Certainty for commercial parties

Introduction

After a hearing held virtually due to the COVID-19 pandemic, the Court of Appeal (CoA) in Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors¹ granted the Claimant (Enka), a Turkish construction company, an anti-suit injunction restraining an entity within the Chubb insurance group from continuing Russian court proceedings which the CoA ruled it had brought in breach of an arbitration agreement specifying London as the seat.

In its judgment, the CoA has provided welcome clarity regarding the approach to be taken when determining the proper law of arbitration agreements and the role of the court of the seat in granting anti-suit injunctions.

Key principles

The CoA’s judgment must be viewed in the context of the following key principles of English arbitration law:

• Separability of arbitration agreements: arbitration clauses are treated as independent contracts, separate from the wider contract in which it they sit. The doctrine of separability ensures that issues relating to the validity or existence of the main contract will not prevent an otherwise valid arbitration agreement from taking effect, thereby strengthening the status of arbitration as an efficient method of dispute resolution.
• Law of the arbitration agreement: in order to determine jurisdictional and other questions arising in relation to the arbitration agreement, it may be necessary to determine the law which applies to it (as distinct from the governing law of the main contract). Prior to the CoA’s decision in the instant case, English conflict of laws rules set out a three-stage test (often referred to as the Sulamerica test) to determine the law of the arbitration agreement:²
  • Is there an express choice of law?
  • If not, is there an implied choice of law?
  • If not, with what system of law does the arbitration agreement have its closest and most real connection?
• Anti-suit injunctions: the English court may in appropriate circumstances grant an anti-suit injunction restraining the pursuance of foreign court proceedings that have been brought in breach of an arbitration agreement. Although the scope of this power depends on the foreign jurisdictions involved (with national courts in EU member states thought to be prevented from granting such anti-suit injunctions restraining proceedings in another member state following a 2008 decision of the European Court of Justice),³ the English court will generally grant anti-suit relief where foreign court proceedings have been or may be brought in breach of binding arbitration agreement or if the foreign proceedings are vexatious or oppressive. Since an injunction is an equitable remedy, the court will only exercise its discretion to grant one in the absence of good reasons against doing so (such as that undue delay on the part of the party seeking the injunction).

The facts

The dispute arose after a massive fire erupted at the Berezovskaya power plant in Russia in February 2016. Enka had been engaged as a subcontractor in the construction of the plant in June 2012. The relevant contract contained an agreement to resolve all disputes by ICC arbitration seated in London. Although it later became common ground that Russian law governed the contract, there was no express choice of governing law (apart from for certain specified clauses). Notably in the context of the dispute which arose, the contract did not specify the governing law of the arbitration agreement.

Following the fire, the First Defendant (Chubb Russia), as insurer, paid out c. USD400 million to the owner of the plant as compensation for the damage caused. By doing so, it became subrogated to any rights the owner had against Enka or others in respect of liability for the fire. In September 2019, Chubb Russia commenced proceedings against Enka and ten other parties in the Moscow Arbitrazh Court in which it sought to recover the amount it had paid out. Later that month, Enka sought an anti-suit injunction from the Commercial Court in London to prevent Chubb Russia from pursuing the Russian proceedings on the basis that they violated the arbitration agreement (which Enka argued was governed by English law). Chubb resisted on the primary ground that the arbitration agreement (and the contract as a whole) was governed by Russian law, pursuant to which the Russian proceedings (characterised as tortious in nature) fell outside the scope of the agreement.

There was no dispute that, on Fiona Trust principles,⁴ if the arbitration agreement was in fact governed by English law, the Russian proceedings fell within its scope and, in accordance with the principles set out in The “Angelic Grace”,⁵ an anti-suit injunction should be granted unless there was a strong reason against doing so.

The Commercial Court decision

In December 2019, the Commercial Court Judge declined to determine the proper law of the arbitration agreement and dismissed Enka’s claim for an anti-suit injunction on the basis that England was not the appropriate forum to decide that claim.

The Court held that in the absence of a constituted arbitral tribunal with jurisdiction over the present case, all questions regarding the scope of the arbitration agreement (including the question of its proper governing law, which the Judge provisionally indicated he regarded as being Russian) were more appropriately to be determined by the Moscow Arbitrazh Court already seised in the Russian proceedings. Moreover, the Judge held that even if he had jurisdiction to do so, he would not have exercised his discretion to grant anti-suit relief in any event because of Enka’s delay, its failure to commence arbitration and its participation in the Russian proceedings.

The CoA decision

The CoA (Popplewell LJ, with whom Flaux and Males LJJ agreed) held that the approach of the Judge below was wrong as a matter of principle and granted Enka an anti-suit injunction, as well as its costs of the appeal and below on the indemnity basis.

Appropriate forum

The CoA held that as the court of the seat of the arbitration, the English court was necessarily an appropriate court to grant anti-suit relief. That conclusion followed from two essential principles reinforced by the CoA in its judgment:

• First, the choice of the seat of the arbitration is an agreement by the parties to submit to the jurisdiction of the courts of that seat in respect of the exercise of such powers as the choice of seat confers.
• Secondly, the grant of an anti-suit injunction to restrain a breach or threatened breach of the arbitration agreement is an exercise of such powers.

In developing these points, the CoA reviewed prior authorities, highlighting that both principles were articulated in the West Tankers case⁶ and emphasising the role of the court of the seat as the “primary arbiter” in determining the substantive jurisdiction of an arbitral tribunal (including whether to grant anti-suit relief to protect that jurisdiction). In playing that role, the court gives effect to the parties’ agreement to arbitrate and their deliberate submission to the law of the seat and whatever control it exerts, thereby promoting certainty.

Accordingly, the Judge was wrong to decline to determine the question of whether the Russian proceedings breached the arbitration agreement.

Governing law of the arbitration agreement

In order to establish whether the arbitration agreement had been breached, it was necessary to determine the law which governed the arbitration agreement. To resolve that issue, the CoA considered the relative weight to be given to the law of the seat (i.e. English law) where it is different from that of the main contract (which it was common ground was Russian law). In this regard, the CoA noted that the “rather unsatisfactory state of the law […] does no credit to English commercial law which seeks to serve the business community by providing certainty” and stated that “the time has come to seek to impose some order and clarity on this area of the law”.

In his judgment, Popplewell LJ embarked upon a comprehensive review of the relevant authorities, endorsing the three-stage Sulamerica test (set out above) and clarifying the correct approach to it in light of the inconsistent way it has been applied by judges in the past, in particular when addressing the often overlapping second and third questions.

Where there is an express choice of law for the main contract, the question of whether that choice also applies to the law of the separate arbitration agreement will be determined by interpreting the whole contract (including the arbitration agreement) using applicable principles of contractual construction.⁷ The judge indicated that in some rare cases where there is an express choice of law for the main contract, the language and circumstances of the case may dictate that such choice also constitutes an express choice of the law of the arbitration clause. In all other cases, the general rule is that, as a matter of implied choice and subject to any particular features of the case demonstrating powerful reasons to the contrary, the law of the arbitration agreement will be the law of the seat.

The CoA pointed to a number of considerations supporting its conclusion, emphasising in particular that there is no principled basis for treating the main contract law as a significant source of guidance for the law of the legally separate arbitration agreement where the law of the seat is different. On the contrary, the overlap between the scope of the law of the seat and that of the arbitration agreement strongly suggests that they should usually be the same. As a matter of commercial common sense, it is unlikely that contracting parties would have intended that the court of the seat should apply two different systems of law.

Applying these principles, the CoA found that, even though the main contract was governed by Russian law (albeit not by express choice), the arbitration agreement was governed by English law and that, as was common ground between the parties, the Russian proceedings therefore violated the arbitration agreement.

Discretion

In those circumstances, the CoA finally considered whether to exercise its discretion to grant the anti-suit injunction sought by Enka. Finding that the approach of the judge below was flawed in principle, the CoA held that the only ground that might have justified a refusal to grant relief was delay by Enka and its effect on the Russian proceedings, but there was no culpable delay by Enka. This was a “classic case” in which the court should grant an anti-suit injunction and the CoA did so, restraining Chubb Russia from pursuing its appeal rights in the Russian proceedings.

Conclusions

In what may well become the leading authority on what was previously an uncertain area of law, the CoA’s clarification of the applicable test when determining the law of the arbitration agreement will come as a welcome development for participants in English-seated arbitrations, who (subject to any appeal to the Supreme Court) can now rely on the following clear principles:

• The three-stage Sulamerica test (set out above) should be applied to determine the law of the arbitration agreement.
• Where there is an express choice of law in the main contract, it may amount to an express choice of the law of the arbitration agreement. Whether it does so will be a matter of construction of the whole contract, including the arbitration agreement, applying the principles of construction of the main contract law if different from English law.
• In all other cases, there is a strong presumption that the parties have impliedly chosen the law of the seat as the law of the arbitration agreement. This is the general rule, but may yield to another system of law governing the arbitration agreement where there are powerful countervailing factors in the relationship between the parties or the circumstances of the case.

Nevertheless, so as to minimise the risk of costly and time-consuming satellite disputes, it remains best practice for parties at the drafting stage to make a clear and express choice of law in relation to not only the main contract but also the arbitration agreement.

In addition, the CoA’s judgment provides an important reminder of the primacy under English law of the court of the seat in determining the jurisdiction of arbitral tribunals and reinforces the status of England and Wales as a robust, pro-arbitration jurisdiction and one that is not afraid to grant anti-suit relief in respect of foreign proceedings where appropriate.

¹ Enka Insaat Ve Sanayi AS v OOO "Insurance Company Chubb" & Ors [2020] EWCA Civ 574
² Sulamerica Cia Nacional de Seguros SA v Enesa Engelharia SA [2013] 1 WLR 102 per Moore-Bick LJ at [9] and [26]
³ Allianz SpA v West Tankers Inc (Case C-185/07)
⁴ In Fiona Trust & Holding Coropation v Privalov & Ors [2007] EWCA Civ 20, the Court of Appeal took a robust, pragmatic approach to the interpretation of arbitration clauses, starting from the presumption that the parties would have intended all of their disputes to be resolved via a single process, the so-called “one-stop shop”.
⁵ In Angeliki Charis Compania Maritima SA v Pagnan Spa (The "Angelic Grace") [1995] 1 Lloyd's Rep 87, the Court of Appeal held that the court should feel no diffidence in granting anti-suit relief so long as it is sought promptly and before the foreign court proceedings are too far advanced.
⁶ West Tankers Inc. v RAS Reiunione Adriatica di Sicurta SpA (The "Front Comor") [2007] 1 Lloyd's Rep 391
⁷ Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] 1 Lloyd's rep 269