Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb (Rev1) [2020] UKSC 38

A Russian power plant was damaged by fire. The Russian insurer, subrogated to the owner's rights, sued Turkish contractor Enka in Russia despite an arbitration clause specifying London as the seat. The Supreme Court held English law governed the arbitration agreement and upheld an anti-suit injunction restraining the Russian proceedings.

Facts

Enka, a Turkish engineering company, was engaged as a sub-contractor in the construction of the Berezovskaya power plant in Russia under a contract with CJSC Energoproekt, which later assigned its rights to PJSC Unipro. The construction contract contained, in article 50.1, a dispute resolution clause providing for ICC arbitration with London as the seat, but contained no express choice of law governing the contract or the arbitration agreement.

In February 2016, a fire severely damaged the power plant. Chubb Russia, the Russian insurer, paid approximately US$400m to Unipro and became subrogated to Unipro’s rights. Chubb Russia commenced proceedings in Moscow against Enka and ten other defendants. Enka sought an anti-suit injunction in England restraining those proceedings as being in breach of the arbitration agreement. Andrew Baker J dismissed the claim on forum non conveniens grounds, but the Court of Appeal reversed and granted the injunction, holding that the arbitration agreement was governed by English law as the law of the seat.

Issues

The central issues on appeal were: (i) which system of national law governs the validity and scope of an arbitration agreement where the law applicable to the contract containing it differs from the law of the seat of arbitration; and (ii) whether an anti-suit injunction should be granted restraining the Russian proceedings.

Arguments

Chubb Russia contended that, in the absence of strong indications to the contrary, a choice of law for the main contract should be treated as a choice of that law for the arbitration agreement. It argued Russian law governed the construction contract and hence the arbitration agreement, and that the Russian courts should be left to determine the scope of the arbitration clause.

Enka argued that the Court of Appeal was correct to hold that, absent an express choice, the law of the seat governs the arbitration agreement as an implied choice, or alternatively as the law with the closest and most real connection.

Judgment

The Supreme Court, by a majority (Lord Kerr, Lord Hamblen and Lord Leggatt; Lord Sales and Lord Burrows dissenting), dismissed the appeal, though for different reasoning than the Court of Appeal.

The applicable law framework

The majority held that the law governing an arbitration agreement is determined by common law conflict of laws rules (arbitration agreements being excluded from the Rome I Regulation by article 1(2)(e)). The three-stage test applies: (i) express choice; (ii) implied choice; (iii) in default, the law with which the agreement has its closest and most real connection.

Choice of law for the main contract

Where parties make an express or implied choice of law to govern the main contract, that choice will generally extend to an arbitration agreement contained within it. The majority disagreed with the Court of Appeal’s view that the law of the seat generally governs as a matter of implied choice. A choice of a different seat does not, without more, negate the inference that the choice of law for the contract extends to the arbitration agreement.

Section 4(5) of the Arbitration Act 1996

The majority rejected the ‘overlap argument’ that choosing an English seat implies a choice of English law for the arbitration agreement. Section 4(5) provides that where a foreign law applies to the arbitration agreement, the non-mandatory provisions of the Act do not apply to it. The statutory scheme therefore contemplates that the arbitration agreement may be governed by a different law from the curial law.

The validation principle

Where applying the main contract law would render the arbitration agreement invalid or significantly undermine it, this may negate the inference that the main contract law was intended to apply to the arbitration clause, following Hamlyn v Talisker Distillery [1894] AC 202 and Sulamérica [2013] 1 WLR 102.

The default rule

Where no choice has been made, the majority held that the arbitration agreement will generally be most closely connected with the law of the seat. This accords with: (i) the seat being the place of performance of the arbitration agreement; (ii) consistency with the New York Convention article V(1)(a) and section 103(2)(b) of the 1996 Act; (iii) giving effect to the commercial purpose of a neutral forum; and (iv) legal certainty.

Application to the facts

The majority held there was no express or implied choice of law governing the construction contract. References to ‘Applicable Law’ (defined as Russian law) imposed obligations to comply with local regulations but did not constitute a choice of governing law. Russian law governed the main contract only by virtue of article 4(3) of the Rome I Regulation (closest connection). As there was no choice of law at all, the arbitration agreement was governed by English law as the law of the seat, being the system with which it was most closely connected.

The anti-suit injunction

The majority held (obiter, given the finding on applicable law) that the principles governing anti-suit injunctions in support of an English-seated arbitration do not differ according to whether the arbitration agreement is governed by English or foreign law. Forum conveniens is irrelevant and comity has little role to play where the injunction enforces a contractual promise.

The dissent

Lord Burrows (with whom Lord Sales agreed) would have held that Russian law governed the arbitration agreement. In their view, the parties had impliedly chosen Russian law for the main contract, and that choice extended to the arbitration agreement. They preferred the ‘main contract’ approach over the ‘seat’ approach, emphasising coherence, the limited scope of the separability doctrine, and practical difficulties in dividing the contract.

Implications

The decision establishes an authoritative framework for determining the law applicable to an arbitration agreement in English law. The principles set out at paragraph 170 of the majority judgment are: (i) the common law rules apply, not Rome I; (ii) the law is determined by choice, express or implied, or failing that, by closest connection; (iii) a choice of law for the contract will generally extend to the arbitration agreement; (iv) choice of a different seat is not, without more, sufficient to negate that inference; (v) the validation principle may negate the inference where the main contract law would render the arbitration agreement ineffective; and (vi) in default of choice, the law of the seat will generally apply as the closest connection.

The judgment resolves the tension between Sulamérica and C v D by endorsing the Sulamérica approach at the choice stage while treating the law of the seat as the default rule at the closest connection stage. It reaffirms the willingness of English courts to grant anti-suit injunctions in support of English-seated arbitrations, regardless of the law governing the arbitration agreement.

The decision is significant for international commercial parties drafting arbitration clauses and for practitioners advising on arbitration-related disputes. It underscores the importance of including an express choice of law clause to avoid uncertainty. It also confirms that the English court, as supervisory court of the seat, will readily act to uphold arbitration agreements through injunctive relief. The dissenting judgments highlight that the area remains contested internationally and that reasonable minds may differ on the appropriate default rule.

Verdict: The appeal was dismissed. The Supreme Court, by majority, upheld the Court of Appeal’s order granting an anti-suit injunction restraining Chubb Russia from continuing the Russian proceedings against Enka, holding that the arbitration agreement was governed by English law as the law of the seat, being the system with which it had its closest and most real connection in the absence of any choice of law by the parties.

Source: Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb (Rev1) [2020] UKSC 38