A-List Celebrity No. 1: The SULAMERICA case

This article is part of the series A-List: The Celebrities of Arbitration Cases. A series delving into the most renowned cases that have shaped the landscape of international arbitration.

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Parties: Sulamérica Cia Nacional de Seguros s.a. & others v Enesa Engenharia s.a. & others

Decided by: England and Wales Court of Appeal (Lord Justice Moore-Bick)

Date: 16 May 2012

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Why is this case famous?

The Sulamerica case is famous for the significant impact it had on the interpretation and application of arbitration agreements. Involving important topics, like the validity of an arbitration agreement incorporated by reference, party autonomy, and the applicable law to the arbitration agreement, this case is widely recognized for the so-called sulamerica test. A three-step test used in the finding of the applicable law to the arbitration agreement. A classic case for all Vis Moot alumni. If you do not know how to recite the sulamerica test by heart, odds are you were never a mootie.

What is this case about?

It would be almost impossible to summarize this case in a single issue or event. The Sulamerica case was full of polemics, highly anticipated and characterised by significant turnarounds.

Background

Enesa (together with other companies) was taking part in the construction works of Jirau, a hydroelectric project entailing the construction of a run-of-river power plant located on the Madeira River in Rondônia, Brazil.

In March 2011, a series of “incidents” took place at the construction site (including workers’ riots, arson, and vandalism). At the time, Enesa actioned Sulamerica, its insurer, requesting payment for the damages occurred. Sulamerica, however, refused to pay the amount claimed by Enesa. That is how the story began.

The insurance policy pursuant to which Enesa claimed compensation contained a reference to Sulamerica’s general conditions which, in turn, contained an arbitration agreement.  This is how it read:

“(…)

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.

(…)

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.”

Relying on the arbitration agreement, Sulamerica began arbitration proceedings in London. Enesa was not happy about it and went before the Brazilian Courts to ask for an anti-suit injunction ordering the ceasing of the arbitration. Sulamerica, in turn, went before the English courts to ask for an anti-suit injunction ordering the ceasing of Enesa's anti-suit injunction proceedings in Brazil.

In the meantime, both Brazilian and English courts were also requested to rule on the validity of the arbitration agreement, and here again there was a discrepancy. While the Brazilian courts decided that the arbitration clause was not valid (and thus the Brazilian courts should have jurisdiction over the dispute), the English Courts found the opposite. They understood that the arbitration clause was valid (and thus the arbitral tribunal was the one with jurisdiction to decide the dispute).

Another discrepancy in this clash between Brazilian and English courts concerned the applicable law to the arbitration agreement. As seen above, it was established that the insurance policy was governed by the laws of Brazil. In the understanding of the English Courts, and based on the principle of separability, the choice for the Brazilian law only applied to the contract, not to the arbitration agreement. In addition, giving significant weight to the parties’ choice of London as the seat of arbitration, the court decided that the arbitration clause should be governed by English Law. The Brazilian Courts, on the other hand, despite acknowledging the separability principle, interpreted the parties’ choice for the Brazilian law as comprehensive of both contract (meaning the insurance policy in this case) and arbitration agreement.

The development of the Sulamerica test

The discussions regarding the applicable law to the arbitration agreement made their way up to the England and Wales Court of Appeal. In the decision dated 16 May 2012, Lord Justice Moore-Bick made sure to clarify the following points.

One. He made clear that “[a]lthough there is a wealth of dicta touching on the problem, it is accepted that there is no decision binding on this court.”

Two. He found that propositions established by authorities were a good starting point. Namely, (i) the possibility to have a different law apply to the substantive contract and the arbitration agreement; and (ii) the possibility to arrive at the “proper” law by undertaking a three-stage enquiry.

Three. He decided in favour of that three-step test. Namely, enquiring about the parties’ “(i) express choice, (ii) implied choice and (iii) closest and most real connection.”

The trick

The trick with the application of the Sulamerica test is that is does not necessarily bring all decision makers to the same conclusion even when applying the test to the same set of facts.

Why you ask? Well, apart from identifying the parties’ express choice (which let’s be honest is almost never the case when it comes to the applicable law to the arbitration clause), the test is all but straightforward.

Indeed, the very Lord Justice admits in the Sulamerica judgement that, in practice, stage (ii) often merges into stage (iii). In his words, that is 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”.

Second, the concept of closest and most real connection is tough to digest. We are talking about the arbitration agreement being closest and most really connected to what? Ideally, to a legal system. Which is why the (obvious) connection between the arbitration clause and the underlying contract will sometimes have to be overlooked. But that does not always seem to be the case. In other words, even having the Sulamerica test set on stone leads us to the unavoidable most common two words used by lawyers: it depends!

Of course, over the years, some of those steps in the Sulamerica test were clarified in another decision (yes, I mean Enka v Chubb), but that is an A-List story for another day.

Curious about what happened in the Sulamerica case?

Despite the exorbitant amount of the fines set for the case of noncompliance, none of the parties respected the anti-suit injunctions issued against them. Once the dispute gained exorbitant proportions, it was finally settled privately between the parties.