On 9 October 2020, the UK Supreme Court finally brought clarity to a question that has been dividing practitioners, courts and commentators alike: in the absence of express choice, which law governs the arbitration agreement where the law of the seat is different from the law governing the main contract?
The long awaited answer in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38 was notably provided within less than a year since the parties first appeared before the Commercial Court, which is a “vivid demonstration of the speed with which the English courts can act when the urgency of a matter requires it”. Our previous article discussed the factual background to this dispute and the Court of Appeal’s decision. In this article, we look briefly at the 3:2 majority decision which, effectively, reached the same conclusion as the Court of Appeal, albeit on different grounds.
The Decision
It is now clear that, in the absence of an express choice, an arbitration agreement will generally be governed by the law of the main contract relevant to the dispute between the parties (expressly or impliedly chosen), even if the law of the seat is different. This inference that the choice of governing law in the main contract is intended to cover the arbitration agreement will only be displaced in limited circumstances. For example, if there is a serious risk that the arbitration agreement would be invalid if it was governed by the law applicable to the main agreement.
In Enka, the seat was agreed to be London, but the parties had not specified the governing law of the main agreement. In these circumstances, the Supreme Court held that the arbitration agreement was governed by the law it was most closely connected with. Generally, but not always, this would be the law of the seat (as was held to be the case in Enka).
Commentary
The Supreme Court decision is welcome and brings a degree of certainty and simplicity. However, it may go against the expectations of commercial parties, who would otherwise expect a single system of law to govern both their disputes and the business relationship generally. It also introduces practical issues related to the admissibility and treatment of pre-contractual negotiations under different legal systems. The decision nevertheless serves as a powerful reminder about the need for clear and specific drafting and the costly dangers of satellite proceedings.
As this was not an unanimous judgment, the debate might still continue among commentators and practitioners on two potential grounds, namely that: (1) an arbitration agreement is most closely connected to the governing law of the main agreement; and (2) even in the absence of choice of law provisions, the presumption should be that the governing law of the main agreement applies to the arbitration agreement.
This judgment is binding, and in order to avoid becoming the centre of any renewed debate, parties should clearly specify and make the distinction (if desired) between the governing law of the arbitration agreement and the governing law of the contract. When doing so, parties should also carefully consider the chosen seat’s attitude towards arbitral autonomy and the powers available to support any arbitral proceedings.
It is therefore important to seek advice at an early stage before finalising the wording of any proposed arbitration agreement. Please contact Jenny Lau or Mariya Lazarova if you would like more information.
*This article is not intended to give any legal advice or to give rise to client-solicitor relationship. It has been prepared for information purposes only. If you require legal assistance in the field of arbitration and/or litigation, please contact iLaw’s Head of Arbitration, Jenny Lau at jenny.lau@ilaw.co.uk
