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19 December, 2016
The Singapore High Court have recently affirmed the enforceability of one-sided optional arbitration clauses (Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2016] SGHC 238 (Dyna-Jet)). The High Court has also considered and clarified the relative burdens of proof where parties seek to enforce or challenge an arbitration agreement in the Singapore courts.
What is a one-sided or asymmetric arbitration agreement?
An arbitration agreement can comprise either a stand-alone agreement or an "arbitration clause" in a wider commercial contract. Whatever their form, arbitration agreements typically provide that all disputes between parties to the agreement shall be resolved by arbitration, and then specify matters relevant to that referral (e.g. the number of arbitrators, and the seat and language of the arbitration).
"Optional" arbitration agreements are different. These types of agreements do not require parties to arbitrate. Instead, they either provide for court litigation but give the parties the option to "opt-in" to resolving their dispute by arbitration, or provide for arbitration but allow parties to "opt-out" and instead pursue court litigation. Optional arbitration agreements can also sometimes be "one-sided" or "asymmetrical", meaning the option to either arbitrate or litigate is
only given to one party.
One-sided optional arbitration agreements are common in finance transactions, where they are typically granted in favor of lending parties to give them maximum flexibility when enforcing any finance obligations or security interests. While the enforceability of such clauses has been upheld in some jurisdictions (e.g. England), it has also been questioned in others.
What were the facts in Dyna-Jet?
In Dyna-Jet, parties had entered into a contract which gave one party (the plaintiff) the right to elect whether any dispute should be resolved by court litigation or arbitration (i.e. an asymmetrical optional arbitration agreement). A dispute arose and the Plaintiff decided to bring an action in court instead of resorting to arbitration.
The defendant applied under s. 6 of the Singapore International Arbitration Act (Cap 50) (the IAA) for an order to stay the plaintiff's action permanently in order to compel the dispute to be resolved through arbitration. Section 6 obliges the Singapore Court to stay litigation between parties to an "arbitration agreement" brought in breach of that agreement, save where the court "is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed". The application was heard by Justice Vinodh Coomaraswamy in the High Court.
What did the Court decide?
Justice Coomaraswamy found that an asymmetrical optional arbitration agreement did constitute an arbitration agreement for the purposes of s 6, and was therefore generally enforceable under the IAA.
In this case, the Plaintiff (the party with the option) had elected not to arbitrate, and instead elected to pursue court proceedings. Justice Coomaraswamy held that, in this particular situation, the arbitration agreement was valid and operative, but not capable of performance. This is so because Dyna-Jet had effectively relinquished its right to refer this particular dispute to arbitration when they elected not to arbitrate. The arbitration agreement could thus no longer be performed.
Justice Coomaraswamy therefore confirmed both the general enforceability of one-sided optional arbitration agreements under Singapore law, and that the Singapore Courts would give effect to the exercise of such a right by a party where they elect between either arbitration or court litigation pursuant to such a clause.
What is the relative burden of proof for granting a stay under the IAA?
Justice Coomaraswamy also commented on the burden of proof plaintiffs and defendants must overcome when seeking or opposing a stay of proceedings under the IAA.
To grant a stay under s 6 of the IAA, the plaintiff must first show that the parties' dispute resolution agreement is an "arbitration agreement". Following Tomolugen Holdings Ltd v Silica Investors Ltd [2015] SGCA 57, Justice Coomaraswamy affirmed that this was a light burden – the applicant only needs to establish that there is a prima facie valid arbitration agreement (roughly equivalent to on the face of the document or on first impressions).
If this burden is discharged, however, then the party resisting the stay has the much higher burden of demonstrating that the agreement is invalid, inoperative, or incapable of being performed. Specifically, such a party must establish that "no other conclusion on this issue is arguable" before the Court will refuse to grant a stay under the IAA. This was the approach taken in Tjong Very Sumito and Others v Antig Investments Pte Ltd [2009] 4 SLR(R) 73, and affirmed by the judge in Dyna-Jet. This interpretation is consistent with the pro-enforcement approach of the Singapore courts.
Conclusion
The Court's confirmation that asymmetrical optional arbitration agreements are enforceable is good news for commercial parties in ensuring flexibility and certainty, and respects their freedom to contract and resolve disputes.
Further, where it is clear that a party is entitled to, and has, elected to litigate rather than arbitrate, the Court has made clear that it will respect that decision.
For further information, please contact:
Leng Sun Chan SC, Principal, Baker McKenzie
lengsun.chan@bakermckenzie.com
