Court of Appeal on the Law of the Arbitration Agreement – Part I

While we eagerly await the decision of the Indian Supreme Court in Bharat Aluminium, the English Court of Appeal has delivered a controversial but significant decision on the significance of the seat in international arbitration. In Sulamérica Cia Nacional De Seguros S.A. v Enesa Engenharia S.A. [2012] EWCA Civ 638, the insurance contract in question concerned a project in Brazil, was governed by Brazilian law, and disputes arising out of or in connection with the policy were subject to the exclusive jurisdiction of the Brazilian courts. However, the Court of Appeal affirmed the High Court in concluding that English law governed the arbitration agreement, influenced primarily by the seat of the arbitration being London and the implications of applying Brazilian law.

The case involved a claim by the insured party for losses arising in the project. The insurers served a notice of arbitration, seeking a declaration of no liability. The insured party responded by initiating proceedings in Brazil, to restrain the insurers from commencing arbitration, and obtained an injunction. In response, the insurers made an application to the Commercial Court in England seeking an anti-suit injunction preventing the insured party from pursuing Brazilian proceedings. The insured party opposed this application on broadly two bases:

• The arbitral tribunal did not have jurisdiction over the issues which the insurer was seeking to refer to it, and under the terms of the contract, mediation was a pre-condition to commencing arbitral proceedings

• Under Brazilian law, an arbitration agreement could be commenced only with the consent of the insured party

While the first of these objections is not relevant for present purposes (discussed in paragraphs 33 to 46 of the judgment), it was in dealing with the second objection that the Commercial Court and then the Court of Appeal was called on to determine the law governing the arbitration agreement. If it was Brazilian law, the arbitration could not have been brought, and the Commercial Court would not grant an anti-suit injunction. If it was English law, then the arbitration could be brought, and subject to the Court’s conclusions on the first of the insured party’s objections, it could grant an anti-suit injunction.

In English law, the law governing an arbitration agreement is determined the same way as the proper law of a contract, by applying a three-stage process: (i) express choice of the parties; (ii) implied choice of the parties; and (iii) closest and most real connection. Here, there was no express choice of the parties as to the law governing the arbitration agreement, leaving the court to apply prongs (ii) and (iii).

The insured relied on several factors which suggested an implied choice of Brazilian arbitration law: (i) Brazilian law was the proper law of the contract; (ii) exclusive jurisdiction of Brazilian courts; (iii) close commercial connection between the policy and Brazil (the parties, the subject matter of the insurance and the currency of the policy were Brazilian; and the language of the policy was Portuguese); and that (iv) the clause on mediation, which was arguably a pre-condition to arbitration, was governed by Brazilian law. Although Moore-Bick LJ, delivering the lead judgment of the Commercial Court, recognised that these were “powerful factors“, he rejected the insured party’s argument citing two other factors:

The seat of arbitration was London – this choice is taken to indicate “an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings … [which] tends to suggest that the parties intended English law to govern all aspects of the arbitration agreement, including matters touching on the formal validity of the agreement and the jurisdiction of the arbitrators” (paragraph 29). The fact that the choice of London as the seat of arbitration made certain substantive provisions of the English Arbitration Act 1996 mandatorily applicable, was taken to suggest an intention that the entire arbitration agreement was governed by English law (relying on XL Insurance).

Under Brazilian law, the arbitration could only be commenced with the insured party’s consent – since this would be a departure from the usual commercial practice, this effect of Brazilian law was considered a “powerful factor“. Further, if this was what the parties intended, they could have included an express provision in the contract to that effect. To the contrary, one of the sub-clauses in the mediation provision indicated that either party may submit the dispute to arbitration, which suggested a contrary intention to that which would result from an application of Brazilian law.

Therefore, although the Court observed that “[a] search for an implied choice of proper law to govern the arbitration agreement is therefore 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” (paragraph 26), the Court concluded that these two factors refuted the existence of any such implied choice.

Moving on then to the ‘closest and most real connection’ test, Moore-Bick LJ concludes that “an agreement to resolve disputes by arbitration in London, and therefore in accordance with English arbitral law, does not have a close juridical connection with the system of law governing the policy of insurance, whose purpose is unrelated to that of dispute resolution; rather, it has its closest and most real connection with the law of the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective” (paragraph 32). What this very brief conclusion on this issue does not make clear, is what his view is on the slew of other factors which connected the dispute with Brazil. Although he draws a distinction between a connection with the substantive contract and a connection with the law governing the contract, that distinction does not explain why all the other connecting factors are irrelevant in applying the ‘closest and most real connection’ test to the arbitration agreement. Possibly the judge is relying on the distinction between connecting factors to a country, and connecting factors to that country’s laws, but there is nothing in the judgment to indicate as much.

[Part II will discuss the issues arising out of this judgment]

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