Achieving Clarity In Contracts And Arbitration Agreements – Litigation, Mediation & Arbitration

Bizar Male


To print this article, all you need is to be registered or login on Mondaq.com.

On October 9, 2020, the UK Supreme Court (UKSC) released its
decision in Enka Insaat Ve Sanayi A.S. (Respondent) v OOO
Insurance Company Chubb (Appellant), [2020] UKSC
38
 (the Decision) clarifying the law regarding
arbitration agreements. While the Decision is from the UK, it will
likely have an impact on the common law around the world.

Arbitration agreements can help limit legal fees by keeping
disputes out of the courts. However, prior to the Decision, there
was a lack of clarity as to what jurisdiction’s law governed
the scope of these agreements. The Decision will no doubt result in
new challenges and opportunities for those analyzing arbitration
agreements. Understanding the key points from this case is
essential.

Background

The proceedings resulted from the alleged faulty work of a
subcontractor, Enka Insaat Ve Sanayi AS (Enka). Enka was involved
in the construction of a Russian power plant damaged by a fire in
2016. Fortunately, the power plant’s owner, PJSC Unipro
(Unipro), had coverage through an insurance policy with OOO
Insurance Company Chubb (Chubb Russia). After paying Unipro
₽26.1 million roubles (approximately $400 million US dollars)
under the insurance policy, Chubb Russia asserted that Enka was the
one responsible for the damages and wished to commence a subrogated
recovery action. However, the contract between Unipro and Enka
contained an arbitration agreement providing for London-seated
arbitration, dictated by the rules of the International Chamber of
Commerce. Notably, the contract did not articulate the law
governing the contract or the arbitration agreement.

The issue and why it matters

The UK proceedings sought to answer which law applies to the
arbitration agreement. The UKSC provides a well-reasoned
judgment on this issue. Although the Decision is specific to the
construction context, the UKSC’s analysis is relevant to any
business that chooses international arbitration as its preferred
dispute-resolution method. The Decision highlights the importance
of establishing what law governs the agreement, in order to prevent
unnecessary disputes.

Analysis

Some of the notable points detailed in the Decision are:

Majority

Lords Hamblen, Leggatt & Kerr (the Majority) addressed
several principles, including:

  • The law applicable to a contract containing an arbitration
    agreement is determined by applying UK common law rules;

  • Pursuant to these common law rules, the law applicable to the
    agreement is the law:

    • chosen by the parties; or

    • with which the arbitration agreement is most closely
      connected.

Applying these principles, the Majority decided that the parties
did not specifically choose the law governing their arbitration
agreement or the underlying contract. Overall, the court concluded
that Russian law governed the contract, though English law was
applicable to the arbitration agreement. In analyzing the
arbitration agreement, the Majority decided that the law of the
place chosen as the “seat” of the arbitration (London)
was the law most closely connected with the arbitration
agreement.

To summarize, what we learn from the Majority is the
following: 




Is there law clearly governing
the contract?
Is there law clearly governing the arbitration
agreement
 What law governs the arbitration agreement?
 ✔  X  The choice of the law for the
contract 
will apply to the arbitration agreement,
even if a country has been nominated for the “seat” of
the arbitration — this is the “default”
rule
 X  X  The arbitration agreement will be governed by the law
with which it most closely connected 
— typically, this is the law of the “seat”

 

Dissent

Lords Burrows & Sales made the following points, which the
Courts may address in the near future:

  • There are problems arising from the division required by the
    “seat” approach. They found that the majority’s
    approach would unnecessarily force the same contract to be governed
    by laws from different jurisdictions, placing too much emphasis on
    the “seat”. Consequently, an arbitration agreement
    has its “closest connection” to the law of the underlying
    contract – not the law of the “seat”.

  • No “express” choice of law in the arbitration
    agreement means that the law of the underlying contract (whether
    express or implied) also governs the arbitration
    agreement. Therefore, since Russian Lawwas determined to be
    the “implied” law of the underlying contract, this would
    be the law governing the arbitration agreement.

Anticipated developments

In order to avoid confusion and disputes, it is evident that the
parties to a contract must stipulate the law governing both:

  • The main contract between them; and

  • The arbitration agreement, which may differ from the choice of
    “seat” of the arbitration.

We have yet to understand the impact that the Decision may have
on future disputes in Canada.  However, it is of paramount
importance to have a clear understanding of its potential
implications – particularly its effect on arbitration, which
is a pragmatic means of alternative dispute resolution (ADR).
Canadian Courts continually encourage litigants to use arbitration
in resolving their disputes. This has especially been the case
throughout the COVID-19 pandemic, as courts encourage ADR to
further access to justice in these unprecedented times.


About BLG

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Litigation, Mediation & Arbitration from Canada

Ontario Has A New Tort: Internet Harassment

Miller Thomson LLP

“A lie can travel halfway around the world while the truth is putting on its shoes,” writes lawyer Christina Wallis, borrowing a quote often attributed to Mark Twain, in responding to a vicious campaign of defamatory online posts …

Next Post

Supreme Court to hear major test of voting rights law

WASHINGTON — The Supreme Court takes up a court fight Tuesday over voting rights in the battleground state of Arizona, and the outcome may affect how the nation’s courts resolve clashes over election laws in dozens of other states. The case also will be a test of one of the […]