Enka v Chubb - arbitration agreements and choice of law

Summary

In Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb the Supreme Court was required to determine the choice of law applicable to an arbitration agreement contained in a construction contract.

It was held that:

• the governing law of an arbitration agreement will usually be that of the main contract, rather than the law of the chosen arbitration seat;
• where a contract contains an express choice of law, there is a strong presumption that the parties intended that choice to apply to the whole contract, including any arbitration agreement; and
• where the parties haven't expressly or impliedly chosen the law of the contract (or of the arbitration agreement therein), the default position is that the law of the chosen seat of the arbitration will govern the arbitration agreement.

Background

The dispute between Chubb and Enka arose out of claims for losses arising following a fire at a Russian power plant. Chubb, as property insurer to the owner of the power plant, was subrogated to claims against various third parties, including Enka.

Enka had been appointed by the design and build contractor of the plant, by a construction contract which provided for disputes to be resolved by ICC arbitration. The arbitration was to be conducted in English, and the seat of arbitration was to be London.

The construction contract contained no (express or implied) choice of law.

The parties disagreed on the law applicable to the arbitration agreement.

Determining the governing law of an arbitration agreement

Despite the supposed clarity offered by the 2012 Court of Appeal decision in Sulamerica v Enesa, subsequent authorities have continued to muddy the water on the vexed issue of how to determine the proper law of an arbitration agreement. In the Supreme Court decision of Enka v Chubb, hopefully we now have clarity.

The provisions of the Rome I Regulation do not apply to arbitration agreements, so (where there is no choice of law in the main contract) the English common law rules apply to determine the law applicable to the arbitration agreement. In the absence of a choice of law by the parties for an arbitration agreement, the common law rules require a determination of which country (therefore which body of law) the contract is most closely connected with.

The majority in the Supreme Court held in Enka v Chubb that:

• Where the parties have not specified the law applicable to the arbitration agreement, but they have chosen the law to govern the contract containing the arbitration agreement, this choice will generally apply to the arbitration agreement. This general rule encourages legal certainty, consistency and coherence while avoiding complexity and artificiality.
• Where there is no such choice, the default position for arbitration agreements is that the closest connection is with the chosen seat of arbitration. As the chosen seat of the arbitration in Enka's construction contract was London, English law applied.

Justifying the default rule, namely that arbitration agreements should be governed by the law of the seat absent a different choice, the Supreme Court pointed to considerations including that the seat is where the arbitration is to be performed (legally, if not physically), that this rule is likely to uphold the reasonable expectations of contracting parties who specify a location for the arbitration and this approach provides legal certainty.

This decision is now the leading authority on the governing law of an arbitration agreement.

What this means

The law governing the substantive contract will generally apply to any arbitration agreement contained therein. The Supreme Court's decision confirms that where a choice of law can be determined with regards to a substantive contract (even where this is by implication), there shall be a presumption in favour of that choice of law.

Where parties have failed (expressly or impliedly) to choose the governing law of the contract, however, the governing law of the arbitration agreement will generally be the seat of the arbitration, as the law with the 'closest connection'.

This decision brings into focus the importance for contracting parties expressly to agree choices of law at the contract formation stage. A failure to do so, particularly where arbitration agreements are concerned, can become highly contentious further down the line.