Author: Rayan Bhattacharya*
| Jurisdiction: United Kingdom |
Topics: Applicable Law Law Applicable to the Merits |
INTRODUCTION
The absence of an express choice of governing law in international arbitration agreements is not an unusual occurrence. However, the appropriate approach to be adopted to determine the implied choice of governing law has provoked multiple conflicting approaches from UK courts. For a substantial part of the last decade, the decision in Sulamérica[1] held that the implied governing law in an arbitration agreement was the law of the main contract itself. However, the UK Court of Appeal’s (COA) April 2020 decision in Enka Insaat Ve Sanayi (Enka)[2] shifted from this approach to hold that the governing law would be that of the seat of arbitration.
In this context, this post will consider the merits of the new approach adopted by the COA. It will first briefly highlight Enka’s background. It will then argue that despite making the law more rigid, the decision adds legal certainty for future courts while determining governing law for agreements without an express choice. It will conclude by noting some of the approaches the UK Supreme Court is likely to adopt after the final hearing of the case, which was conducted in late July of 2020.
BACKGROUND
The claimant (Enka) entered into a subcontract with CJSC Energoproekt (CJSC) relating to the construction of a power plant in Russia. As per the subcontract, all disputes were to be resolved through international arbitration seated in London. However, the subcontract did not mention the governing law of the main contract nor of the arbitration agreement. In 2014, CJSC novated its rights and obligations under the subcontract to PJSC Unipro (Unipro)—the owner of the plant. In 2016, damage caused by a fire at the plant entitled Unipro to recover payments from its insurer—Chubb Russia (the defendant). Having become subrogated to Unipro’s rights, Chubb Russia initiated proceedings against Enka in Moscow in 2019, despite the London-seated arbitration agreement.
In response, Enka sought an anti-suit injunction in London against Chubb Russia from continuing Russian proceedings. However, the trial judge rejected Enka’s claim by arguing it could not conclusively state the governing law of the arbitration agreement but that it was “strongly arguable” for it to be Russian law. It was held that Moscow courts were the appropriate court to hear the case. Enka appealed this decision to the COA and secured the anti-suit injunction by getting its appeal granted. The Supreme Court’s decision to Chubb Russia’s appeal is pending as of September 2020.
POTENTIAL CONCERNS REGARDING ENKA’S APPROACH
English courts follow three steps to determine the governing law for arbitration agreements.[3] They first seek to find an express choice in the agreement, followed by an implied choice. If neither applies, then the law the Court deems as having the “closest and most real connection” applies. The courts in Sulamérica and Enka reached different conclusions for this test on the second step. In the former, the Court held that if a governing law had been specified for the main contract, the same law would govern an arbitration agreement which had specified no jurisdiction. However, Enka adopted the presumption that in the absence of such an express choice, the parties have “impliedly” chosen the seat’s jurisdiction to govern the arbitration agreement.
As a matter of contractual interpretation, it can reasonably be asserted that the arguments supporting the law of the main contract versus that of the seat both have a rational basis. In fact, the Court in Sulamérica was ready to acknowledge that there were “sound reasons” to support “either conclusion.”[4] It simply felt that the main contract’s law was appropriate in the given case. This line of reasoning has even been re-affirmed in Singapore, a popular arbitration jurisdiction which often cites UK arbitration case law. The Court in the Singaporean case of BCY v BCZ goes as far as explicitly endorsing Sulamérica’s conclusion, by noting that the main contract’s law is a “strong indicator” of the governing law of the arbitration agreement as well.[5] However, Singapore courts’ response to Enka’s approach is yet to be seen. Nevertheless, Enka’s move to making the law more rigid and removing Sulamérica’s flexibility is likely to attract critics.
ENKA’S BENEFIT OF CERTAINTY
Despite the concerns about Enka narrowing the scope of the law, the decision arguably offers future courts multiple areas of increased certainty that previous case law did not. Firstly, the search for a choice of governing law is likely to be more predictable for future courts.[6] This is so as Enka’s presumption supporting the seat of arbitration was made in explicit terms as opposed to Sulamérica’s stance supporting the main contract’s law. This is apparent in the difference in phrasing between the two courts. Popplewell LJ in Enka held that there was a “strong presumption” in favor of the seat’s law unless rebutted by “powerful reasons to the contrary.”[7] In contrast, Moore-Bick LJ in Sulamérica merely uses the word “likely” while supporting the main contract’s law.[8] This was due to the Court’s tolerance towards the possibility of a contrary conclusion.
Secondly, Enka’s approach allows any arbitration agreements with English seats to be governed under English law, as long it does not expressly name a foreign jurisdiction for the same. Furthermore, this decision is likely to be read in conjunction with the Kamenogorsk case,[9] where the Supreme Court held that anti-suit injunctions could be granted by English courts where foreign proceedings breach an arbitration agreement seated in London. Such relief would be available even where no arbitration has been commenced or intended. Hence, the combined effect of both decisions gives English courts an automatic jurisdiction to grant anti-suit relief as long as the arbitration agreement names London as a seat and does not name a governing law.[10] Simply put, the new approach allows agreements to be interpreted without any reliance on foreign courts.
This argument can be taken a step further by noting the substantially reduced role of Sulamérica’s “closest and most real connection” test.[11] This is so as Enka’s presumption in favor of the seat’s law under the “implied choice” step of the three-step test, negates the requirement of the third step — the closest connection test. The only circumstance it might be resorted to is where an agreement fails to include a dedicated arbitration clause itself or fails to mention the jurisdiction governing the seat.
Thirdly, there seems to be a clear departure from the approaches adopted by earlier cases on this issue. For instance, the Court in Sonatrach[12] created a presumption that the parties’ express choice of law for the main contract will automatically govern the arbitration agreement as well. A few years later, Svenska Petroleum[13] simply chose to rely on the “closest and most real connection” test as the only source for implied choice. Since Sulamérica’s test was a combination of these early authorities, it did not conclusively direct a judge towards a particular approach. This uncertainty was aggravated by Moore-Bick LJ’s abstract language, as discussed before, and resulted in the inconsistent approaches adopted by future courts. The inconsistent approaches can be best evidenced in two contradictory cases that followed Sulamérica — Arsanovia[14] and Habas Sinai[15]. The former held that because Indian law governs the main contract, it was automatically entitled it to govern the arbitration agreement as well despite London being the chosen seat of arbitration. In contrast, the latter case held that if there is no mention of the law governing the main contract either, the seat of arbitration would govern the arbitration agreement. While Habas Sinai’s decision resembled Enka, the diversity of approaches pursued in the other cases compromised the certainty of the law. These cases survived reversal primarily due to Sulamérica’s lack of express support for the main contract’s law and inability to rule out the seat’s law. However, Enka’s current approach conclusively ends the validity of such contradictory decisions.
THE POLICY BENEFIT OF ENKA AND THE WAY FORWARD
Having made the argument for the direct legal benefits of Enka’s approach, it is worth noting its larger policy implications as well. Enka’s current approach signals a visible shift towards courts trying to enforce arbitration agreements despite ambiguity and poor drafting. This demonstrates greater awareness on the part of the judiciary of the practical realities of a commercial agreement.[16] This observation aligns with Gary Born’s opinion of businesspersons not necessarily being aware of the implications of being bound by the laws of more than one jurisdiction in a single agreement.[17] While Born personally favors the law of the main contract as the more practical option, the COA’s effort to ensure future consistency by explicitly choosing the seat’s law still plays a role in alleviating the uncertainty of the law.
In the coming months, the Supreme Court will have the choice to uphold Enka or revert to Sulamérica. However, certain commentators have recommended the use of a more radical third option—the “basic general rule” approach.[18] This rule presumes that the arbitration agreements are governed by the seat’s jurisdiction under all circumstances, as long as the agreement is not rendered ineffective under the law of the seat. Adopting this approach would require the Supreme Court to discontinue the three-step test that has been a part of English arbitration law up to this point. This could also be done by amending the UK Arbitration Act 1996 and imprinting this approach in legislation. However, it is unlikely that future courts will be wholly rid of legal ambiguity. For instance, the COA failed to elaborate on what constitutes “powerful reasons to the contrary” that can rebut Enka’s presumption.
Regardless of which approach the Supreme Court adopts, the Enka case has worked as a crucial reminder to businesses and their legal representatives about the distinction between the governing law of the main contract and arbitration agreement. It encourages business lawyers who are considering an arbitration clause for their client’s contract to unambiguously state the clause’s governing law.[19] This future-proofs an agreement from any uncertainties in the law and expedites the dispute resolution process.
CONCLUSION
Whichever approach the Supreme Court upholds, it will settle a long-standing area of uncertainty in the law of international arbitration. If the COA’s decision on Enka is upheld, the seat of arbitration will become the presumed source of governing law for an arbitration agreement. Beyond simply enjoying anti-suit relief, parties will be able to interpret arbitration agreements purely through the UK system. This significantly expands the power of UK courts in London-seated international arbitration agreements.
While this academic debate between the main contract and seat’s law will continue beyond the Supreme Court’s decision, future parties are likely to enjoy consistency in the courts’ approach to disputes of this nature. Analyzing the case from a broader commercial perspective, UK courts’ initiative to facilitate doing business by interpreting arbitration agreements despite ambiguity in drafting is a welcome precedent to set. For businesses themselves, this decision is an important reminder to expressly state the law governing the arbitration agreement in its contracts.
[1] Sulamérica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA (Civ) 638.
[2] Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors [2020] EWCA (Civ) 574.
[3] Sulamérica [2012] EWCA (Civ) 638 at [25].
[4] Sulamérica [2012] EWCA (Civ) 638 at [57].
[5] BCY v BCZ [2016] SGHC 249.
[6] Mark Campbell, The Law Applicable to International Arbitration Agreements: the English Court of Appeal Departs from Sulamérica, 23 Int’l Arb. L. Rev. 195 (2020).
[7] Enka [2020] EWCA (Civ) 574 at [91].
[8] Sulamérica [2012] EWCA (Civ) 638 at [26].
[9] Ust-Kamenogorsk Hydropower Plant JSC v. AES Ust-Kamenogorsk Hydropower Plant LLP [2013] 1 WLR 1889.
[10] Tony Dymond, English Court Clarifies Law of Arbitration Agreement and Availability of Anti-Suit Relief, Debevoise & Plimpton Insights (May 4, 2020), https://www.debevoise.com/insights/publications/2020/05/english-court-clarifies-law-of-arbitration
[11] Sulamérica [2012] EWCA (Civ) 638 at [15].
[12] Sonatrach Petroleum Co. v. Ferrell International Ltd. [2001] EWHC (Comm) 481.
[13] Svenska Petroleum Exploration AB v. Government of the Republic of Lithuania [2005] EWHC (Comm) 2437.
[14] Arsanovia Ltd. & Ors v. Cruz City 1 Mauritius Holdings [2012] EWHC (Comm) 3702.
[15] Habas Sinai Ve Tibbi Gazlar Istihsal Andustrisi AS and VSC Steel Company Ltd [2013] EWHC (Comm) 4071.
[16] Craig Tevendale, English Court of Appeal Issues Clear Guidance on the Law Governing Arbitration Agreements (May 13, 2020) Hebert Smith Freehills Arbitration Notes, https://hsfnotes.com/arbitration/2020/05/13/english-court-of-appeal-issues-clear-guidance-on-the-law-governing-arbitration-agreements-and-grants-anti-suit-injunction-restraining-party-from-pursuing-russian-court-proceedings/.
[17] Gary B. Born, International Commercial Arbitration 580 (2d ed. 2014).
[18] Ardavan Arzandeh, The Law Governing Arbitration Agreements in England (Sulamerica v Enesa), Lloyd’s Maritime and Commercial L. Q., 31-35 (2013).
19Amy Edwards, The Governing Law of an Arbitration Agreement and Why It Matters (June 24, 2020) Allen & Overy News & Insights, https://www.allenovery.com/en-gb/global/news-and-insights/publications/the-governing-law-of-an-arbitration-agreement-and-why-it-matters.
*Rayan Bhattacharya is a final year law student at the University of Durham, United Kingdom. He maintains an interest in both transactional and contentious areas of commercial legal practice and was a selected candidate on Latham & Watkins’ 2020 Summer Vacation Scheme (summer associate program) at the London office. He was also the recipient of Durham’s Hogan Lovells’ Prize for Tort Law in 2019 and served as an ambassador for Europe’s largest student-run law conference— the London Law Conference 2019. Additionally, he is an active student member of the Durham European Law Institute. He is authoring his final year dissertation on the legality of nuclear deterrence policies under international law.