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Arbitration case law update

In Sulamerica Cia Nacional De Seguros S.A. v Enesa Engenharia S.A. [2012] EWCA Civ 638 the Court of Appeal explored (amongst other things) the question of how the law governing an arbitration agreement in the absence of express choice is to be determined.

The Court of Appeal upheld a decision of Mr Justice Cooke continuing an anti-suit injunction restraining Enesa and other insured (the Insured) from pursuing proceedings against Sulamerica and other insurers (the Insurers) in the courts of Brazil.

The facts

The underlying dispute involved claims under two policies of insurance against various risks arising in connection with the construction of a hydroelectric generating plant in Brazil. The policies were governed by Brazilian law and contained an exclusive jurisdiction clause in favour of the courts of Brazil. They both included clauses providing for arbitration in London.

In November 2011, the Insurer gave notice of arbitration under the policies. In response the Insured started proceedings in the Brazilian courts to establish that the Insurers were not entitled to arbitrate the dispute in question. The Insured secured an injunction from the Brazilian courts restraining the Insurers from resorting to arbitration (to obtain a declaration that they were not liable under the policies). The Insurers applied to the Commercial Court seeking an injunction to restrain the Insured from pursuing proceedings in Brazil. Stadlen J granted the anti-suit injunction sought, which Cooke J then continued.

A facet of the Insured’s response to the application for anti-suit relief was that they were not bound to arbitrate as (they argued) the arbitration agreements were governed by Brazilian law (under which arbitration could be pursued only with the Insured’s consent which was not forthcoming). The Insurers’ position was those agreements were governed by English law (and were enforceable).

Accordingly, the English courts were called on to determine the proper law of the arbitration agreements (a subject on which those agreements were, as is often the case, silent). At first instance, the Judge found the proper law to be English law, notwithstanding the fact Brazilian law governed the policies and a number offactualconnections between the policies and Brazil.

Principles

It was common ground that the proper law of the arbitration agreement is to be determined in accordance with established common law rules for ascertaining the proper law of any contract (note: the provisions of Rome I not applying to arbitration agreements), which required the court to recognise and give effect to the parties’ choice of proper law (express or implied) failing which it is necessary to identify the system of law with which the contract has the closest and most real connection [9].

The Master of the Rolls set out neatly the "unsatisfactory tension" in the learning on the matter; noting that in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334, 357-8, Lord Mustill appears to have regarded it as "exceptional" for the law of an arbitration agreement to differ from that governing the interpretation of the agreement in which it is contained; and the (obiter) view expressed by the Court of Appeal in C V D [2007] EWCA Civ 1282 (per LongmoreLJ at paragraph 25) that "it would be rare for the law of the (separable) arbitration agreement to be different from the law of the seat of the arbitration." [53 and 54].

Lord Justice Moore-Bick most usefully summarised what he perceived to be two propositions to be distilled from (those and other, relevant) authorities as the starting point for any enquiry into the proper law of an arbitration agreement, being that: [25]

"The first is that, even if the agreement forms part of a substantive contract (as is commonly the case), its proper law may not be the same as that of the substantive contract. The second is that the proper law is to be determined by undertaking a three-stage enquiry into (i) express choice, (ii) implied choice and (iii) closest and most real connection. As a matter of principle, those three stages ought to be embarked on separately and in that order, since any choice made by the parties ought to be respected, but it has been said on many occasions that in practice stage (ii) often merges into stage (iii), because identification of the system of law with which the agreement has its closest and most real connection is likely to be an important factor in deciding whether the parties have made an implied choice of proper law: see Dicey, Morris & Collins, op. cit. paragraph 32-006. Much attention has been paid in recent cases to the closest and most real connection, but, for the reasons given earlier, it is important not to overlook the question of implied choice of proper law, particularly when the parties have expressly chosen a system of law to govern the substantive contract of which the arbitration agreement forms part."

Lord Justice Moore-Bick seems to have preferred the Channel Tunnel approach, finding that: [26]

"In the absence of any indication to the contrary, an express choice of law governing the substantive contract is a strong indication of the parties’ intention in relation to the agreement to arbitrate. A search for an implied choice of proper law to govern the arbitration agreement is therefore likely (as the dicta in the earlier cases indicate) 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, unless there are other factors present which point to a different conclusion. These may include the terms of the arbitration agreement itself or the consequences for its effectiveness of choosing the proper law of the substantive contract..."

The Court’s findings

His Lordship found that, while powerful factors pointed towards an implied choice of Brazilian law, two decisive matters tended against that conclusion. First, that by electing to seat any arbitration in London, the parties were to be taken to have foreseen and intended that provisions of the Arbitration Act 1996 would apply to any arbitration commenced under the policies. This, His Lordship found, suggested that the parties intended for English law to govern all aspects of the arbitration agreements including their formal validity [29]. Second, that (on the Insured’s case) if Brazilian law were to govern those agreements, any pre-requisite of mutual consent to the referral of a dispute to arbitration could undermine a party’s right to arbitrate disputes. This, it was found, suggested that the parties had not intended the arbitration agreement to be governed by that system of law [30]. As such, notwithstanding the fact Brazilian law governed the host agreement, there were insufficient grounds to find an implied choice that Brazilian law governed the arbitration agreements, also. The Lord Justice found that the law with the closest connection to the agreement to arbitrate in London (and therefore in accordance with English arbitral law) was the law of the place where the arbitration was to be held and which would exercise the supporting and supervisory jurisdiction to ensure that the procedure was effective: English law [32]. 

The Master of the Rolls was of the view that the Court did not have to choose between the various approaches set out in Channel Tunnel and C v D. That said, further to underlining the significance of the point that (when identifying the intention of the parties from the terms of the contract) were Brazilian law to govern the agreements the parties’ right to arbitrate might be frustrated, and amplifying several other points, His Lordship dismissed the appeal for the reasons given by Moore-Bick LJ. 

Take home points

The decision highlights the fact that, at least where there is a disconnect between the law governing an agreement and (in the arbitration agreement) the seat of any potential arbitration that would deal with any disputes that might arise thereunder, it is advisable to state expressly the law that is to govern the agreement to arbitrate.

In any given case, the answer generated by the correct application of the test set out by Moore-Bick LJ at [25] will be highly fact sensitive and turn, in the main, by reference to the apparent intention of the parties as gathered from the terms of the contract. 

While the discord in the approaches adopted in Channel Tunnel and C v D survives and will doubtless tax the courts again, the tenor of the judgments in Sulamerica suggests that the best current guidance is that provided by Moore-Bick LJ at paragraph [26]: that as a starting point any express choice of law governing a host agreement provides a strong indication the parties intended an arbitration agreement (which is silent on the subject) to be governed by the same system of law unless other factors point to a different conclusion.

More generally, commentators will doubtless continue to monitor the case with interest to see whether, in due course, any complexities in respect of the enforcement of any arbitral award arise.

A copy of the judgment may be found by clicking here.