In its recent decision in Sulamerica v Enesa Engenharia1, the Court of Appeal considered whether the proper law of an arbitration agreement should follow the governing law of the underlying contract or the law of the seat of arbitration agreed by the parties. The Court of Appeal laid down a useful test to approach this question and held that, on the facts before it, the arbitration agreement had “its closest and most real connection” with the law of the seat of arbitration. In so doing, the Court of Appeal confirmed that the governing law of the contract does not automatically govern the arbitration agreement.

As a matter of practice, it is rarely necessary to include a separate governing law clause to deal with the arbitration agreement. It may be appropriate, for example, where there is a risk that courts of a jurisdiction hostile to arbitration might apply the law of that jurisdiction to the arbitration agreement. In this case, the underlying contract was governed by Brazilian law, whereas the parties had agreed to submit disputes to arbitration in London. If the arbitration agreement were governed by Brazilian as opposed to English law, it would have been ineffective without the recalcitrant party’s consent.

This judgment reflects the commercial and pro-arbitration approach of the English courts and confirms a willingness to ensure that effect is given to the contracting parties’ intention when submitting disputes to arbitration.

Background

The dispute related to two all-risk insurance policies (collectively, the Policy) covering the construction of the Jirau Greenfield Hydro Project in Brazil, one of the largest hydroelectric facilities in the world. As a result of an incident in March 2011, the insured made a claim under the policy for physical damage and consequential losses. The insurers denied liability under the Policy and gave notice of arbitration in London pursuant to the arbitration agreement contained in the Policy.

In response, the insured obtained an injunction from the court in São Paulo restraining the insurers from resorting to arbitration. The insurers then applied to the English Commercial Court for an injunction restraining the insured from pursuing the proceedings in Brazil. Cooke J. granted the insurers’ anti-suit application, which the insured appealed to the Court of Appeal.

The Proper Law of the Arbitration Agreement

The main issue in dispute concerned the question of what law governed the arbitration agreement. The insured argued that Brazilian law should apply, being the law that the parties had agreed to govern the Policy. The insurers, on the other hand, argued in favour of English law, being the law of the seat of the arbitration.

Both parties agreed that “the proper law of the arbitration agreement is to be determined in accordance with the established common law rules for ascertaining the proper law of any contract.”2 However, counsel for both parties cited English legal authorities which appeared to support their opposing positions.

In coming to its decision, the Court of Appeal highlighted the established principle that the arbitration agreement is separable from the substantive contract in which it is contained, as had been emphasised by the House of Lords in Fiona Trust v. Privalov3. The Court of Appeal accordingly proceeded from the starting point 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.”4

The Court of Appeal went on to state that the proper law of the arbitration agreement is to be determined by undertaking a three-stage enquiry into: (i) whether there was an express choice of the law of the arbitration agreement; (ii) whether there was an implied choice of the law of the arbitration agreement; and (iii) the law with which the arbitration agreement has its closest and most real connection.

As is commonly the case, the arbitration agreement (as opposed to the Policy itself) did not contain an express choice of law clause. The Court of Appeal accepted that the parties’ express choice of Brazilian law to govern the Policy provided a “strong indication of the parties’ intention in relation to the agreement to arbitrate,”5 and that this is likely to constitute an implied choice of the law to govern the arbitration agreement, “unless there are other factors present which point to a different conclusion.”6

However, the Court of Appeal was influenced by a factor that it described as “powerful”, concerning the consequence of the application of Brazilian law to the arbitration agreement. The insured submitted that the application of Brazilian law would render the arbitration agreement enforceable only with its consent. The Court of Appeal did not consider that the arbitration agreement, properly construed, was a one-sided agreement that should depend on one party’s consent for its effectiveness.

Accordingly, although the Court of Appeal recognised that, “one may start from the assumption that the parties intended the same law to govern the whole of the contract, including the arbitration agreement”7, the fact that the application of Brazilian law would retract the insurers’ ability unilaterally to initiate arbitration led to the conclusion that this cannot have been the parties’ intention.

The Court of Appeal noted that the choice of a country as the seat of arbitration “imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings.”8 The choice of London as the seat of arbitration provided further evidence of a shared intention between the parties for English law, not Brazilian law, to govern all aspects of the arbitration agreement. Accordingly, the Court of Appeal held that English law should apply to the arbitration agreement.

Conclusion

Whilst this judgment does not prescribe an absolute rule as to what law should govern an arbitration agreement in the absence of an express choice of law, it confirms that the governing law of an underlying contract does not necessarily determine the law of an arbitration agreement. If there may be any issue as to the governing law of the arbitration agreement, contracting parties should ideally specify it expressly. However, and recognising the fact that arbitration clauses rarely contain such choice of law provisions, this decision provides a clear and helpful test as to how this question should be approached and offers a reminder of the pro-arbitration stance adopted by English courts when London is designated as the seat of arbitration.