In Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] EWCA Civ 638, the Court of Appeal has clarified what has, for some time, been an uncertain area of jurisprudence as to which law should apply to the arbitration agreement where none is expressly stated. It upheld the High Court's decision that the law of the seat (England) should apply in this case, despite the fact that all other factors pointed to the law of Brazil. In so doing, they continued the anti-suit injunction that had been ordered in relation to Brazilian court proceedings. For more detail on the case, see Legal update, Sulamerica: full update on Court of Appeal decision on determining law of arbitration agreement and for discussion about the Brazilian courts' decisions in the dispute, see Legal update, Brazilian court issues anti-arbitration injunction).

However, the Lord Justices of Appeal (Moore-Bick LJ giving the leading judgment) explained that this need not necessarily be the case and set out a helpful test by which to ascertain the relevant law. They held that the closest connection will not necessarily be to the law of the seat but rather, in the absence of other factors, the implied law of the arbitration agreement will often be the same as the law of the substantive contract. However, they chose not to be more prescriptive as this will always be a matter of contractual interpretation, taking into account "the wider commercial and legal context in which the arbitration agreement is set".

In order, then, to determine which law should apply to the arbitration agreement, they laid down a three stage enquiry into:

It was recognised that the last two stages of the enquiry will often merge into one another.

In finding the parties' implied choice to be English law, the Lord Justices were persuaded by the fact that, under Brazilian law, the agreement to arbitrate was only enforceable with Enesa's consent. This would seriously undermine the agreement. In addition, in this case, the supervisory jurisdiction was held to have a closer connection to the arbitration agreement than the law of the insurance policy "whose purpose is unrelated to that of dispute resolution."

Until now, English cases have been divided as to whether the arbitration agreement follows the law of the underlying contract or the law of the seat/supervisory jurisdiction selected by the parties. More recent cases take the view that the law of the seat is more closely connected. This tracks the development of the principle of separability, whereby the arbitration agreement is legally distinct from the contract of which it forms a part. It is the logic in these cases that was followed at first instance and indeed since then in the case of Abuja International Hotels Ltd v Meridien Sas [2012] EWHC 87 (Comm) (see Legal update, Proper law of arbitration agreement coincides with curial law of arbitration (Commercial Court)). Nonetheless, to a large extent, the Court of Appeal decision draws a line under this uncertainty and clarifies the way forward in relation to some important points of practice.

From a drafting point of view, the most important points to bear in mind are as follows:

First, although we now have clearer guidance as to the law which English courts will apply to the arbitration agreement where it is not stipulated, there is still room for uncertainty and much will depend on the circumstances of the case. To avoid surprises, it is always worthwhile for parties to state the law they wish to apply. This will ensure that the agreed procedure for resolving disputes remains effective, including in circumstances that would render the substantive contract ineffective.

Second, escalation clauses should be drafted clearly to ensure that any agreement to mediate is construed as a condition precedent to arbitration. As regards the mediation agreement in this case, the Court of Appeal concurred with Cooke J who, at first instance, had held that it did not give rise to a legal obligation. As such, it was not a bar to the jurisdiction of the arbitral tribunal. They did not go so far as to prescribe the essential ingredients for a mediation provision to be effective as they considered that each case must be considered on its own terms. However, they accepted that certain factors were required that did not exist in this situation, namely:

Finally, it is worth noting that the court in this case gave effect to the arbitration agreement, despite the existence of an exclusive jurisdiction clause alongside it in the Policy. Following the approach taken in ACE ltd v CMS Energy Corporation [2009] 1 LRIR 414, the court did not allow the exclusive jurisdiction clause to encroach on the validity of the parties' choice to arbitrate although it left little in practice to court jurisdiction (which was limited to declaring a dispute arbitrable, compelling arbitration, declaring the validity of the award, or deciding on the merits if the parties dispense with arbitration). Nonetheless, it is, of course, advisable to steer clear of incorporating conflicting dispute resolution clauses when entering into new agreements.