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English Court of Appeal lays down test for determining proper law of an arbitration agreement

Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] EWCA civ 638, 16 May 2012

This English Court of Appeal case clarified the position in relation to which law should apply to an arbitration agreement, where none is expressly stated, and sets out a test for ascertaining such.

Enesa, the Brazilian insured, claimed under insurance policies issued by a Brazilian insurer, Sulamerica. Sulamerica declined liability under the policies and commenced arbitration proceedings in London, seeking a declaration of non-liability, pursuant to an arbitration clause in the policies, which provided for arbitration in London under the ARIAS Rules. Enesa commenced proceedings in Brazil, pursuant to an exclusive jurisdiction clause in the policies in favour of the courts of Brazil. The policies also contained an express choice of Brazilian law as the law governing the contract.

Sulamerica sought and obtained an injunction in the English courts restraining Enesa from pursuing the proceedings in Brazil. The judge found that the proper law of the arbitration agreement was English law, notwithstanding the express choice of Brazilian law as the law governing in the policies and the obvious connection of the policies to Brazil. He further held that the choice of the seat of arbitration had determined the crucial law and supervising jurisdiction of the courts of the country where the seat was located, in this case, England.

Enesa had argued that the parties had impliedly chosen the law of Brazil as that governing the arbitration agreement, since the law of Brazil had been chosen as the governing law of the policies, the policies provided that the courts of Brazil had exclusive jurisdiction in respect of the disputes, and there was a close commercial connection between the policies and Brazil.

Dismissing, Enesa's appeal, the Court of Appeal held that the proper law of an arbitration agreement might not be the same as the law of the contract. It said that the law of the arbitration agreement should be determined by the following three stage inquiry:-

  • express choice;
  • implied choice; and
  • closest and most real connection.

The Court accepted that in the absence of other factors, the implied law of the arbitration agreement will usually be the same as the law of the contract. In this case, it said the parties express choice of Brazilian law as governing the substantive contract had not been sufficient evidence of an implied choice of Brazilian law to govern the arbitration agreement, because there was at least a serious risk that Brazilian law would significantly have undermined the agreement and the parties could not have intended to have chosen law that would (or may) have that effect.

The Court held that the arbitration agreement had its closest and most real connection with English law. It said that an agreement to resolve disputes by arbitration in London, and therefore in accordance with English arbitral law, did not have a close juridical connection with the system of law governing the insurance policies, whose purpose was unrelated to that of the dispute resolution. Rather it had its closest and most real connection with the law of the place where the arbitration was to be held and which would exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure was effective. Accordingly, the arbitration agreement was governed by English law.

This case highlights the importance of expressly stipulating the law governing an arbitration agreement, as an express choice of law governing the substantive contract will not necessarily extend to the law governing the arbitration agreement.

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Kwok Kit (KK) Cheung

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