Choice of Law: The Law of the Arbitration Agreement

We had previously noted a recent judgement of the English Court of Appeal in Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (16 May 2012). The said judgement is expected to be cited all over for comprehensively dealing with the issue of the applicable law of arbitration agreement in the absence of express choice by the parties. In this post, we list the salient points in the judgement. This post would form a part of the series in this blog on Choice of Law and the posts contained under the said topic can be accessed from here.

Choice of Law of Arbitration Agreement: The Sulamerica Approach

In Sulamerica, the relevant clause in the insurance policy quoted below provided for the seat to be London, the Governing Law of Contract to be the laws of Brazil and the applicable rules to be ARIAS Arbitration Rules (ARIAS- A.I.D.A Reinsurance and Insurance Arbitration Society of the UK). The policy also provided that any dispute arising in respect of the policy would be subject to the exclusive jurisdiction of Brazilian courts.The relevant clauses:

"7. Law and Jurisdiction

It is agreed that this Policy will be governed exclusively by the laws of Brazil.

Any disputes arising under, out of or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil. 

11. Mediation

If any dispute or difference of whatsoever nature arises out of or in connection with this Policy including any question regarding its existence, validity or termination, hereafter termed as Dispute, the parties undertake that, prior to a reference to arbitration, they will seek to have the Dispute resolved amicably by mediation.

All rights of the parties in respect of the Dispute are and shall remain fully reserved and the entire mediation including all documents produced or to which reference is made, discussion and oral presentation shall be strictly confidential to the parties and shall be conducted on the same basis as without prejudice negotiations, privileged, inadmissible, not subject to disclosure in any other proceedings whatsoever and shall not constitute any waiver of privilege whether between the parties or between either of them and a third party.

The mediation may be terminated should any party so wish by written notice to the appointed mediator and to the other party to that effect. Notice to terminate may be served at any time after the first meeting or discussion has taken place in mediation.

If the Dispute has not been resolved to the satisfaction of either party within 90 days of service of the notice initiating mediation, or if either party fails or refuses to participate in the mediation, of if either party serves written notice terminating the mediation under this clause, then either party may refer to the Dispute to arbitration.

Unless the parties otherwise agree, the fees and expenses of the mediator and all other costs of the mediation shall be borne equally by the parties and each party shall bear their own respective costs incurred in the mediation regardless of the outcome of the mediation.

12. Arbitration

In case the Insured and the Insurer(s) shall fail to agree as to the amount to be paid under this Policy through mediation as above, such dispute shall then be referred to arbitration under ARIAS Arbitration Rules. The Arbitration Tribunal shall consist of three arbitrators, one to be appointed by the Insured, one to be appointed by the Insurer(s) and the third to be appointed by the two appointed arbitrators. The Tribunal shall be constituted upon the appointment of the third arbitrator.

The arbitrators shall be persons (including those who have retired) with not less than ten years' experience of insurance or reinsurance within the industry or as lawyers or other professional advisers serving the industry.

Where a party fails to appoint an arbitrator within 14 days of being called upon to do so where the two party-appointed arbitrators fail to appoint a third within 28 days of their appointment, then upon application ARIAS (UK) will appoint an arbitrator to fill the vacancy. At any time prior to the appointment by ARIAS (UK) the party or arbitrators in default may make such appointment.

The Tribunal may at its sole discretion make such orders and directions as it considers to be necessary for the final determination of the matters in dispute. The tribunal shall have the widest discretion permitted under the law governing the arbitral procedure when making such orders or directions.

The seat of the arbitration shall be London, England."

The issue before the court was whether the law of arbitration agreement was Brazilian Law. It was argued by the insurers that they had validly commenced the arbitration. The insureds resisted this contention by arguing that the law of arbitration agreement was Brazilian law under which the consent of insured were required to commence arbitration. Therefore, the court had to determine if the law of arbitration agreement was Brazilian or English Law.

The decision of the English Court of Appeal is summarized here below. It may be noted that we have not dealt with the English precedents/ previous decisions):

1. In the absence of any indication to the contrary, the proper law governing the arbitration agreement contained in the contract is the proper law of the contract. Where parties have chosen the proper law of the contract, it is "natural" to infer that the law of the arbitration agreement would also be the same as that of the proper law of the contract containing it.
2. The proper law of the arbitration agreement also may differ from the proper law of the contract due to the operation of the doctrine of separability of the arbitration agreement from the rest of the contract.
3. The proper law of the arbitration agreement can be determined by a three-stage enquiry: "(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..."
4. Where there is a separate arbitration agreement to arbitrate in London, the implication, in the absence of express choice of proper law, would be that English law would be the proper law of the arbitration agreement since it would have the closest and most real connection.
5. However, where the arbitration agreement forms a part of the contract with an express choice of proper law of contract, the position is different.
6. "A search for implied 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, unless there are other factors present which point to a different conclusion." 
7. In this case, two factors lead to the conclusion that the parties had impliedly chosen English law as the law of the arbitration agreement: (1) the choice of London as the seat of arbitration: when the parties had expressly chosen London as the arbitral seat, they must have "foreseen and intended" that the provisions of the Arbitration Act, 1996 relating to arbitration agreement including substantive Sections 5 (Agreements to be in writing), 7 (Separability of arbitration agreement.), 8 (Whether agreement discharged by death of a party.), 12 (Power of court to extend time for beginning arbitral proceedings) and 13 (Application of Limitation Acts.) would apply; (2) According to the insureds, as per Brazilian law, despite the arbitration agreement, the arbitration would be commenced only after consent of the insured. This is a "powerful factor" and must be considered in the enquiry on whether Brazilian law is the proper law of arbitration agreement. Unilateral arbitration agreements wherein reference is possible at the option of a party are in vogue. However, no such indication exists in the arbitration clause, which provides for reference of disputes to mediation and arbitration in case of disputes. "The possible existence of a rule of Brazilian law which would undermine that position tends to suggest that the parties did not intend the arbitration agreement to be governed by that system of law."

The court held:

"In my view 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. Its closest and most real connection is with English law."

As per this judgement, where parties have provided for a proper law of contract, an arbitration clause, and a seat that is outside the operation of the proper law of the contract, parties are deemed to have impliedly chosen the law of the seat as the law of arbitration agreement.

Prima facie, the rationale of this judgement does not appear to be convincing. We will do a critique of this judgement in a future post.