TT Talk - Legal eagle: the power of choice

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The importance and impact of careful drafting of contracts is exemplified in this UK Supreme Court decision. While the ruling brings clarity to English law, it represents congruence with other jurisdictions. It is most prudent to be deliberate in documenting law and jurisdiction choices in contracts.

The facts 

Enka contracted to provide work on the construction of a power plant in Russia. The contract contained an arbitration agreement requiring disputes to be referred to arbitration in London under ICC Rules. However, the contract contained no express choice of law governing either the substantive agreement or the arbitration agreement.

A massive fire erupted at the plant. The owner received USD400 million under its insurance policy with Chubb. Chubb commenced subrogated proceedings in the Moscow Arbitration Court against Enka, as well as other defendants, on the basis that the fire was caused by inadequate work. 

Enka sought an anti-suit injunction in the London Commercial Court, restraining Chubb from continuing the Russian proceedings on the basis that they violated the arbitration agreement in the contract, which was subject to English law.

The judgment

At first instance, the Commercial Court refused the injunction on grounds of forum non conveniens. The Court of Appeal overturned this, holding that, in the absence of an express choice of law clause either in the substantive or the arbitration agreement, choice of law of the seat of arbitration was implied. This default rule could be broken only by “particular features of the case demonstrating powerful reasons to the contrary”.

The Supreme Court, in a split decision of 3:2, upheld the Court of Appeal decision, also relying on ‘default’ principles, but reaching its conclusions on different reasoning.

The Court started by applying English common law, on the basis that EU law, specifically the Rome I Regulation, which would apply Russian law by default to the substantive agreement, expressly excluded arbitration agreements. On this approach, whether the parties had made a choice of law was a question of interpretation under English law rules, and not as the Court of Appeal had found, under the law of the substantive contract, which the Supreme Court considered irrelevant in this context. The Supreme Court also found no practical distinction between an express or implied choice; both were equally effective.

Accordingly, the Supreme Court laid down two rules to fit two different scenarios.

1. There is choice of law applying to the substantive agreement but not to the arbitration agreement

The law applying to the substantive agreement will also apply to the arbitration agreement, unless there is good reason to conclude otherwise. 

The most obvious reason to conclude otherwise is if arbitration is invalid or ineffective under the law of the substantive agreement. The parties would then be taken impliedly to have chosen a law under which arbitration was valid. In most cases this would be the law of the seat of arbitration.

2. There is no choice of law applying either to the substantive agreement or to the arbitration agreement 

The court should determine, “objectively and irrespective of the parties’ intention”, the law with which the arbitration agreement has its closest connection.

Although the Supreme Court accepted that this generally would be the law of the seat of the arbitration, it disagreed with the Court of Appeal’s finding that this relied on a “strong presumption” of an implied choice by the parties, which it characterised as based partly on a misinterpretation of the separability provisions in the UK Arbitration Act 1996.  The Supreme Court added that an arbitration clause, because of its different subject matter and purpose, may more readily than other clauses be governed by different law.

In the present case the (majority of the) Supreme Court found that there was no express or implied choice of law in the substantive agreement and that English law was the law with the closest connection to the arbitration agreement. English law therefore applied and the English court could grant the injunction under its supervisory jurisdiction. 

As stated above, this was a majority verdict. The dissenting judgment found that the references to Russian law throughout the agreement, and the context of the dispute (and the fact that the agreement was written in Russian), implied a choice of Russian law.  But even absent this implied choice, and if Russian law had applied to the substantive agreement exclusively by relying on Rome I (see above), it was still to be expected that the entire agreement be governed by one law.  It was not necessary or convenient to separate out the arbitration agreement in this way.

Conclusion 

Although arising from a construction dispute, this decision has clear implications for transport contracts and highlights the importance of careful drafting of substantive and arbitration agreements.
The importance of this case is evident from the almost even split in the Supreme Court and from the fact that the case was rushed through the English courts at a speed that left some commentators reeling. The decision brings long awaited legal certainty and consistency, which has not always been evident in previous judgments, and attempts to meet the reasonable expectations of the parties. The 115 page judgment was also influenced, to an extent, by precedent in other common law and civil jurisdictions. 

ENKA INSAAT VE SANAYI AS v OOO INSURANCE COMPANY CHUBB [2020] UKSC 38

We hope that you have found the above interesting. If you would like further information, or have any comments, please email us, or take this opportunity to forward to any colleagues who you may feel would be interested.

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We look forward to hearing from you.

Peregrine Storrs-Fox

Risk Management Director, TT Club

Peregrine Storrs-Fox

Date12/01/2021

Source Risk Management Director

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