Governing Law and Arbitration Agreements

Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb

14 October 2020

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A decision of the Supreme Court, the final court of appeal for civil cases in the United Kingdom, has clarified how the governing law of an arbitration agreement is to be determined when the law applicable to the contract containing it differs from the law of the “seat” of the arbitration.

Background

The case arose out a fire at a power plant in Russia. Chubb had insured the owner of the power plant against such damage.

The owner had engaged a contractor to carry out construction works at the power plant. In turn, the contractor engaged Enka, a Turkish engineering company, as a subcontractor.

The contract made between the contractor and Enka (the Subcontract) included an agreement that disputes would be determined through arbitration proceedings in London. In May 2014, the contractor transferred its rights and obligations under the Subcontract to the owner. After the fire in February 2016, Chubb paid an insurance claim by the owner and, by doing so, assumed any rights of the owner to claim compensation from third parties, including Enka, for damage caused by the fire.

In May 2019, Chubb brought a claim against Enka in Russia. In response, in September 2019 Enka brought an arbitration claim in the High Court in London arguing that, by proceeding in the Russian court, Chubb was in breach of the arbitration agreement. Enka sought an order restraining Chubb from pursuing the claim in Russia.

The Supreme Court was tasked with determining:

  • Whether the arbitration agreement was governed by Russian law, on the basis that the law applicable to the Subcontract was the law of Russia; or
  • In the absence of an express choice of the law that was to govern the arbitration agreement, the arbitration agreement was governed by the law of the seat, and that the arbitration agreement was therefore governed by English law.

Arbitration

Arbitration is a process for resolving disputes and an alternative to court proceedings.

Rather than have a Judge decide the dispute, an arbitrator or panel of arbitrators is appointed by the parties to make a binding decision that is subject to challenge only in very limited circumstances. Unlike court proceedings, arbitration hearings are private.

Most agreements to arbitrate are clauses within contracts between parties, rather than standalone agreements.

Several of the standard forms of construction contract commonly used in Great Britain and Northern Ireland include provisions on arbitration as an alternative to court litigation, with the parties opting for one or the other as the mechanism for final resolution of disputes.

The NEC4 Engineering and Construction contract, for example, allow parties to select arbitration as the "tribunal" for final resolution of disputes. If arbitration is selected, the Contract Data allows for parties to enter the arbitration procedure (i.e. the agreed rules that will govern the conduct of the arbitration), the method of choosing the arbitrator and the place where the arbitration will be held.

The “seat” of an arbitration is the place where the arbitration well be held.

Decision

In a split decision, the majority in the Supreme Court confirmed that the law applicable to an arbitration agreement will be:

  1. The law expressly or impliedly chosen by the parties; or
  2. In the absence of such choice, the law “most closely connected” to the arbitration agreement.

The majority in the Supreme Court decided that the Subcontract contained no choice of the law that was intended to govern the Subcontract or the arbitration agreement within it. It therefore fell to the Court to determine the law with which the arbitration agreement was most closely connected.

The validity and scope of the arbitration agreement was governed by the law of the chosen seat of arbitration, as the law with which the dispute resolution clause is most closely connected. The seat of the arbitration was London. Therefore, English law governed the arbitration agreement.

Carson McDowell view

Parties to a construction contract (or other form of contract) should carefully consider which is the most appropriate forum for final resolution of disputes. Particularly on international contracts, parties should also consider the choice of law that ought to govern not just the contract but any arbitration agreement within it.

Any party tasked with completing Contract Data in an NEC4 Engineering and Construction Contract should note that the entries made may impact on the law that will govern any arbitration agreement within the contract. A similar consideration will also apply to completion of the Contract Particulars in a JCT contract.

One of the most striking features of the case was that the trial, the appeal to the Court of Appeal and the appeal to the Supreme Court were all heard in just over seven months. In the midst of the global pandemic, that is a strong endorsement of the speed with which courts can act in urgent cases.

If you have any queries the Litigation and Dispute Resolution team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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