20 October, 2020
In its recent decision in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb, the Supreme Court has provided clarity on the approach to be taken to determine the law governing arbitration agreements.
After a fire broke out in a power plant in Russia and the insurer, Chubb, paid out a large sum to the plant owner, Chubb brought proceedings in Russia against Enka, a subcontractor, alleging liability for the fire. Chubb brought the proceedings in Russia on the basis that the law applicable to the main contract was Russian law. Enka, however, began proceedings in England, contending that the dispute was subject to English law, on the basis that the arbitration agreement provided for arbitration in London. Enka also sought an order that Chubb discontinue the Russian proceedings ("an anti-suit injunction").
The majority of commercial contracts contain an express choice of law clause, and most arbitration clauses specify what the "seat" of the arbitration will be, namely where the arbitration will take place. It is less common for a contract to contain an express agreement on the governing law of the arbitration clause.
The key issue for the Supreme Court to rule on arose out of the situation as described above - how to determine the governing law of an arbitration agreement when the applicable substantive contractual law was not the law of the seat chosen for the arbitration in the arbitration agreement.
By a 3-2 majority, the Supreme Court ruled that where parties have not specified which law governs the arbitration agreement, the general position will be that the laws of the seat of the arbitration will be those most closely connected with the arbitration agreement and will govern the arbitration agreement.
In this case, it was held that there had been no express or implied choice of Russian law and therefore the scope and validity of the arbitration agreement was held to be governed by the law of the chosen seat of arbitration, as being the law with which it is most closely connected. London had been chosen as the seat, so even though English law was not governing the contract, English law was held to govern the arbitration agreement. As such, the English court was able to intervene by preventing Russian legal proceedings by granting an anti-suit injunction.
The Supreme Court's decision clarifies the approach to identifying and determining the governing law of contracts where disputes arise, although there is the possibility of different outcomes depending on the facts and circumstances of each case. With this in mind, parties to contracts, especially where there is a multi-jurisdictional element, should consider and expressly agree in their contracts upon all three systems of law that will be relevant to any potential dispute. These are:
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