Understanding Arbitration Agreements

Introduction

The Arbitration Act 1996, Section 6 defines arbitration agreement as an agreement between two parties that they will submit present or future disputes to arbitration irrespective of whether these disputes are contractual or not. An arbitration agreement is the first step towards an arbitration, and such an agreement may be contained in a specific clause in an existing agreement between the parties, or it may be an agreement that the parties agree upon for settling upon the terms and procedure for arbitration in the event of a dispute between them. Section 5 provides that the agreement must be in writing; it must also be clear and ambiguous as held in Aughton Ltd v MF Kent Services Ltd. One issue which has time and again posed some difficulty is with respect to applicable law, which becomes a significant issue in international disputes. Although parties may have stipulated the law applicable in case of dispute in the contract, it may so happen that they have left this point ambiguous. This article discusses the way in which the law applicable to arbitration agreements can be identified. A recent Supreme Court judgment in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb (Enka Insaat), has created interest in the issue of identification of law in the arbitration agreement because the Supreme Court has clarified the position of law on this point and laid down relevant principles of law after considering existing case law on this point. This makes this decision a significant landmark on identification of law in the arbitration agreements.

Law applicable to arbitration agreements: The current position and the earlier confusion

In an international commercial dispute, there are three systems of laws that could be engaged when a dispute occurs, these being the laws governing the substance of the dispute, or the agreement to arbitrate, or the arbitration process. The governing the substance of the dispute is generally the law applicable to the contract from which the dispute has arisen and the law governing the arbitration process is generally the law of the “seat” of the arbitration. As can be surmised, the two systems of law may differ from each other as well as from the law which governs the validity and scope of the arbitration agreement. As can also be seen, there can be confusion or conflict on which system is applicable to a particular arbitration when there is no express identification of it in the agreement between the parties.

Arbitration agreements govern the arbitration between two parties and the existence of arbitration agreement is significant because it can even exclude the jurisdiction of courts as well as laws of a specific jurisdiction. Section 9 of the Arbitration Act 1996 provides that if there is an arbitration agreement which requires a specific dispute to be submitted to arbitration, but one party brings a suit against the others, then that party can apply to the court for a stay of the proceedings. Section 9 applies only where there is an arbitration agreement. This was held by the Court of Appeal in London v Sancheti. Similar decision where a similar ruling was made was in Albon v Naza Motor Trading SDN BHD, where the court held that disputes agreed to be submitted to arbitration can only be submitted to arbitral tribunal and related court proceedings in the matter can be stayed by the court. Similarly, irrespective of

---

1. Aughton Ltd v MF Kent Services Ltd [1991] 57 B.L.R. 1.
2. Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38.
3. Carlos Carvalho, ‘The proper law of the arbitration agreement. The United Kingdom Supreme Court, Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb & Ors [2020] UKSC 38 (09.10. 2020)’ (2021) 18(69) Revista Brasileira de Arbitragem 208.
4. Ibid.
5. London v Sancheti [2008] EWCA Civ 1283.
6. Albon v Naza Motor Trading SDN BHD [2007] EWHC 665 (Ch).

the seat of arbitration, the applicable law can be prescribed in the arbitration agreement and this will be applied. However, arbitration agreements do not always specify the law applicable to the arbitration agreement. This raises the question of applicable law when not expressly noted by the parties in the arbitration clause or agreement.

In Enka Insaat, the Supreme Court was seized of the issue of applicable law in an arbitration agreement and the court laid down important points on this matter. The court held that in the event that an arbitration clause does not specifically identify the law governing the arbitration agreement, but does identify the law of the main contract, then the law of the main contract would govern the law governing the arbitration agreement; thus, in the absence of an express choice of law, the arbitration agreement would be governed by the law of the seat. Prior to the ruling of the Supreme Court in Enka Insaat, the law on identification of law in the arbitration agreement, the 2012 Court of Appeal decision in Sulamerica v Enesa Engenharia (Sulamerica), was the case in which a major judicial pronouncement on identification of law in arbitration agreements was made when the court clarified some aspects of the law. In this case, the Court of Appeal had held that it is not necessarily that law of the seat should apply in every case. Thus, in a period of eight years, the law related to identification of applicable law in arbitration agreements underwent significant change. This is emblematic of the general confusion which has prevailed in this area till Supreme Court decided Enka Insaat. Law on this issue had been uncertain to a great degree and cases were divided on the basis of whether the arbitration agreement follows the law of the underlying contract or the law of the seat selected by the parties. There was certainty on some issues related to arbitration agreement. For instance, arbitration agreement survives even when it is a part of another agreement which itself may not be valid; this is because arbitration agreement is considered to be separable from the main agreement.

However, on the issue of law applicable there has been considerable ambiguity or confusion. This is reflected in the decision of the court in Sulamerica, where one party invoked the jurisdiction of the Brazilian law on the ground that the insurance policy in dispute was under the Brazilian law and parties, location of risk and events were also Brazilian; while the other party invoked jurisdiction of the English law on the ground that the law of the seat of arbitration was English and the law with which the arbitration agreement has its closest and most real connection is that of England. The Court of Appeal held that the determination of which law is apply to the arbitration agreement can be based on two pronged approach: first, that it is not to be assumed that the proper law of the arbitration agreement will follow the law of the contract; and second, that in order to determine the law applicable a “three-stage enquiry” into express choice, implied choice, and) closest and most real connection is to be undertaken. Based upon this, the court decided that English law is the law applicable because it has the closest and most real connection to the agreement.

The chequered and convoluted history in this area of arbitration law is not just reflected in the difference between the approach taken in Enka Insaat and Sulamerica. Even prior to Sulamerica, there was considerable confusion in the law and to that extent, Sulamerica

---

7. Sabrina Pearson, ‘Sulamérica v. Enesa: The Hidden Pro-validation Approach Adopted by the English Courts with Respect to the Proper Law of the Arbitration Agreement’ (2013) 29(1) Arbitration International 115.
8. Ibid.
9. Sulamérica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A [2012] EWCA Civ 638.
10. Ibid.
11. Fiona Trust & Holding Corporation and ors v Privalov and ors [2007] UKHL 40; El Nasharty v J Sainsbury PLC [2007] EWHC 2618 (Comm).
12. Sulamérica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A [2012] EWCA Civ 638.
13. Ibid.

clarified the law to some degree. Enka Insaat has further helped clarify the principles on law applicable to the arbitration agreement. Traditionally, English courts have applied the law governing the substantive contract while the case law prior to Sulamerica applied the law of the seat of the arbitration. The substantive approach was explained by the Court of Appeal in Sulamerica, as the long recognised principle that while arbitration agreement which itself forms part of a substantive contract may differ from that of the contract as a whole, it can be assumed in the absence of any other indication that parties intended the whole of their relationship to be governed by the same system of law. Therefore, in the absence of any express choice of the law to govern arbitration agreement contained, the natural inference is that parties intend that the proper law chosen to govern the substantive contract also governs the arbitration agreement. On the other hand, the approach taken by the court in Sulamerica itself led it to prefer the seat of arbitration. Therefore, there was an apparent conflict in the jurisprudence developed by the English courts. The question is if the Enka Insaat judgment has contributed to clarifying the law.

It must be mentioned that the Enka Insaat judgment is not the only decision in the Court of Appeal where the court has taken a position that has diverged from the earlier position. Another decision by the Court of Appeal which has taken a divergent position is Kabab-Ji v Kout Food Group (Kabab-Ji). This decision can also be considered here to understand the ways in which the law on the issue of applicable law in arbitration agreements has been contentious. In Kabab-Ji, the main contract was a franchise agreement governed by English law, but the arbitration clause did not identify choice of law while the seat of arbitration was identified as Paris, France. The Court of Appeal had to identify the law applicable to the arbitration agreement. The main contract being governed by English law and although conceding that governing law clauses in a contract would not necessarily extend to the arbitration clause, it held that the governing law clause should be properly construed as an express choice of English law for all provisions of the contract including the arbitration clause. This position was different from the one taken in Sulamerica, where the court had held that the applicable law could be decided on the basis of seat of the arbitration. The court based this decision on the basis of the English law and suggested the application of the business efficacy test under English contract law for determining that the implying terms applicable to ascertaining an implied choice of law for an arbitration agreement. The difference between the decision in Sulamerica and Kabab-Ji becomes significant when it is considered that one of the reasons for the court not applying the governing law in the former case was that it could potentially invalidate the arbitration agreement, while no such potential danger to the arbitration agreement’s validity was seen in Kabab-Ji. When these two decisions are compared, the court’s differential approach in the two cases is difficult to justify, which is why the opportunity in Enka Insaat was important because it gave a chance to the court to clarify the law related to the applicable law in arbitration agreements.

---

14. Sabrina Pearson, ‘Sulamérica v. Enesa: The Hidden Pro-validation Approach Adopted by the English Courts with Respect to the Proper Law of the Arbitration Agreement’ (2013) 29(1) Arbitration International 115.
15. Ibid.
16. Sulamerica v Enesa Engenharia [2012] EWCA Civ 638.
17. Ibid.
18. Kabab-Ji v Kout Food Group [2020] EWCA Civ 6.
19. Ibid.
20. Ibid.
21. T.J. Yang and D Chan, Ascertaining the Proper Law of an Arbitration Agreement: The Artificiality of Inferring Intention When There Is None (2020) 37(5) Journal of International Arbitration 635.

To first briefly summarise the principles of law laid down by the Supreme Court in Enka Insaat, the important points are as follows. First, the applicable law is the law chosen by the parties to govern it and if no such choice is made then the system of law with which the arbitration agreement is most closely connected. Second, where the law applicable to the arbitration agreement is unspecified, the choice of governing law of the main contract applies to an arbitration agreement. Third, where there is no express choice of law for the main contract, the fact that the arbitration is seated in a particular place is by itself not enough to infer that the arbitration agreement is intended to be governed by the law of that place. Fourth, where the choice of law is unprescribed, arbitration agreement will be governed by the law which it is most closely connected. In this case, it was to be the seat where the seat has been chosen. If there are provisions in the contract relating to the negotiations, mediation or any other procedure before invoking arbitration, this does not displace the law of the seat of arbitration as the law applicable to the arbitration agreement by default. The Enka Insaat judgment is a reflection on the significance of the way in which arbitration clause is drafted and the importance of identifying the law governing the main contract, the arbitration agreement, and the choice of seat of the arbitration.

In Enka Insaat, the court held that the express choice of law for the main contract is not generally relevant to ascertaining an implied choice of law for the arbitration clause, for the reason that the arbitration clause is separable from the main contract. This is a principle that has been established in the English law, but when it comes to construing the applicable law for the arbitration clause, the issue of separability was considered in a different way from how it has been done in Enka Insaat. In Sulamerica, Moore-Bick, LJ had taken a divergent approach and held that separability only serves to ensure the arbitration agreement’s validity when the main contract is vitiated, but it does not insulate the arbitration agreement from the substantive contract for other purposes. The view taken in Kabab-Ji was that the separability of the main contract from the arbitration clause does not prevent an express choice of law in the main contract from being construed in a way that extends to the arbitration agreement. The approach taken in Kabab-Ji sits at variance with these earlier cases.

It has been argued by Glick and Venkatesan that separability is irrelevant to the choice of law analysis because parties may intend for different systems of law to govern different parts of a single contract and that it makes more business sense for parties to be expected to make a neutral law applicable to the dispute rather than the seat of arbitration or the law applicable to the main contract. If this argument is justified, then the approach taken in Enka Insaat may not have finally clarified the position and there may still be concerns and gaps in our understanding of applicable law to the arbitration agreement. In Enka Insaat, the court appears to have taken an approach which depends on the imputed intention of the parties as opposed to real intention.



Conclusion

To conclude, the Enka Insaat judgment has clarified the principles related to identifying the applicable law to the arbitration agreement in absence of express choice of law in the agreement. According to this, the applicable law is the law chosen by the parties to govern it and if no such choice is made then the system of law with which the arbitration agreement is

Continue your journey with our comprehensive guide to Understanding Acts of Parliament and Delegated Legislation.

---

22. Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, para 170.
23. Fiona Trust & Holding Corporation and ors v Privalov and ors [2007] UKHL 40; El Nasharty v J Sainsbury PLC [2007] EWHC 2618 (Comm).
24. Ian Glick QC & Niranjan Venkatesan, ‘Choosing the Law Governing the Arbitration Agreement’ in Neil Kaplan and Michael J. Moser (eds), Jurisdiction, Admissibility and Choice of Law in International Arbitration: Liber Amicorum Michael Pryles (Kluwer Law International 2018).
25. Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, para 70.

most closely connected would be the law applicable to the arbitration agreement. Where the law applicable to the arbitration agreement is unspecified, the choice of governing law of the main contract can to an arbitration agreement; the fact that the arbitration is seated in a particular place is by itself not enough to infer that the arbitration agreement is intended to be governed by the law of that place. These principles are clear, but there is one issue in the way the court has considered separability of arbitration agreement and main agreement as a reason for considering that this also means that the law in the main contract cannot be applicable to the arbitration contract. This leaves the court with the task of imputing intention of the parties in the absence of express choice of law. It can be argued that this raises the risk of the courts imputing intention in ways that leads to conflicting decisions in different cases or at least increases the uncertainty in the law.

List of cases

Albon v Naza Motor Trading SDN BHD [2007] EWHC 665 (Ch).

Aughton Ltd v MF Kent Services Ltd [1991] 57 B.L.R. 1.

El Nasharty v J Sainsbury PLC [2007] EWHC 2618 (Comm).

Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38.

Fiona Trust & Holding Corporation and ors v Privalov and ors [2007] UKHL 40.

Kabab-Ji v Kout Food Group [2020] EWCA Civ 6.

London v Sancheti [2008] EWCA Civ 1283.

Sulamérica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A [2012] EWCA Civ 638.

Books

Glick I QC & Niranjan Venkatesan, ‘Choosing the Law Governing the Arbitration Agreement’ in Neil Kaplan and Michael J. Moser (eds), Jurisdiction, Admissibility and Choice of Law in International Arbitration: Liber Amicorum Michael Pryles (Kluwer Law International 2018).

Journals

Carvalho C, ‘The proper law of the arbitration agreement. The United Kingdom Supreme Court, Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb & Ors [2020] UKSC 38 (09.10. 2020)’ (2021) 18(69) Revista Brasileira de Arbitragem 208.

Pearson S, ‘Sulamérica v. Enesa: The Hidden Pro-validation Approach Adopted by the English Courts with Respect to the Proper Law of the Arbitration Agreement’ (2013) 29(1) Arbitration International 115.

Yang TJ and D Chan, Ascertaining the Proper Law of an Arbitration Agreement: The Artificiality of Inferring Intention When There Is None (2020) 37(5) Journal of International Arbitration 635.