In Sulamerica Cia Nacional de Seguros SA and others v Enesa Wngenharia SA and others, the Commercial Court was asked to consider the correct interpretation of an agreement that contained competing mediation and arbitration provisions, as well as competing governing law provisions in relation to the arbitration clause.

Background

The dispute in this case concerned a claim under an insurance policy. The Claimant insurers had insured the Defendant insureds under an all-risk insurance policy covering the construction of a hydroelectric facility in Brazil.  The Defendants attempted to make a claim under the policy for physical damage and consequential losses as a result of incidents in March 2011; the Claimant denied liability, commenced arbitration proceedings in London and applied to the English courts for an interim anti-suit injunction restraining the Defendants from pursuing proceedings in Brazil.  The Defendants meanwhile applied to the Brazilian court for a determination that they were not obliged to submit to the English arbitration, and obtained an interim order from the Brazilian court restraining the pursuit of the arbitration.

The policy related to a Brazilian project, the events in question took place in Brazil and the policy was expressed to be subject to Brazilian law with the policy being subject to the jurisdiction of the courts of Brazil.

The policy contained the following mediation clause (Condition 11):

"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… "

However, the policy also contained an arbitration agreement (Condition 12) that provided that:

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

The Defendants argued that the arbitration agreement was governed by Brazilian law, and, as a matter of Brazilian law, an arbitration agreement in an insurance policy could only be operative under that law at the behest of the insured party.  The Defendants also submitted that the right to arbitrate only arose if the requirements to mediate in Condition 11 had been complied with first.  They stated that satisfaction of those requirements is a condition precedent to the ability to refer to arbitration under Condition 12. Conversely, the Claimant submitted that Condition 12 of the policy was an agreement to arbitrate governed by English law as it expressly stated that the seat of arbitration was England and on this basis applied for the continuation of the anti-suit injunction.

Decision

Cooke J granted the continuation of the interim anti-suit injunction without any qualifications as to scope.  His judgment covered the following matters:

  1. Governing law

The law with which the agreement to arbitrate had its closest and most real connection was the law of the seat of the arbitration, English law, rather than the governing law of the policy, Brazilian law. Furthermore, given that Condition 11 formed part of the agreement to arbitrate it must be governed by the same law.  Accordingly, English law was the proper law of the agreement to arbitrate.

  1. Mediation or arbitration?

English case law establishes that there are various requirements for a mediation clause to be binding. On the facts, Condition 12 was too uncertain to impose any enforceable obligation to mediate given that the Condition did not impose any unequivocal commitment to mediate or identify any clear mediation process and there was no provision for selection of the mediator.  In this context, the mediation condition was to be read as giving rise to an agreement to arbitrate whenever there was a failure to settle disputes in mediation. Entering into mediation proceedings was not a condition precedent to the existence of a binding arbitration agreement.  Cooke J stated that if the arbitration clause is permissive only, giving a party the option of referring the matter to arbitration, then reconciliation of that with the exclusive jurisdiction clause is easier but, once one of the parties has elected to refer the dispute to arbitration, the other party is contractually bound to accept the reference to the exclusion of any other form of dispute resolution.

Comment

In circumstances where there was no way of reconciling the two clauses, the effect of Cooke J's decision, to give priority to the seat of the arbitration over the exclusive jurisdiction clause, was to deprive the latter of virtually all practical effect. Given that all disputes were required to be referred to arbitration pursuant to Condition 12, very little remained subject to the exclusive jurisdiction of the Brazilian courts. This case highlights the significance of the seat of the arbitration clause in an agreement. It also demonstrates the importance of giving the seat of the arbitration due consideration in circumstances where it may render an exclusive jurisdiction clause almost entirely redundant.  Under English law the seat of arbitration is a factor that will be considered when determining the governing law of the arbitration clause, whatever the governing law of the policy, and this highlights the fact that an arbitration clause in such cases will take priority over an exclusive jurisdiction clause.

This case is currently on appeal.