Enka v Chubb - UK Supreme Court provides guidance on the law of the arbitration agreement

Earlier this month, in Enka v Chubb [2020] UKSC 38, the UK Supreme Court clarified what many would view as a question which shouldn’t have been asked in the first place.

Most practitioners will be aware that their arbitration agreements should cover the basics – any applicable institutional rules; number of arbitrators, and how they are selected; the place where the arbitration is to take place; applicable law; whether appeals on questions of law are to be permitted; and in rare cases how the arbitration is to be conducted; the requirement for a hearing; disclosure; privacy issues; and how costs are to be dealt with.  Even if these issues are not covered (as in NZS3910 and most construction contracts commonly used here), the Arbitration Act 1996 comes to the rescue; at least for domestic arbitrations.

In an increasingly global World, pandemics notwithstanding, things are not so straightforward where the parties to a contract do not have their places of business in the same States (see article 1(3) of Schedule 1 to the Act).  In those cases, the provisions of Schedule 1, with its implied terms, only apply on an opt-in basis.  Perhaps disappointingly, this provision is frequently overlooked when contracts with overseas contractors and suppliers are increasing the norm.

In the opening paragraph of their judgment, the majority of the Lords in Enka v Chubb identified three laws applicable to international arbitrations – (1) the law applicable to the dispute (generally set in the applicable law clause in the underlying contract), (2) the law governing the arbitral procedure (the curial law, generally being the law of the seat), and (3) the law governing the agreement to arbitrate.  The dispute concerned this last issue; what law governed issues of validity of the agreement to arbitrate.

The case concerned a fire at a power plant in Russia.  The plant’s insurer, Chubb Russia, took over the claim for the losses arising from the fire under its subrogation rights under the insurance policy for the plant.  It then claimed against the plant designer, Enka, a global engineering and construction company based in Turkey.  Under the construction contract (in Russian and English, with the Russian version having prevalence), disputes were to be resolved by arbitration under the ICC Rules, with three arbitrators, conducted in English, in London.  Inexplicably, there was no choice of law clause.

Chubb filed court proceedings in Moscow.  The court determined that the arbitration clause did not apply and on the merits, found against Chubb.  Both parties appealed.

In London, Enka sought an anti-suit injunction on the basis that the Russian proceedings were in breach of the arbitration agreement. At first instance, the judge held that the proper place to hear the issue was the Russian court.  The Court of Appeal disagreed, and issued the anti-suit injunction, restraining Chubb Russia from continuing the Russian court proceedings.

Enka commenced the arbitral proceedings in London with the ICC; Chubb challenged jurisdiction.

Chubb Russia appealed the Court of Appeal decision to the Supreme Court.

While these procedural manoeuvrings may epitomise much of the criticisms levelled at the law, a considerable sum was at stake (Chubb had paid out USD400 million under its policy) and the choice of law was likely to have a significant impact on the outcome.

After summarising the relevant law and the differing approaches taken on this issue, the majority of Supreme Court (Lords Hamblen, Leggatt and Kerr) clarified the common law approach as follows:

(1)    It is well established under English law that an interpretation which upholds the validity of a transaction is to be preferred to one which would render it invalid or ineffective;

(2)    Where a contract contains an arbitration agreement clause, the law applicable to the arbitration agreement may not be the same as the law applicable to other parts of the contract;

(3)    Under English common law rules, the law applicable to the arbitration agreement will be first, the law chosen by the parties to govern the issue, or second, in the absence of such choice, the system of law most closely connected to the arbitration agreement;

(4)    Whether the parties have chosen the law to govern the arbitration agreement will be construed by interpreting the arbitration agreement and the underlying contract as a whole;

(5)    Where the law applicable to the arbitration agreement is not specified, the governing law for the contract will generally apply;

(6)    Choice of the seat for the arbitration in a different country is not, on its own, enough to displace the preference for the law governing the contract to apply to the arbitration agreement;

(7)    Where there is no choice of law governing the contract, the choice of seat will not, on its own, justify applying the law of the seat to the contract or to the arbitration agreement; and

(8)    Absent an express agreement, the law applicable to the arbitration agreement will be that with which it is most closely connected.

In conclusion, the majority held that absent a choice of law clause at all, the law applicable to the arbitration agreement is that of the seat (London) being that most closely connected to that issue.  On the wider issue, their Lordships observed that the parties had chosen London as a neutral forum to determine their disputes and therefore it was appropriate for English law to apply to issues concerning the arbitration agreement.  As the parties had agreed to arbitrate, it followed that they had also agreed not to litigate; and in doing so, they were entitled to the support of the courts.

The minority (Lords Burrows and Sales) noted that the law of the seat was English law and the law of the contract (not without dispute) was Russian law, and that the English courts were being asked to injunct proceedings in Moscow.  In their view, in the absence of a choice of law on any aspect, the law applicable to the arbitration agreement, having the closest connection to that issue, was Russian.

While this may all appear to be an issue far removed from the realities of practise here, where we have a significant number of high value infrastructure projects in the pipeline, with involvement of suppliers from the Pacific, including China with its own system of law, and contractors from the Northern hemisphere, many of them under civil law systems, expressly specifying (1) the seat (carrying with it the curial law), (2) the law applicable to the contract and the dispute, and (3) the law applicable to the arbitration agreement itself is a small price to pay considering the consequences of getting it wrong.