International arbitration: choice of law and bilateral investment treaties
We have previously mentioned the Sulamerica CIA Nacional De Seguros SA and others v Enesa Engenharia SA and others case (see page 13). As well as providing some useful comments on the enforceability of mediation agreements, the Court of Appeal decision provided helpful guidance on determining the proper law of an arbitration agreement where there is no express choice of law and in relation to drafting mediation and dispute resolution clauses.
The case was an appeal against the order of Cooke J continuing an anti-suit injunction restraining the appellants, Enesa, from pursuing proceedings against the respondents, Sulamerica, in the Brazilian courts. The insured, Enesa, entered into two all-risk insurance policies with the insurer, Sulamerica, in connection with the construction of a hydroelectric generating plant in Brazil. The policies contained a London arbitration clause, an express choice of Brazilian law as the law governing the contract and an exclusive jurisdiction clause in favour of the Brazilian courts.
On 29 November 2011, Sulamerica gave Enesa notice of arbitration. In response Enesa commenced proceedings in Brazil in order to establish that Sulamerica was not entitled to refer the dispute to arbitration and obtained an injunction from the court in Sao Paulo restraining the insurer from resorting to arbitration in order to pursue a claim for a declaration that they were not liable under the policy. Subsequently, Sulamerica made an application to the Commercial Court successfully seeking an injunction restraining Enesa from pursuing the proceedings in Brazil.
The issue before the Court of Appeal therefore concerned the choice of proper law of the arbitration contract. Leaving aside the requirement for mediation prior to arbitration, the policy contained an express choice of Brazilian law as the governing law of the agreement, together with an exclusive jurisdiction clause referring disputes to the Brazilian courts. However, the arbitration was to be seated in London if the parties did not agree on the amount to be paid under the policy.
Following a review of authorities on the subject (which the Court of Appeal commented were not entirely consistent), LJ Moore-Bick established that two propositions provided the starting point for any enquiry into the proper law of an arbitration agreement.
First, even if the agreement formed part of a substantive contract (as is commonly the case), its proper law might not be the same as that of the substantive contract. Secondly, the proper law should be determined by undertaking a three-stage enquiry into (i) express choice, (ii) implied choice, and (iii) closest and most real connection. As a matter of principle, those three stages ought to be embarked on separately and in that order, since any choice made by the parties ought to be respected, but in practice stage (ii) often merged into stage (iii), because identification of the system of law with which the agreement had its closest and most real connection was likely to be an important factor in deciding whether the parties had made an implied choice of proper law.
Deciding that the implied choice was English law, LJ Moore-Bick looked at the intentions of the parties and the specific factual circumstances surrounding the case, and took account of the fact that it was Enesa’s case that under Brazilian law, the arbitration agreement would only be enforceable with its consent. If correct, this would significantly undermine the arbitration agreement. Furthermore, there was nothing to indicate that the parties intended to enter into a one-sided arrangement of that kind. The possible existence of a rule of Brazilian law that would undermine the referral to arbitration of disputes suggested that the parties did not intend the arbitration agreement to be governed by that law. The choice of London as the seat assumed acceptance that the arbitration agreement would be conducted under the Arbitration Act 1996. Therefore, the supervisory jurisdiction was held to have a closer connection to the arbitration agreement in this case than the law of the insurance policy whose purpose was unrelated to that of dispute resolution.
Conclusion: drafting arbitration agreements
What this means is that to avoid uncertainty, if the chosen seat of arbitration is in England, it is important to state expressly which law shall govern the agreement to arbitrate, even if the agreement to arbitrate is incorporated into the main agreement as a clause forming part of the main agreement, and that main agreement already contains a jurisdiction clause.
Bilateral investment treaties
Bilateral investment treaties (BITs) are agreements between two States which are intended to promote trade between those two countries. All BITs are different. However, they typically contain clauses protecting the rights of investors from one State when making investments in the other.
The types of rights which are typically protected include:
- the right to receive equal treatment to that given to local companies and to other foreign investors
- the right not to have your investment taken (or expropriated) by the Government; and
- the right to insist that the Government honours its obligations under a contract.
BITs will usually allow an aggrieved investor to bring an action directly against the host State Government in international arbitration, rather than having to bring any action in the host State’s own courts.
BITs can be directly relevant to companies working in the construction and engineering sectors as investment treaty cases have found that construction contracts are an investment which can be protected. Therefore, if the actions of a host State (whether in its capacity as a project participant or in another regulatory or enforcement capacity) causes an ‘investor’ to suffer losses in connection with a project, a remedy may be available under a BIT (if one exists between the host State and the investor’s home State).
If you do have a claim under a Bilateral Investment Treaty, that claim is made not against your contract counterparty directly (unless that counterparty is the government) but against the central government, for failing to ensure that one if its subdivisions or agencies complied with their treaty obligations.
Claiming directly against a host State could obviously have serious commercial (and political) implications. However, this is becoming an increasingly popular method of protecting investor rights in foreign countries and the final awards are more easily enforced than private international arbitration awards. When you are looking at business opportunities in a new country – or if you have a large value dispute which has proven difficult to resolve – it is worth investigating whether a BIT remedy may be available.
The India decision – White Industries Australia Ltd v Republic of India (UNCITRAL) 1
Coal India Limited (CIL) and White Industries Australia Limited signed an agreement in September 1989 for the turnkey development of the open-cast coal mine at Piparwar in Uttar Pradesh, India. The agreement contained an arbitration clause providing for ICC arbitration with Paris as the seat.
During the course of the project, disputes arose in relation to the deduction of penalties by CIL. Ultimately these were referred to arbitration. In March 2002 an ICC Tribunal issued a substantial award in White Industries’ favour. From 2002 onwards White Industries attempted, unsuccessfully, to enforce that award through the Indian courts. At the beginning of 2012, the action had reached the Supreme Court.
In July 2010, frustrated with the lack of progress, White Industries commenced an action against India under the Australia-India BIT, claiming that India had breached its treaty obligation to provide a foreign investor with “effective means of asserting claims and enforcing rights”. What was interesting here was that this obligation was not one which was within the Australia - India BIT itself, but in a BIT entered into between India and Kuwait.
However, the Australia - India BIT did contain what is known as a “most favoured nation” clause which means that White Industries were also to make use of provisions in other BIT’s if the provisions of that other BIT gave investors of another nation greater protection. White Industries also claimed it had been denied justice in violation of the obligation to provide “fair and equitable treatment” to foreign investors.
Having decided that the ICC award was “an investment” which could be protected under the BIT, the UNCITRAL tribunal agreed with White Industries that the nine-year delay by the Indian courts in acting to enforce White Industries’ award amounted to a breach of India’s obligation to provide an effective means of enforcing its rights.
The Tribunal did not accept that India had breached its fair and equitable treatment obligation. This was because White Industries had not done everything it could to prevent the delay.
Therefore, White Industries was awarded the amount due under the original ICC award plus interest dating from 2002 and costs. In other words, White Industries was awarded the amount it would have been entitled to but for the delays it faced in the Indian courts.
Where there is a BIT in existence between the host State in which your project is located and your own country, the decision in White Industries v India will provide additional support in attempts to enforce arbitral awards. Where other attempts to enforce or negotiate payment against an award have been exhausted, the threat of direct action against the host State Government may very well introduce new pressures which could lead to a satisfactory result.
An Indian post-script On 6 September 2012, in the case of Bharat Aluminium Co. v Kaiser Aluminium Technical Service, Inc.,2 the Indian Supreme Court, a five-judge constitutional bench, held that the provisions of Part I of the Indian Arbitration Act 1996 have no application to international commercial arbitration proceedings conducted outside of India. This decision, which applies prospectively to all arbitration agreements executed after 6 September 2012, will serve to restrict the ability of local courts to interfere in international arbitrations seated outside India. The Honourable Justice Surinder Singh Nijjar, stated that awards rendered by international tribunals seated outside of India: “…would only be subject to the jurisdiction of the Indian courts when the same are sought to be enforced in India in accordance with the provisions contained in Part II of the Arbitration Act, 1996.” This should mean that the fact that the parties have chosen Indian law or that the dispute has connections with India (and that can be because a company is a local one or because the subject matter is inside India) will not, on its own, create jurisdiction for Indian courts to exercise supervisory jurisdiction over arbitration proceedings. For example, an application for interim relief (in the form of an injunction) cannot be brought pursuant to Part I of the Indian Arbitration Act 1996 in cases where the seat of arbitration is outside of India. Equally, if an international investor and an Indian company agree to refer disputes arising under a contract to international arbitration seated outside of India, neither party will be able to use the machinery in the Indian Arbitration Act 1996 to obtain an injunction from the Indian Courts so as to restrain those arbitration proceedings. On any major international project, it is always sensible to check whether, and if so, to what extent, the local courts might have the power to intervene.