Sulamérica's Case And The Three-Stage Inquiry To Determine The Law Of Arbitration: Recent Developments & The Divergent Indian Approach (Part I)

1. Introduction

The Indian jurisprudence on the choice of the law of arbitration has evolved through various judicial pronouncements of the Supreme Court of India. The Supreme Court of India has cited approvingly in BALCO's Case^[1] and several later judgments^[2], the judgments delivered by Lord Justice Longmore in C v. D^[3] and Mr. Justice Cooke in Sulamérica Cia Nacional de Seguros SA v. Enesa Engelharia SA^[4], to affirm the view that where there is no express choice of the law for the arbitration agreement, the law with which the agreement to arbitrate has its closest and most real connection is the law of the seat of arbitration.

It is noteworthy that in the appeal arising out of the judgment of Mr. Justice Cooke, the English Court of Appeal in Sulamérica's Case^[5] had revisited the earlier judgments including Longmore LJ's judgment in C v. D and struck a divergent chord and laid down a different approach (three stage enquiry) to determine the law of arbitration. Interestingly, none of the Indian Supreme Court Judgments has referred to or discussed the Court of Appeal's Judgment in Sulamérica's Case.

The three stage enquiry laid down by the Court of Appeal in Sulamérica's Case has been followed by the English Courts subsequently in Arsanovia Ltd v Cruz City 1 Mauritius Holdings^[6](Arsanovia's Case), Habas Sinai Ve Tibbi Gazlar Istihsal Andustrisi AS and VSC Steel Company Ltd^[7](Habas Sinai's Case) and recently (on 20 January 2020) in Kabab-Ji SAL (Lebanon) v. Kout Food Group (Kuwait)^[8] (Kabab- Ji SAL's Case). Sulamérica's Case is also followed by the Singapore High Court in BCY v. BCZ^[9] ("BCY's Case") and BMO Vs. BMP ^[10].

Kabab-Ji SAL's Case is particularly noteworthy, since this judgement sets the stage for potentially conflicting judgements in England and Wales and France. Dispute regarding choice of law governing an international arbitration agreement may arise between parties before arbitral tribunal and in judicial proceedings across multiple jurisdictions and each forum may apply different choice of law principles and arrive at different conflicting opinions. This definitely goes against the very idea of establishing a uniform regime of international standard for recognition and enforcement of International Commercial Arbitration and Arbitral Awards.

In this section (Part I), the author discusses the Sulamérica's Case and analyse the two distinct approaches of Mr. Justice Cooke and the Court of Appeal to determine the law of arbitration. In Part II, the author discusses the later cases in England & Wales and Singapore, which followed the Sulamérica's Case. The author further discusses the scheme of the English Arbitration Act, 1996 and the Indian Arbitration and Conciliation Act, 1996 on the subject.

2. Sulamérica's Case.

Mr. Justice Cooke's Judgment

In the case before the High Court of Justice, Queen's Bench Division, Commercial Court (England) in Sulamérica Cia Nacional de Seguros SA and Anr v Enesa Engenharia SA and Ors, Mr Justice Cooke relied on Court of Appeal's Judgment in C v. D^[11] and his own judgment in Shashoua v Sharma^[12] and held that choice of the seat of arbitration determines the curial law and the supervisory jurisdiction of the courts of the country where the seat is located. This led him to the conclusion that the law with which the agreement to arbitrate has its closest and most real connection is the law of the seat of arbitration, namely the law of England. It may be mentioned that Longmore LJ had observed in C v. D that "..an agreement to arbitrate will normally have a closer and more real connection with the place where the parties have chosen to arbitrate than with the place of the law of the underlying contract in cases where the parties have deliberately chosen to arbitrate in one place disputes which have arisen under a contract governed by the law of another place." (Emphasis Supplied).

Court of Appeal

Lord Justice Moore Bick, who authored the leading judgment of the English Court of Appeal in Sulamérica's Case^[13], traces the shift in the legal position in English Law and expressed his reservations about the reasoning behind Longmore LJ's above observations (quoted in italics) in C v. D. Moore Bick LJ observed that it was unnecessary for the court in C v D to reach a decision on the proper law of the arbitration agreement. Moore Bick LJ noticed Mustill J's judgment in the Black Clawson International ^[14] wherein it was held that in rare cases, the law governing the arbitration agreement can be also different from the lex fori.

Moore Bick LJ thereafter, lays down three stage enquiry for determining the proper law of arbitration as (i) Express Choice (ii) Implied Choice and (iii) closest and most real connection. Moore Bick LJ held as a matter of principle, those three stages ought to be embarked on separately and in that order (emphasis supplied), since any choice made by the parties ought to be respected, but 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.

Moore Bick LJ held that the concept of separability is not to insulate the arbitration agreement from the substantive contract for all purposes. Moore Bick LJ held that in the absence of any indication to the contrary, an express choice of law governing the substantive contract is a strong indication of the parties' intention in relation to the agreement to arbitrate and that a search for an implied choice of proper law to govern the arbitration agreement is therefore likely (as the dicta in the earlier cases indicate) 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. These may include the terms of the arbitration agreement itself or the consequences for its effectiveness of choosing the proper law of the substantive contract.

Hallett LJ simply agreed with Moore Bick LJ. Lord Neuberger MR authored a separate judgment agreeing with Lord Justice Moore Bick but adding his own observations. Lord Neuberger MR noticed the rather unsatisfactory tension between the approach in the earlier cases and the approach in C v D but however favoured not treating what was said in C v D as wrong, although a powerful case was made out to that effect.

(To be Continued in Part II)