E & W Court Of Appeal's Judgment In Enka Insaat vs Chubb Clarifies The "Three Stage Test" Of "Sulamérica's Case": "Seat" Regains Its Control

In a very significant development, on 29^th April, 2020, the England and Wales (E & W) Court of Appeal in Enka Insaat Ve Sanayi A.S. Vs OOO "Insurance Company Chubb^[3] (Enka's case), clarified the "three stage test", which was authoritatively laid down earlier by the E & W Court of Appeal, in Sulamerica Cia Nacional De Seguros S.A. V. Enesa Engenharia S.A^[4] (Sulamérica's Case) for determining the proper law of arbitration agreement.

The judgement in Enka's Case brings back the dominant influence of the "seat" of arbitration in determining the proper law of arbitration agreement and therefore makes for a very compelling reading. Lord Justice Popplewell, who authored the judgement, very candidly states "…time has come to seek to impose some order and clarity on this area of the law, in particular as to the relative significance to be attached to the main contract law on the one hand, and the curial law of the arbitration agreement on the other, in seeking to determine the AA (arbitration agreement) law. The current state of the authorities does no credit to English commercial law which seeks to serve the business community by providing certainty."

In Enka's Case, the claimant ("Enka") is a Turkish company carrying on an international construction and engineering business based in Turkey but with a substantial presence and history of operations in Russia. Enka participated in building the Berezovskaya power plant in Russia as a sub-contractor for design and construction. The first defendant ("Chubb Russia") is a Russian company and part of the well-known Chubb insurance group. Chubb Russia (subrogee), commenced proceedings against Enka in the Moscow Arbitrazh Court, seeking damages in relation to a massive fire in February 2016 at the Berezovskaya power plant in Russia. Enka issued the Arbitration Claim Form in the Commercial Court in London seeking a declaration that Chubb Russia was bound by the arbitration agreement in clause 50 of the contract and that the arbitration agreement applied to the Moscow Claim. Further, Enka sought an injunction restraining Chubb Russia from continuing the Russian Proceedings. The Commercial Court rejected the Arbitration Claim Form which led to Enka prefer an appeal before the E & W Court of Appeal.

The Court of Appeal in Enka's Case was grappling with the arbitration agreement contained in clause 50 of the contract, which did not provide for an express law governing the arbitration agreement but stipulated that "the place of arbitration shall be London, England" and that the "Dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce". The contract was entirely to be performed in Russia. The governing law of the contract is Russian law, not by express choice but accepted to be an implied choice by the parties based on a concession made by Enka. The Court of Appeal took a review of the earlier decision in Sulamerica's Case (Supra) wherein the "three stage test" was authoritatively laid down as the English conflict of laws rule to determine the proper law of arbitration agreement.

In Sulamerica's Case, Moore Bick LJ had observed that as a matter of principle the three stages namely, (i) is there an express choice of law? (ii) if not, is there an implied choice of law? (iii) if not, with what system of law does the arbitration agreement have its closest and most real connection?, ought to be embarked on separately and in that order but that in practice stage (ii) often merges into stage (iii) because identification of the system of law with which the contract has its closest and most real connection is likely to be an important factor in whether the parties have made an implied choice of proper law. Moore Bick LJ held that a search for an implied choice of proper law to govern the arbitration agreement at the second stage is likely to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract, unless there are other factors present which point to a different conclusion. Moore Bick LJ deviated from the principle famously articulated by Longmore LJ in C v D^[5] that an agreement to arbitrate will normally have a closer and more real connection with the place where the parties have chosen to arbitrate than with the place of the law of the underlying contract in cases where the parties have deliberately chosen to arbitrate in one place disputes which have arisen under a contract governed by the law of another place. Pertinently, Longmore's principle was later reaffirmed by Cooke J in Shashoua v Sharma^[6] and in the judgment of the Court in the first instance^[7] under appeal in Sulamerica's Case. In Sulamerica's Case, Moore Bick LJ held the above quoted principle of Longmore LJ to be obiter.

In Enka's Case, Popplewell LJ first discussed the role of the court of 'seat' and underscored the importance of curial court's jurisdiction to grant an anti-suit injunction by holding that if the curial court cedes the question to a foreign court, when asked to protect the integrity of an arbitration agreement by anti-suit relief, there arises a risk of parallel proceedings and inconsistent decisions. He held that by the choice of English seat, the parties agreed that the English court is an appropriate court to exercise the power to grant an anti-suit injunction.

Having decided the issue of the role of 'seat' in determining the curial law and curial courts, Popplewell LJ than turns to the issue regarding the determination of the proper law of arbitration agreement or Arbitration Agreement (AA) Law.

Popplewell LJ held that where the AA law question can be answered at the first stage, namely whether there is an express choice of the AA law, no conceptual difficulty arises.

On the second test of implied choice of AA law, Popplewell LJ held that where there is an express choice of law in the main contract it may amount to an express choice of the AA law. 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. It is not a conclusion which will follow in all cases, or indeed the majority of cases, in which there is an express choice of main contract law but only in the minority of such cases where the language and circumstances of the case demonstrate that the main contract choice is properly to be construed as being an express choice of AA law. [para 90 and 105]. As a case in point, he cited the recent decision (2^nd January,2020) of E & W Court of Appeal in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait)^[8]. He held that in Kabab-Ji's Case, it was unnecessary for the court to grapple with the principles to be applied in the absence of express choice of AA law.

Popplewell LJ than observes that in all other cases, the general rule should be that the AA law is the curial law, as a matter of implied choice, subject only to any particular features of the case demonstrating powerful reasons to the contrary. He cites three reasons for it. First, he cites the doctrine of separability of the arbitration agreement recognised in section 7 of the Arbitration Act 1996 and re-emphasised by the House of Lords in Fiona Trust v Privalov^[9]. Second, he points out that the overlap between the scope of the curial law and that of the AA law strongly suggests that they should usually be the same. Third, he regarded the curial law as a matter of implied choice at stage (ii) of the AA law inquiry, rather than by application of the closest and most real connection test at stage (iii). He observed that curial law is a matter of choice, which comes with the express choice of seat and given the connection and overlap between the scope of the curial jurisdiction and the scope of the AA law, it seems natural to regard a choice of the former as a choice of the latter, rather than merely the latter being the system of law with which the arbitration agreement has its closest and most real connection.

Having found that the proper law of AA is the English Law, the Court of Appeal finally held that the parties intended to apply the wider approach to what amounts to a dispute falling within the clause 50 which is required by English law as explained in Fiona Trust (Supra), rather than the narrower interpretation which it is suggested is required by Russian Law. Consequently, it was held that Moscow Claim was brought and pursued by Chubb Russia in breach of the agreement to arbitrate in clause 50.1 of the Contract.

Author's Conclusion:

In XL Insurance Ltd v Owens Corning^[10], Toulson J commented that "it is a general principle of English Private International Law that it is for the parties to choose the law which is to govern the their agreement to arbitrate and the arbitration proceedings and that English Law will respect their choice". Under the English Arbitration Act, 1996, subject to the mandatory provisions as required by s.4(1) read with schedule 1, s.4(5) enables the parties to agree on a law other than the law of England and Wales or Northern Ireland to apply to the arbitration agreement of the English Act, 1996. S.4(4) states it is immaterial whether or not the law applicable to the parties' agreement is the law of England and Wales or, as the case may be, Northern Ireland. The non-mandatory provisions apply by virtue of the choice of seat in the absence of agreement to the contrary as per s. 4(2). S.4(1) and Schedule 1 precludes parties from contracting out of the basic framework of the English Act, 1996. The scope of applying foreign law (s) to govern the arbitration agreement through agreement between the parties by substituting the non-mandatory provisions of English Act, 1996 to decide on issues like substantive validity, non-arbitrability, formal validity, capacity and authority is therefore left very wide. To give an illustration, the requirement of arbitration agreement to be in writing under s.5 of the English Arbitration Act, 1996 is a non-mandatory provision. Consequently therefore, the courts in England have travelled back and forth to determine the implied proper law of arbitration agreement.

The author is of the opinion that the judgment in Enka's Case is more consistent with the principle of separability of the arbitration agreement from the main contract. Even if arbitration agreements are often regarded as "midnight clauses", parties are generally aware of the distinct and different purpose behind the main contract (clauses) on one hand and the arbitration agreement (clause) on the other. That is true irrespective of whether the arbitration agreement is forming part of the main contract or it exists as a free standing agreement. It is more reasonable to construe the arbitration agreement taking the internal indicia into consideration before looking outwards for guidance. 'Seat', which is intrinsic to international commercial arbitration, ought to be given therefore more importance than the law of contract in determining the law of arbitration agreement. The idea of a dispute resolution clause is to resolve the disputes in the main contract speedily and not get jammed with resolving disputes arising out of the arbitration agreement itself. Adopting a foreign law to govern the arbitration agreement may involve taking expert evidence for its correct appreciation, which may unnecessarily make the dispute resolution clause itself more cumbersome and expensive. In XL Insurance Ltd v Owens Corning^[11], Toulson J very had correctly noticed that " Arbitration Law is all about a particular method of resolving dispute" and that "Its substance and processes are closely intertwined". Adding further, he commented that there are "various provisions" in the English Arbitration Act, 1996 "which could not readily be separated into boxes labelled substantive arbitration law or procedural law because that would be an artificial division". Now, an interpretation by an arbitral tribunal on a point of foreign law is considered to be a finding of fact even though it may be erroneous, as 'law' does not include foreign law under s.82(1) and consequently not appealable under s.69 of the English Act, 1996. This may lead to more serious complications. While it may appear at first blush that the parties understood the law of contract to apply as the implied choice of proper law of arbitration over the curial law, however, this assumption may not be correct. It is only in rare circumstances that businessmen, despite knowing the practical difficulties associated with having inconsistent curial and proper law of arbitration, would agree on a foreign law to apply as the proper law of arbitration agreement, and if they do so, there is no reason why they would not make it explicit.

In India, however, the Arbitration and Conciliation Act, 1996 has adopted a more straightjacket principle. The controversy around the meaning of section 2(2) of the Act, 1996 now stands settled by 5 Judges in BALCO's Case^[12], where the Court has adopted a 'seat' centric approach. The above quoted principle of law laid down by Longmore LJ in C v D^[13], later reinforced by Cooke J in Shashoua v Sharma^[14] and in the judgment under appeal^[15] in Sulamerica's Case has found its unqualified acceptance in Indian arbitration jurisprudence. Once the juridical 'seat' is found to be in India, Part I of the Arbitration and Conciliation Act, 1996 would compulsorily apply. Part I contains both derogable and non- derogable provisions. The scheme of Part I shows that the procedural law provisions relating to internal conduct of the arbitration by the Tribunal are mostly derogable, but those relating substantive arbitration law issues connected to the arbitration agreement would fall in the category of non-derogable provisions under the Indian Law, from which the parties cannot deviate, once they agree the 'seat' to be in India. To illustrate the point, s.7 of Indian Arbitration and Conciliation Act, 1996, being a non-derogable provision, would mandatorily apply if 'seat' is in India and the parties have no choice to override or exclude the same by an agreement.

It is worth mentioning here that in a recent development (27^th December, 2019), the Singapore Court of Appeal in BNA v BNB and another^[16] endorsed the "three stage test" approach taken in Sulamérica's Case. The uncertainty over the legal position in identifying the juridical "seat" or the "proper law of arbitration" can result in a great deal of time and financial resources being wasted litigating on issues, which have no bearing on the merits of the disputes arising under the main contract. Likewise, lack of a uniform approach across different jurisdictions towards determining the seat or the applicable governing law of arbitration agreement may take a party by surprise in international commercial arbitrations. It is therefore extremely important that international commercial contracts are drafted carefully and after doing an analysis of the legal framework and interpretation of the applicable laws to avoid wholly unnecessary and avoidable litigations in the future.

(The author is Advocate on Record, Supreme Court of India and his email id is office@somiransharma.com)