Yash Kapadia and Abhishek Kurian*
In what has been described as an end to the long-running debate apropos the approach to be followed by an arbitral tribunal to determine the law applicable to an arbitration agreement, the U.K. Supreme Court (“UK SC”), recently through its judgement in Enka Insaat Ve Sanayi AS (“Enka”) vs. OOO Insurance Company Chubb (“Chubb”) [2020 UKSC 38] finally set a solid precedent in cases where it is not expressly or impliedly mentioned. The UK SC seems to have disagreed with the reasoning of the Court of Appeal’s (“COA”) decision, while also overruling certain judgements made previously while determining the law applicable to an arbitration agreement.
This blog post states the factual background and analyses the reasoning of the judgement, while distinguishing it from the reasoning of the COA. This post also briefly discusses the practical problems that could arise out of the test used by the courts.
History of the Case and UK SC Judgement:
A company named PJSC Unipro owned a power plant that was damaged in the event of a fire. The appellant (“Chubb Russia”), a Russian insurance company had insured Unipro against such damages and hence through subrogation of rights claimed the right to sue the parties responsible for the damages. Thereby, Chubb Russia sued Enka, a global construction company which was one of the sub-contractors involved in the construction of the power plant.
An ex-parte application was filed by Enka in the English Commercial Court seeking an anti- suit injunction against Chubb Russia, requiring them to withdraw their suit and also grant a stay to the proceedings filed by them in Russia against Enka and ten other defendants whom it claimed were jointly liable for the damage caused by the fire. The Court refused to consider their application for anti-interim relief on the basis of the legal doctrine of forum non conveniens, stating that the reasons given by Enka were not compelling enough to justify granting an anti-interim relief.
Enka further applied to the Court of Appeal, pleading that forum non conveniens should not be the basis to decide the case and that the English law should apply to the arbitration agreement of the contract. The Court of Appeal agreed with Enka and held that the principle of forum conveniens would not apply in the given case and that the arbitration agreement should be governed by English law as there was no express or implied choice of law in the contract and in such a case, the law of the seat i.e. London would apply. Additionally, the court granted an anti-suit injunctive relief to Enka dismissing Chubb Russia’s claims in the Russian court.
On 26 May 2020, Chubb Russia applied to the UK SC for permission to appeal the decision of the Court of Appeal and the same was granted.
The UK SC affirmed, although with different reasons, the COA’s conclusion that the law applicable to the arbitration agreement would be the English law. It made the following conclusion:
No choice of law in the contract
The UK SC concluded that the contract in this case was unclear about the law that was intended to govern the contract or the arbitration agreement within it. To negate the claim of Chubb Russia that the law of the contract was implicitly the law of the arbitration agreement, the UK SC relied on the case of Hamlyn & Co. vs Talisker Distillery, where the court held that it would be unfair to the parties to assume that it was their intention to apply the law of the main contract to the arbitration agreement as well. It reasoned that this could effectively destroy the purpose of one of the most important provisions in the contract, if the main contract law was inconsistent with the arbitration clause.
This reasoning is further substantiated by a principle in English law that the interpretation to be preferred must be such that does not cause the agreement to be invalid, as established in the case of Lancashire County Council vs Municipal Mutual Insurance Ltd.
Dispute resolution clause
The Court accepted Enka’s submission that the arbitration agreement need not be interpreted according to the law applicable to the main contract as the dispute resolution clause mentioned a seat, that could be used to decide the law applicable to the arbitration agreement.
Law applicable to the main contract
The UK SC stated that the contract was for the performance of construction work in Russia thereby requiring compliance with Russian laws and regulations (see para 160). Although the dispute resolution clause provided for arbitration in London, the UK SC stated it was not sufficient to conclude that English law should govern the contract as well. According to Article 4(3) of the Rome I Regulation, the main body of the construction contract had the closest connection with Russia therefore should be governed by Russian law.
The UK SC finally concluded that while the law given in arbitration agreement would normally apply to it, in the absence of the same, the law applying to the contract would apply to the arbitration agreement as well. However, in the lack of any law mentioned in the contract, the “closest connection test” with the arbitration agreement would be used to identify the appropriate law.
Closest connection test
The UK SC primarily disagreed with the approach of the COA in this regard and stated that the law of the seat of arbitration was not to be taken as an implied choice but should instead be used to ascertain the closest connection with the arbitration agreement.
The UK SC opined that since the parties had not chosen a law to govern the arbitration agreement, it is essential to identify the system of law with which the arbitration agreement has the most “real and closest connection” which would generally be the law of the seat chosen by the parties, in this case, London.
Critical analysis of the Judgement
According to the principles laid down by the UK SC while determining the applicable law, the implied choice of law of the contract must govern the arbitration agreement as well. Only when an implied choice of law cannot be determined, the closest connection test would apply.
However, such an approach has certain drawbacks. Recommendation 4 provided in International Law Association Recommendations on Ascertaining the Contents of the Applicable law in International Commercial Arbitration clearly mentions that arbitrators shall not rely on implied presumptions based on the law of the tribunal or the law of the seat to determine applicable law of arbitration. The UK SC has essentially disregarded this recommendation of the ILA report and its decision can result in the law of seat of arbitration being used to constructively establish the implied law. This would result in recurrence of the seat-centric approach and this could be problematic as the seat of arbitration may be chosen for a number of reasons apart from the from the law of the place.
The purpose of choosing a particular seat can range from choosing a neutral background (especially prevalent in international arbitration), or to ensure the effectiveness of the arbitration forum or in some cases even for geographical convenience. In such cases, if the choice of seat is used to determine the implied law, such conclusion would be unreasonable.
The implied law test would use the arbitration clause or the law of the main contract to determine what law have the parties implicitly decided to use. The Closest connection test would also use the terms of the arbitration agreement like the seat of arbitration to determine which law has the closest connection with the arbitration agreement. This shows that the two tests are just marginally different and hence should not form a basis to determine the applicable law.
Courts also attempt to interpret the parties’ intentions for the means of dispute resolution. However, when there exists a dispute between the parties regarding the applicable law it becomes difficult to accurately understand and determine the intention of the parties. It is moreover erroneous to determine and apply the implied law to an arbitration agreement, when parties seldom give thought to the choice of law for the arbitration agreement.
In such cases, when the parties do not clearly draft the choice of law in their agreements it is left for the court to determine the choice after the agreement is already executed. This would lead to retrospective tests which almost seem like a paradox. It is a well-established principle from the case of Amin Rasheed Shipping Corporation vs. Kuwait Insurance Co. that every contract needs to be backed by a governing law, without which it is merely a written document. It is said so because when a retrospective test is used to determine the choice of law, it would mean that until then the contract was merely a lawless document as there was no specific law that was governing its terms.
Additionally, it was also held in Armar Shipping Co. Ltd. vs. Caisse Algerienne, supra that a contract can’t have a proper law which is determined retrospectively by reference to the selection process of the law of the agreement.
Alternate approach to determine choice of law
An alternate method of determining the choice of law used previously by courts, as inferred from Sonatrach Petroleum Corp vs Ferrell International Ltd  is firstly, investigation to understand whether parties have agreed to a proper law which is applicable by the courts. This involves identification of the exact nature of the dispute and then the subsequent determination of the applicable law. In the event the dispute resolution clause is so drafted to connect the applicable law to the venue of arbitration, then it can be construed as an implied choice of law.
Further, from the Kuwait Insurance Co. case (mentioned above) it can also be concluded that the choice and construction of words used by the parties in their agreement can be used as an appropriate indicator of their intention to choose the law for dispute resolution. However, such an approach is to be used with caution and the court must accurately determine from the parties the choice of law they have originally intended.
It can thus be comprehended that unless there has been an express choice of law for the contract or for the arbitration agreement, courts would have the duty and authority to determine the applicable law. The tests applied for such purposes are capable of causing more difficulty to the parties and would often cause an unnecessary delay in dispute resolution. Hence, clear guidelines could be issued to ensure that parties mention the governing law of the contract and the arbitration agreement as well. Additionally, if necessary, the parties could also mention the laws applicable and place of arbitration according the nature of disputes.
In drawing things to a close, it is noteworthy to mention that the most significant aspect of this English proceeding is that the trial, the appeal to the Court of Appeal and the appeal to the UK SC were all heard in about seven months. This is a brilliant demonstration of the speed with which the English courts have acted when there is a required urgency in a matter.
* Yash Kapadia is an advocate at Bombay High Court and Abhishek Kurian is a student at National Law University, Odisha.