Sonia Campbell – Destination unknown: achieving certainty in arbitration agreements

It is common for international parties entering into insurance contracts to make provision for a neutral jurisdiction in which to arbitrate any disputes that may arise under the contract, such as London, Paris and Singapore. These cities are commonly selected as the ‘seat’ of the arbitration.

In the majority of cases, insurance policies expressly provide which law will govern the arbitration. The governing law of the arbitration agreement may well mirror the law of the seat, but equally, it may be different from the law that applies in the country of the chosen seat. As explained below, absent express provision in relation to the governing law of the arbitration and the proper law of the substantive contract, reference alone to a ‘seat’ is likely to give rise to legal difficulties.

This was seen most recently in the Sulamérica case (Sulamérica Cia Nacional De Seguros S.A. v Enesa Engenharia S.A. [2012] EWCA Civ 638), in which the English Court of Appeal found that, in the absence of an express provision, and in a case where the choice of law could not be implied, the law with which an agreement to arbitrate has its closest and most real connection is the law of the seat of the arbitration.

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Here the policies contained an express choice of law which stated that the policies were to be governed by Brazilian law, meaning that Brazilian law was to be applied to any dispute arising out of the substantive policy. However, the arbitration agreement did not contain any express choice of law. The seat of the arbitration was stated to be ‘London’ and it therefore fell to the Court of Appeal to decide which system of law (Brazilian or English) applied to the arbitration agreement.

What is the law of the Arbitration Agreement?

In determining whether the arbitration agreement was governed by Brazilian or English law, it was common ground that absent an express choice, the system of law governing the arbitration agreement was to be determined in accordance with established common law rules.

In the Court of Appeal, some useful commentary was provided on the issue of the proper law of the arbitration agreement and the unsatisfactory tension between previous decisions. It was observed it was not uncommon for commercial contracts to contain:

• a choice of law clause stating that the contract will be governed exclusively by the laws of one country (in this case Brazilian law);
• a jurisdiction clause providing that the courts of the same country will have exclusive jurisdiction in relation to any disputes arising out of the contract (in this case, the Brazilian courts) and;
• an arbitration clause providing that certain, or all, disputes arising out of the contract are to be referred to arbitration, the seat of which might be an entirely different country (in this case, the seat was stated to be ‘London’).

Despite many previous authorities on this point, the Court acknowledged that it is by no means easy to decide whether the proper law of the arbitration agreement is the same as the country whose law is to apply to the contract or the law of the country which is specified as the seat of the arbitration.

In his leading judgment, the Master of the Rolls referred to the 1993 Channel Tunnel v Balfour Beatty case (Channel Tunnel Group Ltd and another v Balfour Beatty Construction Ltd and others [1993] 1 All ER 664), in which Lord Mustill regarded it as exceptional for the law of the arbitration agreement to differ from that governing the interpretation of the substantive contract. This view is echoed in many other cases on the basis that the arbitration agreement is an ‘adjunct’ to, or part of, the contract of which the proper law has been specifically agreed between the parties.

More recently the case of C v D (C v D [2007] EWCA Civ 1282) has suggested adopting a different approach. In C v D the Court of Appeal said that it would be rare for the law of the separable arbitration agreement to be different from the law of the seat of the arbitration. This conclusion was explained on the basis that an arbitration agreement will usually have a ‘closer and more real connection’ with the place where the parties have chosen to arbitrate than with the place of the law of the underlying substantive contract.

The divergence in views may in part be due to a growing awareness of the importance of the principle that an arbitration agreement is separable from and in some ways, ‘juridically’ independent of, the underlying substantive contract of which it is part. Another reason is that, at least where the seat is specified as, for example, London or the UK, certain provisions of the Arbitration Act 1996 would apply to the arbitration, which might suggest that the parties’ intention was for the law of the arbitration agreement to be the same as that of the seat.

In Sulamérica two decisive matters tended against any conclusion that Brazilian law applied to the arbitration. First, by electing to seat any arbitration in London, the parties were to be taken to have anticipated and intended that the provisions of the Arbitration Act 1996 would apply to any arbitration commenced under the policies.

Second, if Brazilian law was to apply to the arbitration agreement, then in the case of the insured, a dispute could only be referred to arbitration with its consent (which the insured would not provide). The Court considered that this particular condition could undermine and frustrate a party’s right to arbitrate any disputes. Accordingly, the Court considered that there were insufficient grounds on which to find an implied choice that the parties intended Brazilian law to govern the arbitration agreement.

The system of law with the ‘closest and most real connection’ to the agreement to arbitrate in London (and therefore in accordance with English arbitral law) was the law of the place where the arbitration was to be held, which would exercise the supporting and supervisory jurisdiction to ensure that the procedure was effective. The applicable system of law in the Sulamérica case was English law.

What does this mean for you?

It is ironic that a dispute resolution clause can itself form the basis of a dispute between parties. However, at the time of contracting, parties may not devote sufficient time or thought to whether the arbitration agreement (or indeed, any other dispute resolution mechanism) is legally effective.

Most parties are aware that sufficient levels of certainty must be achieved when drafting an arbitration agreement but many are less sure of how sufficient certainty can actually be achieved. Despite the fact that certain points should always be the subject of careful consideration and drafting, parties continue to litigate this issue.

In drafting an arbitration agreement you should bear in mind the following considerations which can introduce greater certainty and reduce the potential for dispute: think about whether you want the arbitration to be governed by the rules of a particular arbitral institution, such as the London Court of International Arbitration (LCIA) or Singapore International Arbitration Centre (SIAC), or if your preference is to proceed on an ‘ad hoc’ basis.

You should also consider whether the country whose laws will apply to the seat of the arbitration, or the country whose laws are to apply to the arbitration agreement are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). If they are not, enforcement of any Award may be problematic.

If you are inserting an arbitration agreement into your contract, ensure that you expressly state in that agreement the chosen system of law that is to apply to the arbitration agreement as well as the country in which the arbitration is to be seated (which will then determine the procedural law applicable to any actual arbitration).

Sonia Campbell, Legal Director. Tel +44(0)20 7788 5173

Email:[email protected]

Saul Gindill, Trainee Solicitor. Tel +44(0) 20 7160 3394

Email:[email protected]