Series
Blogs
14 May 2020
In an significant decision (Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors [2020] EWCA Civ 574) the Court of Appeal has examined the approach of the English courts to two important questions. First, whether “appropriate forum” considerations can influence whether to grant an anti-suit injunction when England is the seat of arbitration. Second, how to ascertain the governing law of an arbitration agreement.
Background
The case involved an application by Enka, an engineering firm, for an anti-suit injunction. Enka was a sub-contractor in the construction of a power plant in Russia. It had entered into a contract with the main contractor (the “Contract”); in respect of which the contractor’s rights against Enka were assigned to the plant owner
Later, the plant was seriously damaged by fire and the insurers, Chubb Russia, paid out a large sum to the plant owner. In May 2019, Chubb Russia then commenced subrogation proceedings against Enka in the Russian courts based on Enka’s role in the construction of the plant.
The first instance decision
In response, Enka applied to the English courts for an anti-suit injunction. This was based on Clause 50.1 of the Contract which provided for arbitration under the ICC Rules, with seat in London. The Contract itself did not contain a conventional governing law clause in respect of the Contract as a whole (although common ground this would be Russian law, whether this was by express choice was disputed). Nor was there any express choice of law in respect of the (English seated) arbitration agreement.
At first instance (see here), the judge refused to grant the injunction. This was not, however, on the basis of any decision as to whether the arbitration clause had been breached. Instead, he held that was an anterior step involving an assessment of whether the court was properly seized of the dispute so as to make it appropriate for it to determine such questions (and whether to grant the injunction). On the facts he decided that, despite England being the seat of arbitration, that was not the case here and priority should be given to the Russian courts.
The Court of Appeal - anti-suit injunction
The Court of Appeal held that the judge’s approach was “wrong in principle”. Backed up by a detailed review of the role, and primacy, of the courts of the seat in international arbitration, its view, in short, was that the English courts, when those of the seat of the arbitration, are necessarily an appropriate court to grant an anti-suit injunction - so questions of forum conveniens do not arise (see [2020] EWCA Civ 574 at [42] [43-61]).
Instead, in such a case, the court must (whether it is English, or a foreign law, which applies to the arbitration agreement) simply address two questions; whether the foreign proceedings are a breach of the arbitration agreement and, if so, whether there are strong reasons not to grant the relief [63-64]. It therefore, then fell to the Court of Appeal to determine these questions; starting with the issue of which law applied to the arbitration agreement (as that would inform the scope of the clause).
Governing law of the arbitration agreement
The application of the common law test for this (being (i) is there an express choice of law to govern the arbitration agreement? (ii) if not, is there an implied choice of law? (iii) if not, with what system of law does the arbitration agreement have its closest and most real connection) has been considered in a number of recent English cases (the common law is applicable as this issue is outside the scope of the Rome I Regulation).
The Court of Appeal reviewed these authorities and criticised them as unclear; in particular as to the relative significance to be given to the law applicable to the main contract in determining these matters [68-89]. In an effort to “impose some order and clarity” it stated as follows.
As a starting point, of course, no conceptual difficulties would arise where the parties had expressed a choice of law to govern the arbitration agreement (although the Court noted the variety of circumstances in which such a choice could be located: for example, in the arbitration agreement, in the main governing law clause, or through a process of construction of the contract under its applicable law (see e.g. this case)) as the question would then be answered at the first stage of the test.
Instead, the issue was where no such choice had been made. In those cases, the Court of Appeal’s view was that there should be a general rule that the law of the seat should govern the arbitration agreement as a matter of implied choice, subject only to particular features of a case illustrating powerful reasons otherwise (for example invalidity under that law) [91,104].
Its main reasons for this were two-fold. First, the principle of separability meant that there was no basis for treating the law of the main contract as a guide to the applicable law of an arbitration agreement with a different seat [92-95]. Second, in enforcing the parties’ rights under the arbitration agreement, the courts of the seat will exercise powers under their local law which will overlap with issues determined by the arbitration agreement’s applicable law. Therefore, the Court thought that, as a matter of commercial common sense, parties to would want one law to apply to their “arbitration package” [96-99].
On the facts of this case, the Court then found that there was no express choice of law to govern the Contract, let alone one which extended to the arbitration agreement, and that therefore, given the absence of any contrary factors, English law applied to the clause. That also led to a conclusion that there had been a breach of the clause.
And finally, “strong reasons”
As to whether the injunction should be granted, the Court criticised the judge for being heavily influenced by the earlier view he had taken of the English court’s role. In its view the only ground in the case which might possibly justify refusal of the injunction was the delay by Enka in making its application but, on the facts of the case, it should not be refused [111-119].
Comment and conclusions
On anti-suit injunctions, the Court of Appeal’s assertion of the English courts role (where they are those of the seat) sweeps away the more deferential first instance approach (subject always, of course, to well-known EU Law restraints – whilst they still apply). Consistency is maintained with the common law’s attitude to enforcing exclusive jurisdiction clauses: where the clause applies, only “strong reasons” (not general forum non conveniens considerations) can avoid it.
As to the applicable law of an arbitration clause, the decision is a clear attempt to rationalise and simplify the previous authorities. In particular, in cases where the parties have expressed a choice of foreign law to govern the main contract, and the seat is England, then it may well be that the English courts will now be more inclined to apply English law if the contract is otherwise silent on the law applicable to the arbitration clause (although the case might not invariably be followed: for example, the case did not actually involve a situation where the parties expressly chose the law governing their contract generally, furthermore there will no doubt be future argument over what constitutes “powerful reasons” not to apply the law of the seat).
In this respect, the straightforward answer to avoid these questions remains unchanged. Where England is the seat of arbitration and the governing law of the contract is foreign, parties should consider making an express choice of governing law to cover the arbitration agreement.
When making such a choice aligning it in favour of the law governing the contract may, in reality, carry more attractions than the Court of Appeal seems to appreciate when it assumes (in the context of an absence of choice) that parties would want one law to govern their “arbitration package”
That attitude has clearly come from a starting place of a conceptually pure view of separability; but most commercial parties may not understand this. Instead, their inclination may well be to simply see their relationship as a contract. In which case, it makes sense for contractual aspects of the arbitration agreement (such as its scope, interpretation and formation) to be governed by the law applicable to the rest of the contract. This, in turn, keeps the overall contractual analysis more straightforward and, potentially, helps avoid unforeseen drafting consequences (for example if there are other parts of the contract which in anyway dovetail with the arbitration clause e.g. an ADR provision). Simply put, a choice in favour of the law governing the contract may be a smoother fit with the general process of the contract’s drafting.
In any event, the Court of Appeal acknowledged that there was “nothing conceptually problematic” about a situation in which the law applicable to the arbitration agreement differed from that of the seat; the upshot simply being that when the court exercises powers relating to the jurisdiction of the tribunal, any contractual aspects of that analysis will involve an application of the law applicable to the arbitration agreement.
Click here for the judgment.