Case Law: Which is the governing law – the law of the seat vs the law of main contract?

On 9 October 2020, the UK Supreme Court handed down the judgment in the case of Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb (2020) UKSC 38. This case explored the question of the law governing an arbitration agreement, in the event that no governing law was elected by the contracting parties.

FACTUAL BACKGROUND

Enka Insaat Va Sanayi A.S. (“Enka”) was a service provider, who had a construction contract in place with a client. The contract contained an International Criminal Court (“ICC”) arbitration agreement, which set London as the arbitral seat. Following a fire on the construction site, OOO Insurance Company Chubb (“Chubb”) paid out US$400 million to its client, who was party to the construction contract with Enka. Chubb sought legal action in a Russian court against Enka by way of subrogation, in order to recover the amount paid out to insure the loss of the insureree. In response, Enka sought an anti-suit injunction from the High Court in England to restrain the proceedings in Russia, in favour of the ICC arbitration agreement. Since neither the construction contract nor the arbitration agreement within the contract contained an express choice of law, the courts had to consider what the law governing the arbitration agreement should be.

THE CASE AT THE COURT OF APPEAL

When the question was raised at first instance in the High Court, it was held that the Russian Court was the appropriate forum to rule on the scope of the arbitration agreement. However, the Court of Appeal overturned the decision of the lower court and held that if an express choice of law is absent in the arbitration agreement, there is a strong presumption that the law of the chosen arbitral seat would be the governing law of the arbitration agreement. Given that the chosen arbitral seat is in London, the Court of Appeal concluded it was logical that English law applied to the arbitration agreement.

THE CASE AT THE SUPREME COURT

Chubb appealed and the case was brought to the Supreme Court.

Initially, the majority of the judges agreed with Chubb that Russian law should apply in the absence of an express or implied choice of law. However, the judges discussed the case at hand in length and set out the principles that should be followed in deciding which governing law would apply to the arbitration agreement.

The Supreme Court set out that had a governing law clause been present, the arbitration agreement would follow the governing law clause, rather than the law in the choice of arbitral seat. This was reasonably derived from the assumption that all elements of a contract should be governed by the same system of law, where that is expressly stated.

However, where there is not a choice of law in either the main contract or the arbitration agreement, the test set out by the English common law in determining the applicable law would be one that is most closely connected to the arbitration agreement. At this point, the judges’ opinions diverged. Whilst the majority found that the law of the arbitral seat is usually the most closely connected to the arbitration agreement, the minority considered that the law governing the arbitration agreement is most closely connected to the law governing the main agreement.

The Supreme Court laid down the common law principles that are to be followed in the interpretation of the most appropriate law to apply to an arbitration agreement:

  1. Is there an express choice of law in the arbitration agreement?
    • If so, the arbitration will be governed by the express choice of law.
  2. If not, does the main contract contain an applicable law clause?
    • If so, the arbitration agreement will follow the law in the main contract.
  3. If not, what is the law most closely connected to the arbitration agreement?
    • If the arbitration agreement provides a chosen arbitral seat, the law of the seat will be considered the most closely connected to the arbitration agreement.

CONCLUSION

Following the principles above, the Supreme Court affirmed the Court of Appeal’s finding and ruled that English law indeed applied to the arbitration agreement and granted an anti-suit injunction in favour of Enka.

PRACTICAL TIPS

This case served to clarify any questions around the conflicts of law in arbitration agreements. The Supreme Court’s decision also reiterated that the law of the main agreement will always prevail even in cases where the arbitration agreement contains a different choice of law. This is an important reminder to all that, when drafting contracts and arbitration agreements, it is paramount to expressly include a governing law clause to avoid any confusion or dispute arising as a result of the lack of an express choice.

Please see the case here: Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb (2020) UKSC 38

For more information, and any guidance or advice on commercial and arbitration contracts, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.

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