Global Vantage: UKSC's Recent Impact on International Contracts

October 2020

Antony Smith and Kevin Henderson

The UK Supreme Court published their decision in the case of Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 on Friday, 9 October 2020. The decision will undoubtedly influence drafting decisions on international contracts going forward, and cause parties to live contracts to pause and consider their next steps.

This judgment also provides guidance to the English Courts in determining the governing law of an arbitration agreement in the absence of an express clause. It also clarifies the Court’s authority in granting anti-suit relief in relation to arbitration clauses with a designated seat in England.

Background

A Russian power plant was severely damaged by fire in early 2016. The appellant (Chubb) was the insurer to the owner of the power plant. The respondent (Enka), a Turkish engineering company, was one of contractors. Enka’s contract for the project contained an arbitration agreement as the dispute resolution mechanism with the arbitration seat in London. There was no governing law clause, but there were several references to Russian laws and regulations. Following the payout under the insurance policy for the power plant fire, Chubb, exercising its subrogation rights, sought to recoup some of its losses by pursuing Enka for damage caused by the fire.

In spring 2019, Chubb brought a claim in the Russian courts against Enka. Enka responded by filing a claim in the High Court in London, claiming that by issuing the claim in the Russian court, Chubb had breached the arbitration agreement in the contract. Enka therefore sought an anti-suit injunction to prevent the claim from proceeding in the Russian courts. The High Court rejected Enka’s claim, stating that the Russian courts had jurisdiction to determine the scope of the arbitration agreement. The Court of Appeal overturned this decision. It held that unless there is an express governing law for the arbitration agreement, the general rule should be that the arbitration agreement is governed by the law of the seat as a matter of implied choice. As there was no governing law clause in the contract the arbitration agreement was therefore governed by English law and it was therefore appropriate to grant an anti-suit injunction against Chubb in bringing the claim in Russia. Chubb appealed to the UK Supreme Court.

Supreme Court Judgment

By a 3-2 majority, the UKSC dismissed Chubb’s appeal and held that English law governed the arbitration agreement. However, their reasoning differed from that of the Court of Appeal.

The UKSC rejected the Court of Appeal’s reasoning that an arbitration agreement will be governed by the law of the seat and instead held that an arbitration agreement will typically be governed by the law chosen to govern the main contract. Despite the contract containing references to Russian laws and regulations, the majority decided that on proper construction of the contract the parties had not made an express or implied choice of Russian law as the governing law. Russian law was therefore inferred as the governing law of the contract by virtue of the default rules in Article 4 of the Rome 1 Regulation.
However, as the Rome 1 Regulation contains an express exclusion of arbitration agreements from the scope of its rules, the Court was required to apply the English common law rules of determining the governing law of the arbitration agreement. The law of the arbitration agreement would therefore be determined by the law chosen by the parties, or in the absence of such choice, the law that is the “closest and most real connection” with the arbitration agreement. As the majority held that no such choice had been made by the parties, the most closely connected law in this instance would be English law due to the location of the arbitration seat.

In determining that the arbitration agreement was governed by English Law, the majority also held that it was appropriate for the Court of Appeal to grant the anti-suit injunction to restrain the claim from proceeding in Russian courts. However, the UKSC unanimously agreed that the principles governing the English Courts’ authority to grant an anti-suit injunction in support of an arbitration agreement with an English seat do not differ according to whether an arbitration agreement is governed by English law or foreign law.
A useful summary of the governing law principles from the majority ruling can be found at paragraph 170 of the judgment.

Lessons for International Contracts

Arbitration is a popular dispute resolution mechanism in construction contracts, especially where project parties are not all based in the same jurisdiction. This is only likely to increase leading up to and following Brexit for UK domestic projects with parties based in the EU or where UK companies are bidding for projects within the EU. There are two key reasons for this:

There are concerns about the enforceability of UK court judgments in EU jurisdictions following Brexit as we have not received clear guidance on what instruments addressing enforcement in the EU will be in place on the leave date. However, an arbitration award will be enforced in the EU as all EU countries are signatories to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards – known as the “New York Convention”; and
Many businesses have taken a commercial view that it is better for disputes arising from their international contracts to be resolved in a “neutral” zone. For example, a Spanish contractor engaging a UK consultant for a project in France may wish for French law to govern the contract, being the law most relevant to the immediate site, but have an arbitration agreement with the seat in Geneva. Alternatively, EU employers and suppliers may demand their local laws apply, but are ready to accept that London is a leading destination for arbitration, given the infrastructure, range of available specialist expertise and excellent reputation for commercially reasoned judgments readily available.

The case of Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb is therefore a clear reminder to those drafting and managing international contracts. It is not enough to anticipate that holes in contractual drafting will be interpreted in line with both parties’ commercial intentions. It is highly unlikely that when drafting the arbitration agreement in Enka’s contract, the employer anticipated English law would govern that particular clause in the absence of anything expressly to the contrary.

We therefore recommend that all parties consider their live and upcoming international contracts to ensure that in the event arbitration is the chosen dispute resolution mechanism, the agreement is properly set out to identify the seat and applicable rules. Furthermore, the parties should ensure these contracts have an express governing law clause that will apply to all matters arising from or relating to the contract.