Which law governs your arbitration agreement?

The UK Supreme Court on Friday handed down its highly anticipated judgment in Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb [2020] UKSC 38. The judgment affirms the Court of Appeal's judgment that English law governed an arbitration agreement between a Russian insurer and a Turkish construction company.

The facts of the case were straightforward: a fire broke out at a Russian power plant being constructed by Enka. The plant's owner had acquired insurance from Chubb, and Chubb brought a subrogated claim against Enka in Russia, claiming that the fire had been caused by Enka's works. Enka sought to injunct Chubb's proceedings in Russia with an anti-suit injunction in England, on the basis that its sub-contract with the plant's owner provided for exclusive arbitration in England. In response, Chubb said that the arbitration agreement was governed by Russian law, and under Russian law Chubb's subrogated claims fell outside its scope. (The doctrine of 'separability' means that an arbitration agreement is a separate agreement to the main contract in which it is found, and so it can be governed by a different law). 

So, the key question for the English courts was: did English law or Russian law govern the arbitration agreement? If English law, the subrogated claims were within scope; if Russian law, they were not.

The Supreme Court considered the three-stage test under English law for determining the governing law of the arbitration agreement: (1) is there an express choice of governing law?; (2) if not, is there an implied choice?; (3) if not, consider with which law does the arbitration agreement have the closest and most real connection? The Court concluded that English law governed the arbitration agreement, and that the anti-suit injunction should be granted. 

The most interesting part of the judgment is that the Supreme Court differed from the Court of Appeal on the reasons for concluding this that English law applied. The Court of Appeal had concluded that there was a strong presumption that a choice of a London seat of arbitration meant that the arbitration agreement should be governed by English law as a matter of implied choice, but the Supreme Court disagreed. Instead, the Supreme Court considered that the law governing the main contract in which the arbitration clause sits will generally apply to the arbitration agreement. In the case of Enka's contract, there was no law selected to govern the contract: therefore the Court considered the law with which the arbitration agreement had the closest and most real connection. It concluded that the "default rule" in such circumstances is that the arbitration agreement will be most closely connected with the law of the seat of arbitration: so here, English law. 

The Supreme Court considered that aligning the choice of governing law of the main contract with that of the arbitration agreement within which it sits encourages legal certainty, consistency and coherence and avoids complexities and uncertainties. In the past many practitioners have preferred the view that the law of the seat and the law of the arbitration agreement should be the same, on the basis that the selection of a particular seat suggests that the parties wished all matters relating to the arbitration to be governed by the law of that jurisdiction. Time will tell how the Supreme Court's judgment is received and whether it contributes to the attractiveness of London as a pro-arbitration seat.

For contract drafters the key 'take-away' is that costly satellite disputes over the scope of your arbitration agreement can be avoided by expressly specifying the law governing the arbitration agreement - whether in the arbitration agreement itself or as an extension to the governing law clause in the main agreement.  

You can find our QuickGuide on drafting international arbitration clauses here, and our Arbitration Quickbites video series here, which explains the different laws and rules that govern arbitration, and provides a checklist of the key elements to consider when designing an arbitration clause.