26.11.2021

English Supreme Court clarifies approach to determining the governing law of an international arbitration agreement

The English Supreme Court has recently clarified how the governing law of an arbitration agreement should be determined, where the agreement lacks an express choice of law provision.  In an area of law which has been the subject of conflicting judgments in the past, this case, Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb, is poised to provide much-needed clarity. 

What happened?

In 2016 a fire severely damaged a power plant in Russia.  The appellant (“Chubb”) is an insurance company which insured the owner of the power plant, PJSC Unipro (“Unipro”).   The respondent (“Enka”) was a company engaged as a sub-contractor by CJSC Energoproekt, the company responsible for the design and construction of the power plant.  The contract between CJSC Energoproekt and Enka included an arbitration clause which provided for arbitration under the ICC Arbitration Rules, with London as the arbitration seat, but failed to expressly specify the law which would govern the arbitration. 

After the fire, Chubb paid 26.1 billion roubles (about US$400 million) to Unipro under its insurance policy, and thereby became subrogated to Unipro’s rights to claim compensation from third parties for the damage caused by the fire.

The Russian proceedings

In May 2019 Chubb filed a claim in the Moscow Arbitrazh Court against Enka and others to recover the sums it had paid out.  Enka sought to dismiss these proceedings on the basis that they fell within the arbitration clause, which it argued was governed by English law.  This argument was dismissed.  Chubb’s claim in the Arbitrazh Court was later dismissed on the merits.

The English proceedings

In September 2019 Enka sought an anti-suit injunction in the English Commercial Court to force Chubb to discontinue its Russian proceedings, on the basis that these proceedings were a breach of the arbitration agreement.  The injunction was not granted but an expedited trial was directed.  At trial, Andrew Baker J dismissed Enka’s claims on the basis that considerations of forum conveniens meant that the appropriate forum to decide whether Chubb’s claim against Enka fell within the arbitration agreement was the Moscow Arbitrazh Court, not the English Commercial Court.  Enka appealed.  The Court of Appeal rejected the application of the forum conveniens principle, but held that under the seat of the arbitration (London) it had supervisory powers to issue the anti-suit injunction, preventing Chubb from continuing the proceedings in the Moscow Arbitrazh Court.  (This pre-dated the Arbitrazh Court’s dismissal of these proceedings.)  The Court of Appeal concluded that the parties’ choice to arbitrate in England gave rise to the English court having jurisdiction.  This meant that in the absence of a choice of law clause, the law of the seat would determine the law applicable to the arbitration. 

Chubb then appealed to the Supreme Court.  The central issue on appeal concerned which system of national law governs the validity and scope of the arbitration agreement, when the law applicable to the contract containing it differs from the law of the seat of the arbitration.

The decision of the Supreme Court

Where an international commercial contract contains an arbitration agreement, if a dispute occurs at least three systems of national law are engaged:

  • The law governing the substance of the dispute (i.e. the law applicable to the contract from which the dispute has arisen);
  • The law governing the arbitration agreement; and
  • The law governing the arbitration process (i.e. the law applicable in the ‘seat’ of the arbitration, the place where the arbitration will take place).

Each of these three systems of law may differ from each other. 

The Supreme Court considered that it was reasonable, as a general rule, to construe a choice of law to govern the contract as applying to an arbitration agreement set out in a clause of the contract, even where the law chosen to govern the contract differs from that of the place chosen as the seat of the arbitration.  This approach has the advantage that it provides a degree of certainty, achieves consistency and coherence, and avoids complexity, uncertainty, and artificiality. 

The Court held that where a contract contains an arbitration agreement, the law applicable to the arbitration agreement may not be the same as the law applicable to the other parts of the contract.  The law of the arbitration agreement is to be determined by applying English common law rules for resolving conflicts of laws, as the law of the forum, rather than the provisions of the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (“Rome I Regulation”).  Under English common law 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 law most closely connected to the arbitration agreement.  Where the law applicable to the arbitration agreement is not specified, the choice of governing law for the main contract will generally apply to an arbitration agreement which forms part of the contract.  If there is no express choice of law clause in the contract, an arbitration clause which provides for arbitration in a particular place will not necessarily mean that the contract/arbitration agreement is intended to be governed by the law of that place.  In the absence of a choice of law clause in the arbitration agreement, the arbitration agreement is governed by the law with which it is most closely connected, generally the law of the seat.

The dissenting judgment of Lord Burrows considered that rather than applying English common law principles of interpretation, Articles 3 and 4 of the Rome I Regulation should apply.  The parties stipulated that Enka’s obligations under the main contract should incorporate norms of Russian law.  Lord Sales, who also dissented, considered that the majority judgment overstated the significance of the choice of the seat.  Both Lord Burrows and Lord Sales took the view that the proper law of the arbitration agreement was Russian, not English, law.

Ultimately, by a 3:2 split, the Supreme Court dismissed the appeal and held that English law was the proper governing law for the arbitration agreement. 

How would this type of case be decided under New Zealand law?

This section considers arbitrations considered ‘international’ under the meaning of section 6 Arbitration Act 1996 (New Zealand).  An arbitration is deemed to be international if the place of arbitration is outside the country in which the parties have their places of business.  What would happen if two parties were in the same circumstances as Enka and Chubb, where they had chosen their arbitral rules and the place of arbitration, but had failed to specify the law governing the arbitration?  What would happen if the parties had chosen New Zealand as the place of arbitration? 

Article 28 of schedule 1 to the Arbitration Act 1996 (New Zealand) provides that if the parties fail to designate rules of law applicable to the substance of the dispute, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers appropriate.  This would mean that the tribunal has the power to determine which law should be applied to govern the arbitration agreement.  Because article 28 is likely not a mandatory provision, where parties have agreed to arbitration in accordance with a set of rules (such as the ICC Arbitration Rules) which contain their own choice of law mechanism, that mechanism will be given effect.

However, even if the arbitral agreement specified the arbitral rules and place of arbitration, one party might apply to the New Zealand courts for an anti-suit injunction or a declaration that the subject-matter of the dispute fell within (or without) the arbitral agreement, in similar circumstances to Enka’s application to the English courts.  In this case, the New Zealand courts would apply New Zealand rules on conflicts of law.  These differ very slightly from the English conflict of laws rules discussed above.  English courts have generally broken the search for the proper law into two separate elements: they have first inferred an implied choice from the contract and the surrounding circumstances, and, if this is not possible, they have then held that the proper law will be that with which the contract has the closest and most real connection.  However, the approach of New Zealand courts (and arbitral tribunals applying New Zealand law) is to consider the two parts together.  They determine the proper law from the terms of the contract and the surrounding circumstances, and part of this inquiry is a search for the legal system with the closest and most real connection with the contract. 

While it does not appear that Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb has yet been considered by New Zealand courts, there is a high degree of similarity between the New Zealand and English approaches to conflict of law rules in these circumstances.  It is therefore likely that this case would be relevant in New Zealand cases in the future. 

Our comments

This judgment is a much-needed clarification on how the English courts will handle an arbitration agreement that lacks an express governing law clause.  It confirms that the arbitration agreement will be governed by the law with which it has the closest and most real connection, and establishes a clear set of principles to govern this issue.  Given the similarities between English and New Zealand rules on conflicts of law in these circumstances, it is likely that this case would be applicable in New Zealand. 

To avoid the expense and delay of applying to the Court for confirmation of the governing law, we recommend that parties always include clear provisions on choice of law and jurisdiction in arbitration agreements.  Although the English courts will now follow the principles set out in this case and the New Zealand courts may follow suit in the future, it is always preferable to provide as much certainty as possible under the contract.   

If you have any questions about trade or maritime arbitration, please get in touch with our Trade and Transport team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required

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Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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