ENKA INSAAT VE SANAYI A.S. V OOO INSURANCE COMPANY CHUBB: GOVERNING LAW AND JURISDICTION IN ARBITRATION AGREEMENTS BY- VAGISHA GUPTA
Enka Insaat Ve
Sanayi A.S. v OOO Insurance Company Chubb: Governing Law and Jurisdiction in
Arbitration Agreements
AUTHORED BY-
VAGISHA GUPTA
INTRODUCTION
The
case of Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb
addresses the legal principle of determining the governing law for arbitration
agreements, particularly in situations where the law governing the main
contract is unclear or not specified. The core legal issue revolves around
whether the law of the seat of arbitration or the law of the main contract
should apply to the arbitration agreement when there is no express choice of
law. This case is significant as it clarifies the approach English courts take
in resolving conflicts of law in international arbitration, particularly with
respect to the validity of anti-suit injunctions and the enforcement of
arbitration agreements across jurisdictions. The decision has broader
implications for future arbitration disputes, especially in cross-border
contexts, as it upholds the principle that the law most closely connected to
the arbitration agreement typically governs its validity and enforcement.
FACTS
The
claimant, the Turkish engineering firm Enka Insaat Ve Sanayi A.S. (henceforth
referred to as Enka), was a subcontractor in the project involved in the
building of a power plant in Russia. An arbitration agreement was added to
the contract with the Russian head contractor, stipulating that arbitration
procedures in London would be used to settle any problems.
At the power facility, came about a fire that
caused significant damage. The proprietor of the power plant was insured against
these losses by a Russian insurance provider OOO Insurance Company Chubb
(henceforth referred to as Chubb), the appellant. By paying the proprietor's
insurance claim, Chubb took over their rights to pursue reimbursement from
third parties, like Enka, to compensate for the fire's losses.
Next,
in an attempt to recoup the funds that were given out, Chubb initiated
proceedings in Russian courts against Enka and the other subcontractors. Enka
countered in September 2019 by bringing an arbitration claim in the London
commercial court. Enka contended that Chubb had violated the arbitration
agreement by continuing in the Russian court and sought an anti-suit
injunction preventing Chubb from pursuing the Russian claim.
PROCEDURAL HISTORY
The
Commercial Court of England and Wales was the venue for the first proceedings.
The court decided against Enka, holding that Russian courts were the proper
forum to decide whether or not Enka and Chubb had a legitimate arbitration
agreement, and that the court lacked authority to issue an anti-suit
injunction.
Enka,
displeased with the verdict, filed an appeal with the Court of Appeal. In a
remarkable change of events, the Court of Appeal overruled the Commercial
Court's ruling, accepting Enka's appeal and issuing an anti-suit order against
Chubb.
Subsequently,
Chubb appealed this ruling to the UK Supreme Court.
ISSUES
1. What
approach is applicable in determining the best-suited law of an arbitration
agreement?
2.
For the main contract under
Rome I, what importance does the parties' choice of law have?
3.
What’s the role of the seat of
the arbitration in determining if a foreign court’s proceedings breach an
arbitration agreement?
RULES
ROME
I Regulations: The Rome I Regulation (EC/593/2008)
prescribes the rules that must be followed in the courts of EU member states to
identify what law controls a contract.
Article
1(2)(e) of Rome I omits “arbitration
agreements and agreements on the choice of court” from its scope.
Seat
of the Arbitration: The location designated
by the parties as the legal place of arbitration which then sets the
procedural framework of the arbitration.
MAJORITY DECISION
Rather
than using the Rome I Regulation, which omits arbitration agreements from
its purview (A. 1(2)(e)), the English courts relied on common law norms for
resolving conflicts of law when establishing which system of law regulates an
arbitration agreement.
As
per common law, arbitration agreements are governed by:
- The
law chosen by the parties (expressly or impliedly), or
- If
the absence of such a choice, the legal system most closely connected
to the arbitration agreement would govern the agreement.
To
assess whether a governing law has been selected by the parties, the court
explained, that English contract interpretation rules (being the forum of
the dispute) are meant to be utilized to interpret the arbitration agreement
with reference to the main contract.
If
the primary contract has a clear governing law, and the arbitration agreement
does not, the primary contract's choice of law will typically result in that
law being applied to the agreement of arbitration as well. The Supreme Court
found that it would "put the principle of separability of the
arbitration agreement too high" to hold that the arbitration
agreement's choice of law had "little to say" in relation to
the law of primary contract.
It
is not sufficient to refute the assumption that the primary contract's
governing law also governs the arbitration agreement solely because the
arbitration's seat is different from the main contract's governing law.
Certain
factors might indicate that a different governing law should apply to the
arbitration agreement, such as the risk of rendering the arbitration agreement
ineffective if it is governed by the same law as the primary contract (this
follows the validation principle in English Law that says that contracts should
be interpreted in such a way that they are valid rather than ineffective). It
was also explained that this requires consideration of the language used in the
contract, the surrounding context, and the extent to which the arbitration
agreement’s validity and scope might be compromised if governed by that law.
The court relied on the case Sulamérica Cia Nacional de Seguros SA v Enesa
Engenharia SA [2012] EWCA Civ 638
where t was noted that business parties are generally unlikely to choose the
same governing law for both the contract and the arbitration agreement if there
is a "serious risk" that this choice could "significantly
undermine" the arbitration agreement. The other reason would be in case any
clause within the law of the seat that specifies when arbitration is governed
by that law, the arbitration agreement will likewise be considered subject to
that country’s legal framework (For instance, Section 6 of the Arbitration
(Scotland) Act 2010).
Each of the two aforementioned considerations may be strengthened if it is
demonstrated that the seat was purposefully selected as a neutral venue for the
arbitration.
Without
an express choice of law governing the main contract, a provision that provides
a specific place for arbitration will itself not be sufficient to justify an
assumption that the contract or the arbitration agreement is to be governed by
the law of such a place.
If
no clear or implied choice of law is evident, the law most connected to the
arbitration agreement must be determined. When the parties have selected the
arbitration seat, the law most closely tied to the arbitration agreement is
typically the law of the seat, even if it differs from the law governing the
contract itself.
In
the absence of a designated governing law for the arbitration agreement, the
requirement in the contract for parties to attempt dispute resolution through
negotiation, mediation, or other processes before arbitration usually does not
justify replacing the law of the seat as the default governing law for the
arbitration agreement.
In
this matter, as no express or implied governing law was selected for the
contract, the arbitration agreement falls under the law of the arbitration
seat, which is London. Consequently, English law governs the arbitration agreement.
Chubb did not contest the Court of Appeal’s authority to issue an anti-suit
injunction under English law.
The
Supreme Court further affirmed that it is inconsequential whether the
arbitration agreement is governed by English law or foreign law; the critical
consideration is whether a breach of the agreement has occurred and, if so,
whether it is just and convenient to issue an injunction to prevent that
breach. Consequently, the appeal was dismissed.
CONCLUSION
This
case was crucial in clarifying the principles that clarify the governing law of
the arbitration agreement. The governing law would be either (a) the law which
is specified in the agreement to be applied to the contracts or (b) in cases
where the parties have not made such an express choice, the law which has the
closest relation to the arbitration agreement.
The
court further emphasized that if the main contract specifies a governing law, this
law will typically extend to the arbitration agreement as well except if there
is a reason to not do so such as the risk of the arbitration agreement being
rendered ineffective. Without such a choice of law, the arbitration agreement
will generally be covered by the law of the seat of the arbitration which in
this case was the English Law, London being the seat of the arbitration.
DISSENTING OPINION
The
dissenting view expressed by Lord Burrows, with the backing of Lord Sales,
posits that when there is no express or implied choice of law governing the arbitration
agreement, the law of the main contract (in this case, Russian law) should
apply rather than the law of the seat (English law). They contend that the
parties have implicitly selected Russian law for both the main contract and the
arbitration agreement. Lord Burrows maintains that utilizing different laws for
the contract and the arbitration agreement could result in inconsistent and
unjust outcomes. They agree with the majority that the central issue regarding
the issuance of an anti-suit injunction is whether the initiation of foreign
proceedings constitutes a breach of the arbitration agreement, rather than
which legal framework governs the agreement. Having determined that the
arbitration agreement falls under Russian law, they suggest referring the
matter of whether a breach justifies an anti-suit injunction to the Commercial
Court.
CRITICAL ANALYSIS
IN
LINE WITH INTERNATIONAL STANDARDS
The
procedure established in this case is in line with what has been followed in
different jurisdictions. One such example would be in Singapore where in the
case Anupam Mittal v Westbridge Ventures II Investment Holdings,
the Singapore Court of Appeal maintained the three-stage methodology for
determining the law governing an arbitration agreement, which was established
in BCY v. BCZ .
During the second stage of the inquiry, the Singapore court recognized the
validation principle, which states that if the law governing the main contract
invalidates the arbitration agreement, the court will proceed to the third
stage to determine which legal system the arbitration agreement is most closely
related to.
The
controversy in Anupam Mittal emerged as a result of a shareholder agreement
governed by Indian law. However, applying Indian law to the arbitration
agreement would have rendered it invalid, as claims involving tyranny and
mismanagement are not arbitrable in India. As
a result, the court proceeded to the third step, where it decided that
Singapore law was the most closely related to the arbitration agreement since
Singapore was the seat of arbitration. This is in line with the seat-based
approach in Enka Insaat.
THE INDIAN POSITION
The
legal framework surrounding arbitration agreements seems obscure in India when
compared to the consistent rule of the Enka Insaat case. Earlier rulings like
National Thermal Power Corporation v. Singer Company
held that where parties expressly choose the governing law for the contract, in
the absence of any contrary intention, that same law would generally apply to
the arbitration agreement. Where there is no election of governing law, the law
of the seat of arbitration applies. This proposition was confirmed also in
Sumitomo Heavy Industries Ltd v. ONGC
and later in Indtel Technical Services Pvt Ltd v. W.S. Atkins Rail Ltd
which ruled that ordinarily the law governing the main contract is extended to
the arbitration agreement, which usually means Indian law.
However,
Union of India v. Hardy Exploration
cited this position but failed to decisively lay it to rest, resulting in
divergent interpretations by Indian Courts. For example, the Delhi High Court
in Carzonrent India v. Hertz International
and by SC in Sakuma Exports Ltd v. Louis Dreyfus Commodities Suisse SA
have ruled that the law governing the main contract should also apply to the
arbitration agreement.
On
the other hand, in cases such as Katra Holdings Ltd v. Corsair Investments Ltd
and HSBC PI Holdings (Mauritius) Ltd v. Avitel Post Studioz Ltd,
the Bombay High Court maintained that arbitration agreements are independent
and that the law of the seat governs them.
PERSONAL
ANALYSIS
In
my opinion, countries, where the doctrine of separability is well established,
should follow the law most closely connected to the arbitration agreement and
not the main contract unless there are strong reasons to apply another law.
The
doctrine of separability is already well-established in Indian jurisprudence.
For instance, in National Agricultural Co-op Marketing Federation of India
Ltd. v. Gains Trading Ltd.,
the Apex Court ruled that an arbitration clause is separate and apart from
the main contract, which means that it will still be enforceable even in the vent
that the contract is deemed void. The autonomy of the arbitration provision is
maintained by the theory of separability, which guarantees that it is
unaffected by the outcome of the underlying contract.
