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By Laura Thomson, Pillsbury Winthrop Shaw Pittman
English Court of Appeal dismisses appeal, upholding injunction of coverage dispute in Brazilian courts because arbitration clause specifying London as the seat of arbitration trumps the policy's controlling law provision.
The English Court of Appeal has released its decision in the appeal between Sulamerica Cia Nacional De Seguros S.A. and Enesa Engenharia S.A. over which law, Brazilian or English, governs an arbitration agreement that specified London as the seat of arbitration within an insurance policy that also specified Brazilian law as the controlling law. The nature of the specific claims was unreported, except that they related to coverage procured for the construction of Jirau Greenfield Hydro Project, a hydroelectric generating plant in Brazil. Ruling that English law applied to the arbitration agreements within two substantially similar manuscript insurance policies, the Appeals Court dismissed the appeal, continuing the injunction of the insured's coverage dispute against its insurers in Brazilian court, in favor of London arbitration.
The policies at issue include express provisions that Brazilian law is the law governing the contract and Brazilian courts have exclusive jurisdiction for any disputes arising under the Policy. But, the policies also include an arbitration clause which provides that London is the seat of arbitration. That provision was key for the court in determining the choice of law as to the arbitration agreement.
Observing first that it is not uncommon for the law applied to an arbitration to be different than that of the substantive contract, the court analyzed the question of which law applies using a three-step inquiry into the express choice of law, the implied choice of law, and which law has closest and most real connection to the arbitration.
There was no question that the policy was to be governed exclusively by the law of Brazil. For the court, this selection, however, did not expressly carry over to the interpretation of the arbitration agreement. Relying principally on the decision in C v D  EWCA Civ 1282, 1 All ER (Comm) 1001, the court reported, there is "growing awareness of the importance of the principle that an arbitration agreement is separable from, in some ways almost juridically independent of, the underlying contract of which it is physically part." The court further cited a "growing appreciation of the point that, at least where the seat is the UK, certain substantive provision of the [UK Arbitration Act of 1996] would apply to the arbitration, which could be said to suggest that the parties intended the law of the arbitration to be that of the seat." Ultimately, the court concluded that Brazilian law, which would have allowed the suit to proceed in the Brazilian courts, did not apply to the arbitration agreement.
Effectively, the court concluded that the selection of the seat of arbitration was the de facto express choice of English law, Brazilian law was not likely to have been the implied choice because application of Brazilian law requires the express consent of the parties before arbitration could commence and such an intention was not clear from the agreement, and the law of the selected seat of arbitration has the closest and most real connection to the arbitration agreement. The insureds also argued that the policies mediation provision, which it asserted was a condition precedent to arbitration, was unquestionably governed by Brazilian law and thus a strong indicator of the parties' intention to apply Brazilian law to the arbitration agreement. The court did not accept the logic of the argument, and did not find clear language creating a condition precedent.
This decision offers some useful insights for policyholders and insurers whose policies are subject to international arbitration:
Any business agreeing to arbitration should expressly state the law to be applied to the arbitration agreement. This is true even if the parties want that law to be the same as the law governing the substantive portion of the contract. Otherwise, as it was here, selection of the seat of the arbitration may well be interpreted as the de facto selection of law governing the arbitration agreement itself.
Business that want an additional consent or mediation to be a condition precedent to commencing arbitration need to use clear and unequivocal language on these points. They should also include steps detailing how and where the mediation process will be conducted.
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