Enka v Chubb Revisited: The UK Supreme Court settles the proper approach to the law governing an arbitration agreement

This Judgment is an essential read for arbitration practitioners and provides vital guidance on what happens when there is no clear choice of law in an arbitration agreement. Enka also acts as a stark warning against unclear or ill-considered arbitration clauses.

The Supreme Court’s Judgment

The Supreme Court upheld the decision of the Court of Appeal (although on different grounds) and decided Chubb was in breach of the arbitration agreement (a brief background of the case and procedural history can be found in our article here).

The Supreme Court held that, where the parties have chosen the governing law of the contract but have not chosen the governing law of the arbitration agreement, the law of the arbitration agreement will be the same as the law of the contract unless there is a good reason to depart from this principle. The Supreme Court identified two exceptions to this:

1. Contracts where applying the principle would mean that there is a significant risk that the arbitration agreement would be ineffective; and
   
   
2. Any law of the arbitration seat which indicates that the arbitration will also be treated as governed by that country’s law. The Supreme Court gave the example of section 6 of the Arbitration (Scotland) Act 2010. This states that, where an arbitration agreement provides that the arbitration shall be seated in Scotland but does not specify the law that governs the arbitration agreement, then the arbitration agreement is to be governed by Scots law (unless the parties agree otherwise). 

Where there is no express choice of governing law for the contract, the governing law of the arbitration agreement will be the system of law which the arbitration agreement is most closely connected to. In many cases (but not always) the arbitration agreement will be most closely connected to the law of the seat of the arbitration. Interestingly, the Supreme Court found that the Court of Appeal was wrong to hold that an arbitration agreement will usually be governed by the law of the seat.

In Enka, there was no express choice of governing law for the contract and, therefore the law that the arbitration agreement was most closely connected to was the law of the seat (London), which was English law. This was because London was the place where – legally, if not physically – the arbitration agreement was to be performed. The Supreme Court said this supported the reasonable expectation of the parties who specified the location of the arbitration proceedings. It also echoes international law (such as the New York Convention) and encourages legal certainty.

What is the impact of this Judgment?

Enka should act as a warning shot to contractual parties as it makes clear that arbitration clauses can no longer be an afterthought. The parties should carefully consider the governing law of the contract and the law of the arbitration agreement and make express provision for both – taking care when drafting these clauses. If not, be prepared to waste considerable time and costs dealing with unnecessary satellite litigation!

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