The judgment handed down by the UK Supreme Court (UKSC) in October 2020 in Enka v Chubb was regarded as a seminal judgment which settled the longstanding issue of what law applies to arbitration agreements where the parties have not made a choice on governing law applicable to the arbitration agreement. Less than a year after that judgment of UKSC, in August 2021, the Maldives Supreme Court (MVSC) delivered its judgment in Sun v Hilton with notably comparable holdings on the issues. In this blog, the author will consider how the judgment of MVSC in Sun v Hilton was influenced by the judgment of UKSC in Enka v Chubb. In doing so, a particular focus will be given to the similarities between the two judgments and outline the impacts of Sun v Hilton on foreign investors entering cross-border commercial transactions in the Maldives.
Background of Sun v Hilton
Hilton International (“Hilton”) and Sun Travel and Tours Pvt Ltd (“Sun”) negotiated a hotel management contract, where Hilton was to manage Irufushi Beach & Spa (“Resort”) owned by Sun. During January 2009, Hilton International Manage (Maldives) negotiations, Hilton provided financial projections to Sun, showing the expected room occupancy, room rate and gross profit for the Resort should Sun allow Hilton to manage the Resort. Relying on the projections, in February 2009, Sun entered into a hotel management contract with Hilton. The management of the Resort was handed over to Hilton in July 2009. Even two years after Hilton started to operate the Resort, the gross profit of the Resort was nearly a quarter below the projected gross profit. Dissatisfied with Hilton’s performance, in April 2013, Sun terminated the management contract (Sun v Hilton at 3 – 7).
Subsequently, Hilton commenced arbitration proceedings pursuant to the arbitration agreement in the management contract claiming that the termination of the management contract by Sun was a repudiatory breach of the contract and claimed for lost profits and for sums due and owing under the management contract. Justifying the alleged wrongful repudiation, Sun contended that the financial projections by Hilton were fraudulent misrepresentations solely prepared by Hilton with the intention of inducing Sun to enter into a hotel management contract with Hilton. In May 2017, the arbitral tribunal dismissed Sun’s claim and ruled that Sun’s termination of the contract is a repudiatory breach of the contract. In August 2015, the ICC rendered the final award in favor of Hilton (Sun v Hilton at 7 – 13).
While Hilton was seeking enforcement of the arbitral award in the Maldives, Sun began proceedings in a civil action against Hilton at the Civil Court of the Maldives, litigating on the same grounds submitted at the arbitration proceedings, i.e., alleging misrepresentation and contractual breaches on Hilton’s part. In March 2017, the Civil Court gave judgment in favour of Sun, which was subsequently overturned by the High Court on appeal. Sun appealed the High Court’s decision at the MVSC (Sun v Hilton at 14 – 20).
Applicable Laws to the Dispute between Sun and Hilton
In MVSC, the primary issue of concern was regarding the applicable law to the agreements, i.e., the management contract and the arbitration agreement between the two parties (Sun v Hilton at 24). The governing law clause of the management contract between Sun and Hilton expressly provided that the contract was to be governed by the laws of England and Wales (Sun v Hiltonat 2 – 3). Conversely, the arbitration agreement between Sun and Hilton was silent as to the applicable law to the arbitration agreement.
Sun’s contention at appeal was that a distinction should be drawn between the dispute decided upon at arbitration and that of the civil action since the dispute at arbitration was decided based upon the laws of England and Wales, whereas the civil claim filed in the Maldives by Sun was filed under the laws of the Maldives. Sun maintained that since the management contract was entered based on falsely represented facts by Hilton, the contract is voidable under section 16 of Contract Act for misrepresentation.
Decision of the Supreme Court of the Maldives
The Supreme Court of Maldives approached the appeal on two main grounds:
- The law applicable to the merits of the dispute
- The law applicable to the arbitration agreement
i. The law applicable to the merits of the dispute
On the issue of the law applicable to the merits of the dispute, the Court noted that the parties are free to choose which law is to govern their contract, provided that the law chosen is not contrary to the public policy of the Maldives and a general policy of the Government of the Maldives (Sun v Hilton at 24 – 25). Therefore, where the parties have agreed on a choice of law to govern a contract they enter into, the dispute that arises out of or in relation to that contract will also be decided based on the governing law of the contract.
On the question of the proper law applicable to a dispute arising in relation to a contract that does not expressly provide for the governing law, the Court first noted that it is a question to be answered based on rules of contractual interpretation. In doing so, courts must give prevalence to the governing law expressly or impliedly agreed between the parties. (Sun v Hilton at 25). The Court then went on to state that where the parties to a dispute submitted to arbitration have not agreed on the governing law applicable to that arbitration, the arbitral tribunal shall make a determination on the choice of law on the basis of the parties to the dispute, the countries involved and the conflict of laws rules with due consideration to the applicable laws (see section 51, Arbitration Act (Act Number 10/2013).
The Court further observed that, where parties have not provided for the law applicable to the contract between them, the applicable law to the contract, and thereby to the dispute related to that contract, will be the law that has the ‘closest and most real connection’ to the contract (Sun v Hilton at 26 – 27). Applying this rule, the Court opined that as Sun and Hilton had expressly agreed to the laws of England and Wales as the applicable law to the contract between them the law applicable to all disputes arising out of and in relation to the contract will also be the laws of England and Wales.
ii. The law applicable to the arbitration agreement
The Court first recognised that the arbitration agreement is separate from the contract containing the arbitration agreement, i.e., the so-called principle of separability (Sun v Hilton at 29 – 30). In doing so the Court relied on the dictum of Moore-Bick LJ on the principle in Sulamerica v Enesa Engenharia [2012] EWCA Civ 638 that the purpose of the principle is to give legal effect to the presumed intention of the parties that the procedure they have agreed for resolving disputes should remain effective even where the substantive contract is ineffective. The Court, however, same as the UKSC in Enka v Chubb refrained from stretching the principle of separability enough to regard it as meaning that the arbitration agreement is a distinct agreement for all purposes from the contract containing it.
The MVSC held that where parties have not agreed on the law applicable to the arbitration agreement but have chosen the governing law of the substantive contract, the law applicable to the substantive contract will normally apply to the arbitration agreement, with the exception being where it results in apparent gross injustice (Sun v Hilton at 30 – 31). The MVSCseems to have been persuaded by the reasoning put forth by the UKSC in Enka v Chubb on this front that though the arbitration agreement is separable from the contract containing it, applying the law to govern the contract also to the arbitration agreement encourages legal certainty and coherence while avoiding complexity and artificiality (Enka v Chubb at 18).
Notably, however, the exception of ‘gross injustice’ established by MVSC in Sun v Hilton appears to be distinct from the exception of ‘validation principle.’ The validation principle provides that where the parties have not expressly agreed on a choice of governing law and a putative governing law would render all or part of the agreement ineffective, the contract should be interpreted so that it is valid rather than ineffective (Enka v Chubb, at 33). Unfortunately, the Courts did not elaborate further on how these exceptions will operate in practice.
The MVSC also did not delve into the question of law applicable to the arbitration agreement where there is no clear choice on the law governing the main contract. The UKSC in Enka v Chubb held that in such a situation, the courts are to apply the system of law that has the closest connection to the arbitration agreement which is to be determined objectively irrespective of the parties’ intention (Enka v Chubb at 41). In Enka v Chubb, UKSC also established the general presumption that the arbitration agreement will be most closely connected to the law of the place chosen as the seat of arbitration. The reasonings behind this presumption are: (i) arbitration agreement is to be legally performed, (ii) it is the approach that is consistent with international law and legislative policy, (iii) it gives effect to commercial purpose and, (iv) promotes legal certainty (Enka v Chubb at 41 – 50). Should the question of what law is applicable to an arbitration agreement contained in a contract with no choice of law provisions be decided by Maldivian courts, it is expected that the issue will be decided based on the same rule established by the UKSC in Enka v Chubb. However, the issue is as of now, left open-ended.
Conclusion
Parties entering complex international commercial transactions opt for arbitration as a dispute resolution mechanism primarily because it allows their disputes to be resolved by neutral arbitrators in neutral countries rather than by the judges of national courts of either party. It is also common among parties to choose suitable governing laws for the main contract and laws which are different from the laws of the seat of arbitration.
Following the decision of the MVSC in Sun v Hilton, foreign investors entering into commercial contracts with Maldivian parties or with parties having interests in the Maldives, should be mindful of the governing law clause of their contracts and arbitration agreements. Sun v Hilton confirmed that where parties have made a choice on the governing law of the main contract, it will also be the law applicable to the dispute and the arbitration agreement. This in effect means that the governing law clause will not only determine the merits of the dispute but will also be extended to determine the existence, validity and scope of the arbitration agreement where needed. However, where parties do not expressly or impliedly provide for the governing law of the main contract but provide for the seat of arbitration, it is likely that the law of the seat will be applicable to the arbitration agreement.Any of the above-stipulated determinations, be it the governing law of the main contract or the arbitration agreement, will depend on the contract in question as a whole. Hence, even where a governing law clause is incorporated, obscure and imprecise drafting may mean that parties find that the law they anticipated is not the applicable law to the arbitration agreement. Same as Enka v Chubb did, what Sun v Hilton has affirmed is that should parties, therefore, wish to avoid any uncertainty as to the applicable law to the arbitration agreement, the best approach is to expressly provide for not only governing law clauses for the main contract but also expressly state what law is applicable to the arbitration agreement.
Mariyam Naufa is Senior Associate with CTL Strategies, Maldives.