27 October 2020
Client Alert | UK | Dispute Resolution
On 9 October 2020, the UK Supreme Court handed down a landmark judgment in the case of Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb  UKSC 38. The decision settles the rules to be applied to determine the governing law of an arbitration agreement in the absence of an express choice by the parties.
The Supreme Court referred to "proliferating" English law cases on this question "which do not speak with one voice". The crucial issue was the "relative significance to be attached to the main contract law on the one hand, and the curial law", the law of the seat of arbitration, on the other.
The law governing the arbitration agreement is important. It affects, among other things, the possibility of extending the arbitration clause to third parties, something which is more likely to be possible, for example, under French law than under English law, as is demonstrated by another interesting case working its way through the courts on both sides of the Channel (Kebab-Ji (Lebanon) v Kout Foods Group (Kuwait)  EWCA Civ 6 and CA Paris, 23 June 2020, No. 17/22943).
Two general rules emerge from the Supreme Court's judgment in Enka:
1. Where the parties have agreed on a law to govern the contract, but have not made a specific choice of law to govern an arbitration clause contained in that contract, the natural conclusion will be that the law chosen to govern the main contract will also apply to the arbitration clause, in the absence of good reasons to the contrary; and
2. On the other hand, if the parties have not made a choice of law for the contract, the arbitration agreement will generally be governed by the law of the seat of the arbitration, as the system of law with which the arbitration agreement has its closest connection.
The greater certainty afforded by the rules set out in this judgment is likely to come as somewhat of a relief to commercial parties. The Court of Appeal had decided that while an express choice of the main contract law may sometimes amount to an express choice of law governing the arbitration agreement, in all other cases "there is a strong presumption that the parties have impliedly chosen the curial law" (the law of the seat) as the law of the arbitration agreement. This approach, which was not always simple to apply, risked giving rise to complications in existing contractual relationships where, as is very often the case, the law governing the contract is different from the law of the seat of arbitration.
Under the Court of Appeal's decision, the governing law of the arbitration agreement would generally be the law of the seat (subject to the construction of any governing law clause in the contract as a whole). Under the decision of the Supreme Court, the arbitration agreement is usually governed by the same law as the main contract.
As noted by the Supreme Court, commercial parties negotiating a contract may well not give much thought to the doctrine of the separability of the arbitration clause, and are likely to assume that if they choose a law to apply to the contract, it will govern all of the parties' rights and obligations under the contract, including the agreement to arbitrate.
Parties who have specified a governing law of the main contract on the assumption that it will apply to the arbitration agreement can therefore be assured that their assumption will generally be respected.
It should be noted, however, that the Supreme Court referred to two situations in which this assumption may not hold true:
On a practical level, the clearly worded judgment of the Supreme Court means that it is unlikely to be necessary to revise an existing contract which contains a governing law clause for the contract as a whole, if the parties are happy for this choice of law to apply to the arbitration agreement. The two exceptions outlined above are only likely to come into play in limited circumstances.
However, it remains true that parties considering including an arbitration clause in their contract would be well advised to consider which law they wish to govern that arbitration agreement and whether or not their choice of the seat of the arbitration will have an impact on their expectation.
Parties who wish the arbitration agreement to be governed by the same law as the contract can mitigate any potential uncertainties in the future by including wording in standard governing law clauses along the following lines:
"This Agreement, including the arbitration agreement in Clause [__], will be governed by the law of [__]."
Parties who wish the arbitration agreement to be governed by another law (e.g. the law of the seat) should make an express choice of law in the arbitration clause itself.
Where a contract does not contain a governing law clause at all, an English court will now hold that, absent unusual circumstances, an arbitration agreement in such a contract which provides for a seat in a particular country will be governed by the law of that country, even if the contract as a whole is more closely connected with another system of law.
In Enka, there being no express choice of law, the court found that the contract itself was most closely connected with Russia and therefore governed by Russian law. However, since London had been chosen as the seat of arbitration, the arbitration agreement (only) was governed by English law.
Of course, much litigation could have been avoided by considering the question of the governing law of the arbitration agreement at the time of signing the contract.
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Gide's International Arbitration practice group is available to answer any questions you may have in this respect. You may also get in touch with your usual contact at the firm.
This legal update is not intended to be and should not be construed as providing legal advice. The addressee is solely liable for any use of the information contained herein and the Law Firm shall not be held responsible for any damages, direct, indirect or otherwise, arising from the use of the information by the addressee.