (which is the EU and therefore English conflict of law rules) to determine the law governing the substantive contract. Applying Rome I, he found that the contract was governed by Russian law. On his reasoning, it therefore followed that the law most closely connected with the arbitration agreement was also Russian law. 

The question of validity of the arbitration agreement under Russian law did not specifically arise in this case, and the dissenting judgment offered no substantive comment on whether their assessment would alter if the arbitration agreement would be invalid as a matter of Russian law. In obiter, Lord Burrows suggested that a narrow approach to this question would be preferred, agreeing with written submissions by Enka’s counsel that “It is impossible to say that just because Russian law takes a narrower view of AAs than English law does … that the parties must have intended English law to apply. That is results-based reasoning that ignores the fact that there are legitimate reasons for adopting a narrower approach”.

The dissenting judgment agreed with the majority that questions of granting an anti-suit injunction do not depend on the law governing the arbitration agreement, rather whether pursuing the foreign proceedings is a breach of the arbitration agreement. Given that they had concluded that Russian law governs the arbitration agreement, they held that they would remit to the Commercial Court the question of whether, applying Russian law, there had been a breach justifying the grant of an anti-suit injunction. 

This dissenting judgment of Lord Burrows and Lord Sales highlights that there remains diverging views within the judiciary which will no doubt continue to be debated in the arbitration community.

Conclusion 

The Supreme Court decision in Enka is an important development of English arbitration law, and one worthy of note for all commercial parties who choose to include arbitration agreements in their contracts. However, in practice, good drafting has always prescribed expressly stating both the choice of governing law of the substantive contract as well the governing law of the arbitration clause. Failure to specify both has the potential to lead to disputes and extensive satellite litigation as evidenced in this case. With this recent Supreme Court judgment, however, there is now greater certainty as to how such disputes will be resolved. 

With thanks to Aman Tandon, trainee, for his contribution to this article.