Legal Insights

Is the law of the contract and the law of an arbitration agreement the same? Not always

By Paul WoodsAmelia French

• 25 January 2021 • 3 min read

In the absence of an express choice of law to the contrary, an arbitration agreement will, in the usual case, be governed by the system of law that is most closely connected to it.

In Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, the Supreme Court of England and Wales held that in the absence of an express choice of law to the contrary, an arbitration agreement will, in the usual case, be governed by the system of law that is most closely connected to it. In most cases, that will be the law of the seat of arbitration, which in an international or other multi-jurisdictional context, will often differ from the law governing the contract.

The decision considered the choice of law to be made by an English court under English common law rules in circumstances where contracting parties do not choose the law to govern either their contract or an arbitration agreement contained in it.

It serves as an important reminder for drafters of contracts that contain arbitration agreements that nominate England as the seat of arbitration, not to assume that the law of the contract will automatically apply to the arbitration agreement.

While the decision in not binding under Australian law, it will provide persuasive authority for similar actions commenced in Australian courts.

Background

Enka, a Turkish engineering company, was involved in the construction of a power plant in Russia.

The contract between Enka and the owner of the plant contained a binding dispute resolution clause. That clause provided that disputes between the parties were to be determined by arbitration in London. Neither the contract or the arbitration agreement contained a governing law clause.

In 2016, the power plant was severely damaged by fire. In May 2019, Chubb Russia, insurers of the plant’s owner, commenced proceedings against Enka in Russia alleging liability for the fire.

In September 2019, Enka commenced proceedings in London seeking, among other things, an anti-suit injunction to restrain Chubb Russia from continuing with the Russian proceeding on the basis that such proceeding was a breach of the arbitration agreement.

At first instance, the High Court dismissed Enka’s claim. The Court of Appeal subsequently allowed the appeal, and in doing so granted Enka an anti-suit injunction. Chubb Russia appealed.

The Supreme Court decision

The primary issue before the court was which national law governs the validity and scope of an arbitration agreement, when the law that governs the contract differs from the seat of arbitration.

The court, in applying English common law rules, held that where the parties have chosen the law to govern a contract, that law should also apply to the arbitration agreement contained in it, even when that law differs from the law of the seat of arbitration: [54].

But where the parties have not chosen the law to govern the contract or the arbitration agreement, by default, the law applicable to an arbitration agreement will be the system of law ‘most closely connected’ to it, not the contract: [112] and [120]. That will usually be the law of the seat of arbitration, which in this case was English law, because:

  • the seat is where the arbitration agreement is to be performed: [121]
  • this general position accords with international law, i.e. the New York Convention: [125]
  • it is more likely to uphold the reasonable expectations of the contracting parties who have chosen to specify a place to settle their disputes by arbitration. This is particularly so where the contracting parties are different nationalities and have chosen a ‘neutral forum with which neither party is connected’: [142]
  • having a clear default rule is in the interests of legal certainty: [144].

Key take-aways

The decision highlights the importance of a governing law clause that covers all aspects of the contract, not just the parties’ substantive obligations. And if contracting parties intend for the law of the contract to apply to the arbitration agreement irrespective of the place of the arbitration, that choice should be expressly made under contract.

Would you like more information on this case or laws governing contacts?

Get in touch with the Construction & Projects team.

By Paul WoodsAmelia French

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