UK Supreme Court establishes rules on long-contended arbitration matter

In Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38  the UK Supreme Court on Friday October 9th confirmed the proper approach to determining the governing law of an arbitration agreement.

Barristers 7KBW observed that the decision was “set to become the leading authority on the governing law of arbitration agreements and the role of the courts of the seat in granting anti-suit relief”.

The panel consisted of Lord Kerr, Lord Sales, Lord Hamblen, Lord Leggatt, Lord Burrows. The case was heard on July 27th and 28th.

The case covered an issue which had long divided courts and commentators, both in the UK and internationally. On the one side there were those who said that the law that governed a contract should generally also govern an arbitration agreement which, though separable, formed part of that contract.

On the other side there were those who asserted that the law of the chosen seat of the arbitration should also generally govern the arbitration agreement. In the English Courts there had been Court of Appeal decisions falling on either side of this divide:

The Appellant, Chubb, argued that the relevant arbitration agreement – which provided for arbitration in London under the ICC Rules – was governed by Russian law, on the basis that the law applicable to the main contract was Russian law.

The Respondent, Enka, sought to uphold the Court of Appeal’s decision that, although the main contract was subject to Russian law, the arbitration agreement was governed by the law of the seat, i.e. English law.

The Court accepted Chubb’s submissions that an arbitration agreement would usually be governed by the law chosen to govern the main contract.

In so doing they rejected the Court of Appeal’s reasoning that, save in rare cases, an arbitration agreement would be governed by the law of the seat.

The majority (Lords Hamblen, Leggatt and Kerr) held that, on a proper construction of the contract, there had been no express or implied choice of Russian law. Although the main contract was governed by Russian law by virtue of the default rules in Article 4 of the Rome I Regulation, the arbitration agreement had its closest and most real connection with the law of the seat, which was English law.

However, the minority argument was not insignificant. Lord Burrows and Lord Sales dissented in Chubb’s favour. They would have concluded that there had been a clear choice of Russian law for the main contract, given the multiple references to Russian law throughout the agreement, as well as the wider circumstances of the case (which involved the construction of a power plant in Russia). The minority stated that, even if there had been no choice of Russian law for the main contract, Lords Burrows and Sales would have held that the law of the arbitration agreement was nevertheless the same as that of the main contract. They said that it was not necessary or helpful to impose a general rule that in the absence of a choice of law for the main contract an arbitration agreement will have its closest and most real connection with the law of the seat. Commercial parties would expect all the clauses of their contractual document to be governed by the same system of law, and this would avoid practical difficulties such as the potential application of different rules on the admissibility of pre-contractual negotiations to the main contract on the one hand, and to the arbitration agreement on the other.

Had the majority accepted that the arbitration agreement was governed by Russian law, the Court would have remitted the case back to the Commercial Court to determine, by reference to Russian law expert evidence, whether there had been any breach of the arbitration agreement.

David Bailey QC, Marcus Mander and Clara Benn represented Chubb, together with Toby Landau QC. They were instructed by Kennedys Law LLP.