Australia: The law applicable to arbitration agreements in international contracts

In the same way parties choose a law to apply to their contract and a procedural law to apply to any future arbitration, parties to international contracts should expressly choose a law to govern an arbitration agreement contained in a contract.

This law will govern the validity of the arbitration agreement, including questions as to who is a party to the agreement, the scope of the agreement and whether certain disputes can be submitted to arbitration.

The decision in Sulamerica Cia Nacional De Seguros v Enese Engenharia¹ (Sulamerica) is a useful example of why it is now important to expressly provide for a law governing the arbitration agreement, even if the main contract already has a governing law clause.

Sulamerica in context

Arbitrations raise a range of conflicts of laws issues. First, there is the law governing the substantive dispute before the arbitrator (usually, the governing law of the contract). Secondly, there is the law governing the arbitration itself (usually the law of the seat of arbitration). Thirdly, there is the law governing the arbitration agreement, as an arbitration agreement is treated in most jurisdictions as being a separate contract, even if contained within a larger contract.

In the past, it was usually accepted that the law of the main contract would apply to the arbitration agreement within that contract. However, the decision in Sulamerica suggests that this is not automatic and that the seat chosen by the parties for arbitration may be a persuasive factor in determining the proper law of an arbitration agreement.

The decision in Sulamerica follows a number of recent authorities that took this same approach. The English decisions in XL Insurance Ltd² and C v D³ discussed that the seat of arbitration elected by the parties can determine the proper law governing its arbitration agreement. The Victorian Supreme Court in Altain Khuder opined that the proper law of the contract does not automatically apply to the arbitration agreement therein, on the basis that arbitration agreements are separable from the contract.⁴ Further, in the absence of an express choice of law, both the UK Supreme Court and Paris Court of Appeal in Dallah v Pakistan applied French arbitration law to an arbitration agreement for the purposes of enforcement under Article V(1)(a) of the New York Convention⁵ on the basis that the parties intended for French law to apply and the seat of the arbitration was Paris.

Facts

A group of Brazilian construction companies that had contracted to undertake work on the Jirau Greenfield Hydro Project in Brazil entered into two all risk insurance policies with a group of Brazilian insurance companies. Various incidents occurred that led the insured to claim under the policies. The insurers denied the claim and gave notice of arbitration to the insured for the purpose of seeking a declaration of non-liability. The policies contained an express choice of Brazilian law, but provided for the seat of arbitration to be London.

Under Brazilian law, the arbitration agreement was unenforceable, whereas it was binding and enforceable under English law. Accordingly, the Court had to determine which law governed the agreement before deciding whether it could seek to give effect to the arbitration agreement.

The decision

The Court of Appeal agreed with the judge on first instance in that the parties' choice of London as the seat of arbitration suggested an implied intention of the parties to elect the curial law and the supervising jurisdiction of the English courts. Both courts determined the applicable law by applying the common law threestage enquiry:

• first, to look for an express choice of law provision
• secondly, if there is no such express choice of law, to look for the law the parties intended would govern the arbitration agreement by implication; and
• thirdly, to consider the law to which the arbitration agreement has the "closest and most real connection".

The policies contained no express choice of law to govern the arbitration agreement, which lead the court to the "natural inference"⁶ that the law governing the contract will also govern the agreement to arbitrate. However, other factors led the court to a different construction, strongly suggesting that parties intended for English law (not Brazilian law) to govern the arbitration agreement.

The law implied to govern

Notwithstanding many connecting factors with Brazil (including the location of the parties, the law of the contract, Brazilian courts having exclusive jurisdiction), the Court found that the parties impliedly intended for English law to apply. This was because:

• first, the choice of seat "imports an acceptance" that the parties were aware that the law of that country would apply to the conduct and supervision of arbitration
• secondly, it could not have been the parties' intention for Brazilian law to govern the arbitration agreement, because under Brazilian law a party's right to unilaterally commence arbitration could be retracted
• thirdly, the resolution of the dispute was held to be unrelated to Brazilian law governing the policies.

International contracts – be clear and express which law is to govern

The decision in Sulamerica is important to keep in mind when drafting arbitration agreements in international contracts and follows a number of recent cases in both Australia and England where the choice of law governing the arbitration agreement has been determinative in deciding whether or not to enforce awards.

To avoid the potential for costly litigation or the risk of obtaining an award that is unenforceable, parties should include an express clause stating which law is to govern the arbitration agreement. This should usually be the same law which governs the main contract, unless there are good reasons to choose the law of the seat (for example, because the law governing the main contract would more likely render an arbitration agreement void).

Footnotes

¹ [2012] EWCA Civ 638.

² [2001] 1 All E.R. (Comm) 530.

³ [2007] EWCA Civ 1282.

⁴ IMC Aviation Solutions Pty Ltd v Altain Khuder LLC [2011] VSCA 248.

⁵ Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46. Article V(1)(a) of the New York Convention provides that a court may refuse
the enforcement of an award where the arbitration agreement is not valid under the laws to which the parties' have subjected it to.

⁶ Sulamerica [11], referring to Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] A.C. 334 (Lord Mustill), 357-358; Black Clawson International Ltd v Papierwerke Waldhof- Aschaffenburg AG [1982] 2 Lloyd's Rep. 446, 455; Sumitomo Heavy Industries Ltd v Oil and Natural Gas Commission [1994] 1 Lloyd's Rep. 45 (Potter J), 57; Leibinger v Stryker Trauma GmbH [2005] EWHC 690 (Comm) (Cook J).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.