1. A perennial problem for international arbitration is what law governs the arbitration agreement and the arbitration. These are two separate questions and distinct from the law that governs the substantive issues in a matter submitted to arbitration.

2. There appear to be three fundamental rules (like all rules subject to exceptions). First, party autonomy recognizes and requires that the law chosen by the parties governs the main contract. Second, generally where a contract expressly selects the law to govern the substantive contract, it is presumed that the same law will govern the arbitration agreement as well, especially where the arbitration agreement is contained in the substantive contract. Third, the arbitration itself is governed by the system, rules and laws agreed by the parties, subject to the fall back to, and the mandatory law of, the seat of arbitration.

3. There have been two recent decisions of the English courts that have focussed on what law governs the arbitration agreement in English law. Specifically, Sulamérica,1 a decision of the Court of Appeal, and Arsanovia,2 a High Court decision. These cases provide an indication of the analysis of the English courts when having to determine a question of applicable law to govern the agreement to arbitrate.

4. In this context there are potentially different laws to govern the substantive contract, the arbitration agreement, and the arbitration. Although these are three separate issues, invariably, and in most places, the substantive contract and the arbitration agreement will be governed by the same law, and there is an express choice of law.

5. An initial issue relevant to determine the applicable law in these circumstances, which may complicate this discussion, is where the decision concerning the applicable law is made: in a national court, or in an international arbitral tribunal. Generally speaking these decisions are likely to be taken at different times and for different purposes.

6. National court decisions relating to applicable law affecting an arbitration agreement will be taken where court proceedings have been brought and a stay is sought under Article II of the New York Convention. In such a case the court must stay its proceedings unless it concludes that the arbitration agreement is 'null and void, inoperative or incapable of being performed' to use the New York Convention language.

7. A court will also look at the validity of the arbitration agreement when, after an award is issued, there is an application to set aside the award or when the court is being asked to refuse to enforce it on the basis that the arbitration agreement was not valid and binding, or that the decisions taken by the tribunal in the award are ultra petita and have gone outside the scope of the arbitration agreement.

8. Pertinent to today's discussion, in England at least, but also in other jurisdictions, a court may look at the validity of an arbitration agreement for the purpose of determining whether to grant relief in support of the arbitration process. In the case of Sulamérica the relief was an anti-suit injunction to preclude legal proceedings being brought in a foreign court.

9. Prior to these cases, English law expressly recognized that the law of the contract could differ from the law governing the interpretation of the arbitration agreement.3 English law also contained a presumption that parties to a contract with an arbitration clause intend that 'all questions arising out of their relationship should be determined in accordance with their chosen procedure'.4 The Court of Appeal in Sulamérica used both of these principles to find that the choice of law of the arbitration agreement differed from that of the substantive contract.

Sulamérica

10. The facts of Sulamérica are as follows. The insurers issued two insurance policies to the respondents in connection with a hydroelectricity project. The respondents made claims under the two policies (which were in substantially the same terms) and the insurers denied liability. The policies contained a London arbitration clause (with a pre-requisite of mediation), and also an express choice of Brazilian law as the law governing the insurance contracts, and an exclusive jurisdiction clause in favour of the courts of Brazil.

11. The insurers gave notice of arbitration. The respondents then started Brazilian court proceedings to obtain an injunction restraining the insurers from going to arbitration. The insurers applied to the English Commercial Court seeking an anti-suit injunction against the Brazilian court proceedings.

12. The Commercial Court applied the 'established common law rules for ascertaining the proper law of any contract', i.e. to 'recognise and give effect to the parties' choice of proper law, express or implied, failing which it is necessary to identify the system of law with which the contract has the closest and most real connection'.5 The Court granted the injunction, holding that the arbitration agreement had its closest and most real connection to English law because of the seat of arbitration being in London. Accordingly, English law was the proper law of the arbitration agreement.6 This was a strange decision because the insurance contracts clearly provided they were governed by Brazilian law.

13. The Court of Appeal upheld the Commercial Court's decision. In doing so the Court of Appeal noted that English common law recognized that 'exceptionally' the law regulating the arbitration agreement could differ from the law regulating the substantive rights and duties of the parties to the contract.7 Lord Justice Moore-Bick found that the proper law of an arbitration agreement is 'to be determined by undertaking a three-stage inquiry into (i) express choice, (ii) implied choice and (iii) closest and most real connection'. These stages should be discussed in that order, though Moore-Bick LJ recognized that 'in practice stage (ii) often merges into stage (iii)'.8

14. Moore-Bick LJ also discussed the concept of the separability of the arbitration agreement, finding that it reflected the 'presumed intention that [the] agreed procedure for resolving disputes should remain effective' should the contract be found ineffective. This was the purpose of separability, 'not to insulate the arbitration agreement from the substantive contract for all purposes'. As a result, absent other indications, an express choice of law for the substantive contract 'is a strong indication of the parties' intention in relation to the agreement to arbitrate' and the search for an implied choice of law would likely conclude that the parties intended the law of the substantive contract to apply - absent other factors.9

15. Moore-Bick LJ went on to find that these factors were present in the case. The first factor was the choice of London as seat of arbitration. This meant the parties 'must have foreseen and intended' that the Arbitration Act 1996 would apply to arbitrations commenced under the contracts, suggesting English law governed all aspects of the arbitration agreement including its formal validity.

16. The second factor was the argument raised by the insured that if Brazilian law governed the arbitration agreement, it was enforceable only with their consent. The Court of Appeal found 'nothing to indicate that the parties intended to enter into a one-sided arrangement of that kind'. Together these two factors led to a finding that the parties had not impliedly chosen Brazilian law to govern the arbitration agreement. The Court then had to look for the system of law with the closest and most real connection to the agreement.

17. The Court of Appeal here found as follows:10

No doubt the arbitration agreement has a close and real connection with the contract of which it forms part, but its nature and purpose are very different. 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.

18. This decision gave preference to the law of the seat of arbitration, over the parties' express choice to govern their contract. The Court of Appeal rationalized its decision by its wish to give meaning to the arbitration agreement which was void under Brazilian law. The presumption is that parties do not contract intentionally to do what is illegal or enter into a contract which is of no effect from the outset. By applying English law to the arbitration agreement the English court was giving effect to its view of the parties intention to submit to arbitration in England which in turn justified it issuing an anti-suit injunction against the proceedings brought in the Brazilian courts.

Arsanovia

19. Following the decision in Sulamérica, the English High Court applied the same principles but reached a different outcome in Arsanovia. The facts of the case were as follows.

20. Three arbitrations arose out of a joint venture for the development of slum areas in Mumbai, involving finding temporary housing for residents, clearing the slums, redeveloping the areas, and re-housing the residents. Several agreements were signed between various companies for the purposes of the project. This included a shareholders' agreement which formed a new company, and a Keepwell Agreement providing funds for one party to make payments under the shareholders' agreement. Other companies, including Burley, subscribed to parts of the shareholders' agreement.

21. Delays and bankruptcies led to the three arbitrations, brought by Cruz City against Arsanovia, Burley and others. The three arbitrations were determined by identically composed tribunals. The shareholders' agreement and the Keepwell Agreement were both governed by Indian law pursuant to express provisions in those contracts, and provided for LCIA arbitration in London. The contracts further provided that the parties were not to seek interim relief in India under LCIA rules, and specific portions of the Indian Arbitration Act would not apply.

22. The three arbitral tribunals found that they had jurisdiction and made awards in favour of Cruz City.

23. Arsanovia and Burley disputed the awards, arguing that the tribunals did not have substantive jurisdiction and sought to have them set aside by the English courts. They argued that Indian law applied to the arbitration agreement, which would cover the question of whether Burley was a party to that agreement; if Burley was not a party, under Indian law the tribunals could not determine the claims against Arsanovia either. This question had to be decided before the other two arbitrations could be determined.

24. The claimants relied on Moore-Bick LJ's remark in Sulamérica that the choice of the governing law of the contract (in this case Indian law) provided 'a strong indication of the parties' intention in relation to the agreement to arbitrate'. Indian law could therefore be implied to govern the arbitration agreement as well. Cruz City argued that by choosing London as the seat of arbitration, the parties intended English law to apply to the arbitration agreement.

25. Smith J found that although the choice of seat was a factor, it did not by itself displace the inference raised by the express choice of law for the substantive contract. Smith J also noted that the express exclusion of certain portions of the Indian Arbitration Act implied that Indian law was otherwise applicable. Though it was not necessary to consider the final factor raised in Sulamérica - the system of law with which the arbitration had the closest and most real connection - Smith J considered that English law would have applied because London was the seat of arbitration. However this factor was not required in this case.

Analysis

26. In considering these two decisions it is important to remember that English courts consider the exercise of anti-suit injunctions to be a very important procedural tool. It enables them to uphold the arbitration process that was chosen by the parties. Though English courts cannot impose anti-suit injunctions on EU member-states,11 they continue to use them against proceedings in the courts of other countries in breach of an arbitration agreement.12

27. However the contrast between the cases shows that English courts can reach very different decisions regarding the choice of law of the arbitration agreement. The Arsanovia decision appears more straightforward, due to the mention of the Indian Arbitration Act. The court considered the intent of the parties to arbitrate and the agreement to exclude the application of certain permissive provisions of the Indian Arbitration Act. The court concluded that the parties intended Indian law to govern the arbitration agreement with the exclusion of those certain permissive provisions.

28. However in Sulamérica it is arguable that the court wanted to issue the anti-suit injunction against the Brazilian court proceedings, and was prepared to identify the choice of law in a way that allowed this remedy. Lord Justice Moore-Bick emphasized that absent other factors, an express choice of law for the substantive contract was good evidence of an implied choice of the same law for the arbitration agreement. The 'fairness' factor regarding consent to the arbitration agreement was likely the element that swayed the court, rather than the seat of arbitration. Under Brazilian law, which governed the main contract, the arbitration agreement was rendered ineffective. The court thought it unlikely that the parties, having agreed to specific arbitration under LCIA Rules in England, would have intended the consequences of Brazilian law that rendered the arbitration agreement ineffective.

Determination by Arbitral Tribunals

29. More usually it is the arbitral tribunal rather than a national court which has to determine the applicable law to govern the substantive contract, and in rare cases the law to govern the arbitration agreement. This will be in the context of arbitrators being asked to determine the validity or the scope of the arbitration agreement for issues of jurisdiction or arbitrability. As arbitration is generally confidential, numbers are unknown but I expect that it is in this context more frequently than in a national court that the validity of arbitration agreements is determined.

30. There are two important differences when the applicable law to an arbitration agreement is determined by a national court as opposed to an arbitral tribunal. First, a national court has an obligation to uphold the national interest both in respect of the law and generally. This would apply to providing support for an arbitration under the national law. A court is also mindful (especially in the common-law world) of the precedent it sets for other cases. By contrast, an international arbitration tribunal's authority is based on the autonomy of the parties, and its duty lies primarily to the parties and not to any national law. There is no system of precedent in international arbitration.

31. The second distinguishing factor is the conflict of law rules which are applied by national courts and arbitral tribunals.

32. A national court applies its own conflict of law rules to determine the applicable law to a contract. Within the European Union, conflict of law rules are now based on the Rome I Regulations. These provide that contracts are governed by the law chosen by the parties. The choice may be express or clearly demonstrated by the circumstances of the case. In the absence of a choice, the applicable law will be determined by certain presumptions set out in the Rome Regulation or by the law of the country in which the party who is to effect the characteristic performance of the contract has its habitual residence. This would be the position in England13 and in other EU member states.

33. Although in most cases the arbitration agreement will be governed by the same law as that which governs the substantive contract, some legal systems have specific provisions for determining the law to govern the arbitration agreement.14 For example, English law as now expounded by Sulamérica and Arsanovia is stated in Dicey Morris-Collins, Rule 64 as follows:

1. The material validity, scope and interpretation of an arbitration agreement are governed by its applicable law, namely:

a. The law expressly or impliedly chosen by the parties; or

b. In the absence of such choice, the law which is most closely connected with the arbitration agreement, which will in general be the law of the seat of the arbitration.

2. In general, arbitral proceedings are governed by the law of the seat of the arbitration.

3. The substance of the dispute is governed by either:

a. The law chosen by the parties; or

b. If the parties so agree, such other considerations as are agreed by the parties or determined by the tribunal; or

c. If there is no such choice or agreement, the law determined by the conflict of laws rules that the arbitral tribunal considers applicable.

34. By contrast, international arbitration tribunals have no fixed conflict of law rules. Arbitrators must therefore look first to what the parties have agreed and then to other ways to choose the law to apply. This is fundamental to the nature of arbitration - follow party autonomy except in rare cases.

35. This is recognized in the different arbitration rules and in national laws. For example:

ICC Rules, Article 21.1:

The parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate.

UNCITRAL Rules, Article 28:

1. The arbitarl tribunal shall decide the ed isinp utcaocrdance with su ch rules of law as are chosen by the parties as applicable to the substance of the dispute. […]

2. Failing ayn designtaion yb the parties, the aalr bittrribunal shall ap ply the law determined by the conflict of law rules which it considers applicable. […]

LCIA Rules, Article 22.2:

The Arbitral Tribunal shall decide the parties dispute in accordance with the law[s] or rules of law chosen by the parties as applicable to the merits of their dispute. If and to the extent that the Arbitral Tribunal decides that the parties have made no such choice, the Arbitral Tribunal shall apply the laws or rules of law which it considers appropriate.

36. National laws which may apply in other situations include, for example, the Swiss Private International Law Act, Article 187 of which provides:

The arbitral tribunal shall decide the dispute according to the rules of law chosen by the parties or, in the absence of such a choice, according to the rules of law with which the case has the closest connection. […]

37. The fundamental intent of conflict of law rules in contractual matters is to determine and give effect to the intention of the parties. In this context it is interesting to note that in the greatest number of contracts there is an express choice of the law to apply. ICC statistics show that in 88% of ICC arbitrations started in 2012 there was an expressed choice of law to govern the substantive contract.

38. Accordingly, where there is an express choice of law to govern the contract this will be recognized and given effect to by courts and arbitral tribunals. The only limitation would be issues affecting illegality, mandatory law and international public policy. In the absence of an express choice, the court or tribunal has to try and determine what the parties intended based on the way the contract is worded or other relevant factors, i.e. an implied or indirect choice of law. If that is not sufficient, they rely on an objective factor which indicates what the applicable law should have been.

39. Logically, a choice of law to govern a substantive contract should govern all aspects of the contract including the arbitration agreement. I have never seen an arbitration agreement contained in a substantive contract where the law to govern the arbitration agreement is expressly stated to be different to the law governing the main contract. I have seen that in submissions to arbitration. There must be some compelling reason to assume that even though a contract contains an express choice of law there was an implied intention that the arbitration agreement should be governed by a different law. That was expressed by the courts in Sulamérica and Arsanovia.

40. It is clear that the arbitration itself may be governed by another law, i.e. that of the place of arbitration. Generally, the agreement to arbitrate will provide for the arbitration to be under the rules of a system of law or under chosen institutional rules. The parties will often have agreed, directly or through the choice of rules, the form, structure and procedures of the arbitration. This agreement will have effect on the basis of party autonomy. In the absence of agreement by the parties these issues will be decided by the tribunal, with a fall back to the law of the seat of the arbitration where, in any event, mandatory law must be obeyed.15 Most arbitration laws are largely permissive.

41. Much is made in the Sulamérica case of separability of the arbitration agreement. This may be unfortunate. The whole purpose of the separability doctrine is to prevent a party avoiding arbitration, and requiring the other party to go to court by arguing that the underlying contract was not valid, was illegal, had expired or terminated or has been fully executed, or the subject matter in dispute was not arbitrable. By separating the arbitration agreement it survived the substantive contract, and a tribunal could deal with all of these issues provided there was, at least, a prima facie arbitration agreement. To avoid doubt, LCIA (and other institutions too) provide in their recommended arbitration clause that disputes submitted to arbitration shall include 'any question regarding its existence, validity or termination' of the contract.16

42. The positive side of these cases is that the court's rationale was to uphold the arbitration process. Though both arbitrations had their seat in England, English law was only found to govern one of the arbitrations. However in both cases the arbitration process itself was supported by the court. In support of arbitration in England, the English courts have for many years been prepared to issue anti-suit injunctions against a party bringing proceedings in a foreign court because the English court considered the arbitration agreement to be valid.

Conclusion

43. It is unlikely that Sulamérica will be the final word on this issue in English law though the rationale for choice of applicable law is unlikely to change much. Obviously the key is whether the parties have expressly chosen the law to govern the substantive contract. If they have, there will have to be a compelling reason to prefer the law of the seat to govern the arbitration agreement. Sulamérica can be explained by the desire of the court to uphold the agreement to arbitrate and therefore to issue an anti-suit injunction to preclude court proceedings in Brazil.

44. Further, it will be unclear to what extent this decision will be followed by an arbitral tribunal having to decide the law to govern an arbitration agreement. The choice of law rules under the ICC and UNCITRAL and other institutional rules are less prescriptive than the English rules that were applied in Sulamérica.

1
Sulamérica CIA Nacional de Seguros SA et al v. Enesa Engenharia SA [2013] EWCA Civ 638.

2
Arsanovia Limited, Burley Holdings Limited, et al v. Cruz City 1 Mauritius Holdings [2012] EWHC 3702

3
Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd [1993] A.C. 334, at 357-8; Arbitration Act 1996, s.7.

4
Sulamérica, § 9, citing Fiona Trust & Holding Corp v. Privalov [2007] UKHL 40.

5
Sulamérica, § 9.

6
Sulamérica CIA Nacional de Seguros S.A. et al v. Enesa Engenharia S.A. [2012] EWCA Civ 638

7
Sulamérica, para 11, citing Lord Mustill in Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd [1993] A.C. 334, at 357-8.

8
Sulamérica, para 25.

9
Sulamérica, para 26.

10
Sulamérica, para 32.

11
Allianz SpA v. West Tankers Inc (The Front Comor) (C-185/07) [2009] ECR I-663.

12
Arbitration in England, § 1.04.

13
Dicey Morris, §§ 16-015.

14
Gary Born notes that 'virtually no jurisdiction… dissents from [the ] view' that an arbitration agreement is presumptively separable from the substantive contract. See Born, International Commercial Arbitration (2nd ed.), Kluwer Law International, 2014, at 358.

15
See Born, p 525.

16
LCIA Recommended Clauses, a vailable at http://www.lcia.org/Dispute_Resolution_Services/LCIA_Recommended_ Clauses.aspx (accessed 15 August 2014).