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Identifying proper law of hybrid arbitration clause (Commercial Court)
Practical Law UK Legal Update Case Report 6-517-4412 (Approx. 7 pages)
Identifying proper law of hybrid arbitration clause (Commercial Court)
by PLC Arbitration
| Law stated as at 25 Jan 2012 • England, Wales |
In Sulamerica CIA Nacional De Seguros SA and others v Enesa Engenharia SA and others [2012] EWHC 42 (Comm), the Commercial Court considered issues relating to the proper law and interpretation of a clause that provided for both mediation and arbitration.
Speedread
Cooke J held that the arbitration agreement contained in an insurance policy was governed by English law and was valid as a matter of its governing law. He rejected a submission that the arbitration agreement was governed by Brazilian law (under which the arbitration agreement was arguably invalid) and further held that provisions requiring the parties to mediate were too uncertain to enforce. Therefore, he concluded that the parties were subject to a valid obligation to arbitrate and continued an anti-suit injunction restraining proceedings brought in the courts of Brazil.
The judgment confirms the modern trend of treating the governing law of the arbitration agreement as coinciding with the curial law of the arbitration, rather than with the proper law of the underlying contract. It further provides a good example of the complications that can arise where hybrid dispute resolution provisions are not sufficiently carefully drafted. Cooke J was driven to accept that certain parts of the mediation provisions might be governed by a different law, and that an exclusive jurisdiction clause was inconsistent with the arbitration agreement and, therefore, of little practical effect. (Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA [2012] EWHC 42 (Comm).)
Background
Arbitration clauses: governing law
As a matter of English law, an arbitration clause is regarded as separable from the host contract. For further discussion, see Practice note, Separability in English law. One consequence of this is that the arbitration clause may be governed by a different law to that which governs the host contract.
The question of which law governs an arbitration clause will be decided by an English court in accordance with English conflicts of law rules, which direct the court to identify the law with which the arbitration clause has its closest and most real connection. English authorities are inconclusive on whether this will generally be:
- The law which governs the host contract.
- The curial law governing the arbitration (generally the law of the seat of the arbitration).
Obiter dicta in C v D [2007] EWCA Civ 1282 and Shashoua and others v Sharma [2009] EWHC 957 (Comm) suggest that, in most cases, the law of the arbitration agreement will coincide with the curial law. However, the matter is not yet settled law. For further discussion, see Ask the team: Which law governs an arbitration agreement in the absence of an express choice of law?.
Hybrid dispute resolution clauses
Some dispute resolution clauses may provide for more than one dispute resolution mechanism (for example, mediation followed by arbitration in the event of failure to settle the dispute). For further discussion, see Practice note, Hybrid, multi-tiered and carve-out dispute resolution clauses.
English law does not recognise an agreement to negotiate or an agreement to settle disputes amicably. Such agreements are too uncertain to enforce, and the courts have declined to do so because of the practical difficulties of monitoring and enforcing compliance (Courtney & Fairbairn v Tolaini Bros (Hotels) Ltd [1975] 1 WLR 297). However, where negotiation or mediation procedures are sufficiently clearly prescribed in a contract, the court will enforce them (Cable & Wireless plc v IBM United Kingdom Ltd [2002] EWHC 2059 (Comm) and Holloway and another v Chancery Mead Ltd [2007] EWHC 2495 (TCC), discussed in Legal update, Court rules on pre-appointment requirements in arbitration clause).
Anti-suit injunctions
In some cases, the English court has jurisdiction to grant injunctive relief restraining the pursuit of overseas proceedings brought in breach of an arbitration agreement. For further discussion, see Practice note, Remedies for breach of the arbitration agreement: anti-suit injunctions in the English courts.
Facts
The dispute arose in connection with an insurance policy that contained the following dispute resolution provisions:
Condition 7 provided that the policy was "governed exclusively by the laws of Brazil" and provided that
"Any disputes arising under, out of or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil".
Condition 11 provided:
"Mediation
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 ...
If the Dispute has not been resolved to the satisfaction of either party within 90 days of service of the notice initiating mediation, or if either party fails or refuses to participate in the mediation, or if either party serves written notice terminating the mediation under this clause, then either party may refer to the Dispute to arbitration."
Condition 12 (Arbitration) 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."
Disputes arose and the insurers commenced arbitration in London.
The insureds argued that the arbitration agreement was governed by Brazilian law and was operable only by the insureds as a matter of its governing law. The insurers obtained an interim anti-suit injunction from the English court restraining the pursuit of proceedings in Brazil, in which the insureds had obtained an order restraining the pursuit of the arbitration.
The insurers applied for the continuation of the anti-suit injunction.
Decision
Cooke J granted the continuation of the interim anti-suit injunction.
Governing law and validity of arbitration clause
Cooke J decided that the arbitration clause was governed by English law. The key issue was the weight to be given to the provision, in Condition 12, that the seat of the arbitration was London. Cooke J noted that the choice of an English seat meant that the English Arbitration Act 1996 would apply to the arbitral proceedings. Referring to C v D and Shashoua v Sharma, he concluded that the law with which the agreement had its closest and most real connection was the law of the seat, namely the law of England.
Furthermore, insofar as Condition 11 formed part of the agreement to arbitrate, it must be governed by the same law.
It was common ground that there was no basis for impugning the validity of the arbitration agreement as a matter of English law (as opposed to Brazilian law).
Enforceable condition precedent to arbitration?
The insureds argued that Condition 11 imposed not only an enforceable obligation to mediate, but a condition precedent to arbitration under Condition 12.
Cooke J disagreed. Referring to the decision of Ramsey J in Holloway v Chancery Mead, he noted that there were three requirements for a mediation clause to be binding:
- The process had to be sufficiently certain, in that there should not be the need for any agreement at any stage before matters could proceed.
- The administrative processes for selecting a party to resolve the dispute and to pay that person had to be defined.
- The process or, at least, a sufficient model of the process should be set out so that the detail is sufficiently certain.
Applying those criteria here, Condition 12 was too uncertain to impose any enforceable obligation to mediate, because:
- The clause did not impose any unequivocal commitment to mediate.
- The clause did not identify any clear mediation process.
- There was no provision for selection of the mediator.
Against that background, Condition 12 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.
Effect of jurisdiction clause
Cooke J concluded that Condition 12 required the parties to refer all disputes to arbitration, although he accepted that this construction of the agreement deprived the jurisdiction clause in Condition 7 of almost all effect. The judge noted that the only practical effect of the jurisdiction clause was that:
"it enables the parties to found jurisdiction in a court in Brazil to declare the arbitrable nature of the dispute, to compel arbitration, to declare the validity of the award, to enforce the award, or to confirm the jurisdiction of the Brazilian courts on the merits in the event that the parties agree to dispense with arbitration. It specifically operates to prevent the parties proceeding in another court on the merits."
Use of the Condition 7 rights in this way would not detract from the arbitration clause.
Comment
The case is a good example of the modern approach to identification of the proper law of the arbitration agreement. In most cases, this will coincide with the curial law (generally the law of the seat), rather than necessarily being the same as the law governing the host contract.
This case was complicated by the fact that the dispute resolution provisions also provided for mediation. Cooke J accepted that the mediation and arbitration agreements must, logically, be governed by the same law, at least, insofar as the mediation agreement was to be regarded as part of the arbitration agreement. He does appear to have accepted the possibility that some parts of the mediation clause may have been governed by Brazilian law (under the general governing law clause in Condition 7). However, on the facts nothing turned on this, as the principles of construction of Brazilian law were materially identical to those of English law.
Cooke J's robust and liberal interpretation of the arbitration clause was consistent with modern authority, but meant that the jurisdiction clause was deprived of virtually all practical effect, as it was largely inconsistent with the obligation to arbitrate disputes.