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Enka v. Chubb

Erdem Küçüker, MCIArb

Senior L.L.B Student at Istanbul University

Brief Commentary

International arbitration cases often involve more than one legal system and set of rules. Throughout the course of the proceedings, the governing law of the main contract (“law governing the merits” or “lex causae”), the law of the seat of arbitration (“curial law” or “lex arbitri”), the law governing the arbitration agreement and, if any, the institutional rules, may all come into play[1]. Although in most cases, the lex causae and lex arbitri are determined by the parties in advance of the dispute (in case of the lex arbitri by a choice of the seat), parties rarely make an express choice of the law governing the arbitration agreement. Since this law clarifies the scope and validity of the arbitration agreement, and may in many ways have a significant impact on the arbitration proceedings themselves, the law applicable to the arbitration agreement has been subject to much discussion over the last years (see for example Sulamerica[2], BCY v. BCZ[3], Kabab-Ji[4]).

In its recent judgment of 9 October 2020, the UK Supreme Court (“the Court”) ruled in Enka v. Chubb[5] that, failing any express provisions on the law governing the arbitration agreement, the law chosen for the main contract shall generally extend to - and govern - the arbitration agreement. The Court also noted that in the absence of the parties’ determination on the law governing the merits, the law of the arbitration agreement shall generally be the law of the seat, being the place with the closest and most real connection to the arbitration agreement.

Background of the Case

The underlying dispute arose from a construction contract (“the Contract”) between Enka Insaat Ve Sanayi AS (“Enka”), a Turkish construction and engineering company, and CJSC Energoproekt (“Energoproekt”), a Russian company. Pursuant to the Contract, Enka was engaged as a subcontractor to Energoproekt, the main contractor, to construct a power plant in Russia. The Contract contained a dispute resolution clause that provided for ICC arbitration in London. The Contract as well as the arbitration clause did not contain any express choice of law.

In 2014, Energoproekt assigned its rights and obligations under the Contract, as well as the arbitration agreement, to PJSC Unipro (“Unipro”), the owner of the power plant.

The facility was severely damaged following a catastrophic fire at the power plant in February 2016, which resulted in the insurer of Unipro, OOO Insurance Company Chubb (“Chubb”) paying approximately 400 Million USD to the former, and subrogating its rights and claims under the Contract. Consequently, Chubb commenced proceedings against the power plant’s subcontractors, including Enka, before the Moscow Arbitrazh Court in relation to the fire and for related losses. Enka raised jurisdictional objections based on the arbitration clause.

At the same time, in September 2019, Enka turned to the UK High Court, as the applicable court at the seat of arbitration, to seek an anti-suit injunction. There, the Court had to consider in particular the law that governed the scope of the arbitration agreement. The matter was ultimately appealed to the UK Supreme Court.

The Decision of the Supreme Court

On the question of the law governing the scope of the arbitration agreement, the Court started its analysis with the observation that the Rome I Regulation does not cover arbitration agreements and was therefore inapplicable. Accordingly, the Court analysed the question in light of the relevant choice-of-law rules under English common law. Such rules contemplated a three-stage test pursuant to which a court is first asked to investigate whether the parties made (i) an express choice of law or (ii) an implied choice of law for the arbitration agreement. Absent such a choice, the applicable law would then be (iii) the one with which the agreement has the closest and most real connection.

With respect to the first two prongs, the Court found that a choice of law agreement in the main contract, as a rule, extends also to the arbitration agreement, even if it differs from the curial law. The Court held that this approach would not only enhance certainty and consistency for the contracting parties, but would also reduce complexity. That said, the Court ruled the arbitration agreement could still be governed by the law of the seat in two particular circumstances:

  • First, and in conformity with the validation principle, if the law governing the main contract would render the arbitration agreement invalid.
  • Second, where the curial law determines that, absent any express party agreement, the arbitration agreement shall be governed by the law of the seat (as under Swedish and Scottish arbitration laws).

The majority found that in the present case, the parties had not made a choice of law for the main contract and so the scope of the arbitration agreement had to be examined under the third prong of the test, i.e., the closest connection test. In this respect, the Court found that the arbitration agreement had the closest connection with the seat. The Court found support for its approach in international law. Specifically, Article V (1) (a) of the New York Convention provides that failing any choice by parties, the arbitration agreement will be subject to the law of the seat. Last but not least, the Court also reasoned that its interpretation would be conducive to the goal of enhancing legal certainty. It would give effect to the reasonable expectations of contracting parties who choose a seat yet omit to make a choice of law.

The majority summarized its view as to the applicable choice of law framework as follows:

i) Where a contract contains an agreement to resolve disputes arising from it by arbitration, the law applicable to the arbitration agreement may not be the same as the law applicable to the other parts of the contract and is to be determined by applying English common law rules for resolving conflicts of laws rather than the provisions of the Rome I Regulation.

ii) According to these rules, the law applicable to the arbitration agreement will be (a) the law chosen by the parties to govern it or (b) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected.

iii) Whether the parties have agreed on a choice of law to govern the arbitration agreement is ascertained by construing the arbitration agreement and the contract containing it, as a whole, applying the rules of contractual interpretation of English law as the law of the forum.

iv) Where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract.

v) The choice of a different country as the seat of the arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.

vi) Additional factors which may, however, negate such an inference and may in some cases imply that the arbitration agreement was intended to be governed by the law of the seat are: (a) any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration will also be treated as governed by that country’s law; or (b) the existence of a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective. Either factor may be reinforced by circumstances indicating that the seat was deliberately chosen as a neutral forum for the arbitration.

vii) Where there is no express choice of law to govern the contract, a clause providing for arbitration in a particular place will not by itself justify an inference that the contract (or the arbitration agreement) is intended to be governed by the law of that place.

viii) In the absence of any choice of law to govern the arbitration agreement, the arbitration agreement is governed by the law with which it is most closely connected. Where the parties have chosen a seat of arbitration, this will generally be the law of the seat, even if this differs from the law applicable to the parties’ substantive contractual obligations.

ix) The fact that the contract requires the parties to attempt to resolve a dispute through good faith negotiation, mediation or any other procedure before referring it to arbitration will not generally provide a reason to displace the law of the seat of arbitration as the law applicable to the arbitration agreement by default in the absence of a choice of law to govern it.[6]

Lord Burrows and Lord Sales dissented, finding that the parties had impliedly chosen Russian law as the governing law of the main contract and that this choice should be extended to the arbitration agreement, as the arbitration agreement had its closest connection with the law governing the main contract.

Comments

Various approaches exist as to how to determine the law governing the arbitration agreement. These include applying the law of the contract, the law of the seat, a combination thereof or to simply consider the parties’ common intentions without reference to any specific national law.[7]

In Enka v. Chubb, the Court clarified that absent an express choice of law for the arbitration agreement, the law of the main contract may extend to the arbitration law, even though it differs from the law of the seat. This approach is welcome. The Court correctly interpreted the doctrine of separability narrowly, thereby paving the way for extending the law governing the main contract to the arbitration agreement. The doctrine of separability does not necessarily require the governance of the arbitration agreement by a law different from the law of the main contract. Instead, it serves to ensure that the arbitration agreement is not affected by the invalidity of the main contract.

The Court further clarified that absent a choice of law, the closest connection test should be applied. In this respect, the Court considered the curial law to be the law with the closest connection to the arbitration agreement. The author agrees with this view, which is consistent with previous case law. In practice, it is nevertheless recommended that parties expressly decide on the applicable law themselves, instead of leaving the issue to courts and tribunals. Thereby, commercial parties will help to avoid expensive disputes over the applicable law.

On a final note, there is no doubt that the judgment will not remain the final word on this issue. As there cannot be a “one size fits all” approach to determine the law of the arbitration agreement and because the interpretation is to be made on a case-by-case basis, the author thinks that this contentious topic will continue to be discussed in future cases and the debate will further shape the discourse on the law governing the arbitration agreement.


[1] Chapter 3. Applicable Laws', in Blackaby Nigel, Constantine Partasides, et al., Redfern and Hunter on International Arbitration (Sixth Edition), 6th edition (© Kluwer Law International; Oxford University Press 2015), p. 157, para. 3.07.

[2] Sulamérica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A [2012] EWCA Civ 638 (16 May 2012).

[3] BCY v BCZ [2016] SGHC 249 (9 November 2016).

[4] Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ 6 (20 January 2020).

[5] Enka Insaat Ve Sanayi AS (Respondent) v. OOO Insurance Company Chubb (Appellant), [2020] UKSC 38 (9 October 2020).

[6] Enka v. Chubb, para. 170.

[7] Redfern and Hunter on International Arbitration, p. 158, para. 3.09 ff.


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