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International Arbitration agreements - the Supreme Court has the final say on governing law
- AuthorSinead O'Brien
In the first of a series of posts on domestic and international arbitration Sinead O’Brien in our London based dispute resolution team looks at a recent Supreme Court decision that clarified the court’s approach if governing law is not stated in an arbitration agreement.
What happens if governing law is not expressly stated in an arbitration agreement?
Parties to arbitration agreements are often based in different jurisdictions and therefore questions often arise as to the governing law of a particular arbitration agreement – normally this should be dealt with expressly in an arbitration agreement, but problems can arise if the agreement is silent on this issue. The Supreme Court has recently handed down its long awaited judgment in Enka Insaat Ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant)  UKSC 38, which sets out key principles to assist with determining the question when the governing law has not been stated.
What were the facts in Enka Insaat Ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant)?
In brief, the facts of this case are as follows. A Turkish engineering company, Enka, entered into a sub-contract to carry out construction work at a power plant in Russia. There was an arbitration clause in the contract which provided that any dispute arising from the agreement would be dealt with under the Arbitration Rules of the International Chamber of Commerce, with such arbitration to be seated in London. The governing law of the contract was not specified nor was the governing law of the arbitration agreement specified. Following a fire at the power plant, Chubb, a Russian insurance company, acquired the rights of the owner of the power plant to claim compensation against third parties. Chubb issued proceedings against various contractors, including Enka, in Russia. Enka commenced proceedings in England against Chubb alleging that the proceedings in Russia breached the arbitration agreement and should be stopped.
How will the court determine the governing law in an arbitration agreement?
The key issue therefore centred on how to establish what the governing law of the arbitration agreement actually was, which the Court addressed by way of the following guidance:
- Common law rules should be applied to determine the relevant governing law on arbitration agreements. This is the law expressly or impliedly chosen by the parties to the agreement;
- For the purpose of certainty and consistency, the parties’ agreement on the governing law in the main contract should also be applied to the arbitration agreement itself; and
- In the absence of an express or implied choice, the jurisdiction of law “most closely connected” to the arbitration agreement is to be applied. In general, the default rule will be that the arbitration agreement will be most closely connected with the law of the seat of arbitration.
The Supreme Court ultimately held in this case that English law governed the arbitration agreement as a result of using the “most closely connected” test, noting that the seat of the arbitration was in London.
It is hoped that this ruling will provide further certainty to parties entering into arbitration agreements if their agreements have not addressed the issue of choice of law. However, the judgment also serves as a valuable reminder of the importance of trying to tackle any such uncertainties at the drafting stage when parties are about to enter into their contract. Covering the issue off at the contract stage in the Chubb case could have saved the parties huge expense and uncertainty.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.
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