Majority Ruling of UK Supreme Court Sheds Light on Questions Concerning Law of Arbitration Agreements

In arbitration proceedings, the question as to which law governs the arbitration agreement when the agreement itself is silent on the issue has been the subject of a long standing debate. A recent judgment of the UK Supreme Court has fortunately provided some clarity on this issue.

In the case of Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, the Supreme Court held (by a majority decision of 3-2) that where the law of the seat had the closest and most real connection with the arbitration agreement, the law of the seat rather than the governing law of the main contract, would apply to the arbitration agreement.

The background to this case is that the Appellant, Chubb, had submitted that the arbitration agreement should be governed by Russian law, which was consistent with the governing law of the underlying contract. In this case, the arbitration agreement provided for an arbitration seated in London under the rules of the International Chamber of Commerce. The Respondent, Enka, disagreed, arguing that the applicable law for the arbitration agreement ought to be English law, consistent with where the arbitration was seated.

Supreme Court's Decision

The majority of the Supreme Court ruled that although it agreed with the Appellant that in most cases the law of the main contract ought to also be the law of the arbitration agreement, based on the facts applicable to this case, the relevant law was the law of the seat, i.e. English law. This was because in their view, a proper construction of the contract did not show either an express or implied choice of Russian law. In contrast, in line with Article 4 of the Rome I Regulation, the arbitration agreement had a much closer connection with the seat, meaning that English law should apply.

On the other hand, the minority of the Supreme Court agreed with the Appellant that since the law of the main contract had clearly been selected to be Russian law, and the surrounding facts of the case (which involved a power plant construction project in Russia) also involved a close connection with Russia, then the law of the arbitration agreement should therefore follow suit. The minority further argued that there should not be a general rule that if there is no choice of law provision in the main contract, the law of the seat will apply. This is because in commercial matters, parties would generally expect the law of the arbitration agreement to mirror the governing law of the main contract.

Relevance of Decision

Although the Supreme Court judgment constitutes a binding decision, the fact that it was not unanimous suggests that there may be ongoing debate as to whether it reflects the right one. It should also be recognised that the decision of the Supreme Court was understandably influenced by the particular facts of the case. In other words, it should not necessarily be construed to mean that the seat of the arbitration will always dictate the law of the arbitration agreement, where the latter is silent.

The decision could well be relevant in the Cayman Islands which presently lacks a designated arbitration institution, the consequence of which being that many Cayman arbitrations are seated abroad. The decision also serves as a helpful reminder for parties who are contemplating using arbitration as a dispute resolution mechanism that it is preferable to expressly state what the law of the arbitration agreement is so as to avoid any ambiguities in this regard and to hopefully reduce the risk of potentially lengthy and costly jurisdiction challenges before the resolution of the main dispute even occurs.

CAYMAN ISLANDS
Nick DunnePartnerT +1 345 814 4548nick.dunne@walkersglobal.com
Andrew GibsonSenior CounselT +1 345 814 4573andrew.gibson@walkersglobal.com

HONG KONG
Xia LiSenior AssociateT +852 2596 3431xia.li@walkersglobal.com