Law of the Arbitration Agreement

In Sulamerica v Enesa Engenharia [2012] , the Court of Appeal was asked to determine the law applicable to an arbitration agreement contained in two insurance policies. Whilst the law of the insurance policies was Brazilian, the Court confirmed that the law of the arbitration clause is legally distinct from the contract of which it forms a part. On the facts, the Court upheld the High Court’s decision that the law of the seat of the arbitration (which was English law) should apply in this case and set out a test by which to ascertain the relevant law.

Background

The case involved two policies relating to the construction of a hydroelectric generating plant in Brazil. The insured, Enesa, submitted a claim under the policies for physical damage and consequential losses. The insurer, Sulamerica, denied liability under the policies and commenced arbitration proceedings seeking declarations of non-liability and that a material alteration had occurred. The policies provided for arbitration in London.

In response, Enesa commenced proceedings in the Brazilian courts pursuant to the exclusive jurisdiction clause  contained in the policies. Sulamerica sought an interim anti-suit injunction in the English Commercial Court to restrain Enesa from pursuing the Brazilian proceedings in view of the arbitration afoot.

In the anti-suit proceedings, Enesa submitted that the parties had impliedly chosen the law of Brazil as the law governing the arbitration agreement. They relied, in particular, on the facts that the Policy was expressly subject to Brazilian law and the exclusive jurisdiction of Brazilian courts; and that the parties, location of risk and events in question were all Brazilian. In response, Sulamerica argued that the law with which the arbitration agreement has its closest and most real connection was that of England, because the arbitration clause provides that the seat of the arbitration is to be London, England.

First Instance Decision

At first instance, Mr Justice Cooke agreed with Sulamerica that the law of the seat (the law of England) should apply to the arbitration agreement. In so doing, he adopted a ‘closest connection’ test, namely “if there is no express or implied choice of law, the arbitration agreement will be governed by the law with which the agreement has its closest and most real connection“. He determined that the choice of supervisory jurisdiction as England was the deciding factor in this case.

Court of Appeal Decision

The Court of Appeal upheld the Judge. However, the Court provided a more sophisticated analysis and recognised that the closest connection will not always be to the law of the seat. The Court’s two pronged approach was that (1) one cannot assume that the proper law of the arbitration agreement will follow the law of the contract; and (2) that there should be a “three-stage enquiry” into (i) express choice; (ii) implied choice and (iii) closest and most real connection, in that order (albeit (ii) and (iii) would often be hard to separate). Contrary to the decision of the Judge, the Court accepted that, in the absence of other factors, the implied law of the arbitration agreement will often be the same as the law of the substantive contract.

Here, the Court first determined that there was no implied choice of Brazilian law. The two key factors were the choice of another country as the seat of the arbitration (which imported an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to proceedings); but also the fact that, under Brazilian law, the agreement to arbitrate would be enforceable only with Enesa’s consent, which tended to undermine the arbitration agreement. The Court then turned to limb (iii) of its test and determined that the law of England had the closest and most real connection with the arbitration agreement in light of the fact that the arbitration was to be held in England and that the English Courts would exercise supporting and supervisory jurisdiction.

As regards the mediation provisions within the policies, the Court of Appeal concurred with the Judge that these did not give rise to a binding obligation to mediate (and so there was no requirement to comply with the mediation clause in order to be permitted to commence arbitration). It was noted that the relevant condition did not set out any defined mediation process, nor did it refer to the procedure of a specific mediation provider.

Finally, the Court of Appeal agreed with the Judge that the scope of the arbitration clause included determinations as to liability. The insured had argued that the words “shall fail to agree as to the amount to be paid” in the arbitration clause meant that the clause applied only to quantum disputes. The Court of Appeal disagreed and noted that it would be unusual for parties to establish separate procedures for determining what in many cases would be different aspects of the same dispute. He had no difficulty in holding that a dispute as to whether there was any liability to pay anything at all fell within the above wording.

Comment

Although the Court of Appeal has provided clearer guidance as to the law which will apply to the arbitration agreement in the absence of express agreement, the case underlines the importance of making an express determination. In particular, it is important to note that an arbitration agreement is a separate agreement to the underlying insurance policy. A policy that provides that a particular law will apply to the policy does not, without more, make the arbitration agreement within the policy subject to that same law.  

Whilst the result is welcome the refusal of the Court of Appeal to give definitive guidance as to how to resolve the “rather unsatisfactory tension” between the approach in cases such as Sumitomo Heavy Industries v Oil and Natural Gas Commission [1994] where it was held that the choice of law to govern the substantive contract will usually be decisive in determining the proper law of the arbitration agreement and CvD  [2007] where it was held that the the choice to arbitrate in London carried with it a choice of English law.  The Court of Appeal said that whichever was the correct approach they led to the same conclusion on the facts ands hence it was unnecessary to decide between them.  Given the desirability of certainty (which the Court recognised) the failure to give definitive guidance is disappointing and either a venture to the Supreme Court or another trip in a different case to the Court of Appeal will be required to bring the required certainty.

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