In the recent case of Sulamérica Cia Nacional de Seguros, S.A. and ors. v Enesa Engenharia, S.A. and ors.  EWCA Civ 638, the English Court of Appeal has provided useful clarification regarding a tricky, but not uncommon, issue arising in relation to international contracts: namely, the interrelationship between the different systems of law governing different parts of a contract and its effect on the parties chosen method(s) for resolving disputes.
The case serves as a useful reminder that dispute resolution clauses should not be a mere afterthought. They can have a real impact on how a contract does or does not function at a critical time; when something has gone wrong in the parties' relationship. Careful consideration and drafting are needed to avoid potentially unpleasant surprises.
The background to the case is relatively complex, involving insurance and reinsurance arrangements for a hydroelectric project in Brazil. However, its history may be briefly summarised as follows.
In November 2011, the insurer, Sulamérica, started arbitration against Enesa in England, pursuant to 3 policies of insurance. Enesa responded by starting court proceedings in Brazil, seeking to establish that arbitration had not been validly commenced and that the dispute should instead be fought out in the Brazilian national courts. Sulamérica retaliated by asking the English Commercial Court to restrain Enesa from continuing the proceedings in Brazil, to allow the arbitration to continue. The Commercial Court found in Sulamérica's favour and Enesa appealed.
The insurance policies in question contained a number of potentially confusing clauses regarding choice of law and dispute resolution. First, the policies stated that they were subject to Brazilian law and the exclusive jurisdiction of the Brazilian courts. Second, they provided that the parties would attempt to mediate any differences or disputes arising in connection with the policies. Third and finally, they stated that, where mediation failed, disputes concerning amounts to be paid out under the policies would be subject to arbitration in London, England.
One of the questions put to the Court of Appeal was: which country's law governs the clause providing for disputes to be referred to arbitration? Enesa contended that if Brazilian law governed the clause, then it could not be enforced without Enesa's express consent. In other words, if Enesa was right, then Sulamérica would have to litigate in Brazil.
The Court's approach
The Court of Appeal surveyed the previous case law and noted that, while the applicable principles were readily identified, there was some inconsistency in the way those principles had been applied in the previous cases, and that there was no existing authority binding upon the court.
As such, the court's starting point was to acknowledge that there are potentially three different systems of law applicable to a contract which contains an arbitration clause:
- First, the law governing the parties' obligations under the contract (i.e. the substantive law).
- Second, the law of the place where the parties have decided the arbitration shall have its seat (sometimes termed the 'curial law'). The curial law is relevant to determining the matters such as the procedure to be followed in the arbitration (to the extent an overriding set of arbitral rules has not also been chosen) and the powers and identity of the national court which has jurisdiction to supervise and support the arbitral process.
- Finally, and perhaps less often considered, there is the law governing the arbitration clause itself. This is the law which deals with, for example, the formal requirements for the validity of the clause. Crucially, it need not necessarily be the same as either of the substantive law or the curial law. As the court noted, this flows from the separable nature of an arbitration clause which, where necessary, stands on its own to bind the parties to their chosen method of dispute resolution, even where their dispute is as to the very existence or validity of the containing contract.
In this case, the substantive law (Brazilian) of the policies and the curial law of an arbitration (English – the seat of arbitration being London) were both specified. The question therefore was how to determine the third – the law governing the arbitration clause.
In this regard, the English common law rules for determining the proper law of any contract were applicable. They require the court to give effect to the parties' choice of 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.
Enesa argued that either there was an implied choice of Brazilian law to govern the arbitration clause (as the law which the parties had chosen to govern the rest of their contractual relationship) or alternatively that the choice of substantive law gave a strong (Enesa contended, decisive) indication of the system of law with which the arbitration clause had its closest and most real connection. Sulamérica, on the other hand, relied on authorities which suggested that where the curial law is not the same as the substantive law (i.e. where arbitrations are to be held in a neutral foreign jurisdiction), the curial law gives the best indication of the system of law with which the arbitration clause has its closest and most real connection.
The Court of Appeal accepted Enesa's proposition that, "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". However, relying on the earlier case of XL Insurance Ltd v Owens Corning  1 All E.R. (Comm) 530, it also recognised that there may be other factors which point to a different conclusion including, "the terms of the arbitration agreement itself or the consequences for its effectiveness of choosing the proper law of the substantive contract".
On that basis, the court found unanimously in favour of Sulamérica, holding that the combination of:
- the choice of London as the seat of arbitration (and the attendant expectation that the English Arbitration Act 1996, including its more substantive sections, would apply to any arbitration); and
- the consequences which would flow from Brazilian law governing the arbitration clause (i.e. that the clause would become one-sided – Enesa's consent being required before Sulamérica would be able to commence arbitration), which would undermine the effectiveness of the clause to an extent which the parties could not have intended;
was sufficient to overcome any inference which might be drawn from the choice of Brazilian law as the substantive law of the contract. Moore Bick LJ considered that this was the case, whether on the basis that there was an implied choice of English law to govern the arbitration clause or on the basis that the arbitration clause had the closest and most real connection with English law.
The case emphasises the importance of clarity when drafting choice of law and arbitration clauses. In addition to specifying the substantive law of the contract and the curial law of the arbitration, it may be prudent also to state explicitly the law governing the arbitration clause itself. Otherwise, this is likely to become a question of interpretation for the courts – adding unnecessary complexity, risk and delay to any dispute resolution process.
This might be especially important in situations where: (i) it is crucial that one or other of the chosen systems of substantive or curial law governs the arbitration clause; (ii) the parties choose either a substantive law which is unconnected with their nationalities and the place of performance of the contract or a curial law which is not a common international arbitral jurisdiction; or (iii) perhaps less likely, where the parties specifically wish to have a third system of law govern the arbitration clause, which is different to either the substantive law of the contract or the curial law of the arbitration.