9 March, 2017
In a rare decision, the Singapore High Court in TMT v The Royal Bank of Scotland  SGHC 21 has ruled that an arbitration clause did not meet the prima facie standard for a stay of court proceedings because it designated the wrong arbitral institution.
TMT Co., Ltd (“TMT”), a Liberian ship-owning company, opened a trading account with the Royal Bank of Scotland plc (“RBS”) in 2007. In 2010, TMT commenced proceedings against RBS in the English Commercial Court for breach of the trading account agreement (the “Trading Agreement”) negligence, breach of statutory duty concerning risk management and other obligations and negligent misrepresentation as to the margin requirements of the trading accounts. In May of 2012, the parties entered into a settlement agreement to settle the English proceedings (the "Settlement Agreement").
In 2015, TMT sued RBS’s Singapore branch and a number of its officers (the “Defendants”) for losses arising from imposing improper and erroneous margin requirements, improper and erroneous valuation, diversion of monies and delay of instructions, fraud and conspiracy relating to TMT’s margin trades. The Defendants moved to stay the Singapore proceedings, arguing that:
- The Singapore proceedings fell within the scope of the Settlement Agreement and its exclusive jurisdiction clause for disputes to be before English courts prevented TMT from further proceedings; and
- The Trading Agreement was subject to an arbitration agreement and the Court and any dispute should be stayed in favour of arbitration.
The Defendants succeeded on both arguments at first instance. TMT appealed to the High Court.
The Defendants prevailed in showing that the claims in the Singapore proceedings fell within the scope of the Settlement Agreement. TMT had argued that the Settlement Agreement only covered claims raised in the English proceedings. The Court disagreed, because the settlement was worded broadly to include “all and any claims…of whatsoever nature and howsoever arising…whether known or unknown”. Hence, there was no reason to limit the scope to only the English proceedings. Accordingly, the Court upheld the stay of proceedings as the parties’ settlement was found to include the claims in the Singapore proceedings.
The Court further found that the exclusive jurisdiction clause in the Settlement Agreement which refers to disputes "which may arise out of or in any way relate" to the Settlement Agreement meant that the jurisdiction clause was to be interpreted broadly.
Under Singapore law, the threshold to find an arbitration agreement for purpose of a stay of proceedings is relatively low. The applicant need only prove on a prima facie basis that:
- There is a valid arbitration agreement between the parties;
- The parties’ dispute fell within the scope of the arbitration agreement; and
- The arbitration agreement is not null and void, inoperative or incapable of being performed.
Despite the low threshold, the Court surprisingly found that there was no valid arbitration agreement between the parties in the Trading Agreement. The relevant part in the arbitration clause read:
Any dispute arising from or relating to these terms or any Contract made hereunder shall, unless resolved between us, be referred to arbitration under the arbitration rules of the relevant exchange or any other organisation as the relevant exchange may direct and both parties agree to, such agreement not to be unreasonable [sic.] withheld, before either of us resort to the jurisdiction of the Court.” (emphasis added)
The arbitration clause in the Trading Agreement had referenced arbitration rules of “the relevant exchange” but no exchange was involved in the dispute. TMT argued that the arbitration clause was null and void, inoperative or incapable of being performed. The Defendants, on the other hand, argued that the clause could be read as referring to either an exchange or a clearing house. RBS was a member of the London Clearing House. Further, the Defendants argued that the Court should focus on the parties’ agreement to arbitrate their disputes. The rest of the clause should be treated as only the relevant mechanism, which could be modified or adapted to adapt to the situation at hand.
The High Court rejected the Defendants’ arguments. It found that the arbitration clause did not encompass the dispute before the court, or most part of the disputes between the parties. However, the reasons for this finding were not elaborated upon. More significantly, the High Court found that to read “relevant exchange” as referring alternatively to a clearing house required a significant rewriting of the arbitration clause. The Court could not simply rewrite agreements entered into between parties, especially a commercial agreement between commercial entities. Commercial entities are relatively sophisticated and the Trading Agreement had presumably been scrutinised by their legal advisors before execution. Hence, the parties had to live with any errors that survived such scrutiny. Hence, there was no arbitration agreement giving rise to a stay here.
Admittedly, the ruling on the arbitration agreement would not have changed the result since the exclusive jurisdiction clause in the Settlement Agreement governed the disputes in question. Nevertheless, this decision was unusual in that the Court had found that a coherently drafted arbitration clause failed to meet the prima facie threshold for a stay of proceedings.
The Singapore courts have on previous occasions saved other defective arbitration agreements between commercial parties, even when the defect was more apparent. It has found an arbitration clause capable of being performed despite providing for a non-existent arbitral institution. See, HKL Group Co Ltd v Rizq International Holdings Pte Ltd  SGHCR 5. The Court of Appeal has also found that an agreement providing for arbitration administered by the SIAC but applying ICC arbitration rules was valid. See, Insigma Technology Co Ltd v Alstom Technology Ltd  SGCA 24.
Unfortunately, none of the above cases were canvassed in the present case. It remains to be seen if the High Court would have adopted a different approach in a similar case.
One way of reconciling the approach taken in this case with the earlier authorities appears to be that a bad arbitration clause is more likely to be saved than one that is coherent but inapplicable. Where the parties’ arbitration agreement is ambiguous, the Court may be more willing to fill in the gaps based on the implied intention of the parties. However, where parties have concluded a clear – albeit inapplicable – arbitration agreement, the Court is more reluctant to “rewrite” and contradict their agreement. In addition, where the parties had intended a specialist arbitral institution, the courts are more likely to find that parties intended arbitration to apply only to specific matters involving the specialist institution.
The takeaway here is that all arbitration agreements should be crafted with great care in order to be enforceable. Commercial parties that insert an arbitration clause into their contracts at the eleventh hour are nevertheless presumed to have scrutinised their agreement to arbitrate and the Singapore Court would be slow to correct a provision which is clearly drafted but inapplicable to the dispute. Further, reference to specialist arbitration rules (e.g. rules for maritime arbitration, trade associations, intellectual property) in arbitration agreements should generally be avoided for potential claims of a general nature.
For further information, please contact:
June (Junghye) Yeum, Partner, Clyde & Co