[Satyajit Bose is a III year BA LLB (Hons) student at the National Law School of India University, Bengaluru]
On 29 April 2020, the English Court of Appeal delivered its judgement in Enka Insaat ve Sanayi S.A. v. OOO “Insurance Co Chubb”. In a landmark decision, the Court held that in the absence of an express choice of governing law, it ought to be presumed that the parties had implicitly chosen the law of the seat as the proper law of the arbitration agreement. This judgement has significant implications for Indian law as the Court explicitly overruled its decision in Sulamérica Cia Nacional de Seguros SA v. Enesa Engenharia SA, which is analogous to the position adopted by the Indian Supreme Court in National Thermal Power Corporation v. Singer Company.
In this case, the dispute pertained to an insurance agreement governed by Russian Law. The contract contained an arbitration clause, with London as the ‘place’ (which the Court interpreted to mean ‘seat’) of the arbitration. In 2019, Chubb Russia filed a tort claim against Enka before the Moscow Arbitrazh Court, seeking damages for insurance losses suffered due to a fire. In response, Enka appeared before the English Courts seeking an anti-suit injunction restraining Chubb Russia from continuing proceedings before the Moscow Court, which were allegedly in breach of a valid arbitration agreement. The application for injunctive relief was rejected by the English High Court, against which Enka preferred an appeal. Before the Court of Appeal, Enka argued that the proper law of the arbitration agreement was English Law, which does not differentiate between contractual and tortious claims in determining the scope of the arbitration agreement. In contrast, Chubb Russia argued that Russian Law governed the arbitration agreement, which follows a narrow interpretation of such clauses, which meant that the tort claim was not covered by the arbitration agreement. This post examines the decision in Enka v. Chubb, and argues that the Court erred in laying down a presumption in favour of the law of the seat.
Reviewing the Existing Governing Law Framework
In determining the proper law of the arbitration agreement, English courts have traditionally followed a three-stage approach. This inquiry proceeds by analysing whether the parties have made an express (step one) or implied choice (step two). If no express or implied choice can be discerned, the law with the closest and most real connection is applicable (step three). In Sulamérica, the Court of Appeal held that in the absence of an express choice, it should be presumed that the parties had implicitly chosen the law of the underlying contract to govern the arbitration agreement (previously addressed here and here). This was because commercial parties would usually intend for the same system of law to govern both the substantive contract and the arbitration agreement. However, this presumption was rebuttable – it may be displaced if there are other factors that point to the contrary. For example, in Sulamérica, the choice of a foreign seat and the invalidation of the arbitration agreement under the law of the substantive contract were sufficient to displace this presumption. Eventually, the Court applied the law of the seat as the law with the closest and most real connection under step three of the three-stage test.
Scope of the Separability Principle
The first reason provided by the Court to reverse the aforementioned presumption is the separability principle, enshrined in section 7 of the Arbitration Act, 1996. The Court opined that when the parties have chosen a curial law, the arbitration agreement should also be treated as completely separable from the underlying contract. This is because the parties have chosen to apply a different system of law to the arbitration agreement, which has the effect of insulating it from the substantive contract. Moreover, the Court holds that the doctrine of separability is not restricted to cases where the validity, existence or effectiveness has been challenged – it may be invoked while determining the proper law of the arbitration agreement.
The conclusion reached by the Court is not supported by the text of section 7 of the Arbitration Act, which reads: ‘an arbitration agreement which forms or was intended to form part of another agreement … shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid … and it shall for that purpose be treated as a distinct agreement.’ [emphasis added] The use of the phrase ‘for that purpose’ in section 7 indicates that the legislative intent behind this provision was merely to protect the arbitration agreement if the underlying contract was invalidated. This conclusion is further supported by the Department Advisory Committee Report on Arbitration Bill (1996), which reads: ‘This is now omitted as being unnecessary, since we have redrafted sub-section (1) in order to follow the relevant part of Article 16 of the Model Law more closely, and to make clear that the doctrine of separability is confined to the effect of invalidity etc of the main contract on the arbitration agreement , rather than being, as it was in the July 1995 draft, a freestanding principle.’ [emphasis added] On a more fundamental basis, the Court’s selective use of the separability doctrine only when the parties have chosen a curial law is questionable. The expansion of the doctrine to accommodate party intention in choosing a curial law can neither be traced to section 7 nor article 16(1) of the UNCITRAL Model Law.
On a tangential note, the Court of Appeal did clarify that the decision in Kabab-Ji was confined to the individual facts of the case. This means that the governing law of the substantive contract will not ipso facto constitute an express choice for the arbitration agreement – this will depend on the construction of the clauses in the contract. However, the Court of Appeal’s expansive use of the separability principle is inconsistent with the reasoning in Kabab-Ji. If the choice of a curial law is sufficient to completely separate the arbitration agreement from the underlying contract, then the law of the underlying contract cannot constitute an express choice for the arbitration agreement. Therefore, the correct interpretation of the separability principle is that the arbitration agreement is only separate from the substantive contract if its validity, existence or effectiveness is challenged. In conducting a choice of law inquiry, the separability of the arbitration agreement is irrelevant.
Construction of Party Intent
The second reason provided by the Court is that as a matter of business rationale, it should be presumed that the parties have implicitly chosen the law of the seat. The claim is essentially that there exists an overlap between the curial law and the proper law of the arbitration agreement. This overlap takes place due to the application of mandatory rules of the seat, such as section 5, which stipulates that arbitration agreements must be in writing. Therefore, this implies that the curial law of the arbitration is not merely procedural, but also governs substantive interpretation of the arbitration agreement. In light of this, reasonable businesses would usually not intend for two different laws to govern the arbitration agreement. Rather, they would prefer one uniform system of law to govern the entire dispute resolution mechanism, which would be the law of the seat.
The crux of this argument lies in the acceptance of mandatory laws of the seat, and what inferences can be drawn from this regarding party intention. It is submitted that the Court’s approach to determining what reasonable businessmen would intend is highly questionable. On a purely practical level, it is unlikely that reasonable business parties contemplated the application of mandatory rules at the time of drafting the arbitration agreement, making it difficult to draw inferences regarding party intention. Rather, the better approach is for the proper law of the contract to govern the entire agreement, which would also govern the substantive validity and interpretation of the arbitration clause. This is because business parties are more likely to have intended that the governing law of the contract should govern all clauses therein, except to the extent that is derogated as per the mandatory laws of the seat.
While the Court sought to bring an end to the confusion surrounding the proper law of the arbitration agreement, it has further convoluted the law. On technical grounds, the decision in Sulamérica was also delivered by a bench of three judges of the Court of Appeal, which raises questions as to whether the Court in Enka v. Chubb could overrule it. Moreover, the judgement unsettles a position of law that has crystallised across most of the common law world, including India and Singapore. It will be interesting to see whether this decision is viewed favourably by the Indian courts in the future.
– Satyajit Bose