23 December, 2016
The High Court held that the arbitration agreement was valid, however it was incapable of being performed Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2016] SGHC 238 (Singapore, High Court, 31 October 2016)
In Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2016] SGHC 238, the High Court heard an application by the defendant to an action to stay court proceedings in favour of arbitration with reference to a dispute resolution clause that gave only the plaintiff the right to elect to arbitrate disputes.
The Court held that such a clause constituted a valid arbitration agreement within the meaning of Singapore’s arbitration legislation.
However, the Court found that the plaintiff in commencing the court action had elected not to arbitrate the dispute. An election to arbitrate the dispute was the contingency that the parties made intrinsic to their arbitration agreement. As this had not been satisfied, the plaintiff had bound itself to litigate the dispute and accordingly the intrinsic contingency in the parties’ dispute- resolution agreement could never be satisfied such that the arbitration agreement was now incapable of being performed.
Our Comments/Analysis
The decision clarifies the Singapore court’s position in relation to several important questions in arbitration law which were not previously fully considered.
Firstly, this decision confirms that an asymmetric or optional arbitration clause granting only one party the right to elect for arbitration constitutes a valid arbitration agreement under section 2A of the International Arbitration Act (“IAA”). The position as now held in this case is in line with other major jurisdictions. Optional arbitration clauses are increasingly used in commercial contracts and the confirmation as to their validity provides welcome certainty for users.
Second, while consistent with the pro-arbitration approach of the Singapore courts, the decision highlights that the courts will give effect to the commercial intent of the parties and here the High Court did so when examining the effect of the plaintiff’s election of court proceedings over arbitration.
Third, the decision suggests that in a reverse situation involving a default arbitration provision and a clause affording one party the right to opt for litigation, such clauses would be upheld by the Singapore courts.
This Update takes a look at the High Court’s decision.
Background
Plaintiff had sole right to submit disputes to arbitration
The parties had entered into a contract pursuant to which the defendant engaged the plaintiff to carry out specialist engineering services on the island of Diego Garcia in the Indian Ocean. The contract contained a dispute resolution clause, which in express terms gave the plaintiff the sole right whether to submit any disputes to arbitration. The relevant section of the dispute-resolution clause is set out below:
“…Any claim or dispute or breach of terms of the Contract shall be settled amicably between the parties by mutual consultation. If no amicable settlement is reached through discussions, at the election of [the plaintiff], the dispute may be referred to and personally settled by means of arbitration proceedings, which will be conducted under English Law; and held in Singapore.”
When a dispute between the parties subsequently arose, the plaintiff elected not to refer the dispute to arbitration and commenced court proceedings instead. The defendant applied to stay the proceedings in favour of arbitration. However, the plaintiff resisted the application on the basis that there was no arbitration agreement between the parties, or alternatively, that any arbitration agreement they had was “null and void, inoperative or incapable of being performed” under section 6(2) of the IAA.
The Assistant Registrar (“AR”) at first instance held that the dispute-resolution clause was an arbitration agreement within the meaning of the IAA, even though only the plaintiff had the right to elect to arbitrate.
However, the AR held that this arbitration agreement, on the facts of the present case, was “inoperative” or “incapable of being performed” because the plaintiff had elected not to arbitrate the dispute, but had elected litigation instead.
There were two issues to be determined on appeal to the High Court:
- Whether the dispute-resolution agreement was an “arbitration agreement” within the meaning of section 2A of the IAA; and
- Whether the dispute-resolution agreement was “null and void, inoperative or incapable of being performed” within the meaning of the proviso to section 6(2) of the IAA.
Was there a valid arbitration agreement?
Must be a contractual obligation to arbitrate
The High Court held that the burden was on the defendant to establish prima facie that there was a valid arbitration agreement between the parties. The defendant submitted that the dispute-resolution clause made a “clear reference” to refer future disputes to arbitration and this sufficed to establish prima facie that it was an arbitration agreement. The Court held that it could not be correct that a dispute- resolution clause that merely referred in some way to the parties’ submitting future disputes to arbitration would be an “arbitration agreement”. To be an arbitration agreement, the Court held that a dispute-resolution clause must comprise a contractual obligation to arbitrate, whether conditional or unconditional, and a dispute-resolution agreement which merely made a reference to arbitration was not an arbitration agreement.
Further, the Court held that it was clear from a proper construction of the dispute-resolution clause that it conferred a right of election only on the plaintiff. The Court held that the general approach to be taken in construing arbitration agreements was a generous one and there was no reason to depart from this approach in the present case. The parties’ contract was an ordinary commercial contract and neither the contract nor the dispute touched upon specialised areas of the law. The Court noted that the effect of the generous approach was merely to stipulate that arbitration agreements should be interpreted by adopting the same approach as taken in respect to any other provision of any other contract. Applying this approach to the dispute- resolution clause in the present case, it was unarguable that this clause conferred a right to elect to arbitrate disputes on the plaintiff alone.
However, the Court agreed with the defendant’s alternative argument that a dispute-resolution clause which conferred on only one party a right to elect to arbitrate was nevertheless an arbitration agreement. The plaintiff had submitted that the dispute-resolution clause was not an arbitration agreement because of lack of mutuality and because the obligation to arbitrate future disputes was entirely optional. In dismissing the plaintiff’s submissions, the Court held that the weight of modern Commonwealth authority had established the following propositions:
(i) A contractual dispute-resolution agreement which operates asymmetrically is nevertheless an arbitration agreement.
(ii) Acontractualdispute-resolutionagreementwhichgrants a right to elect whether to arbitrate a future dispute is nevertheless an arbitration agreement.
(iii) The combined effect of (i) and (ii) is that a contractual dispute-resolution agreement which confers an asymmetric right to elect whether to arbitrate a future dispute is nevertheless an arbitration agreement.
(iv) A contractual dispute-resolution agreement which confers a right to elect to arbitrate a future dispute, whether symmetric or asymmetric, is an arbitration agreement from the moment the parties enter into it contractually. When the right of election is exercised actually to refer a specific dispute to arbitration, the dispute-resolution agreement gives rise to a specific arbitration agreement for that specific dispute. But the underlying dispute-resolution agreement is nevertheless from the outset an arbitration agreement, and, even after the right of election comprised in it is exercised, continues into the future to be an arbitration agreement, capable of being invoked by election in relation to other disputes.
(v) Where an arbitration agreement confers a right to elect to arbitrate future disputes, whether symmetric or asymmetric, it is a question to be determined on the proper construction of that agreement whether a party who has a right to elect to arbitrate: (a) who does not make that election remains entitled to commence litigation against its counterparty; and (b) who does elect to arbitrate can stay litigation brought by the counterparty.
The Court held that these propositions were consistent with section 2A of the IAA, which does not require an arbitration agreement to refer all future disputes to arbitration or to do so unconditionally. In fact, the Court noted that section 2A of the IAA expressly accommodated within its definition an arbitration agreement that dealt only with “certain disputes”. In the Court’s view, that captured within the statutory definition agreements, such as the present one, in which the “certain disputes” which are to be referred to arbitration in the future are only those disputes which a party having a right of election chooses to so refer.
As the dispute-resolution agreement in the present case was an arbitration agreement, the Court was obliged to stay the proceedings pursuant to section 6(1) of the IAA unless the plaintiff was able to make out an unarguable case that the arbitration agreement was “null and void”, “inoperative”, or “incapable of being performed” within the meaning of the proviso to section 6(2) of the IAA.
The proviso to section 6(2) of the IAA Party cannot arbitrate after first electing to litigate
The Court noted that the proviso to section 6(2) of the IAA, which permitted the plaintiff to avoid a stay of proceedings if it could establish that the arbitration agreement was “null and void, inoperative or incapable of being performed” was adopted from Article 8(1) of the Model Law, which in turn adopted the proviso from the obligation which Article II(3) of the New York Convention imposes on the courts of each contracting state to refer litigants to arbitration when they are parties to an arbitration agreement.
The Court held that, where an arbitration agreement confers on one party a asymmetric option to arbitrate disputes, and where that party declines to exercise that option with respect to a specific dispute and instead commences litigation on that dispute, that decision will preclude that party from thereafter referring the same dispute to arbitration, and because the other party has no independent right to refer the dispute to arbitration, the arbitration will be within the proviso to section 6(2) of the IAA. This was the proposition on which the plaintiff must satisfy the Court in order to succeed on the second issue.
Parties’ In the present case, the Court found that the parties’arbitration agreement was “incapable of being performed” arbitration agreement was “incapable of being performed” because it was subject to a contingency that could never be fulfilled. The arbitration agreement between the parties was expressly made subject to a condition; i.e. that the plaintiff must elect to arbitrate. That contingency had not been satisfied as the plaintiff did not elect to arbitrate and the plaintiff had put it out of its power to ever revisit the issue and to elect to arbitrate the dispute.
Not However, the Court held that the parties’ arbitration “inoperative” or “null and void” agreement was not “inoperative” as found by the AR. The arbitration agreement had not ceased to have effect and had not been discharged, it had operated precisely as contemplated by the parties. The dispute underlying this action had not been referred to arbitration because of the operation of the parties’ arbitration agreement and not because that agreement was inoperative. The Court also found that the arbitration agreement was not “null and void”.
In the event, the Court found that the plaintiff had succeeded in establishing that there was no arguable case that could be made against its submission that the arbitration agreement was within the proviso to section 6(2) of the IAA.Leave has been granted (to the defendant) for appeal to the Court of Appeal.
For further information, please contact:
Andre Maniam, WongPartnership
andre.maniam@wongpartnership.com
