Choice of Proper Law of Arbitration Agreement: Sulamerica

We did a descriptive comment on the recent decision of Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (16 May 2012) (Sulamerica) in which the English Court of Appeal dealt in detail with the concept of implied choice of the law of arbitration agreement was dealt with in detail. At the end ofthe post, we stated that we were not convinced by the reasoning in the judgement. As a prelude to a critique on the judgement, we briefly analyse the existing Indian position on the law on the choice of law of arbitration agreement.

Indian Position:

One of the earliest cases to decide on the determination of the law of the arbitration agreement in the absence of express choice is the well-known case of NTPC v. Singer AIR 1993 SC 998, where the Supreme Court held that the proper law of the arbitration agreement was “normally” the proper law of the contract expressly chosen by the parties. The court clarified that where the parties had expressly agreed on the proper law of the contract but had not designated the proper law of the arbitration agreement, “[i]t is Indian law which governs the contract, including the arbitration clause, although in certain respects regarding the conduct of the arbitration proceedings the foreign procedural law and the competent courts of that country may have a certain measure of control." It must be noted that the court stated that in “exceptional cases”, the expressly designated proper law of the contract may not be the proper law of the arbitration agreement, although the court did not elaborate on what the exceptional circumstances were.

This judgement has been cited with approval in several cases under the 1940 and the 1996 Acts. Examples are Sumitomo’s Case MANU/MH/0085/1996, Sumitomo v. ONGC AIR 1998 SC 825, Eitzen Bulk A/S v. Ashapura Minechem Limited AIR 2011 Guj 13 and Aastha Broadcasting Network Limited v. Thaicom Public Company Ltd. MANU/DE/4410/2011. In NTPC v. Singer, it was held:

“Where, there is no express choice of the law governing the contract as a whole, or the arbitration agreement as such, a presumption may arise that the law of the country where the arbitration is agreed to be held is the proper law of the arbitration agreement. But that is only a rebuttable presumption..”

Thus, where neither the proper law of contract nor the proper law of arbitration agreement is chosen, it would be presumed that the latter would be the seat of arbitration. This does not mean that where the proper law of contract is expressly chosen, the law of the seat of arbitration would nevertheless be the proper law of arbitration agreement.

The Indian position can be summed up in three propositions:

1.      In the absence of express choice of the law of arbitration agreement, the choice of the proper law of the contract will also govern the arbitration clause.

2.      However, in exceptional circumstances, even if the proper law of the contract is chosen, such may not be the law of the arbitration agreement where the agreement is silent.

3.      Where neither the proper law of contract nor the proper law of arbitration agreement is chosen, it would be presumed that the latter would be the seat of arbitration.

The phrase “exceptional cases” employed in NTPC v. Singer has not been explained in any of the decided cases. However, from the decided cases, one can decipher what does not amount to an exceptional case. In NTPC v. Singer, for instance, the proper law of contract was Indian law, the courts at Delhi had exclusive jurisdiction, the seat was London and the arbitral rules were the ICC Rules. Even so, the Supreme Court held:

"It is Indian law which governs the contract, including the arbitration clause, although in certain respects regarding the conduct of the arbitration proceedings the foreign procedural law and the competent courts of that country may have a certain measure of control."

Note that in Sulamerica, the relevant clause in the insurance policy provided for the seat to be London, the Governing Law of Contract to be the laws of Brazil and the applicable rules to be ARIAS Arbitration Rules (ARIAS- A.I.D.A Reinsurance and Insurance Arbitration Society of the UK). The policy also provided that any dispute arising in respect of the policy would be subject to the exclusive jurisdiction of Brazilian courts. The facts in Sulamerica and NTPC v. Singer appear similar: 

Aspect	Sulamerica	NTPC v. Singer
Seat	London	London
Choice of Proper Law of Contract	Brazil	India
Applicable Arbitral Rules	ARIAS	ICC Rules
Exclusive Jurisdiction of Court	Brazil	Delhi, India

Even so, the conclusions arrived at by the Court of Appeal and the Supreme Court are different. In the future, Sulamerica would probably be cited in an Indian court to canvass the proposition that even if the proper law of the contract is expressly designated by the parties, the proper law of arbitration agreement would be the law of seat (which is different from that of the proper law of the contract). Following are the reasons why the proper law of arbitration agreement should be the expressly designated proper law of contract and not the seat of arbitration:

1. At a basic level, it is only logical that the arbitration clause, which forms a part of the contract, would be governed by the same law that the rest of the contract is.
2. In India, unlike in several other countries, often business managers solely negotiate contracts without any legal advice. In such cases, the law on choice of law should not be intricate or complicated and should proceed on the basis of logic and common sense. Considering that, the conclusion reached in NTPC v. Singer is commonsensical and in accord with business understanding and common sense.
3. The consequence of Sulamerica is to make the parties agree on the proper law of arbitration agreement in addition to that of the contract so as to prevent ambiguities. From a transaction cost point of view, this would lead to additional cost to negotiate a proper law of arbitration agreement, in addition to the proper law of contract.
4. Indian precedents, as discussed above, are not in favour of Sulamerica approach.
5. To generalise Sulamerica, where there exists a rule similar to the Brazilian law (requiring further consent of insured for reference to arbitration) and where the seat is London, the law of arbitration agreement in the absence of express choice would not be Brazilian law although the law of contract is but would be English law. ("The possible existence of a rule of Brazilian law which would undermine [the reference of disputes to arbitration without further consent] tends to suggest that the parties did not intend the arbitration agreement to be governed by that system of law."). What Sulamerica does is to make the law on choice of law of arbitration agreement dependent on the law of another country. If the jurisdiction which parties agree as governing the contract provides for  further consent for reference of disputes to arbitration, in such case, the law of arbitration agreement (in the absence of express choice ) would not be that law but English law, which does not provide for such as clause. Assume for a moment that a contract identical to the one in Sulamerica is agreed to between two parties. If Sulamerica approach is adopted, English Law would be the law of arbitration agreement. Assume that prior to reference of a dispute under the contract to arbitration, the Brazilian legal requirement of further consent is removed by an amendment to the law. In such a case, would English Law still remain the law of arbitration agreement? This hypothetical example points out the defect of the Sulamerica approach. The choice of the law of arbitration agreement would change during the currency of the contract not by an amendment to the contract but by operation of Brazilian law, which the parties might not even be aware of. Law on choice of law is already complicated. Why make it murkier? [Note that Sulamerica can be read as holding that even if the contract provides for the proper law of contract but not the proper law of arbitration agreement, the latter would be the law of the foreign seat (“In my view an agreement to resolve disputes by arbitration in London, and therefore in accordance with English arbitral law, does not have a close juridical connection with the system of law governing the policy of insurance, whose purpose is unrelated to that of dispute resolution; rather, it has its closest and most real connection with the law of the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective. Its closest and most real connection is with English law.")]

It may be noted that the Sulamerica approach is not altogether disadvantageous. If the law of the seat is to be the law of arbitration agreement in the absence of express designation, a foreign party entering into a contractual relationship with Indian law as the substantive law of contract providing for arbitration in London need not worry about the Indian arbitration law (in a scenario where Bhatia International does not exist). The party needs to only look at the English arbitration law which it would in any case do considering that the lex arbitri would be English Law.  However, considering the above reasons, it makes sense for India to continue to apply NTPC v. Singer.

NLSIR: Call for Papers

Call for Papers for NLSIR is below:

 

"The National Law School of India Review is now accepting submissions for its upcoming issue - Volume 25(1). The National Law School of India Review (NLSIR) is the flagship law journal of the National Law School of India University, Bangalore, India. The NLSIR is a bi-annual, student edited, peer-reviewed law journal providing incisive legal scholarship on issues that are at the forefront of contemporary legal discourse. Over the last 20 years, the NLSIR has regularly featured articles authored by judges of the Indian Supreme Court, Senior Counsel practicing at the Indian bar, and several renowned academics. 

The most recent issue of the NLSIR, Vol. 23(2), featured contributions by Mr Aseem Chawla (Partner, Amarchand & Mangaldas & Suresh A. Shroff & Co.),  Mr Sunil Jain  (Partner, Direct Tax, J Sagar Associates, Advocates & Solicitors) and Mr. Ravishankar Raghavan (Principal, Tax Group, Majumdar & Co., India) among several others. Moreover, in August 2009, NLSIR attained the unique distinction of being the only Indian student-run law journal to be cited by the Supreme Court of India, in Action Committee, Un-Aided Private Schools v. Director of Education. NLSIR has also recently been cited in Justice R. S. Bachawat's Law of Arbitration and Conciliation, a leading treatise on arbitration law in India.

Papers may be submitted as Long Articles (approximately 8000 words), Essays (approximately 5000 words) or Notes (approximately 2500 words). Submissions may be made to mail.nlsir@gmail.com under the subject heading  25(1) NLSIR - Submissions. Queries regarding submission may be sent to the same email address. The last date for submissions is November 15, 2012. For more information, please visit - http://www.nlsir.in/."

UNCITRAL Digest on the Model Law on International Commercial Arbitration

UNCITRAL usually comes up with extremely good work on International Commercial Arbitration. Its contribution to the subject has been astounding, to say the least. It has added another feather to its cap by publishing the Digest of Cases on the Model Law on International Commercial Arbitration. The 242 page Digest lists out almost all the major cases of prominent Model Law jurisdictions and also includes several Indian cases such as Bhatia International, Venture Global, Patel Engineering, Bohgara Polyfab, SAW Pipes, Phulchand Exports, Centrotrade Minerals, etc. The digest is a must-have for all enthusiasts of international commercial arbitration and can be accessed from here.

It has been our constant complaint in this blog that advocates in India do not cite relevant foreign decisions. We hope this Digest will aid advocates cite relevant decisions in the courts and explain the rationale for a particular legal position prevailing in another Model Law jurisdiction.

Choice of Law: The Law of the Arbitration Agreement

We had previously noted a recent judgement of the English Court of Appeal in Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (16 May 2012). The said judgement is expected to be cited all over for comprehensively dealing with the issue of the applicable law of arbitration agreement in the absence of express choice by the parties. In this post, we list the salient points in the judgement. This post would form a part of the series in this blog on Choice of Law and the posts contained under the said topic can be accessed from here.

Choice of Law of Arbitration Agreement: The Sulamerica Approach

In Sulamerica, the relevant clause in the insurance policy quoted below provided for the seat to be London, the Governing Law of Contract to be the laws of Brazil and the applicable rules to be ARIAS Arbitration Rules (ARIAS- A.I.D.A Reinsurance and Insurance Arbitration Society of the UK). The policy also provided that any dispute arising in respect of the policy would be subject to the exclusive jurisdiction of Brazilian courts.The relevant clauses:

"7. Law and Jurisdiction

It is agreed that this Policy will be governed exclusively by the laws of Brazil.

Any disputes arising under, out of or in connection with this Policy shall be subject to the exclusive jurisdiction of the courts of Brazil. 

11. 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.

All rights of the parties in respect of the Dispute are and shall remain fully reserved and the entire mediation including all documents produced or to which reference is made, discussion and oral presentation shall be strictly confidential to the parties and shall be conducted on the same basis as without prejudice negotiations, privileged, inadmissible, not subject to disclosure in any other proceedings whatsoever and shall not constitute any waiver of privilege whether between the parties or between either of them and a third party.

The mediation may be terminated should any party so wish by written notice to the appointed mediator and to the other party to that effect. Notice to terminate may be served at any time after the first meeting or discussion has taken place in 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, of if either party serves written notice terminating the mediation under this clause, then either party may refer to the Dispute to arbitration.

Unless the parties otherwise agree, the fees and expenses of the mediator and all other costs of the mediation shall be borne equally by the parties and each party shall bear their own respective costs incurred in the mediation regardless of the outcome of the mediation.

12. Arbitration

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 ARIAS Arbitration Rules. The Arbitration Tribunal shall consist of three arbitrators, one to be appointed by the Insured, one to be appointed by the Insurer(s) and the third to be appointed by the two appointed arbitrators. The Tribunal shall be constituted upon the appointment of the third arbitrator.

The arbitrators shall be persons (including those who have retired) with not less than ten years' experience of insurance or reinsurance within the industry or as lawyers or other professional advisers serving the industry.

Where a party fails to appoint an arbitrator within 14 days of being called upon to do so where the two party-appointed arbitrators fail to appoint a third within 28 days of their appointment, then upon application ARIAS (UK) will appoint an arbitrator to fill the vacancy. At any time prior to the appointment by ARIAS (UK) the party or arbitrators in default may make such appointment.

The Tribunal may at its sole discretion make such orders and directions as it considers to be necessary for the final determination of the matters in dispute. The tribunal shall have the widest discretion permitted under the law governing the arbitral procedure when making such orders or directions.

The seat of the arbitration shall be London, England."

The issue before the court was whether the law of arbitration agreement was Brazilian Law. It was argued by the insurers that they had validly commenced the arbitration. The insureds resisted this contention by arguing that the law of arbitration agreement was Brazilian law under which the consent of insured were required to commence arbitration. Therefore, the court had to determine if the law of arbitration agreement was Brazilian or English Law.

The decision of the English Court of Appeal is summarized here below. It may be noted that we have not dealt with the English precedents/ previous decisions):

1. In the absence of any indication to the contrary, the proper law governing the arbitration agreement contained in the contract is the proper law of the contract. Where parties have chosen the proper law of the contract, it is "natural" to infer that the law of the arbitration agreement would also be the same as that of the proper law of the contract containing it.
2. The proper law of the arbitration agreement also may differ from the proper law of the contract due to the operation of the doctrine of separability of the arbitration agreement from the rest of the contract.
3. The proper law of the arbitration agreement can be determined by a three-stage enquiry: "(i) express choice, (ii) implied choice and (iii) closest and most real connection. As a matter of principle, those three stages ought to be embarked on separately and in that order, since any choice made by the parties ought to be respected, but it has been said on many occasions that in practice stage (ii) often merges into stage (iii), because identification of the system of law with which the agreement has its closest and most real connection is likely to be an important factor in deciding whether the parties have made an implied choice of proper law..."
4. Where there is a separate arbitration agreement to arbitrate in London, the implication, in the absence of express choice of proper law, would be that English law would be the proper law of the arbitration agreement since it would have the closest and most real connection.
5. However, where the arbitration agreement forms a part of the contract with an express choice of proper law of contract, the position is different.
6. "A search for implied search for an implied choice of proper law to govern the arbitration agreement is therefore likely... to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract, unless there are other factors present which point to a different conclusion." 
7. In this case, two factors lead to the conclusion that the parties had impliedly chosen English law as the law of the arbitration agreement: (1) the choice of London as the seat of arbitration: when the parties had expressly chosen London as the arbitral seat, they must have "foreseen and intended" that the provisions of the Arbitration Act, 1996 relating to arbitration agreement including substantive Sections 5 (Agreements to be in writing), 7 (Separability of arbitration agreement.), 8 (Whether agreement discharged by death of a party.), 12 (Power of court to extend time for beginning arbitral proceedings) and 13 (Application of Limitation Acts.) would apply; (2) According to the insureds, as per Brazilian law, despite the arbitration agreement, the arbitration would be commenced only after consent of the insured. This is a "powerful factor" and must be considered in the enquiry on whether Brazilian law is the proper law of arbitration agreement. Unilateral arbitration agreements wherein reference is possible at the option of a party are in vogue. However, no such indication exists in the arbitration clause, which provides for reference of disputes to mediation and arbitration in case of disputes. "The possible existence of a rule of Brazilian law which would undermine that position tends to suggest that the parties did not intend the arbitration agreement to be governed by that system of law."

The court held:

"In my view an agreement to resolve disputes by arbitration in London, and therefore in accordance with English arbitral law, does not have a close juridical connection with the system of law governing the policy of insurance, whose purpose is unrelated to that of dispute resolution; rather, it has its closest and most real connection with the law of the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective. Its closest and most real connection is with English law."

As per this judgement, where parties have provided for a proper law of contract, an arbitration clause, and a seat that is outside the operation of the proper law of the contract, parties are deemed to have impliedly chosen the law of the seat as the law of arbitration agreement.

Prima facie, the rationale of this judgement does not appear to be convincing. We will do a critique of this judgement in a future post.