High Court applies Sulamérica test in Arsanovia and gives rise to unexpected results

In December last year, the High Court upheld a challenge under section 67 of the Arbitration Act 1996 (the Act) in Arsanovia Ltd and others v Cruz City 1 Mauritius Holdings [2012] EWHC 3702 (Comm) and overturned an arbitration award on the ground that the Tribunal did not have substantive jurisdiction. The court was required to determine, by reference to the English common law conflict of law rules, the law applicable to the arbitration agreement in the absence of an express governing law. This was required in order resolve the issue of which law determined whether one of the claimants was party to the arbitration agreement.

In resolving whether to follow the law of the underlying contract (India) or the law of the seat (England) the court considered the Court of Appeal's reasoning in the well-known cases of C v D and Sulamérica. Of particular note, the court factored in the exclusion by the parties of Part I of the Indian Arbitration and Conciliation Act 1996 (Indian Arbitration Act), and consequently held somewhat surprisingly that the parties had impliedly chosen the governing law to be Indian.

Background

Three LCIA awards were rendered by identical Tribunals in July 2012:

• Award 1: Mauritian company A as claimant, and Cypriot company and Mauritian company B as respondents.
• Award 2: Mauritian company A as claimant and Indian company as respondent.
• Award 3: Cypriot company and Mauritian company B as claimants, and Mauritian company A as respondent in which Mauritian company A had made a counterclaim against the Cypriot company.

The underlying facts are complex but can be summarised as follows. The Cypriot company, Mauritian company B and the Indian company challenged Awards 1 and 2 under s.67 of the Act on the grounds that the Tribunals did not have substantive jurisdiction. In Award 3, the Tribunal dismissed the claim and counterclaim without making findings on jurisdiction. The Indian company was the parent company of the Cypriot company and Mauritian company B. The arbitrations arose out of a joint venture entered into with Mauritian company A. The purpose of the joint venture was to redevelop slum areas in Mumbai, India. Kerrush Investment Limited (Kerrush) was formed with the Cypriot company and Mauritian company A as shareholders. A Shareholder Agreement (SHA) was entered into between Kerrush, the Cypriot company and Mauritian company A with the others, including Mauritian company B subscribing to parts of the SHA.

Both agreements were governed by Indian law and contained arbitration agreements providing for LCIA arbitration seated in London. Both agreements excluded Part I of the Indian Arbitration Act and the ability of the parties to seek interim relief in India including under section 9. There was no express governing law of the arbitration agreement.

The clearance of the slums was delayed. In July 2010, a bankruptcy event arose under the SHA which permitted the Cypriot company to serve notices on Mauritian company A. The effect of the notices, if valid, would have given the Cypriot company management control over Kerrush and would require Mauritian company A to sell its interest in Kerrush to the Cypriot company. In September 2010, Mauritian company A purported to exercise a put option under the SHA on the basis that the requirements for the start of the construction phase had not been met. This put option would have required the Cypriot company to buy the Mauritian company A's interest in Kerrush on more favourable terms to Mauritian company A. The key point in the dispute was whether the Cypriot company's notices were valid, and, if they were, Mauritian company A was not entitled to exercise the put option. It was also in dispute whether Mauritian company B was party to an arbitration agreement with Mauritian company A in the SHA.

The law applicable to the arbitration agreement

Smith J analysed the Sulamérica decision where the court recognised that it cannot be assumed that the law governing the arbitration agreement is the same as the substantive law of the agreement, and, in the absence of an express choice, the court should consider first whether the parties have made an implied choice of law, the final stage of enquiry being the closest and most real connection test.

In the Sulamérica case, a number of reasons led the court to determine the implied governing law as English, including that the choice of arbitral seat was London and the view that the parties could not have intended the arbitration agreement to operate the way it would have done under Brazilian law. Previous discussion with regard to the Sulamérica case can be found here.

However, in this case, Smith J considered it relevant that the parties had expressly excluded interim relief in India and excluded Part I of the Indian Arbitration Act noting that "the natural inference is that they understood and intended that otherwise that law would apply". Therefore, this reference to the Indian Arbitration Act was enough for Smith J to conclude that it was implied that the arbitration agreement should be governed by Indian law (except insofar as they agreed otherwise). Interestingly, the court noted that had it been required to decide which system of law has the closest and most real connection with the arbitration agreement it would have concluded English law on the same basis as C v D and Sulamérica, but in this decision the question did not arise.

Decision – challenge under s.67 upheld

Did the Tribunal have jurisdiction to award against Mauritian company B?

As regards the Award 1, a director of Mauritian company B had signed the SHA which bound that company to a limited number of direct obligations. The arbitration clause was not amongst those clauses. As such, the court concluded that the clear implication was that company was not bound by the arbitration agreement in the SHA. The court noted that this conclusion would be the same on both the basis of English and Indian law and therefore upheld the challenge to Award 1 as against Mauritian company B because there was no valid agreement to which Mauritian company B was a party.

Did the Tribunal have jurisdiction to award against the Cypriot company?

The court held that because the Tribunal did not have jurisdiction over Mauritian company B, the whole matter before them with regard to the claims from Mauritian company A as against the Cypriot company was not arbitrable. Therefore, it was held that the Tribunal did not have substantive jurisdiction over the claim as against the Cypriot company within the meaning of s.67 of the Act - it was not a matter "submitted to arbitration in accordance with the arbitration agreement".

With regard to the Award 2, the court dismissed claimants' argument in relation to substantive jurisdiction.

Comment

This case again highlights the importance of expressly citing which law is to govern an arbitration agreement when drafting clauses in international contracts and to ensure that the correct parties are bound by the arbitration agreement under whichever law applies.

However, the court's reasoning in relation the exclusion of Part I of the Indian Arbitration Act as a factor in determining the implied choice of the parties is somewhat surprising. Until recently (as laid down by Bhatia International v Bulk Trading SA), the position under Indian law had been that the Indian courts may be able to exercise their powers under Part I of the Indian Arbitration Act even in relation to arbitrations with their seat outside India, unless the parties agreed that Part I should not apply. It has therefore been standard practice for parties to expressly exclude Part I in their India related contracts so as to limit scope for the Indian courts to intervene in offshore arbitrations. Whilst this was overruled on 6 September 2012 in Bharat Aluminium Co v. Kaiser Aluminium Technical Services ('Balco') (but only applies to arbitration agreements executed after the date of the judgment), where the parties have been careful to exclude Part I in order limit the extra-territorial reach of the Indian courts, it seems unlikely that they were seeking to apply Indian law to their arbitration agreement.

Previous discussion with regard to the Bhatia and Balco cases can be found here.

Rahima Patel, Associate, Herbert Smith Freehills LLP

Case: Arsanovia Ltd and others v Cruz City 1 Mauritius Holdings [2012] EWHC 3702 (Comm)