Last month the UK Supreme Court released its judgment in the case of Chubb v Enka[1], a decision which has made waves in the arbitration community. The Supreme Court clarified the English law approach to determining which law governs issues of validity and scope of an arbitration agreement found in a wider contract.
Relevance of the law applicable to an arbitration agreement
Knowing what law is applicable to the arbitration agreement is critical when establishing whether there is an agreement to refer a particular matter to arbitration and whether that agreement is lawful. The applicable law governs issues such as whether the claims fall within the arbitration agreement, whether the arbitral tribunal has jurisdiction over the parties and if the courts must refer to the parties to arbitration and make orders to that effect.
National laws adopt different criteria for the validity and scope of an arbitration agreement and there is currently no harmonization. Because the outcome could be different depending on the law which applies it is important to determine which law applies.
The English law approach
Under English common law rules the law applicable to the arbitration agreement is (like any contract) governed by: (i) the law expressly or impliedly chosen by the parties; or (ii) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected. The English court will use its normal rules of contractual interpretation to determine whether the parties have chosen a particular law.
The Enka v Chubb case has given the Supreme Court the opportunity to clarify certain principles when applying the common law test. The key part of the judgment is confirmation that where the arbitration agreement does not specify the law applicable to it, but sits in a wider contract which includes a choice of law clause, that choice will ordinarily be taken as extending to the arbitration agreement. This is a surprisingly common scenario, as parties commonly agree a contract (for example for the sale of goods) with an express choice of law (e.g. English law) and then insert an arbitration clause into the contract, forgetting that the arbitration clause is a separate agreement to the contract that it sits within.
In Enka, the Supreme Court confirmed that the inquiry should stop at the contractual choice of law clause unless there are compelling reasons not to apply the law governing the rest of the contract. An example where the court might not apply the law of the contract would be if there is a serious risk that the law of the main contract would invalidate the arbitration agreement.
Where there is no choice of law provision under the arbitration agreement and no choice can otherwise be taken as having been made by the parties (e.g. the wider contract is also missing a choice of law) the law applicable to the arbitration agreement will be that to which the arbitration agreement is most closely connected. In practice, the Supreme Court suggests that will in most cases be the law of the place of arbitration as chosen in the arbitration clause.
Commentary
The Supreme Court’s main input is the presumption that where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract. Among the reasons underlying the ruling is that it is natural for businesspersons to assume that where an arbitration agreement forms part of a commercial contract a choice of law in the contract containing the arbitration agreement will also apply to the arbitration agreement. The ruling thus reconciles the law with the expectations of commercial parties and should be welcomed for adding greater certainty.
Is the English law approach relevant to your business?
The ruling is relevant for you if your contracts have a close connection to England, include an arbitration clause with a seat in England and Wales, a choice of law clause for English law, or if you have an arbitral tribunal that is predominantly common law trained or educated. Any one of these circumstances may lead an arbitral tribunal or a court to apply the English law approach to determining the proper law of an arbitration agreement.
The decision will be also the precedent which English courts will apply when asked to enforce an arbitration agreement (e.g. to suspend court proceedings commenced in the UK or overseas), or grant interim relief.
For more information or any question about the above please, please contact Caroline Croft or your usual contact in our IDR team.
[1] Enka Insaat Ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38.
