The Supreme Court clarifies the test for establishing which law governs an arbitration agreement: Enka v Chubb.
In its much-anticipated judgment, the UK Supreme Court recently clarified the legal position in respect of several key issues relating to arbitration agreements in the case of Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb [2020 UKSC 38]. This decision settles a long-uncertain area of English law providing some certainty to businesses already party to, or considering being party to, an arbitration agreement. We provide background details of the Enka v Chubb case below and summarise the court’s key findings.
The key issues
The Supreme Court was asked to determine what the law governing the arbitration agreement between Enka and Chubb was, in order to rule whether court proceedings in Russia, started by Chubb, breached the agreement to arbitrate.
In this case, the contract made no express agreement as to the governing law of the contract, or the arbitration agreement, but there was an express provision that London would be the seat of the arbitration.
Applying the relevant test
In reaching its judgment, the Supreme Court departed from the reasoning of the Court of Appeal in its decision of the same case a few months ago and applied the following test:
— Where the parties have not expressly specified the law that governs their arbitration agreement, but have (expressly or impliedly) chosen the law that governs their contract, which contains the arbitration agreement – the parties will be presumed to have intended for such law to apply to the arbitration agreement.
— However, such a presumption may be set aside – in cases where the arbitration agreement was intended to be governed by the law of that seat. This may occur where there is (a) any provision of the law of the seat which indicates that the arbitration agreement is also intended to be governed by that 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”. This may also be reinforced by “circumstances indicating that the seat was deliberately chosen as a neutral forum for the arbitration.”
— Where the parties have not expressly specified the law that governs their arbitration agreement, nor have they chosen a governing law of their contract – the law that governs the arbitration agreement would be the law of the seat, as this is the law with the ‘closest connection’ to the arbitration.
The Supreme Court’s decision
Applying the above test, the court held that English law governed this arbitration agreement for the following reasons:
— No choice of law (either expressly or impliedly) was made that governed the main contract or the arbitration agreement, and therefore it was necessary to apply the closest connection test.
— As a result, the law of the seat of the arbitration (English Law) was the law that was most closely connected to the arbitration.
— There is a presumption favouring the governing law of the contract, rather than the law of the seat, in situations where a choice of law is identified, and that in the absence of a “good reason to the contrary”, this presumption exists because the arbitration clause is part of the contract which the parties have agreed is to be governed by the specified system of law. This approach is also consistent with English law authority and principle.
Lessons learnt from this decision
This decision provides welcome clarity to an area of law that has long been uncertain, subject to some exceptions relating to situations where there is no express choice of law and parties seek to rely on an implied choice of law.
From a practical perspective, this case is as an important reminder for contracting parties to carefully consider what law should govern the arbitration agreement when negotiating contracts. We strongly recommend parties take their time at the contracting stage, to expressly agree the choice of law that will govern the arbitration agreement, the main contract and the law of the seat, in order ensure their intentions are accurately reflected.
Our Business & Finance and Disputes teams have a wealth of experience in advising parties about arbitration clauses when negotiating contracts, as well as handling complex and typically cross-border disputes in most major arbitral forums such as the LCIA and ICC. If you would like advising on arbitration terms or a dispute, please do get in touch.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: firstname.lastname@example.org