Enka v. Chubb: The English Court of Appeal Provides Guidance on the Governing Law of the Arbitration Agreement

Aditi Mozika*

The English Court of Appeal delivered its judgment in Enka Insaatve Sanayi S.A. v. OOO “Insurance Co Chubb” on 29th April, 2020. Through the judgment, it provided the much-needed clarification on law relating to anti-suit injunctions. The court also explained the test that should be applied to determine the law that would govern an arbitration agreement where the agreement itself is silent on the law that would apply to it. In doing so, it spelled out the mode of application of the test that was laid down in the case of Sulamérica Cia Nacional de Seguros SA and others v. Enesa Engenharia SA. This article aims to briefly address the facts and major contentions of the parties, while also highlighting the main points of discussion that were taken up by the court and the law that was laid down.

Facts of the Case

Enka was one of the sub-contractors engaged in building a power plant in Russia. According to the contract, any disputes between the parties would be resolved via arbitration in London, following the ICC Rules. There was an insurance agreement that was governed by the Russian law. After a fire broke out, Chubb paid out the insurance money. Subsequently, exercising its right of subrogation, Chubb initiated court proceedings against Enka and others, alleging that the fire was caused by their faulty performance in construction. In response, Enka filed an anti-suit application before English courts, alleging that Chubb was precluded from initiating proceedings in Moscow owing to the arbitration agreement.

Contentions of the Parties

According to the agreement between the parties, English law was the curial law, and therefore, English courts would have the power to grant anti-suit injunctions. However, Chubb contended that since the law of the arbitration agreement was Russian, the claims in the Moscow Court would not be covered. On the other hand, had English law been the law of the arbitration agreement, the claims in the Moscow Court would have been covered by the arbitration agreement.

Decision of the English High Court

Enka appealed against this decision before the English Court of Appeal. It argued that the Court’s approach in rejecting its application on the ground of forum non conveniens was wrong in principle. The Court decided in favour of Enka, holding that there was no question of forum non conveniens, that the arbitration agreement was governed by English law, and that it saw no other reason to deny relief to Enka.

Breakdown of the Decision

  • The ground of forum non conveniens:

The Court of Appeal held that the High Court’s rejection of the application on the ground of forum non conveniens was incorrect. It held that since the English Court was the court of the seat, it would necessarily have jurisdiction to grant an anti-suit injunction. It based this observation on two grounds. First, a choice of seat by the parties confers supervisory jurisdiction on the courts of the seat. Second, supervisory jurisdiction includes the power to grant anti-suit injunctions. The Court held that if the court of the seat gives up its powers in favour of a non-curial court, it would defeat the objectives that the law of arbitration necessarily seeks to protect, namely certainty and party autonomy. The Court also clarified the tests that must be applied when a court of the seat has to determine whether to grant anti-suit injunction: (i) whether the foreign proceedings are a breach of the arbitration agreement (under the law of the arbitration agreement); and (ii) if so, whether relief should be granted as a matter of discretion.

  • Governing Law of the Arbitration Agreement:

The decision of the English Court of Appeal in Sulamérica reinforces the point that an arbitration agreement can be embodied within a larger contract, and thatthe arbitration agreement is separate and distinct from the main contract. It is also well established that the law governing the arbitration agreement may not be the same as the main contract law. The determination of the law that governs the arbitration agreement is important because it supervises the arbitration and decides the interpretation, validity, and scope of the agreement. Importantly, the arbitration agreement may be governed by the laws of a jurisdiction different from that governing the performance of the substantive portion of the contract. In this case, what the court had to decide was the relative weight that would be given to the curial law and the main contract law in determining the law governing the arbitration agreement, where they are different.

The Court remarked that it was time to “impose some order and clarity” on this area of law. It laid down certain principles, which would govern the determination of the law governing the arbitration agreement: i) express choice of law ii) implied choice of law iii) the system of law with which the arbitration agreement has its closest and most real connection. 

For the second point, the court referred to approach taken in XL Insurance v. Owens Corning and in C v. D. The court noted that there is no foundation for treating the main contract law as a significant source of guidance for the law governing the arbitration agreement in cases where there is an arbitration clause with a different curial law. This is based on the fact that the principle of separability comes into play here, which implies that the law of the main contract applies to the terms of the main contract and their validity, interpretation and performance, and not to the terms of the separate arbitration agreement and their validity, interpretation and performance. Further, as mentioned in XL Insurance, the court noted that the overlap between the scope of the curial law and that of the law governing the arbitration agreement strongly suggests that they should usually be the same. Toulson J had in that case observed that the scope of the curial law is not limited to the exercise of purely procedural powers; it also determines aspects of the substantive rights of the parties.

In the present case, the Court noted that there was nothing in the agreement that expressly provided that Russian law would be the governing law. In the absence of such countervailing factors, it was deduced that the parties had impliedly chosen English law. As a result, all disputes would be covered by the agreement and the Russian proceedings were, therefore, brought in breach of that.

  • No Other Reason to Reject the Application:

The Court referred to Ust-Kamenogorsk Hydropower Plant JSC v. AES Ust-Kamenogorsk Hydropower Plant LLP, where it was noted that an arbitration agreement contains an independent negative promise not to commence proceedings anywhere in the world. In light of this, Enka’s participation in the Russian proceedings could not be made a ground for denying it relief. Further, Enka sought relief twelve days after the Russian courts accepted the claim and hence, the Court of Appeal held that this did not amount to a delay in obtaining injunctive relief. Therefore, the Court held that there were no other reasons to refuse relief.

Analysis

In Sulamérica, the Court of Appeal had laid down a three-step test to determine the governing law- (i) express choice, (ii) implied choice, or (iii) the law that has the “closest and most real connection”.  What was important here was that there was a presumption that the parties had impliedly chosen the law of the underlying contract to govern the arbitration agreement. The Court of Appeal in Enka reversed the principle of presumption that was laid down in Sulamérica. It based its decision on the separability principle enounced by Section 7 of the Arbitration Act, 1996. The court held that a distinction should be maintained between the arbitration agreement and the underlying contract, when a curial law has been chosen. The reason behind this is that when parties choose to apply a different system of law to the arbitration agreement, it is insulated from the underlying contract.

However, the court’s reliance on Section 7 appears dubious. This is because the wording of Section 7 indicates that it was drafted with an aim to protect the arbitration agreement if the underlying contract was invalidated. Further, the use of the doctrine in a liberal manner to cover parties’ intention to choose a curial law is not supported by the provision.

Conclusion

The biggest achievement of the judgment is that it has clarified the role of the court of the seat on the granting of anti-suit injunctions. This illustrates the courts’ forceful approach towards breaches of arbitration agreements. It also clarifies the law that governs the arbitration agreement. The decision highlights the importance of the seat of arbitration and the law of the contract and the role they play in determining the governing law of the arbitration. This elucidation of the law will significantly reduce time and cost in determining the law governing arbitration agreements which lack any express governing law provisions. Although the judgment is likely to be appealed against before the Supreme Court, it is for the time being a welcome restatement of the law insofar as it simplifies previous authorities and provides certainty. Most importantly, it helps us understand that in order to avoid conflict, the best way is to draft watertight arbitration clauses with express mention of the choice of law.


* Aditi Mozika is a IVth Year student at Gujarat National Law University. She can be contacted via LinkedIn, or emailed at aditimozika@gmail.com


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