LAW GOVERNING ARBITRATION HAS CLOSEST CONNECTION TO LAW OF THE SEAT - Joachim Delaney

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1 Page 1 LAW GOVERNING ARBITRATION HAS CLOSEST CONNECTION TO LAW OF THE SEAT - Joachim Delaney The Court of Appeal has upheld the first instance decision in Sulamerica Cia Nacional de Seguros SA v Enesa Engenharia SA. (1) The court found that the law of the arbitration agreement had its closest and most real connection with the seat of the arbitration, not the substantive law governing the underlying insurance policy. Facts The insurer had been granted an anti-suit injunction that prevented the insured from pursuing proceedings against the insurer in the Brazilian court system. That injunction had been continued by the first instance judge. (2) continuation order. The insurance policy was governed by Brazilian law and included: The insured appealed the an exclusive jurisdiction clause referring any disputes to the Brazilian courts; a mediation clause; and an arbitration clause (with London as the seat of arbitration). The insurer had commenced arbitration proceedings in London pursuant to the arbitration agreement, after which the insured commenced court proceedings in Brazil. The insured had obtained an injunction from the Brazilian courts restraining the insurer from resorting to arbitration for a declaration of no liability, but only after the insurer had obtained an anti-suit injunction from the English courts. The Court of Appeal has upheld the first instance decision in Sulamerica Cia Nacional de Seguros SA v Enesa Engenharia SA. (1) The court found that the law of the arbitration agreement had its closest and most real connection with the seat of the arbitration, not the substantive law governing the underlying insurance policy. Issues The insured argued that: they were not bound by the arbitration agreement; the arbitration agreement was governed by Brazilian law and as a

2 Page 2 matter of Brazilian law could be invoked only with their consent; the right to refer the dispute to arbitration was limited by the obligation to mediate; and the arbitration agreement covered only disputes over quantum. The insurer argued that: Decision the arbitration agreement was governed by English law, which was the law of the seat of arbitration; as the insured had failed to join a mediation, the dispute was validly submitted to arbitration; and the mediation clause was insufficient to impose a condition on the Applicable laws agreement to arbitrate. The Court of Appeal acknowledged that three separate laws may apply to arbitration proceedings: the substantive law governing the rights and duties under the contract; the law governing the submission to arbitration (ie, the law of the arbitration agreement); and the curial or procedural law governing the arbitration procedure. The choice of curial law usually follows the seat of arbitration in the absence of an express agreement to the contrary. The law of the seat governs the conduct and supervision of the arbitration. In many situations, the seat of arbitration is chosen for entirely different reasons from those governing the choice of the contract's substantive law (eg, in the interest of having a neutral forum). The choice of curial law usually follows the seat of arbitration in the absence of an express agreement to the contrary. The law of the seat governs the conduct and supervision of the arbitration. In many situations, the seat of arbitration is chosen for entirely different reasons from those governing the choice of the contract's substantive law (eg, in the interest of having a neutral forum). Proper law of the agreement The proper law of an arbitration agreement must be determined in accordance with the common law rules for ascertaining the proper law of any contract. First, the parties' intentions express or implied are ascertained. If no intentions can be established, the relevant law is the one to which the contract has the "closest and most real connection".

3 Page 3 Factors weighing in favour of Brazilian law were: the express choice of Brazilian law to govern the policy; the granting of exclusive jurisdiction to the Brazilian courts; and the close "commercial connection" of the contract to Brazil. Evidence of the latter was the parties' nationality, the currency and language used and the subject matter of the contract. Factors weighing in favour of English law were: the choice of London as the seat of arbitration; and the serious risk that the choice of Brazilian law as the law of the arbitration agreement would undermine the agreement, as Brazilian law required that additional consent be sought before the arbitration agreement could be invoked. Taking these factors into account, the court found that the law of the arbitration agreement had its closest and most real connection with the law of the seat that is, English law. The court recognised that the law of the seat would provide the necessary supporting and supervisory jurisdiction to ensure that the arbitration proceedings were effective. The governing law of the insurance policy was unrelated to the resolution of the dispute. The desire to give effect to the arbitration clause was strongly persuasive, as the governing law of the policy undermined the parties' agreement to arbitrate. The court confirmed that the mediation clause did not create a condition precedent to the commencement of arbitration. The fact that no mediation procedure or provider had been specified led the court to uphold the finding that it did not create a binding obligation on the parties. Mediation as a condition precedent to arbitration The court confirmed that the mediation clause did not create a condition precedent to the commencement of arbitration. The fact that no mediation procedure or provider had been specified led the court to uphold the finding that it did not create a binding obligation on the parties. Scope of the agreement The court upheld the finding of the first instance judge that, in the absence of express choice, the language of the parties' intention to refer all disputes to arbitration was not intended to refer only issues of quantum to arbitration.

4 Page 4 Exclusive jurisdiction clause The court refused permission to appeal the first instance decision regarding the interplay between the exclusive jurisdiction clause and the arbitration agreement. The court took the view that the first instance judge made no decision either way as to the nature of the arbitration agreement. It was sufficient that the arbitration clause provided a right to refer disputes to arbitration. Comment While each case will depend on its own facts, the Court of Appeal decision indicates that the law of the arbitration agreement is likely to follow the seat of arbitration, rather than the substantive law of the contract. The arbitration agreement is likely to have its closest and most real connection to the place in which the arbitration is held, as it is the law and courts of the seat that provide the necessary support and supervisory jurisdiction over the arbitration proceedings. Endnotes (1) [2012] EWCA Civ 638. (2) For further details please see "Mediation blues: agreement to mediate found not binding". Find this article on: Author Profile - Joachim Delaney Joachim Delaney has more than 12 years experience in international arbitration with Clifford Chance, working on a range of commercial arbitrations as well as investment arbitrations under the ICC, LCIA, AAA, SIAC, UNCITRAL Rules as well as the ICSID Convention. Jo regularly lectures and writes on issues of international arbitration. "This article was originally edited by, and first published on, - the Official Online Media Partner to the IBA, an International Online Media Partner to the ACC and the European Online Media Partner to the ECLA. Register for a free subscription at

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