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2 April, 2020
Introduction
A dispute resolution clause provides that the main agreement is governed by PRC law, and that “any and all disputes shall be finally submitted to the Singapore International Arbitration Centre (“SIAC”) for arbitration in Shanghai, which will be conducted in accordance with its Arbitration Rules”. Is the arbitration agreement governed by Singapore or PRC law, and is the arbitration seated in Singapore, Shanghai, or elsewhere?
These questions arose in the context of a challenge to an arbitral tribunal’s jurisdiction (BNA v BNB and another [2019] SGCA 84 (“BNA”)). The seat of arbitration and the proper law of the arbitration agreement in turn determined whether the Tribunal had jurisdiction – the arbitration agreement was potentially invalid if PRC law applied and if the arbitration was seated in the PRC. Interestingly, the arbitration clause attracted a different interpretation from each of the Tribunal, the High Court, and the Court of Appeal – a salutary tale of the pitfalls of a vaguely-worded arbitration clause.
Background
The dispute arose under a gas takeout agreement governed by PRC law. The buyer (the Respondent in the arbitration) failed to make the requisite payments, and the seller (Claimant) commenced SIAC arbitration under the dispute resolution clause. The Respondent then argued that the Tribunal had no jurisdiction as the arbitration agreement was invalid under PRC law, which prohibits foreign arbitral institutions (such as the SIAC) from administering a PRC-seated arbitration. However, the majority of the Tribunal held that the arbitration clause was governed by Singapore law (notwithstanding that the main agreement was governed by PRC law) and was valid – they held that it would have made no sense for the parties select a law which would result in the arbitration agreement being invalid. The Tribunal accordingly affirmed its jurisdiction.
The Claimant then challenged the Tribunal’s jurisdictional ruling in the Singapore Courts under section 10(3) of the Singapore International Arbitration Act. The challenge failed at the first instance – the High Court agreed that the arbitration agreement was governed by Singapore law and was therefore valid. It also found that, notwithstanding the provision for “arbitration in Shanghai”, the arbitration was seated in Singapore by operation of the SIAC Rules.
The Court of Appeal took a different view. It concluded that the arbitration agreement was governed by PRC law, and that the arbitration was seated in Shanghai. It then declined to determine the validity of the arbitration agreement under PRC law, viewing this as a matter more appropriately determined by the PRC courts as the seat court of
the arbitration.
Section 10 of the IAA provides as follows:
“(2) An arbitral tribunal may rule on a plea that it has no jurisdiction at any stage of the arbitral proceedings.
(3) If the arbitral tribunal rules
a) on a plea as a preliminary question that it hasjurisdiction; or
b) on a plea at any stage of the arbitral proceedings that it has no jurisdiction, any party may, within 30 days after having received notice of that ruling, apply to the High Court to decide the matter.”
Key Findings
In arriving at its decision, the Court of Appeal made the following key findings:
Three-stage test
In determining the proper law of an arbitration agreement, Singapore law adopts a three-stage inquiry which asks the following questions1:
Have the parties expressly chosen the proper law of their arbitration agreement?
Have the parties impliedly chosen the proper law of their arbitration agreement?
With which system of law does their arbitration agreement have its closest and most real connection?
Choice of law of arbitration agreement
If the dispute resolution clause is silent as to the governing law of the arbitration agreement (as in this case), the starting point is generally that the law of the arbitration agreement would follow the main agreement, unless displaced by indications to the contrary2. In this case, by selecting PRC law as the governing law of the takeout agreement, the parties were taken to have made an implied (though not express) choice to apply PRC law to the arbitration agreement as well, absent any contrary indications. The implied choice was not displaced by the choice of a materially different seat of arbitration, since in this case the law of the arbitration agreement and the law of the seat (see below) were one and the same (PRC law)3.
Seat of arbitration
While the phrase “arbitration in Shanghai” could possibly be interpreted as selecting Shanghai as the arbitral venue (the physical location where proceedings would be conducted), the better interpretation was that the parties intended Shanghai to be the arbitral seat (the legal centre of the arbitration). The Court reasoned that the choice of venue (which is often motivated by mundane considerations such as convenience and cost, and can change throughout the arbitral process) is not essential to the arbitration, whereas the choice of seat (which determines the laws that would govern the arbitral process) is critical. As such, the provision of “arbitration in Shanghai” was most naturally construed as a reference to the seat rather than the venue of the arbitration, unless displaced by contrary indication.
In this regard, the Court of Appeal disagreed with the High Court’s finding that the parties had, by providing for SIAC arbitration, intended for the arbitration to be seated in Singapore. The SIAC Rules5 provide for Singapore to be the default seat of arbitration in the absence of the parties’ agreement – but in this case, the parties were taken to have agreed on Shanghai as the seat.
Seat of arbitration
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Legal “place” of the arbitration
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Arbitration procedure will be governed by the arbitration law of the Seat
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Arbitration will be supervised by the courts of the Seat
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Essential for the arbitration clause to stipulate the Seat Venue of arbitration
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Physical location where arbitration proceedings will be held
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Can be any location convenient to the parties, including video conferencing
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Can be changed from time- to-time based on cost and convenience considerations
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Need not be specified in the arbitration clause
Admissibility of pre-contractual negotiations
The choice of Shanghai as the seat of arbitration was also not displaced by evidence of the parties’ pre-contractual negotiations (drafts of the takeout agreement and emails enclosing such drafts). The Claimant argued that these negotiations suggested that the parties (being PRC and South Korean respectively) intended the arbitration to be seated in an internationally “neutral” venue such as Singapore. The Claimant however had failed to adduce such evidence before the Tribunal, and the Singapore Courts’ were constrained by the parol evidence rule (which restricts the admission of pre-contractual negotiations unless they fulfil certain criteria) from now admitting the evidence. The Court
of Appeal found that the evidence did not fulfil the criteria of admissibility – the drafts of the takeout agreement and the email correspondence was insufficiently clear as to the parties’ intentions, particularly as the correspondence was brief and did not shed light on the parties’ negotiating process, the bulk of which was conducted orally.6
Validation principle
The High Court rejected the principle that, in interpreting an arbitration agreement to determine its proper law, a court should presume that the parties would not choose a law that renders the arbitration agreement invalid (the “validation principle”). The Court of Appeal however found it unnecessary to decide whether the validation principle was part of Singapore law, since in this case there was simply no indication that the parties appreciated that the choice of PRC law would invalidate the arbitration agreement.7
Did the Tribunal have jurisdiction?
Having found that the arbitration was seated in Shanghai and not Singapore, the Court of Appeal deemed it inappropriate to go further to determine the validity of the arbitration agreement as a matter of PRC law (and accordingly, whether the Tribunal had jurisdiction). Since Singapore was not the seat, the Singapore courts had no supervisory jurisdiction over the arbitration, and its ruling on jurisdiction would not be binding on the Tribunal – the issue should instead be determined by the PRC court, as the supervisory court.
Jurisdictional challenge was rightly brought in Singapore
Even though the Court of Appeal declined to determine the jurisdictional question, it clarified that it was “entirely correct” for the Respondent to have brought its jurisdictional challenge in the Singapore courts given the Tribunal’s preliminary ruling that Singapore was the seat (notwithstanding that the Respondent’s position was that Shanghai and not Singapore was the seat). To hold that the jurisdictional challenge was not rightly brought in Singapore would create an “unsolvable contradiction”, since the arbitral seat was precisely the subject of the challenge, and could not be confirmed until the challenge was determined.8
Specify the governing law of the arbitration agreement
The arbitration clause is regarded as legally distinct and separate from the main agreement in which it is located. Therefore, it is advisable to make an express statement of the law governing the arbitration clause (e.g., “This clause shall be governed by the laws of [ ]”). Such wording is particularly helpful where the seat of arbitration is different from the law of the main contract, as it would avoid a situation of the Tribunal or Court having to consider, on a case-by-case basis and based on the surrounding circumstances, whether to apply the law governing the main agreement or the law of the seat.
Specify the seat of arbitration
Likewise, when specifying the seat of arbitration, it is advisable to use an unambiguous phrase such as “arbitration with seat (or legal place) in Singapore”, rather than “arbitration in Singapore”. Failure to clearly designate a seat might mean leaving the choice to the Tribunal, or the seat defaulting to that provided under the applicable arbitration rules, both of which might not always give effect to the parties’ true intentions. Do note that the physical venue(s) for arbitration hearings need not be stated, to avoid confusion with the arbitral seat and because such venue can be changed from time to time (depending on considerations of convenience and cost).
Check the requirements of a valid arbitration agreement under the governing law
Once the law governing the arbitration agreement has been selected, it is critical to obtain advice on validity requirements under the chosen governing law, including requirements as to choice of seat and the administering arbitral institution. BNA is a classic example of a situation where the choice of a particular seat and arbitral institution can render the arbitration agreement valid under one set of laws but not another – the arbitration agreement (which provided for Shanghai-seated arbitration to be administered by the SIAC) would have been valid under Singapore law (which places no restriction on the parties’ choice of seat and arbitral institution), but was potentially invalid under PRC law (which requires domestic arbitrations to be seated in the PRC and further, for PRC-seated arbitrations to be administered by a domestic institution, with certain limited exceptions)9.
Other laws require the use of a particular seat and particular arbitration institutions in certain circumstances – Russian law for instance requires that corporate disputes relating to shareholdings or shareholder claims in a Russian company be seated in Russia and be administered by licensed arbitration institutions (known as Permanent Arbitration Institutions or “PAIs”)10. Failure to observe these requirements could render the arbitration agreement invalid, and in turn lead to the arbitration being terminated (upon a preliminary jurisdictional challenge being raised) or the final award being unenforceable. The Linklaters Dispute Toolkit provides an overview of the arbitration requirements under the laws of various jurisdictions, and a checklist of questions to ask your local lawyer when considering arbitration seated in a particular jurisdiction.
Linklaters Dispute Toolkit
The Linklaters Dispute Toolkit provides useful guidance on the drafting of arbitration clauses, as well as precedent clauses tailored for key arbitral institutions including the SIAC.
A basic precedent arbitration clause which clearly specifies the governing law of the clause and the seat of arbitration, is as follows:
“[Subject to [ADR],] any dispute arising out of or connected with this Agreement, including a dispute as to the validity or existence of this Agreement and/or this clause [number], shall be resolved by arbitration with seat (or legal place) in [insert choice of seat] conducted in the [Language] by a single arbitrator.
This clause [number] shall be governed by [insert governing law].”
Challenging jurisdiction where the seat is disputed
A challenge to the Tribunal’s jurisdictional ruling would normally be heard by the seat court, by virtue of its supervisory jurisdiction over the arbitration. But where the parties disagree over the seat of arbitration, where should a jurisdictional challenge be brought? The UNCITRAL Model Law expressly provides that jurisdictional challenges to set aside the award should only be heard by the seat court11; the cases also explain that the parties’ choice of a seat amounts to an exclusive choice of the curial law of the arbitration and applications
to set aside the award.12 In BNA, the Singapore court took a pragmatic approach and confirmed that it was appropriate for a jurisdictional challenge to be brought before it where it was the putative seat (i.e., where the Tribunal had found that the arbitration was seated in Singapore), notwithstanding that the Singapore court ultimately disagreed with the Tribunal and found that Singapore was not the seat. To rule otherwise would create an “unsolvable contradiction” since the seat would only be confirmed after the jurisdictional challenge was determined.13 The Court’s approach is also consistent with the competenz-competenz principle of international arbitration law which provides that the Tribunal is competent to rule on its own jurisdiction (including, as in this case, where the jurisdictional ruling requires the Tribunal to determine the seat of arbitration). It remains an open question whether the Singapore courts would hear a jurisdictional challenge brought by a party asserting that Singapore is the seat, in circumstances where the Tribunal has found that Singapore is not the seat. Arguably, where parties disagree on the seat of arbitration, the better approach is for the dissatisfied party to first seek a declaration from either the putative or alleged seat court as to whether it is the seat, instead of directly mounting a jurisdictional challenge in either court which presupposes (or which might be taken to amount to acknowledging) that the court in which the challenge is brought is the seat court.
Pre-contractual negotiations
If a dispute over the interpretation of the arbitration agreement does arise, and a party wishes to rely on pre- contractual negotiations to support its interpretation of the arbitration agreement, such evidence should be adduced before the Tribunal (such as in the course of the Tribunal’s preliminary determination of jurisdiction), rather than seeking to introduce such evidence only when the dispute comes before the supervisory court. This is because the restrictions applied by many common law courts to the admission of evidence of pre-contractual negotiations (or evidence of conduct subsequent to the contract)14, generally do not apply to arbitration15. And once the evidence is admitted before the Tribunal, it would form part of the record of proceedings and would likely be considered by any supervisory court reviewing the Tribunal’s decision, without necessarily having to satisfy the Court’s criteria for admissible pre-contractual negotiations. In BNA, the Claimant (who sought to rely on evidence of pre-contractual negotiations) failed to adduce the evidence before the Tribunal, and only sought to introduce it in affidavits filed in the jurisdictional challenge before the High Court. The Court refused to admit the evidence as it did not satisfy the limited exceptions to the parol evidence rule, but noted that the outcome could well have been different had the Claimant adduced the evidence the before the Tribunal16.
Conclusion
As with all aspects of a commercial agreement, an arbitration clause is likely to be the product of negotiations and necessarily reflect a compromise between the parties, or conversely might reflect inattention from the parties or their lawyers. When pursuing a mutually acceptable compromise, however, care must still be taken to ensure that the essential elements of the arbitration clause, in particular, the seat, governing law and institutional rules, are clearly stipulated. A clear and unambiguous arbitration clause could save the parties the time and costs of a dispute over the interpretation and workability of the clause later down the track.
For further information, please contac
Melvin Sng, Partner, Head of Dispute Resolution, Asia, Linklaters
melvin.sng@linklaters.com
1 Based on the English Court of Appeal decision in Sulamerica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 (“Sulamerica”), affirmed by the Singapore Courts in BCY v BCZ [2017] 3 SLR 357 (“BCY”).
2 BNA at [56] and [61]
3 BNA at [94]
4 BNA at [65] and [69]
5 Rule 18.1
6 BNA at [78]-[79] and [83]
7 BNA at [90]
8 BNA at [101]
9 BNA at [15]. See also our PRC and Hong Kong Offices’ briefing note on the establishment Shanghai Lin-Gang Pilot Free Trade Zone, which exceptionally permits foreign arbitration institutions which fulfil certain criteria to administer foreign-related disputes in the PRC.
10 Art 225.1 of the Russian Arbitrazh Procedure Code. See the Russian Arbitration section of the Linklaters Dispute Toolkit, and our Moscow Office’s briefing note on key reforms to Russian arbitration law with effect from September 2016.
11 UNCITRAL Model Law, Art 16(3) read with Art 1(2); see also the Explanatory Note by the UNCITRAL Secretariat on the Model Law at [16]
12 Atlas Power v National Transmission and Despatch Company Ltd [2018] EWHC 1052 at [38], C v D [2008] 1 Lloyd’s Rep. 239. Note however that
challenges to an award for the purpose of resisting enforcement will be determined by the court where the award is sought to be enforced.
13 BNA at [101]
14 Including in Singapore, by virtue of sections 94-99 of the Evidence Act
15 The IBA Rules on the Taking of Evidence in International Arbitration, which apply to many arbitral proceedings, do not contain restrictions on
the admissibility of pre-contractual negotiations. Section 2(1) of the Singapore Evidence Act expressly excludes the parol evidence rule from
application to “proceedings before an arbitrator”.
16 BNA at [78]
