How to resolve a missing choice of law clause in an international arbitration agreement

This article considers a recent case  where the English Court was asked to decide which system of law should apply to a dispute relating to a fire at a power plant in Russia.  The Court also considered whether proceedings in Russia could continue.

What was the case about?

A power plant in Russia was severely damaged by fire. A Russian company (“Chubb Russia”) had insured the owner of the power plant against such damage. The owner had engaged a main contractor to carry out construction work at the plant and, in turn, the main contractor engaged the defendant (“Enka”), a Turkish engineering company, as a sub-contractor.  After a fire broke out in the power plant, Chubb Russia paid the owner’s insurance claim and brought proceedings to recover damages from Enka, alleging liability for the fire.

This case concerned the appropriate forum and choice of law for dealing with that dispute.

Which jurisdictions and choices of law were involved?

The claimant, Chubb Russia was located in Russia. The power plant was in Russia and the fire occurred there. The defendant Enka was Turkish but had carried out work in Russia.  

The contract between the main contractor and Enka included an agreement that disputes would be determined through arbitration proceedings in London. There was no choice of law specified.

Chubb Russia brought court proceedings in Russia. Enka objected and asked the High Court in London for a ruling that the dispute should be governed by English law and the Russian proceedings should be stopped. 

What did the courts decide?

The case went through three levels of courts, which demonstrates the importance of conflict of law cases.  

At first instance, the High Court decided that the appropriate forum to decide the scope of the arbitration agreement was the Russian court and it dismissed Enka’s claim. Enka appealed.

The Court of Appeal overturned the High Court decision and held that, unless there has been an express choice of law, the general rule should be that it will be governed by the law of the location chosen for resolving disputes, as a matter of implied choice. The arbitration agreement stated London as the forum so the agreement was governed by English law. An anti-suit injunction was granted to stop Chubb Russia from pursuing the claim in Russia. Chubb Russia appealed to the Supreme Court.

The Supreme Court dismissed the appeal. Although its approach differed from the Court of Appeal, the Supreme Court found that the arbitration agreement was governed by English law because that was the system of law with which it had its closest connection. The injunction granted by the Court of Appeal to restrain Chubb from proceeding against Enka in Russia was confirmed.

General Application

Although this case had Russian, Turkish and English connections, the principles which the court set out apply to any cases with differing international elements and competing claims. 

What are the implications of this case?

Proceedings:

If you are bringing proceedings or considering whether proceedings against you have been brought correctly, this case sets out important guidelines.

The applicable law will be the law expressly or, failing that, impliedly chosen by the parties.  

If the parties have expressly or impliedly chosen the law of the contract, this choice will also apply to the arbitration agreement.

Where there is no express choice of law, a choice of the location does not by itself justify an inference that the contract is intended to be governed by the law of that location. 

In the absence of an express or implied choice, it will be the system of law “most closely connected” with the agreement.

The case is a useful reminder that if parties have agreed to resolve their disputes through arbitration, then it is not open to a party to bring court proceedings without the consent of the other. If court proceedings are brought, they are liable to be stayed pending a reference to arbitration.

Drafting Point:

Extensive – and expensive - litigation could have been avoided if the parties had included in their original contract drafting a choice of English (or other) law (as well as stating arbitration in London). It is always worth having a contract professionally drafted, or at the very least checked.  It is also important to keep standard form contracts under regular review to ensure they are up to date.