10 April, 2017
Recently, we reviewed the Singapore High Court decision of TMT v The Royal Bank of Scotland [2017] SGHC 21 in which an arbitration agreement that designated an inapplicable arbitral institution was found incapable of being performed. The Singapore High Court had another occasion in KVC Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd [2017] SGHC 32 to revisit how to treat a pathological arbitration clause.
Background
This was a case involving two separate disputes where the plaintiffs, KVC Rice and Tanasan Rice each agreed to sell 5,000 metric tons of rice in consignments to defendant, Asian Mineral. The defendant withheld payment for the fifth consignment of rice alleging that plaintiffs gave a 15% discount to defendant. Plaintiffs denied ever giving such discount to defendant and both plaintiffs claimed that they had delivered the fifth consignment. Defendant on the other hand did not make payment even on the discounted rate, alleging it had not received the fifth consignment.
The contracts between the parties were identical save for the price and one word in the arbitration clause:
KVC Rice Contract
The Seller and the Buyer agree that all disputes arising out of or in connection with this agreement that cannot be settled by discussion and mutual agreement shall be referred to and finally resolved by arbitration as per Indian Contract Rules.
Tanasan Rice Contract
The Seller and the Buyer agree that all disputes arising out of or in connection with this agreement that cannot be settled by discussion and mutual agreement shall be referred to and finally resolved by arbitration as per Singapore Contract Rules.
Plaintiffs made attempts to pursue arbitration, only to be met with rejection by the defendant. Plaintiffs then brought Singapore court proceedings on the basis that the two arbitration clauses were pathological clauses because the clauses did not refer to any existing or known procedural rules and did not specify the seat or law of the arbitration. Accordingly, it was impossible to give effect to the intention of the parties. Defendant argued that the arbitration clauses were not unworkable, and sought a stay of court proceedings in favour of arbitration.
Court's findings – Arbitration agreements not incapable of being performed
Under section 6 of the International Arbitration Act, where the Court finds on a prima facie basis that the arbitration agreement is not "null and void, inoperative or incapable of being performed", court proceedings are to be stayed in favour of arbitration.
The Singapore High Court found that a bare arbitration clause which merely provides for submission of dispute to arbitration without specifying the place of the arbitration, the number of arbitrators or the method for establishing the arbitral tribunal remains a valid and binding arbitration agreement if the parties have evinced a clear intention to settle any dispute by arbitration.
The Court turned to Article 11(3) of the Model Law (which is incorporated into Singapore law) to break the deadlock caused by the lack of the parties’ agreement on the appointment of arbitrator(s). Article 11(3) of the Model Law provides that where the parties had not agreed on the mechanism for appointment of arbitrator(s), the default appointing authority (i.e. the Singapore International Arbitration Centre ("SIAC") President) will appoint the arbitrator(s).
The key issue before the Court was whether Article 11(3) of the Model Law could apply where the parties had not clearly selected Singapore as the seat of arbitration. The Court had to decide whether the SIAC President could be satisfied on a prima facie case that an arbitration agreement exists.
To that end, the Court had to consider how to interpret the phrases “as per Indian Contract Rules” (in the KVC Rice Contract) and “as per Singapore Contract Rules” (in the Tanasan Rice Contract). In the Court’s view, there were three possible ways of construing the phrases:
First, the clause in the KVC Rice Contract could be construed as subjecting the arbitration to the arbitral laws of India and the clause in the Tanasan Rice Contract, the arbitral laws of Singapore;
Second, the clause in the KVC Rice Contract could refer to Indian contract laws as the substantive governing law of the sales contract and in the Tanasan Rice Contract, Singapore contract laws as the substantive governing law of that sales contract; and
Finally, they could be regarded as lacking any intelligible meaning and disregarded.
In the case of the KVC Rice Contract (which provided for "Indian Contract Rules"), the Court found that the third interpretation applied. There were sufficient connecting factors for the SIAC President to be prima facie satisfied that Singapore law was the arbitral law as the defendant was a Singapore-incorporated company.
As for the Tanasan Rice Contract (which provided for "Singapore Contract Rules"), all three interpretations above could apply and the SIAC President could likewise be prima facie satisfied that Singapore law was the arbitral law. Hence, the Court found that Article 11(3) of the Model Law applied to empower the SIAC President to appoint the arbitrator(s) on the parties’ behalf.
The Court’s decision, however, did not bind the SIAC President and he could independently decide that he did not have the power to appoint the arbitrator(s) for the parties. The Court noted that in the event that the SIAC President declines to appoint the arbitrator(s), the Singapore courts retain residual jurisdiction to ensure that the arbitration under both contracts may proceed notwithstanding any deadlock between the parties on the appointment. Where there was no other way to prevent injustice to a would-be claimant, the Court is prepared to step in to appoint an arbitrator for the parties. This is provided the dispute has some connection with Singapore, which was satisfied in this case as the defendant was a Singapore company. This residual jurisdiction is consistent with Singapore’s strong policy in favour of arbitration and to prevent the plaintiffs from being denied access to justice.
Discussion
In this case, in stark contrast to TMT v The Royal Bank of Scotland [2017] SGHC 21, the High Court went to great lengths to find mechanisms for a bare arbitration agreement to operate. Even though the Model Law did not expressly provide for the SIAC President to appoint an arbitral tribunal where the place of arbitration was undetermined, the Court read the Model Law as one which did not preventsuch an approach.
The decision accords with the approach taken in earlier Singapore court decisions such as Insigma Technology Co Ltd v Alstom Technology Ltd [2009] 3 SLR(R) 936 (arbitration clause providing for non-existent arbitral institution found capable of being performed) and HKL Group Co Ltd v Rizq International Holdings Pte Ltd [2013] SGHCR 5 (arbitration clause providing for arbitration administered by SIAC but applying International Chamber of Commerce ("ICC") arbitration rules valid) that a pathological arbitration clause would not be disregarded.
In an age where users are becoming more sophisticated and model arbitration clauses are easily accessible, parties usually enter into detailed arbitration agreements. Nevertheless, this decision affirms the principle that the core of an arbitration agreement is the intention to arbitrate. Even a bare arbitration agreement is capable of being performed so long as the parties’ intention to arbitrate is sufficiently apparent.
Key takeaways
Although the Singapore courts have been rather generous in finding inconsistent, defective or bare arbitration agreements workable, the result may not have been the same had the plaintiffs brought court proceedings in a different jurisdiction or if there were no connecting factors between the dispute and Singapore.
A bare arbitration agreement should be avoided wherever possible. On one front, the arbitration agreement could be difficult to enforce without a defendant’s cooperation. While the High Court did not decide the point, it acknowledged that there were arguments that the inability to establish the arbitral tribunal without the defendant's cooperation may render a bare arbitration agreement incapable of being performed. The claimant may find it unable to enforce the bare arbitration agreement without the defendant's cooperation. On the other hand, if a claimant were to commence court proceedings, a defendant may invoke the arbitration agreement to seek a stay of court proceedings. At worst, a bare arbitration agreement may leave a claimant with no effective remedy since the courts may refuse to entertain an action and the arbitration clause is defective.
Therefore, to avoid unnecessary, costly legal battles and courts second guessing whether an arbitration agreement is workable, parties should give sufficient thought when crafting an arbitration agreement. It is advisable to always insert a well drafted arbitration clause which provides for the place of the arbitration, the number of arbitrators and the process for constituting the arbitral tribunal.
For further information, please contact:
June (Junghye) Yeum, Partner, Clyde & Co
june.yeum@clydeco.com
