Professor Franco Ferrari, the Center’s Director, has just published a paper on the importance of the law of the seat in international commercial arbitration in a volume entitled “Applicable Law Issues in International Arbitration / Questions de droit applicable dans l’arbitrage international”, co-edited by Diego P. Fernández Arroyo (Sciences Po) and Giuditta Cordero-Moss (Oslo University), and published by Brill under the auspices of The Hague Academy of International Law. The volume, which is part of the Centre for Studies and Research in International Law and International Relations Series, explores the importance of identifying the law applicable to many arbitration related issues, also including the merits of the dispute, the limits to party autonomy, the effects of overriding mandatory rules, the interpretation of international treaties by arbitrators, the principle iura novit arbiter, manifest express of powers in  ICSID arbitration, the arbitrability, res iudicata, the liability of arbitrators, and the importance of domestic law.
 
The contributors, who come from Argentina, Bburkina Faso, Cameroon, Colombia, France, Italy, Morocco, Norway, Portugal, Sweden, and Turkey, are, apart from Professor Ferrari, Didier Bationo, Marco Buzzoni, Federico Alberto Cabona, Ludovica Chiussi Curzi, Ana Coimbra Trigo, Lito Dokopoulou, Dr. Yagmur Hortoglu, Ali Kairouani, Andrea Mackielo, Paola Patarroyo, Luca G. Radicati di Brozolo, Alexandre Senegačnik, Erik Sinander Nicola Strain, Giulia Vallar, Wendinkonté Sylvie Zongo, and Apollin Koagne Zoupet.

For more information, please click here: https://brill.com/edcollbook/title/68987?rskey=11m0FB&result=27

Introduction

The purpose of this paper is to assess whether the reformed Article 822 of the Italian Code of Civil Procedure (“CCP”) is consistent with the reform’s goal of making Italy a more attractive arbitral seat. The paper focuses only on the possibility for the parties to choose the law applicable to the merits of their dispute, codified in the new Article 822 CCP. It does not analyze the part of Article 822(2) CCP concerning the determination of the law applicable to the merit absent valid choice by the parties. 

1. The parties’ freedom to choose the law applicable to the merits before the recent amendments:

Party autonomy in arbitration is not limited to the power to submit the dispute to arbitration and to appoint arbitrators. It normally includes the freedom for the parties to choose the substantive law that applies to the merits of their dispute[1]. Indeed, most arbitration laws[2] expressly contain an “arbitration-specific conflict rule”[3] that establishes the connecting criteria by which arbitrators shall designate the law applicable to the merits and, therefore, prevent recourse to general conflict rules in arbitration[4]. These provisions recognize the importance of party autonomy as the main connecting criterion by which the law applicable to the merits is designated and require arbitrators to apply the law chosen by the parties[5], even when the law chosen is not that of a country connected with the dispute[6]. Additionally, many of these provisions use the expression “rules of law”[7],  and thus, do not limit the parties’ choice to “a law”, understood as an exhaustive national corpus of law[8]. The former includes not only national laws, but also non-State rules[9], which may be chosen by the parties as substantive rules to govern the merits of their dispute. Therefore, the use of the expression “rules of law” is intended to broaden the range of substantive rules to which the parties can subject their relationship[10]. In arbitration, the choice of “rules of law” has the same value as the designation of a “law” (i.e., a national body of law), since these rules occupy the same place as state law in the hierarchy of sources applicable to the merits[11]. Arbitration in Italy is primarily regulated by Articles 806-840 CCP, but none of these provisions expressly recognize the power of the parties to choose the substantive law applicable to the merits[12]. Italy, after the Legislative Decree nº 209/2006,[13] and until the recent amendments come into effect, lacks an arbitration-specific choice of law rule found in most jurisdictions[14]. In fact, in 2006[15] the legislature profoundly reformed the previous rules on arbitration by eliminating the whole of Chapter IV, Title VII of Book IV of the Italian CCP (the “2006 Reforms”) and, thus, altered the very concept of international arbitration[16]. The reform led to a “monistic” system in which the rules of domestic arbitration are applied to international arbitration, with few exceptions[17]. Consequently, the legislature also eliminated the previous arbitration-specific conflict rule contained in Article 834 CCP providing: “[t]he parties shall have the power to determine by agreement the rules to be applied by the arbitrators to the merits of the dispute or to provide that the arbitrators shall rule according to equity. If the parties do not so provide, the law with which the relationship is most closely connected shall apply. In either case, the arbitrators shall take into account the indications of the contract and the usages of the trade”[18].

Under the 2006 Reforms, and considering the absence of a specific arbitration-specific choice of law rule, all arbitrations seated in Italy became rooted in Article 822 CCP, which merely states that “arbitrators judge according to the norms of law unless the parties have authorized them by any expression to judge according to equity”[19].

The Italian legislature’s failure in 2006 to introduce an arbitration-specific choice of law rule to determine the applicable substantive regime has raised the question of which conflict rule is applicable to establish the substantive law on the merits, specifically in ad hoc arbitrations seated in Italy[20]. In fact, only for the latter type of arbitration, the “general” rules of private international law apply, including the provisions of the Rome I Regulation, where applicable[21]. However, while the Rome I Regulation[22] grants the parties the right to choose the applicable law, it does not allow the choice of “a law” other than that of a State[23]. Consequently, only a choice in favor of the law of a State leads to that law prevailing over otherwise applicable mandatory rules[24]. When, on the other hand, the parties choose to subject their contractual relationship to a soft law regime[25], such a choice solely determines the content of the contract per relationem[26]. This means that the provisions contained in the chosen soft law instrument do not override the mandatory rules of the otherwise applicable law[27]. Conversely, in cases where the arbitration is subject to institutional rules (i.e., the UNCITRAL Arbitration Rules), arbitrators will have to resort to the specific conflict rules contained in the UNCITRAL Arbitration Rules and not to the EU regulations on private international law, which are not of mandatory application in arbitration and are relevant only as default private international law rules[28]. These UNCITRAL Arbitration Rules contain an arbitration-specific conflict rule[29] allowing the parties to choose “rules of law” as those applicable to the merits.

The absence of an arbitration-specific conflict rule in Italy is therefore specifically relevant in the matter of ad hoc arbitrations seated in Italy. For this type of arbitration, the question which remains is whether arbitrators can disregard the parties’ choice of non-state law by invoking the limits imposed on private autonomy by the Rome I Regulation as the default instrument of private international law[30].

To overcome this dilemma, and while simultaneously promoting the goals of legal certainty and predictability in arbitration, it was necessary to reintroduce an arbitration-specific conflict rule in Italy[31].

1. The Italian arbitration amendment project in the Enabling Act:

In November 2021, the Parliament enacted the Enabling Act of Nov. 26, 2021 nº 206 (the “Enabling Act”)[32] to reform Italian civil procedural law with the aim of promoting “the efficiency of civil procedure[33]” in accordance with “objectives of simplification, expeditiousness, and rationalization” [34]. The Enabling Act, presented as part of the Italian “National Recovery and Resilience Plan,”[35] also authorizes the Italian Government to issue one or more legislative decrees to amend arbitral legislation in compliance with eight (8) specific guiding principles and criteria[36]. 

As stated in the Report[37] accompanying the proposals presented by the “Luiso Committee”[38] (incorporated into the Enabling Act), the objective of these amendments on arbitration is to “general[ly] enhance[] […] the institution of arbitration” as well as to “strengthen[] […] its specific prerogatives” in order to, “reinforce the confidence in the institution among potential users”[39]. In particular, “it is intended to conform arbitration in Italy to that provided in European rules”[40]. These statements demonstrate that the ratio behind the reform is to improve arbitration in Italy also in light of foreign legal systems considered more advanced in this field,[41] with the ultimate aim of “making arbitration more attractive […] to individuals and foreign investors”[42].

Next, Section d of Article 1(15)[43] introduces the express possibility for a party to choose the law applicable to the merits of the dispute. Specifically, the guiding principle requires the legislature to “provide, in the case of adjudication according to law, the power for the parties to indicate and choose the applicablelaw”[44].  As rightly pointed out in commentary[45], the formula used by the legislature in Section d is ambiguous and incomplete in some respects. First, from a terminological point of view, the simultaneous use of the verbs “indicate” and “choose” is ambiguous. On one hand the term “indicate” can refer to situations where only one option is possible, in contrast with the term “choose” which presupposes the existence of two or more options[46]. Second, the formula generates uncertainty because it does not clarify whether the reference to “applicable law” refers only to “a (State) law” or also includes the possibility for parties to choose non-State “rules of law”. Finally, the formulation is silent on the test which arbitrators should apply to identify the applicable law in absence of a valid choice by the parties[47]. As detailed in the following section, some of these gaps and uncertainties have been resolved by the recent Legislative Decree nº 149/2022. However, the final formulation of Article 822 CCP, which filled the gaps in Section d[48], has also generated its own perplexities.

1. Critical remarks on Article 822 CCP after the enactment of Legislative Decree of Oct. 10, 2022 nº149

On October 10, 2022, the Italian Government implemented Enabling Act nº 206/2021 with the enactment of Legislative Decree No. 149/2022[49]. Article 3(53) of Legislative Decree nº 149/2022 finally reintroduces an arbitration-specific choice of law rule with the addition Article 822(2) CCP, which will become effective on June 30, 2023. The new provision[50] states that:[51]

 “[w]hen the arbitrators are called upon to decide according to the rule of law [(i.e., as opposed to equity)], the parties in the arbitration agreement or by virtue of a written instrument preceding the initiation of the arbitration proceedings may indicate the provisions or a foreign law as a law applicable to the merit of the dispute. Failing this, arbitrators shall apply the provisions or laws identified under the conflict criteria deemed applicable”.

This provision introduces an arbitration-specific choice of law rule in Italy that recognizes party autonomy as the main connecting criterion. However, this new rule is inconsistent with modern approaches to the law applicable to the merits (A) and does not it eliminate all uncertainties when determining the applicable law (B).

1. The inconsistency of the new provision with modern approaches to the law applicable to the merit

In this respect, the provision has two problematic aspects. Firstly, the opening sentence of the new provision states that parties may chose the applicable law only “in the arbitration agreement or by virtue of a written instrument preceding the initiation of the arbitration proceedings”[52]. The legislature, in the Explanatory Report to Legislative Decree 149/2022[53], made it clear that this temporal limitation of party autonomy “responds to the logic of identifying in advance […] the applicable law” in order to “allow the arbitrators to consider whether or not to accept the appointment” and thus, avoid “[the] unnecessary waste of procedural activity”[54]. However, this limit on party autonomy is not in line with modern approaches to the parties’ choice of law applicable to the merits. Virtually no other States’ arbitration-specific choice of law rules have a temporal limitation[55]. It is therefore evident that such restriction is inconsistent with the goal of the reform, that is, to shape Italian arbitral legislation in light of foreign legal systems[56].

Secondly, the first sentence of the new provision also provides that the parties may only designate “provisions or a foreign law” as the law applicable to the merits[57]. Through this provision, the legislature eliminated the possibility for parties to choose Italian law as the law applicable to the merits of the dispute. Even this type of limitation on party autonomy is not in line with similar arbitration-specific choice of law rules, which do not provide such limitation[58]. Indeed, in almost all arbitration-specific choice of law rules[59], the parties are free to choose any “law” (understood as an exhaustive national corpus of law), not subject to the same restrictions that apply under the conflict of law rules in litigation[60]. Surprisingly, the legislature instead decided to limit the range of laws that parties can designate by excluding the possibility for parties to have Italian law governing the dispute.  This decision contrasts with the reform’s goal of promoting Italian-seated arbitration. Eliminating the possibility to choose Italian law does not promote resort to Italian-seated arbitration, but rather pushes Italian companies, with the economic power to impose a choice of law, to avoid Italian-seated arbitration. In fact, if these companies want Italian law to apply to the merits of a dispute, they will be prompted, because of this provision, to turn to other arbitral seats with greater autonomy.

• The uncertainties generated and unresolved by the new provision

The new provision generates uncertainties that the legislature could have avoided. The employed formulation, “provisions or a foreign law”, does not expressly clarify whether parties are allowed to also choose non-State rules to govern the merit of the dispute. As pointed out above, the most recent arbitration-specific conflict of law rules allows parties to designate “rules of law” to govern the merits of the dispute[61]. Unfortunately, the new Italian arbitration-specific choice of law rule is ambiguous on this point and does not bring definitive certainty as to whether the parties are allowed to make such rules applicable.  However, it should be noted that in the Explanatory Report to Legislative Decree nº 149/2022, the legislature refers to “lex mercatoria, UNCITRAL Model Law, and others,” in relation to “the type of sources that can be invoked by the parties”[62]. However, if the provision were to be interpreted in the sense of allowing the choice of non-State rules, the legislature would have avoided all uncertainties by drafting the choice of law rule differently.

In addition, the text of the new provision fails to answer a number of questions. First, the provision does not clarify whether the choice of “foreign law” (i.e., an exhaustive national corpus of law) is limited only to the substantive law of that State[63]. Moreover, the provision does not establish whether parties are also allowed to make an implicit choice of law or whether the choice must be explicit[64]. Further, the provision neither determines whether parties have the faculty of choosing more than one law applicable to the substance of the dispute[65], nor does it clarify whether and to what extent a negative choice of law is permissible[66]. Finally, the new paragraph of Article 822 does not elucidate which law should govern the validity of the choice of law.

In light of the critique above, the legislature could have better grasped the opportunity to reform (once and for all) a specific-arbitration choice of law rule resolving these issues.

1. Conclusion

To summarize, the new Article 822(2) CCP designed by the legislature is, for all the reasons stated above, not in line with the reform’s goal of making Italy a more suitable arbitral seat and is not consistent with modern approaches to the parties’ choice of law applicable to the merits. Indeed, the formulation employed by the legislature, in addition to leaving open a number of uncertainties, limits the autonomy of the parties temporally and substantively (excluding the possibility to choose Italian substantive law to govern the merits of the dispute).  As suggested by commentary[67], I believe that the legislature should have modelled the reform after the arbitration-specific choice of law rule contained in Article 834 CCP, repealed in 2006, instead of adopting the new provision as it stands today.

Bianca Tavarelli is an Italian lawyer currently pursuing the IBRLA LLM at NYU School of Law. After graduating with honors from the University of Pisa and prior to joining NYU, Bianca practiced law as a trainee lawyer in an Italian boutique law firm specializing in Corporate and Business law. She passed the Italian Bar in July 2022.

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[1] See C. T KOTUBY, A. POMARI, Do the 2021 Reforms of the Italian Code of Civil Procedure Make Italy a Favorable Seat for International Arbitration?, in Matthias Scherer (ed), ASA Bulletin, pp. 344 – 358 (2022).

[2] See Article 1511 of the French Code of Civil Procedure; Article 187 of the Swiss Private International Law Act; Section 1051 of the German Code of Civil Procedure; Section 46 of the English Arbitration Act; Article 34 of the Spanish Arbitration Act; Section 27a of the Swedish Arbitration Act, introduced in the 2019 revision of the Act.  

[3] Note: in the paper, this expression is used interchangeably with “arbitration-specific choice of law rule”.

[4] See supra note 2.

[5] See supra note 1.

[6] I. e. a neutral law. See. W. KÜHN, Express and Implied Choice of the Substantive Law in the Practice of International Arbitration, in Planning efficient arbitration proceedings/The Law Applicable in International Arbitration, p. 383 – 384 (1996).

[7] See i.e. Article 187(1) of the Swiss Private International Law Act: “ the arbitral tribunal shall decide the case according to the rules of law chosen by the parties”; Article 21 of the ICC rules; Article 35(1) of the UNCITRAL Arbitration Rules; Article 35(1) of the PCA Arbitration rules.

[8] F. FERRARI, L. J. SILBERMAN, Getting to the Law Applicable to the Merits in International Arbitration and the Consequences of Getting it Wrong, in Ferrari and S. Kroll (EDS), Conflict of Laws in the International Arbitration, p. 383 (2011).

[9] Such as “UNIDROIT Principles of International Commercial Contracts”.

[10] See supra note 8.

[11] F. FERRARI, Dell’opportunità di una regola di conflitto per individuare le norme sostanziali applicabili negli arbitrati internazionali con sede in Italia: una proposta, In Studium Iuris, Rivista per la formazione nelle professioni giuridica, rivista mensile n. 9/2021 (2021), p. 1025

[12] See supra note 1.

[13] Legislative Decree February 2, 2006 No. 49.

[14] See supra note 2.

[15] See supra note 13.

[16] D. BORGHESI, La Legge applicabile al merito, in M. Rubino-Sammartano, Arbitrato, Adr, Conciliazione, pp. 567 – 580 (2009).

[17] See supra note 11.

[18] Author’s translation of Article 834 of the Italian Civil Procedure Code, repealed by the Legislative Decree n° 49/2006.

[19] Author’s translation of Article 822 of the Italian Civil Procedure Code.

[20] See supra note 11.

[21] Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).

[22] Article 3(1) Rome I Regulation.

[23] See. F. RAGNO, Article 3, para 20, in F. Ferrari, Concise Commentary on the Rome I Regulation, 2 ed. (2020).

[24] See supra note 11.

[25] I.e. UNIDROIT Principles of International Commercial Contracts.

[26] See supra note 11

[27] See supra note 11, F. RAGNO: “[t]he parties – by opting for non-national rules – incorporate those rules into the contract as contractual terms and, thus, can derogate from just the non-mandatory rules of the otherwise applicable law”.

[28] See supra note 11; P.A. DE MIGUEL ASENSIO, The Rome I and Rome II Regulations in International Commercial Arbitration, in F. Ferrari, The Impact of EU Law on International Commercial Arbitration, p. 177 et seq (2017).; F. ROSENFELD, The Rome Regulations in International Arbitration: The Road not Taken, in F. Ferrari, The Impact of EU Law on International Commercial Arbitration, p. 245 et seq (2017).

[29] Article 35(1) of the UNCITRAL Arbitration Rules: “The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate.”

[30] See supra note 11.

[31] See supra note 11.

[32] Law No. 206/2021, Article 15, November 26, 2021, ( “Enabling Act”).

[33] Author’s translation from the Enabling Act November 26, 2021 No. 206.

[34] Author’s translation of Article 1(1) Enabling Act November 26, 2021 No. 206.

[35] “Piano Nazionale di Ripresa e Resilienza” ( “PNRR”) is the Recovery and Resilience Plan presented by the Italian Government to access the  “Next Generation Eu” funds.

[36] Article 1(15) of the Enabling Act November 26, 2021 No. 206. See specifically paras. a-h.

[37] “Luiso Committee” (see infra) Explanatory Memorandum for the Reform of the Italian Civil Procedure, p. 17 (24 May 2021).

[38] “Luiso Committee” is the Commission for the Development of Interventions on Civil Process and Alternative Instruments (Pres. Prof Francesco Paolo LUISO), established within the Legislative Office of the Ministry of Justice in accordance with the Ministerial Decree of March 12, 2021. 

[39] Author’s translation of  Explanatory Memorandum for the Reform of the Italian Civil Procedure, p. 17 (2021).

[40] Ibidem.

[41] See M. BENEDETTELLI, Lett. D: Legge applicabile, in Benedettelli, Briguglio, Carlevaris, Carosi, Marinucci, Panzarola, Salvaneschi, Sassani, L’arbitrato della legge di delega (commento ai principi in materia di arbitrato della legge di delega n. 206 del 21 novembre  2021, art. 1, c. 15), Rivista dell’Arbitrato, Fascicolo 1, p. 50 – 65 ( 2022).  

[42] Author’s translation of  Explanatory Memorandum for the Reform of the Italian Civil Procedure, p. 17 (2021).

[43] See supra note 32.

[44] Author’s translation of Article 1(15)(d) Enabling Act November 26, 2021 No. 206.

[45] See supra note 41.

[46] Ibidem.

[47] Ibidem.

[48] Particularly the gap relating to the identification of the criteria by which Arbitrators should determine the applicable law in the absence of a valid choice by the parties.

[49] Legislative Decree October 10, 2022, No. 149.

[50] Article 822(2) CCP introduced by the Legislative Decree October 10, 2022, No. 149.

[51] Author’s translation of Article 822(2) CCP introduced by the Legislative Decree October 10, 2022, No. 149.

[52] Article 822(2) CCP.

[53] Explanatory Report to Legislative Decree October 10, 2022, No. 149 of October 19, 2022, Ministry of Justice (2022).

[54] See note 53, p. 99. Author’s translation.

[55] For examples see supra note 2.

[56] See supra Section II, p. 3.

[57] See supra note 52.

[58] See supra note 55.

[59] I.e. Article 1511(1) of the French Code of Civil Procedure, “the arbitral tribunal shall decide the dispute in accordance with the rules of law chosen by the parties or, where no such choice has been made, in accordance with the rules of law it considers appropriate”; Section 27a of the Swedish Arbitration Act, introduced in the 2019 revision of the Act, “[t]he dispute shall be determined by applying the law or rules agreed to by the parties”.

[60] See supra note 8, pp 373 – 374.

[61] See supra Section I, pp. 1 – 2.

[62] See supra note 53, p. 100. Author’s translation.

[63] Namely whether the “renvoi” is prohibited or not, see supra note 8, p. 391

[64] See supra note 8, pp. 388-389.

[65] I.e. “dépeçage” see supra 8, p. 387.

[66] I.e., in contrast with a positive choice of law.

[67] See supra note 11.

Cambridge University Press has just published the 3 volume Cambridge Compendium of International Commercial and Investment Arbitration, edited by Professor Franco Ferrari, the Center’s Director, together with Professors Andrea Bjorklund (McGill University School of Law) and Stefan Kröll (Bucerius Law School). The Compendium contains contributions for most of the foundational principles and concepts underlying international arbitration. Each contribution takes a holistic view of international arbitration, as the contributions tackle core concepts from both a commercial and an investment arbitration perspective, focusing on the fundamental issues underlying the various topics rather than on the solutions adopted in any particular jurisdiction, thus making the Compendium a truly cross-border, transnational resource. This innovative approach will allow readers to identify the commonalities as well as the differences between commercial and investment arbitration, whether and where cross-fertilization has taken place and what consequences it can have. This approach allows the Compendium to be a tool in promoting the creation of a culture of international arbitration that considers commercial arbitration and investment arbitration as part of a whole but with certain distinct features particular to each.

The Compendium is organized in 14 parts, namely Foundations, Public Law Questions Relating to Arbitration, Stakeholders in Arbitration, Applicable Law, Jurisdiction of the Arbitrator, the Arbitral Tribunal, Procedural Questions in Arbitration, Role of State Courts in Arbitration, Awards, Post Award Issues, Legal Concepts, Areas of Concern, Arbitration and Related Fields, and EU Law and Arbitration.

The contributors of the 70 papers composing the Compendium are, in the order of publication of their contribution, Florian Grisel, Emmanuel Gaillard, Franco Ferrari, Friedrich Rosenfeld, Fabien Gélinas, Andrea K. Bjorklund, Petra Butler, Marc Bungenbergl, August Reinisch, Giuditta Cordero-Moss, Daniel Behn, Christopher R. Drahozal, Victoria Shannon Sahani, Stephan Wilske, Laura Bräuninge, Andrea Carlevaris, Luke Nottage, Chester Brown, Luca G. Radicati di Brozolo, Christophe Bondy, Lukas Vanhonnaeker, Shahla Ali, Sabine Katrin Neuhaus, Monique Sasson, Jonathan Brosseau, Christophe Seraglini, Julien Fouret, Stavros Brekoulakis, Vladimir Pavić, Stefan Kröll, Elian Keller, John J. Barceló III, Alan Scott Rau, Jan Paulsson, Thilo Kerkhoff, R. Doak Bishop, Caline Mouawad, Jessica Beess und Chrostin, Kun Fan, Jacomijn van Haersolte-van Hof, Mathew Stone, Sébastien Besson, S. I. Strong, Maxi Scherer, Dharshini Prasad, Dina Prokic, Chiara Giorgetti, Saud Aldawsari, D. Brian King, Elliot Friedman, Tibor Várady, Christopher Kee, Gloria Alvarez, David Holloway, Christopher Boog, N. Jansen Calamita, Dafina Atanasova, Edna Sussman, Frédéric Bachand, Patricia Shaughnessy, Linda J. Silberman, Robert U. Hess, Geneviève Saumier, Francesca Ragno, George A. Bermann, Mark Feldman, Laurence Boisson de Chazournes, Elise Ruggeri Abonnat, Diego P. Fernández Arroyo, Alexandre Senegacnik, Stephan W. Schill, Susan D. Franck, Michael Waibel, Gerhard Wagner, Ronald A. Brand, Catherine Kessedjian, Ursula Kriebaum, Richard Happ, Sebastian Wuschka

Apart from having edited the Compendium, Professor Franco Ferrari co-authored two contributions, entitled “Limitations to Party Autonomy in International Arbitration” (pp. 47-81), and “Applicable Law in Commercial Arbitration” (pp. 482-511) respectively. For more information, please see the Contents pages taken from the Compendium.

The Center is glad to announce the publication of the book entitled “Recognition and Enforcement of Foreign Arbitral Awards: A Concise Guide to the New York Convention’s Uniform Regime”, authored by the Center’s Director, Professor Franco Ferrari, together with Dr. Friedrich Rosenfeld, Global Adjunct Professor at NYU Paris and Partner at the Hamburg based law firm Hanefeld, and Professor Charles T. Kotuby, Professor of Practice and Executive Director of the Center for International Legal Education at the University of Pittsburgh.

The book analyses case law from major arbitration jurisdictions in view of examining the New York Convention’s scope of application, the duty to recognize and enforce arbitration agreements and arbitral awards as well as its limitations, the grounds for refusal related to jurisdiction, the grounds for refusal related to proper notice and the ability to present one’s case, the grounds for refusal related to procedure, the grounds for refusal related to the award’s status under the #law applicable to it, as well as the grounds for refusal related to public policy, and the procedure and formal requirements for recognition.

Combining insight from arbitration practice with perspectives from private international law, the book underlines the importance of the Convention being a treaty of international law, arguing that this entails a requirement to autonomously interpret the key concepts it relies on. However, the book also shows where municipal laws are relevant and discusses the private international law principles through which these instances can be identified.

Addressing one of the core treaties of international arbitration, this book is a useful reading for practitioners and judges alike.

For more info, please click here.

Professor Franco Ferrari, the Director of the Center, and Professor Marco Torsello, professor of law at Verona University School of Law and Global Professor of Law (at NYU Paris), have just published the third edition of their book on the 1980 United Nations Convention on Contracts for the International Sale of Goods. The Convention, which covers more than 3/4 of world trade, is in force in 95 States, including the United States and its most important trading partners. The book, which is part of West’s Nutshell series and is aimed at both practitioners and scholars, covers the Convention’s basic rules one should be aware of, so as to avoid surprises when doing business with parties having their place of business in other countries. For more information, please click here.

Professor Franco Ferrari, the Center’s Director, has just published a paper entitled “National International Commercial Arbitration” in 32 American Review of International Arbitration 439 (2022). In the paper, Professor Ferrari elaborates on the view, expressed in various earlier papers (including in Plures Leges Faciunt Arbitrum, 37 Arbitration International 579 (2021) – available here: https://academic.oup.com/arbitration/article/37/3/579/6246135?login=true; Lex Facit Arbitrum 2.0, Diritto del commercio internazionale 915 (2021)) that it is national law that confers juridicity to arbitration, i.e., “where the source of [the arbitrators’] power and the legal nature of the process and of the ensuing decision stem from” (Gaillard). This new paper, which is a review article of International Commercial Arbitration. A Handbook edited by Stephan Balthasar, relies on the Handbook’s various chapters (addressing the New York Convention as well as arbitration law in Austria, Belgium, Brazil, China, England and Wales, France, Germany, Hong Kong, India, the Netherlands, the Russian Federation, Singapore, Spain, Sweden, Switzerland, and the United States) to corroborate the findings of the earlier papers. At the same time, it allows the reader to identify the many areas in which national law is relevant in the international commercial arbitration context.

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[1] Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm) [36] (Eng.).

Multi-tier arbitration clauses are increasingly utilized as a way of allowing parties to settle a dispute before arbitration. However, with the increased use of such clauses comes a greater concern about the clause’s effect on the arbitral proceedings – does non-compliance with any one step of the clause invalidate the arbitral tribunal’s jurisdiction? While academic scholarship is firmly on the side of characterizing this as an admissibility issue, case law is still rather split. The English High Court (Commercial Court Division) recently grappled with this very problem in Republic of Sierra Leone v. SL Mining Ltd. In a commercially minded judgement, Sir Michael Burton endorsed the predominant academic scholarship, holding that compliance with a multi-tier dispute resolution clause is not an issue of substantive jurisdiction for the purposes of the Arbitration Act of 1996, but a question of admissibility for the tribunal to determine. This paper takes a closer look at the case and argues that SL Mining crucially clarifies the English position, which had been left uncertain by previous case law, and significantly brings English law in line with the academic authorities on the issue.

I. Factual Background

The underlying dispute arose out of the grant of a 25-year mining licence and subsequent licence agreement by the government of Sierra Leone to SL Mining on 29 March 2017 and 6December 2017 respectively. The parties had inserted the following provision into the mining licence and agreement (“MLA”), stating that:

‘6.9 Interpretation and Arbitration …

• The parties shall in good faith endeavor to reach an amicable settlement of all differences of opinion or disputes which may arise between them in respect to the execution performance and interpretation or termination of this Agreement…
• In the event that the parties shall be unable to reach an amicable settlement within a period of 3 (three) months from a written notice by one party to the other specifying the nature of the dispute and seeking an amicable settlement, either party may submit the matter to the exclusive jurisdiction of a Board of 3 (three) Arbitrators who shall be appointed to carry out their mission in accordance with the International Rules of Conciliation and Arbitration of the… ICC.’ [1]

The licence was suspended on 3 July 2018 and then terminated unilaterally by Sierra Leone. SL Mining then served a notice of dispute on 14July 2019, triggering the three-month ‘amicable settlement’ period stipulated in clause 6.9(c). On 20 August 2019, SL Mining invoked the Emergency Arbitrator provisions of the ICC Rules which require the service of a Request for Arbitration (“RFA”) within 10 days of the request for emergency relief. [2] Pursuant to clause 6.9(c), SL Mining suggested that the emergency arbitrator should defer service of the RFA until the settlement period elapsed on 14 October 2019. However, Sierra Leone insisted that SL Mining serve the RFA within the 10-day period stipulated in the ICC Rules. Therefore, SL Mining served the RFA on 30 August 2019.[3]

During the arbitration proceedings, Sierra Leone challenged the Tribunal’s jurisdiction since the provisions of clause 6.9(c) had not been complied with and arbitration proceedings had been commenced before 14October 2019. The Tribunal rejected Sierra Leone’s challenge, rendering a Partial Award in favor of SL Mining on 6 March 2020.[4] In doing so, the Tribunal concluded that the challenge was not a question of jurisdiction but of admissibility and ruled that SL Mining’s claim was indeed admissible.[5]

Consequently, Sierra Leone brought a challenge in the English High Court with respect to the Award under section 67 of the Arbitration Act. The case raised the issues of whether the prematurity of the RFA challenged the arbitrators’ jurisdiction under section 67, whether Sierra Leone had consented or waived the condition precedent and about what the proper construction of clause 6.9 should be.[6]

II. The High Court’s Judgement

Sir Michael Burton dismissed Sierra Leone’s claim, holding that there was no basis for a challenge under section 67 of the Arbitration Act. In determining the case, Sir Burton tackled the following three issues in turn:

A.     Jurisdiction versus Admissibility within the Scope of a Section 67 Challenge

Burton J cited the distinction between questions of admissibility and jurisdiction, which has recently emerged in English case law[7], starting with Butcher J’s opinion in PAO Taftnet v. Ukraine,  in which he stated that ‘issues of jurisdiction go the existence… of a tribunal’s power to ajudge the merits of a dispute; issues of admissibility go to whether the tribunal will exercise that power in relation to claims submitted to it’.[8] Section 67 of the Act stipulates that a party may challenge an award based on the tribunal’s substantive jurisdiction.[9] The definition of substantive jurisdiction is provided by section 82(1) of the Act and refers back to section 30(1)(c) which provides that ‘the arbitral tribunal may rule on its own substantive jurisdiction… as to…. (c) what matters have been submitted to arbitration in accordance with the arbitration agreement’.[10] In its submission, Sierra Leone had tried to argue that their challenge fell under section 30(1)(c), contending that ‘no matters have been “submitted to arbitration in accordance with the arbitration agreement”’.[11]

After surveying the academic landscape, Burton J concluded that ‘the international authorities are plainly overwhelmingly in support of a case that a challenge such as the present does not go to jurisdiction’.[12] Indeed, the issue of compliance with a multi-tier arbitration clause, in this case, was not a question of whether the claim itself was arbitrable but concerned whether the claim was admissible due to the prematurity of the proceedings. Therefore, it was clearly a matter of admissibility. As such, Sierra Leone would be precluded from a section 67 challenge. Burton J agreed with the Tribunal that if the settlement period is viewed as a condition precedent for the arbitration ‘it could therefore only be a matter of procedure, that is, a question of admissibility of the claim, and not a matter of jurisdiction’.[13]

B.     Consent or Waiver by the Parties of the Condition Precedent

SL Mining contended that Sierra Leone plainly consented to the RFA being served on 30 August 2019, thereby barring Sierra Leone from bringing forth a challenge according to section 73 (loss of right to object) of the Arbitration Act and Article 40 of the ICC Rules (waiver).[14] Sierra Leone’s rejection of SL Mining’s proposal to postpone service of the RFA until 14October 2019, and insistence that SL Mining complies with the ICC timelines, was deemed by the Court to be implicit consent and waiver of the amicable settlement period.

C.     Construction and Interpretation of Clause 6.9

Both parties clearly considered that the escalation stipulated in clause 6.9 was mandatory and not directory.[15] However, Burton J held that on its proper construction, the period in clause 6.9(c) ‘is subsidiary to the obligation to attempt an amicable settlement’ and as such was not ‘an absolute bar to bringing proceedings within three months’.[16] Instead, the three-month period simply provided a time frame in which the dispute could, but need not, have been resolved amicably. Failing this, it would be subject to earlier proceedings if it were clear that no such objective settlement could be achieved. Given that Sierra Leone had taken drastic action against SL Mining, including a temporary suspension of its licence and a criminal investigation of its employees, it was clear that relations between the two parties were so hostile that ‘there was not a cat’s chance in hell of an amicable settlement by 14 October’.[17] Therefore, even if Sierra Leone had not consented or waived its right to the three-month period, that on an objective analysis, there was no chance that the parties would have reached an amicable settlement by the end of the period and so there was no failure to comply with clause 6.9(c).[18]

III. Analysis

The decision has rightly attracted a fair amount of attention amongst arbitration practitioners and scholars [19]. The decision in SL Mining is of particular interest in light of the prevailing English authorities on challenges to arbitral awards with similar multi-tier dispute resolution clauses. For example, in Sul América CIA Nacional de Seguros v. Enesa Engenharia, the Court held that mediation was not a binding condition precedent to arbitration because the multi-tiered clause did not contain clear language stipulating such a condition.[20] Similarly, in (Wah) Tang v. Grant Thornton International Ltd, the Court stressed that tiered alternative dispute resolution provisions are only enforceable if they outline a clear commitment to the process, with readily identifiable steps.[21] However, in Emirates Trading Agency LLC v. Prime Mineral Exports Pte Ltd, the Court held that a contractually-mandated ‘friendly discussion’ acted as a mandatory condition precedent to the right to refer a claim to arbitration.[22]

Emirates and Tang had attracted vast amounts of criticisms for their treatment of multi-tier dispute resolution clauses as jurisdictional questions and in both cases section 67 jurisdiction was assumed.[23] For example, Merkin & Flannery opined that the decision in Emirates was an ‘unnecessary leap’, turning a binding and enforceable obligation to settle a dispute into a prerequisite to the tribunal’s jurisdiction that ‘may turn out to be dangerous precedent’. [24] As such, Burton J’s decision is even more noteworthy because it signals a welcome clarification on the English position towards multi-tier arbitration clauses. Burton J himself found that the reasoning in these earlier cases was not only unpersuasive and non-binding but also out of step with other academic scholarship on the issue.[25] For example, Born’s treatise on International Commercial Arbitration clearly concludes that ‘pre-arbitration procedural requirements are not “jurisdictional” …. the arbitral tribunal’s resolution of such issues would generally be subject to only minimal judicial review in subsequent annulment or recognition proceedings’ much like other procedural decisions made in the arbitral process.[26] In his work, Paulsson took a similar stance on the question of jurisdiction versus admissibility.[27] In this author’s view, therefore, the judgement in SL Mining signals a shift in the right direction, bringing English law in line with the prevailing academic opinions about multi-tier dispute resolution clauses.

However, while the weight of academic authority in arbitration leans in favor of such a failure to comply with multi-tier arbitration clauses being characterized as an admissibility issue, legal jurisprudence around the world is much more divergent. As one commentator claimed, ‘the lack of coherence in the treatment of such provisions is tangible and significant’.[28] As such, this shift in English law is the first step in crystallizing and clarifying a common law approach to non-compliance with multi-tier dispute resolution clauses. The case has already been followed in NWA v. FSY, another High Court judgement from November, in which Calver J held that a similar failure to mediate before entering into the arbitration was a question of the admissibility of the claim and not the Tribunal’s jurisdiction.[29]

The judgement also brings English law closer in line with the US precedent set in BG Group plc v. Republic of Argentina. In BG, the Court held that the claimant’s failure to comply with the local litigation requirement, which was a condition precedent prior to the arbitration, was a procedural issue and not a jurisdictional one.[30] Two similar decisions have also come out of the Singapore Court of Appeals in BBA v. Baz and BTN v. BTP, in which the judges specifically approved the views expressed by Paulsson and Merkin & Flannery that pre-conditions to arbitration, such as time limits and escalating dispute resolution mechanisms, are matters of admissibility and not jurisdiction.[31]

IV. Conclusion

Ultimately, the decision in SL Mining has clarified the English interpretation of multi-tiered clauses and consolidated a common law approach. Preconditions to arbitration ought to be treated as a mechanism for facilitating settlement but do not constitute an absolute bar to proceedings (or challenges) as they concern the admissibility of a claim in front of the tribunal, not the tribunal’s jurisdiction itself.

Iqra Bawany is an LL.M. Candidate at the NYU School of Law, specializing in International Business Regulation, Litigation & Arbitration. Prior to attending NYU, she received a B.A. in Law from the University of Cambridge and a B.A. in History & Spanish from Columbia University.

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[1] Id. at [3].

[2] Int’l Comm. Arb. Arbitration Rules 2021, Appendix V, Article 1(6) https://iccwbo.org/content/uploads/sites/3/2020/12/icc-2021-arbitration-rules-2014-mediation-rules-english-version.pdf  

[3] SL Mining’s parent company also pursued an ICSID claim against Sierra Leone; See Gerald International Ltd v. Republic of Sierra Leone, ICSID Case No. ARB/19/31, Award (July 8, 2020).

[4] Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm) [4] (Eng.).

[5] Id. at [8].

[6] Id. at [6].

[7] See generally PAO Taftnet v. Ukraine[2018 EWHC 1797 (Comm) [97] (Eng.); Obrascon Huarte Lain S.A. v. Qatar Foundation for Education[2020] EWHC 1643 (Comm) [19] (Eng.).; Republic of Korea v. Dayanni [2020] 2 All ER (Comm) 672 (Eng.).

[8] PAO Taftnet v. Ukraine[2018] EWHC 1797 (Comm) [97] (Eng.).

[9] Arbitration Act 1996 c.23 § 67(1)(a) (Eng., Wales & N. Ir.).

[10] Arbitration Act 1996 c.23 §82(1); § 30(1) (Eng., Wales & N. Ir.).

[11] Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm) [10] (Eng.).

[12] Id. at [16].

[13] Id. at [21].

[14] Arbitration Act 1996 c. 23 § 73 (Eng., Wales & N. Ir.); Int’l Comm. Arb. Arbitration Rules 2021, Art. 40 (supra note 3)

[15] Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm) [30] (Eng.).

[16] Id. at [32].

[17] Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm) [36] (Eng.).

[18] Id. at [37].

[19] See generally Benjamin Tham, Case Note: Republic of Sierra Leone v SL Mining Ltd., 2 Sing. Arb. J. 166, 179 (2021); Masood Ahmed & Syed Ali International Arbitration: Clause & Effect, New L. J., Feb.18, 2022 at 15; Robert Merkin, Substantive Jurisdiction and the Arbitration Act 1996, 3 J. of Bus. L., 273 (2021).

[20] Sul América CIA Nacional de Seguros v. Enesa Engenharia [2012] EWCA (Civ) 638.

[21] (Wah) Tang v. Grant Thornton International Ltd [2012] EWHC 3198 (Ch).

[22] Emirates Trading Agency LLC v. Prime Mineral Exports Pte Ltd [2014] EWHC 2104 (Comm) [26] (Eng.).

[23] See generally Ned Beale & Cara Gillingham, Dispute Escalation Clauses in England and Wales: A New High Water Mark, 26 Int’l Co. & Com. L. Rev., 102 (2015); Louis Flannery & Robert Merkin, Emirates Trading, Good Faith, and Pre-arbitral ADR Clauses: a Jurisdictional Precondition? 31 Arb. Int’l, 63 (2015); Keith Han & Nicholas Poon, The Enforceability of Alternative Dispute Resolution Agreements – Emerging Problems and Issues 25 Singapore Academy of L. J., 455 (2013); Robert Rhodes & Andrew Maguire, Have the risks of ADR Escalation Clauses Reduced?, 82 Arbitration, 16 (2016).

[24] Louis Flannery & Robert Merkin, Emirates Trading, Good Faith, and Pre-arbitral ADR Clauses: a Jurisdictional Precondition? 31 Arb. Int’l 63, 103 (2015).

[25] Republic of Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm) [12] (Eng.).

[26] Gary Born, International Commercial Arbitration(3d ed. 2021), 1000.

[27] See Jan Paulsson, Jurisdiction and Admissibility, 693 Global Reflections on International Law, Commerce and Dispute Resolution (ICC Publishing) 601, 616–617 (2005).

[28] Hamish Lal et al., ‘Multi-Tiered Dispute Resolution Clauses in International Arbitration – The Need for Coherence’ 38(4) Swiss Arb. Ass’n (ASA) BULL., 796 (2020).

[29] NWA v. FSY & ors [2021] EWHC 2666 (Comm) (Eng.).

[30] BG Group Plc. v. Republic of Argentina,134 S.Ct. 1198 (2002).

[31] BBA v. Baz [2020] 2 SLR 453 [77]-[78] (Singapore); BTN v. BTP [2020] SGCA 105 [70] (Singapore).

In 2021, the UK Jurisdiction Taskforce of the Lawtech Delivery Panel (“UKJT”),[1] a body established by the Secretary of State for Justice, and chaired by the Master of the Rolls, published Version 1.0 of the Digital Dispute Resolution Rules (“the Rules”).^[2] These arbitration rules, which operate under the law of England and Wales, are intended to be used by parties in commercial disputes, in particular in disputes involving “cryptoassets, cryptocurrency, smart contracts, distributed ledger technology, and fintech applications”.^[3]

The Rules are less than a year old and, at the time of writing, there are no published awards or decisions on any challenges under them. However, they recently received the approval of the Law Commission of England and Wales in its advice to Government on smart contracts in November 2021, where they were discussed in detail, and described as “particularly well-suited for disputes involving smart legal contracts”.^[4] The increasing use of distributed ledger technologies and smart contracts, coupled with the growing sophistication and size of decentralised finance,^[5] make it very likely the Rules will have an increasingly important role going forward.

While the Rules are not the only arbitration rules proposed for smart contracts (the JAMS rules were published in 2018 but remain in draft),^[6] they have a number of innovative features which the JAMS rules do not. As such the Rules are innovative even within this new frontier of dispute resolution. These features may give rise to unique implications in eventual challenges under the Arbitration Act 1996, and in particular challenges under s.67 (substantive jurisdiction) and s.68 (serious irregularity) of the Act.^[7]

Innovative Features of the Rules and Challenges under s.67 and 68 of the Arbitration Act

This paper picks out three innovative aspects of the Rules which may alter how challenges to decisions operate: (1) the provision for on-chain enforcement of arbitral awards by the tribunal;^[8] (2) the provision for anonymity between the parties;^[9] (3) the provision that “automatic dispute resolution” is legally binding between the parties.^[10]

Feature 1: Enforcement by the tribunal

The provision in Clause 11 of the Rules provides for the tribunal to have the power to “operate, modify, sign or cancel any digital asset relevant to the dispute.” This is particularly interesting when understood in the context of disputes arising out of blockchain or distributed ledger technologies (such as those involving cryptocurrencies or cryptoassets). This is because ownership and control of such assets is confirmed by cryptographic means on a distributed ledger, in most disputes satisfying an award would involve taking appropriate steps to record a transaction on such a ledger. The power of a tribunal to operate, modify, sign or cancel any such asset will therefore in many cases be equivalent to the power of a tribunal to enforce the award.

In one sense, this mirrors the result of “on-chain” automatic dispute resolution (discussed briefly below), where awards are often executed automatically on the distributed ledger by a smart contract. But it also represents a radical departure from the traditional enforcement system for arbitration awards.

This power is likely to be attractive to parties using new decentralised technologies where traditional enforcement mechanisms may be more difficult (not simply because of the continuing uncertainty when considering jurisdiction or conflict of laws in distributed ledger disputes, but also because it remains unclear to what extent signatory states to the New York Convention will consider that at least some distributed ledger disputes fall foul of the public interest exception to enforcement). As such, similar powers are likely to be features of arbitration rules for this industry in the future.^[11]

By allowing for tribunal enforcement of the award, the party successful in the arbitration obtains benefits which extend beyond those it could obtain from the Courts when seeking security for costs^[12] or security for the award^[13] when an award is challenged.^[14]

Therefore, where tribunal enforcement occurs, a party seeking to challenge an award will find itself facing unique hurdles. While there is no general rule that enforcement should be stayed pending the determination of a Section 68 challenge,^[15] the party against whom an award is to be enforced in the English Courts would normally have recourse to the provisions of CPR 62.18(9) (to apply to set aside an order made to enforce an award under s.66 Arbitration Act) and CPR 83.7 (to stay enforcement of an award when converted to a judgment).^[16] These are valuable tools to a party resisting an award,^[17] but will not be available to a party where tribunal enforcement has occurred under the Rules.

This necessarily changes the balance of power in any challenge under s.67 or s.68, and does so in a way which has the effect of circumventing the balance struck by the Courts and Parliament under the provisions for staying enforcement and providing for security for costs or the award under Arbitration Act 1996. The party holding the award under the Rules (where tribunal enforcement has been used) holds far more cards than they otherwise would. In effect, they will enter any s.68 or s.67 challenge in astronger tactical position than a successful party under other arbitration rules.[18]

Feature 2: Anonymity

The provision for anonymity during an arbitration under the Rules may well be particularly attractive to parties to transactions on the distributed ledger, where anonymity in the transactions themselves is the norm. The Rules have however recognized that absolute anonymity would not be appropriate, providing for disclosure, providing for disclosure of “identity details” when “necessary for the fair resolution of the dispute, for the enforcement of any decision or award, for the protection of the tribunal’s own interests, or if required by any law or regulation or court order”.^[19] This language should be wide enough to enable the disclosure of “identity details” when a party wishes to challenge the award.

The identity details are defined by the Rules as “for an individual… evidence as to his or her identity and residence and for a company… evidence as to its identity, place of incorporation and principal place of business”.^[20] It is however not clear if  these would be sufficient to enable service of the arbitration claim form, especially given the short time limits under s.70(3) of the Arbitration Act to issue a challenge under s.67 or s.68.[21] (this problem is especially acute if one party is a Decentralised Autonomous Organisation[22]).  These practical uncertainties may well be resolved as challenges occur and decision are reported, but will require resolution by the Courts and early users of this procedure.

Feature 3: Automatic Dispute Resolution

The Rules envision that the parties may engage in automatic dispute resolution, and that such resolution will be binding on the parties. Indeed, the effect of such dispute resolution is often binding in matter of fact because the decision of the process is implemented on-chain by a smart contract. Automatic dispute resolution systems come in different varieties and methods, but often involve the application of game theory (including incentivising decision-makers to make the decision they think the majority will make, rather than the decision they consider ‘correct’^[23]), crowdsourced self-selecting juror decision-making, Artificial Intelligence, and appeal or de novo re-hearing procedures.^[24]

While the Rules describe automatic dispute resolution as “legally binding”, the Further Guidance published alongside the Rules indicate that the Rules “may, for example, be adopted to resolve disputes as to whether the automatic dispute resolution processes have been properly complied with or has worked as intended. Where such automatic processes are present, the parties will need to agree how the Rules are intended to work alongside them”.^[25] This raises the prospect of a situation in which the parties agree to use an arbitration under the Rules to confirm or wrap the decision of an automatic dispute resolution process in a form of an arbitral award.^[26] This will give rise to some unique questions when bringing challenges to awards based on automatic dispute resolution processes, among them: (i) Does a jurisdictional challenge have to be taken during the automatic dispute resolution process in order to sustain a s.67 challenge? (ii) Does the general duty of fairness extend to the automatic dispute resolution process, and can a challenge to an award under s.68(2)(a) on that basis be sustained on appropriate facts? (iii) Could the conduct of jurors in automatic dispute resolution give rise to a challenge for serious irregularity? (iv) Would an admission of an irregularity (caused perhaps by a coding or software error) by the provider of the automatic dispute resolution process fall within s.68(2)(i)?

Conclusion

While disputes arising out of cryptoassets, cryptocurrency, smart contracts, distributed ledger technology – and procedures for resolving such disputes – are in their infancy, this survey suggests that, if widely adopted, the Rules will present the Courts with new and difficult questions when considering challenges to awards, requiring an approach as innovative as that shown in the design of the Rules themselves.

Jonathan Schaffer-Goddard is a Barrister practicing from 4 Pump Court Chambers in London and an LLM candidate (Starr Foundation Global Law School Scholarship) in the International Business Regulation, Litigation and Arbitration program at the NYU School of Law. 

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[1] More information at https://technation.io/lawtechukpanel/

^[2] UK Jurisdiction Taskforce, Digital Dispute Resolution Rules (2021) (“UKJT Rules”), https://perma.cc/FT6E-CUD3

^[3] Clause 1, Digital Dispute Resolution Rules

^[4] Smart Legal Contracts: advice to Government, Law Commission of England and Wales, 2021, para 5.156 https://perma.cc/4WFA-2JYP

^[5] The total value locked (the sum of all assets deposited in decentralized finance protocols) reached USD 250 billion at the end of 2021 on some metrics (https://perma.cc/B8KB-TYEB).

^[6] The JAMS Smart Contract Rules (JAMS Rules Governing Disputes Arising out of Smart Contracts) can be accessed at https://www.jamsadr.com/rules-smart-contracts (https://perma.cc/HW6J-MRVE)

^[7] Challenges under s.69 of the Act are excluded by the Rules (Clause 16, Digital Dispute Resolution Rules: “… The decision or award of the tribunal is final and binding. There is no right to appeal any award on a point of law, and there is no other right of appeal or challenge to such award except as permitted under the Arbitration Act 1996.” While this excludes s.69 appeals, it cannot exclude appeals under s.67 or s.68).

^[8] Clause 11, Digital Dispute Resolution Rules: “The tribunal shall have the power at any time to operate, modify, sign or cancel any digital asset relevant to the dispute using any digital signature, cryptographic key, password or other digital access or control mechanism available to it. The tribunal shall also have the power to direct any interested party to do any of those things.”

^[9] Clause 13, Digital Dispute Resolution Rules: “The claimant and each respondent must provide details and evidence of their identity to the reasonable satisfaction of the tribunal. If the incorporating text allows for anonymous dispute resolution, or the parties agree, then a claimant or respondent may provide identity details confidentially to the tribunal alone and need not include them in a notice of claim or initial response. In that case the tribunal shall not disclose the identity details unless disclosure is necessary for the fair resolution of the dispute, for the enforcement of any decision or award, for the protection of the tribunal’s own interests, or if required by any law or regulation or court order.”

^[10] Clause 4, Digital Dispute Resolution Rules: “The outcome of any automatic dispute resolution process shall be legally binding on interested parties.”

^[11] In light of the challenges that this procedure raises (are set out below), and the likelihood of this procedure being more widely adopted, the problems caused by the use of this procedure may be worthy of consideration by the Law Commission in its recently announced review of the Arbitration Act 1996 (https://perma.cc/BFD5-PUFV).

^[12] Section 70(6), Arbitration Act 1996

^[13] Section 70(7), Arbitration Act 1996

^[14] The circumstances in which the Court will order security for costs or security for the award are limited by considerations of availability of assets (Azov Shipping Co v Baltic Shipping (No 2) [1999] 2 Lloyd’s Rep 39), the prospects of the challenge (MDIL (UK) Ltd v Mittal Steel Skopje (CRM) AD [2008] EWHC 2243 (Comm)) and prejudice on party seeking to enforce if order not made (see for example: Konkola Copper Mines Plc v U&M Mining Zambia Ltd [2014] EWHC 2146 (Comm)). Applications are often unsuccessful.

^[15] BSG Resources Ltd v Vale SA & Ors [2019] EWHC 2456 (Comm), at [55]

^[16] It has been held by the High Court that there is an inherent jurisdiction to suspend enforcement while a challenge is ongoing, even if no application has been made to enforce the award. Apis AS v Fantazia Kereskedeli KFT[2001] 1 All ER 348. See also Socadec SA v Pan Afric Impex Co Ltd [2003] EWHC 2086.

^[17] A v B [2020] EWHC 952 (Comm) is a recent example of a successful application under CPR 62.18(9) to set aside an order to enforce a judgment entered under Section 66 of the Arbitration Act.

[18] The likelihood of this procedure for tribunal enforcement being more widely adopted in the crypto industry means that the impact of tribunal enforcement of an award may be worthy of consideration by the Law Commission in its recently announced review of the Arbitration Act 1996 (https://perma.cc/BFD5-PUFV).

^[19] Digital Dispute Resolution Rules, Clause 13

^[20] Digital Dispute Resolution Rules, Clause 2

[21] An extension of time is available under s.80(5) of the Arbitration Act 1996. The relevant caselaw and the principles derived from it are set out in State A v Party B & Anor [2019] EWHC 799 (Comm), [28] – [33]

[22] For an explanation of what a DAO is, see: https://ethereum.org/en/dao/ (https://perma.cc/TL3F-F2JV)

^[23] Kleros, Short Paper v1.0.7, page 2 (https://kleros.io/whitepaper.pdf) 

^[24] See surveys of such systems in Allen, DWE, Lane, AM and Poblet, M. 2019, The Governance of Blockchain Dispute Resolution, Harvard Negotiation Law Review, vol. 25, pp. 75-101 and Yann, Federico and Bruno, 2021, Decentralized Justice: A Comparative Analysis of Blockchain Online Dispute Resolution Projects, Frontiers in Blockchain, vol 4 (https://doi.org/10.3389/fbloc.2021.564551)

^[25] Digital Dispute Resolution Rules, page 12

^[26] The status of awards rendered by automatic dispute resolution processes is a matter of debate, and it is likely that in many (if not all) cases they are not by themselves enforceable awards under the New York Convention 1958.

When challenging arbitral awards, it is said that ‘as parties have made their bed … they must lie in it’ –[1] parties ‘must live with the decision of the arbitrator, good or bad’.[2] This is a manifestation of party autonomy in ‘limiting the scope of post-award review’[3] to narrow grounds such as ‘fraud or corruption’ or ‘a breach of … natural justice’ through their choice of the relevant seat of arbitration.[4] Viewed in conjunction with Singapore courts’ stance of ‘minimal curial intervention in arbitration proceedings’,[5] it is no surprise that the setting aside of awards by Singapore courts is a ‘[r]are’ and ‘exceptiona[l]’ occurrence.[6]

The decision by the Singapore High Court (the ‘Court’) in BZV v BZW[7] to set aside the arbitral award in the case (the ‘Award’) for breaches of natural justice (the ‘Decision’) thus provides some valuable insights in this regard. For one, it highlights the limits imposed by parties on courts’ control over arbitral awards. Relatedly, the Court’s analysis also helpfully illustrates the extent to which judicial deference can no longer cover for deficiencies in an award. Moreover, the unique facts of the case precipitate a discussion on whether Singapore courts should be given greater latitude to set aside awards.

Last, this paper eschews any superfluous understanding that ‘national courts are the sole guardians to watch over arbitral awards’, and evaluates the Decision through the valuable and perceptive lens of the ‘[s]hared [c]ontrol of [a]rbitral [a]wards’ exercised by the parties (the ‘Parties’), the tribunal (the ‘Tribunal’), and the Court.[8]

I.   Background Facts and Summary of the Decision

In BZV v BZW, the plaintiff and defendants entered into a shipbuilding contract (the ‘Contract’) for the purchase of a vessel by the plaintiff buyer from the defendant shipbuilders. A dispute arose between the Parties which proceeded to arbitration, where the plaintiff alleged that the defendants had (a) ‘delayed in delivering the vessel’ (the ‘Delay Claim’),[9] and (b) ‘breached the Contract by delivering the vessel with [incorrect] generators’, having provided the plaintiffs with generators of a lower ingress protection rating (IP23) than contractually specified (IP44) (the ‘IP44 Claim’). In response, the defendants argued, inter alia, that the plaintiff was entitled to neither the Delay nor IP44 Claim since ‘the delay was in fact caused by the plaintiff’,[10] and the plaintiff was ‘estopped from asserting that the defendants were under an obligation to deliver the vessel with generators rated IP44’.[11]

The Tribunal dismissed the plaintiff’s claims, prompting the plaintiff’s application to the Court to set aside the Award. The plaintiff relied on, inter alia, section 24(b) of the Singapore International Arbitration Act (the ‘IAA’), arguing that the Tribunal ‘breached natural justice in dismissing its claim’.[12] In turn, apart from contesting the claim, the defendants argued that (a) the plaintiff’s application under article 34(3) of the Model Law was filed outside of the three-month window and ought to be dismissed ‘in limine’, and (b) even if the Award should be set aside, the Court should remit the Award to the Tribunal under article 34(4) of the Model Law.[13]

The Court quickly disposed of the defendants’ preliminary objection, finding that article 34(4) of the Model Law only required that the Originating Summons and not the supporting affidavit be filed within the specified three-month time limit. The plaintiff had complied with this and had made a valid application.[14]

Importantly, the Court allowed the plaintiff’s application under section 24(b) of the IAA in finding that the Tribunal had rendered its Award ‘in breach of the fair hearing rule and … natural justice’, and declined to remit the Award to the Tribunal.[15] On both the Delay and IP44 Claims, the Court found that the Tribunal’s reasoning had ‘no nexus to any of the defendants’ defences’.[16] On the Delay Claim, the Tribunal had failed to ‘apply its mind to determine … an essential issue’ – whether the plaintiff’s acts actually caused the delay.[17] As for the IP44 Claim, the central tenet of the Tribunal’s conclusion that the plaintiff was estopped from rejecting the IP23 generators was its initial impression that the plaintiff’s representative had expressed that the IP23 generators were acceptable.[18] However, this was ‘based on an entirely false premise’ as the Tribunal had ‘misidentified’ the representative as the plaintiff’s, who was actually the defendants’ instead.[19] When responding to the plaintiff’s request to correct the Award under article 33(1)(a) of the Model Law, the Tribunal only had corrected the reference to the representative, but not its conclusions on liability. This therefore led to a gap in the Tribunal’s reasoning.[20]

II.   Analysis and Key Takeaways

Overall, the Decision well illustrates the equilibrium of control between the Parties, Tribunal, and Court. While it appears that the right outcome was reached, it is nevertheless proposed that parties in Singapore-seated arbitrations be given greater autonomy to empower courts to review and set aside awards for patent errors of fact.

A.   Party Autonomy as a Constraint on the Remit of the Court’s Review of the Award

First, parts of the Decision establish that parties do exercise a considerable degree of control over their award, most significantly by selecting the seat of arbitration (and, thus, the lex arbitri). Inasmuch as the Court easily dismissed the defendants’ preliminary objection, some insight can yet be gleaned as to the balance of control. Primarily, the Court noted that even if the plaintiff had requested to extend the three-month period, the Court was ‘prepared to accept’ that article 5 of the Model Law ‘excludes the court’s general procedural power’ to do so.[21] Thus, in choosing the lex arbitri, the Parties exerted control by restricting the Court from exercising its procedural powers.

Next, a constant refrain of the Court was that insofar as the plaintiff’s alleged breaches of natural justice were properly characterised as ‘attempt[s] to seek … review of the [A]ward on the merits’, this was ‘impermissible’.[22] This merely reflects the Court enforcing party autonomy in deciding on the lex arbitri, and as a corollary, the contours of possible post-award actions. If the Parties wanted an appeal on a point of law, they could have opted to arbitrate with English or Hong Kong Law as the lex arbitri.[23]

This fetter on the Court’s review certainly operated at its greatest and most dramatic where the Court noted that if the Award had not been corrected (to correctly attribute the defendants’ representative’s statement), while this would have left ‘an egregious and fundamental error of fact patent on the face of the [A]ward’, the Court would not have been able to set aside the Award as ‘a tribunal’s error – no matter how fundamental, egregious or patent, and whether of fact or law – is no basis whatsoever on which to set aside an award’.[24]

B.   Tribunals’ and Courts’ Control: Judicial Deference and its Proper Limits

Second, certain nuances in the Court’s analysis reflect the limits of courts’ control over arbitration (in deference to tribunals), yet the Court’s ultimate finding of a breach of natural justice also draws the line beyond which judicial deference can no longer countenance a faulty award. Generally, the Court granted the Tribunal ‘fair latitude’ in reading the Award ‘with all the generosity [it] could muster’ without intent ‘to find fault … or errors’.[25] Indeed, the Court did adopt the most favourable interpretations: [26] for instance, ‘no breach [by the defendants]’ was construed liberally as meaning ‘no liability [to the plaintiff]’, to ensure consistency with the Tribunal’s earlier finding that the defendants had not fulfilled a contractual obligation.[27] However, ‘[e]ven on a generous reading’, the Court found breaches of natural justice. There was ‘no sign anywhere in the [A]ward’ relating to any finding of causation (vis-a-vis the Delay Claim), and ‘nothing … in the [A]ward’ to support the finding that the plaintiffs represented to the defendants that the IP23 generators were acceptable (regarding the IP44 Claim).[28] Judicial deference, therefore, rightly exists only to the point where a tribunal’s error is ‘demonstrably clear on the face of the record’.[29]

Notably, the Court declined to extend such deference to the Tribunal’s ‘general and self-serving paragraph’ which stated that the Tribunal ‘ha[d] considered in detail [all] documents and submissions’ and that any failure to specifically mention any argument ‘d[id] not suggest that [it] h[ad] not been considered’.[30] This could not ‘immunise [the] [A]ward against an allegation that the [T]ribunal ha[d] breached the fair hearing rule’, and so the Court ‘gave this paragraph no weight’.[31] This is certainly welcomed as judicial deference should not be used to support such boilerplate paragraphs and give Tribunals carte blanche to commit breaches of natural justice.

C.   Expanding Party Autonomy and Courts’ Control: Setting Aside Awards for Errors of Fact?

Last, the unique facts of this case bring certain difficulties to the fore. For one, while the Court’s hands would undoubtedly have been tied if the Tribunal had not corrected its error – as a ‘fundamental, egregious or patent … [error] of fact … is no basis … to set aside an award’ –[32] this strikes as quite dissatisfactory in the circumstances. Indeed, the Tribunal had ‘read a key piece of evidence hopelessly wrong’.[33] Next, the plaintiff’s subsequent request for a correction left the Tribunal in a difficult position, since on the one hand correcting the error would risk the Award being set aside for a breach of natural justice, and on the other, leaving it untouched would be ‘professionally dishonest’ in allowing the defective Award to be upheld.[34] In fact, the propriety of the Tribunal’s correction is also doubtful as corrections under article 33(1)(a) of the Model Law are only allowed for computational, typographical or clerical errors. The Tribunal’s error ‘c[ould not] on any view’ be a mere ‘clerical error’ as the Tribunal clearly ‘intended to find, albeit on an erroneous factual basis’ that the representation was attributable to the plaintiff.[35] This puts similarly situated tribunals in an even more impossible position, as allowing the correction is legally ‘wrong’, yet would lead to the ‘right’ outcome in allowing defective awards to be set aside.

Circling back to party autonomy, within the current Singapore lex arbitri, parties are ‘entitled to a fair decision, but not necessarily a correct one’.[36] It is within this framework that judicial deference, even to factually or legally defective awards, exists. However, it is perhaps time to recognise that in exceptional circumstances an error of fact is a basis upon which a court should be allowed to set aside an award. On these particular facts, the error was both indisputable, and undisputed – the Tribunal agreed to correct, and the defendants did not object.[37] Moreover, this was a central plank of the Tribunal’s reasoning on the IP44 claim.[38]

Such a proposal understandably brings with it concerns that this will erode efficiency and finality as hallowed virtues of arbitration. While a detailed examination of this proposal to amend the IAA is beyond the remit of this paper, suffice to say, courts can safeguard these virtues by imposing appropriate costs awards on parties bringing frivolous claims on these grounds, deterring others from the same. Further, courts can weed out unmeritorious challenges by requiring parties to first obtain leave to appeal, as is the procedure under the English Arbitration Act on appeals on points of law.[39] Indeed, an opt-in mechanism to allow parties to appeal to the Singapore High Court on points of law is under consideration by the Ministry of Law,[40] and BZV v BZW makes a strong case that patent errors of fact should, at the very least, be included for consideration as well.

III.  Conclusion

BZV v BZW thus aptly exemplifies how various entities’ control an award, while exposing potential deficiencies in the balance of control – or at least, in parties’ options to adjust the balance. It was perhaps fortunate for the plaintiffs that the Tribunal corrected the Award in the manner it did, exposing the Award to the successful set aside application.[41] However, future parties may not be so fortunate, and parties ought to be allowed to empower courts to exercise greater review to prevent such defective awards from being enforced. Finally, this analysis is also a testament to how the framework of control over arbitral awards is a useful analytical tool to understand the underlying tensions and drivers of how different entities act, and understand potential problems in a holistic manner.

Kay Han Lee is an LL.M. candidate (Dean’s Graduate Scholar) in the International Business Regulation, Litigation and Arbitration program at the NYU School of Law, on a dual-degree program with the National University of Singapore Faculty of Law where he is also pursuing an LL.B. (Hons).

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[1] Iris Ng and others, ‘Five Recurring Problems in International Arbitration: The Relationship between Courts and Arbitral Tribunals’ (2020) 8 Indian J Arb L 19, 20.

[2] TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] SGHC 186, [2013] 4 SLR 972 [65].

[3] Friedrich Rosenfeld, ‘The Shared Control of Arbitral Awards’ in Larry A. DiMatteo, Marta Infantino, and Nathalie M-P. Potin (eds), The Cambridge Handbook of Judicial Control of Arbitral Awards (CUP 2020) 443.

[4] See, e.g., International Arbitration Act (Cap 143A, 2002 Rev Ed Sing) s 24.

[5] BLC v BLB [2014] SGCA 40, [2014] 4 SLR 79 [51].

[6] Sapna Jhangiani and Jarret Huang, ‘Limits, Latitude, and Lacunae: Rare Set-aside of Award in CBX v CBZ’ (Kluwer Arbitration Blog, 26 July 2021) <http://arbitrationblog.kluwerarbitration.com/2021/07/26/limits-latitude-and-lacunae-rare-set-aside-of-award-in-cbx-v-cbz/> accessed 21 November 2021.

[7] [2021] SGHC 60.

[8] Rosenfeld (n 3) 443 (control is also shared with arbitral institutions, and courts at the place of enforcement).

[9] BZV v BZW (n 7) [1], [89].

[10] id [95].

[11] id [98].

[12] id [48].

[13] id [20], [217].

[14] id [45].

[15] id [224]-[227] (the Tribunal’s reasoning ‘d[id] not inspire confidence’ that it would genuinely re-evaluate the case).

[16] id [149], [191].

[17] id [145].

[18] id [172]-[173].

[19] id [175].

[20] id [175].

[21] id [26] (emphasis removed).

[22] id [131], [153].

[23] Arbitration Act 1996 (UK) s 69 and Arbitration Ordinance (HK, 2011, Cap 609) sch 2, items 5, 6.

[24] BZV v BZW (n 7) [191].

[25] id [52], [109].

[26] id [141], [161].

[27] id [161] (which was therefore a ‘breach’ of contract).

[28] id [145], [191].

[29] id [52].

[30] id [128].

[31] ibid (emphasis added).

[32] id [191].

[33] Nicholas Poon, ‘Singapore—the arbitral tribunal’s right to be wrong, up to a point (BZV v BZW)’ (LexisNexis, 27 April 2021) <www.lexisnexis.co.uk/legal/news/singapore-the-arbitral-tribunals-right-to-be-wrong-up-to-a-point-bzv-v-bzw>.

[34] ibid.

[35] BZV v BZW (n 7) [184].

[36] Ng and others (n 1) 20.

[37] BZV v BZW (n 7) [182]-[183].

[38] id [187].

[39] Patric McGonigal, ‘The Appeal of the Law: Singapore’s Decision to Hold Off Introduction Option to Appeal on Point of Law and Other Changes’ (King & Wood Mallesons, November 2020) <https://pulse.kwm.com/international-arbitration/appeal-arbitral-award-on-law-singapore/> accessed 24 November 2021.

[40] ibid.

[41] One view is, possibly, that the Tribunal recognised the patent error it had committed, and decided that the partial correction was the best way for a set aside application to succeed – but this is, admittedly, a generous interpretation.

Professor Franco Ferrari, the Center’s Director, and a renowned expert on the United Nations Convention on Contracts for the International Sale of Goods (CISG), has just published a paper focusing on the interpretation of the CISG in which he identifies two interpretative trends, both of which are disruptive of the uniformity aimed at by the drafters of the CISG; the homeward trend and the outward trend. As for the homeward trend, it has been defined as the tendency of interpreters of the CISG to read the expressions used in the CISG in light of the domestic law in which the interpreter was trained. On the other hand, the “outward trend”, an expression coined by Professor Ferrari in earlier writings, is defined by Professor Ferrari as the “the tendency of those interpreting a uniform law instrument to project foreign law onto the provisions of an international instrument where these provisions refer to legal concepts unknown in the system in which the interpreter is trained”. As Professor Ferrari points out in his paper, both trends go against the very idea behind the creation of a uniform sales law and must therefore be combatted. In his paper, Professor Ferrari makes a suggestion on how to do so successfully.

The paper is entitled Tendencia nacionalista vs tendencia importadora en la jurisprudencia de la CVIM, and is published in The Transnational Sales Contract. 40 years influence on the CISG on National Jurisdictions edited by F. Benatti et al., Milan, 2022, p. 199-217.

Professor Franco Ferrari, the Center’s Director, has just published a paper on the importance of the seat of arbitration entitled “Lex facit arbitrum 2.0” in the Italian peer reviewed law journal Diritto del commercio internazionale. The paper, which builds of earlier papers authored by Professor Ferrari, shows what implications the choice of the seat of arbitration has over the course of an arbitration’s life-cycle. As the paper shows, the choice of the arbitral seat identifies the lex loci arbitri and, thus, the applicable arbitration framework. As Professor Ferrari shows, this does not mean that an arbitration will only be governed by the national arbitration regime of the seat. Different national arbitration regimes may be – and generally are – applicable to any given arbitration.

Professor Franco Ferrari, the Center’s Director, has just published a paper entitled “Plures leges faciunt arbitrum” in issue 3/2021 of Arbitration International.

In his paper, Professor Ferrari asserts that in international arbitration the lex loci arbitri has not lost its importance, which is not to say that it operates as the exclusive source of the arbitral process. While it is still the law of the seat that primarily furnishes arbitration its legal framework, in the form of ground rules in accordance with which arbitral activity may validly take place at the arbitral seat, it is not the only law imposing itself upon an international arbitration. In other words, the regulatory sovereignty of the State of the seat of arbitration is not necessarily the only one to be triggered during the different stages of an arbitration’s life-cycle. This is due to the fact that this regulatory sovereignty encounters both subject-matter limitations and territorial limitations, and, therefore, depending on what matter is to be addressed – and when and by whom – may call into play the regulatory sovereignty of States other than that of the seat. Thus, plures leges faciunt arbitrum.

The paper can be downloaded here.

Daniel Gaw

Introduction

When determining the seat of arbitration and the proper law of an arbitration agreement, is it relevant that the choice of a particular seat and/or law may invalidate the arbitration agreement? In BNA v. BNB,[1] the Singapore Court of Appeal (“SGCA”) reached a result that effectively answered this question in the negative. Specifically, the Court held that the law of the People’s Republic of China (“PRC”) governed an arbitration agreement despite a real risk that the arbitration agreement would be rendered invalid as a result. In doing so, the Court reversed the decision of the Singapore High Court (“SGHC”),[2] which had held that Singapore law governed the arbitration agreement.

This paper takes a closer look at the case and highlights three key takeaways relating to: (a) the express choice of law for an arbitration agreement; (b) the implied choice of law for an arbitration agreement; and (c) the relevance of the validation principle. It concludes that the SGCA’s decision was correct notwithstanding the unsatisfactory outcome for the party that relied on the arbitration agreement.

Summary of the Case

Facts

In BNA v. BNB, the Korean sellers commenced arbitration against a Chinese buyer for alleged non-payment of amounts due under a contract for the sale of industrial gases (the “Agreement”). Article 14.1 of the Agreement provided that “[t]his Agreement shall be governed by the laws of the People’s Republic of China”, while Article 14.2 provided for disputes to be “submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai, which will be conducted in accordance with its Arbitration Rules”.

The buyer objected to the tribunal’s jurisdiction. It contended that the arbitration agreement was invalid because: (a) the arbitration was seated in the PRC and the arbitration agreement governed by PRC law; (b) PRC law prohibited a foreign arbitral institution like SIAC from administering the arbitration of a domestic dispute; and (c) in any event, even if the dispute had sufficient foreign elements, PRC law nonetheless prohibited a foreign arbitral institution from administering an arbitration seated in the PRC.

The tribunal’s decision

The majority of the tribunal held that it had jurisdiction over the dispute because: (a) the arbitration was seated in Singapore; (b) the arbitration agreement was thereby governed by Singapore law; and (c) PRC law was therefore irrelevant on the question of jurisdiction.[3] In reaching that decision, the majority applied the validation principle and effective interpretation principle, which it summarised as follows: “[I]t makes no commercial or logical sense for parties to intentionally select a law to govern an arbitration agreement which would then invalidate it.”[4] The dissenting arbitrator, however, took the view that the tribunal lacked jurisdiction because: (a) the proper law of the parties’ arbitration agreement was PRC law; (b) the parties’ dispute was classified in PRC law as a domestic dispute; and (c) PRC law prohibited a foreign arbitral institution from administering the arbitration of a domestic dispute.[5]

The SGHC’s decision

Dissatisfied with the tribunal’s jurisdictional decision, the buyer asked the SGHC to decide the issue pursuant to Section 10(3) of the Singapore International Arbitration Act. The SGHC upheld the tribunal’s jurisdiction on the basis of two key findings.

First, the court considered that the arbitration agreement referred not only to Shanghai, but also Singapore, as a potential seat of arbitration. Specifically, the reference to the SIAC Rules included Rule 18.1 thereof, which provided that if the parties did not agree on a seat of arbitration, then it shall be Singapore unless the tribunal determines otherwise.[6] The question was therefore whether the phrase “arbitration in Shanghai” amounted to an agreement by the parties on the seat of arbitration. As a matter of construction, the court held that the reference to Shanghai merely identified the venue of arbitration and not a seat, as Shanghai was a city and not a law district.[7] In contrast, the express reference to the SIAC Rules was “the clearest possible manifestation” of the parties’ intention to have their arbitrations seated in Singapore.[8]

Having found that Singapore was the seat of arbitration, the SGHC turned to determine the proper law of the arbitration agreement, applying the three-stage choice of law analysis set out by the English Court of Appeal in Sulamérica v Enesa Engelharia SA:[9] (a) Have the parties expressly chosen the proper law of their arbitration agreement? (b) If not, have they impliedly done so? (c) If there is no express or implied choice, then with what system of law does the arbitration agreement have its closest and most real connection?[10]

            Under the first stage, the court found that the express choice of law to govern the main contract did not amount to an express choice of law in respect of the arbitration agreement. Proceeding to the second stage, the court accepted that the starting point was that the proper law of the contract (PRC law) would also govern the arbitration agreement.[11] It held, however, that this presumption was displaced in favour of the law of the seat (Singapore law). This was because the choice of PRC law “would defeat the parties’ manifest intention to resolve their disputes through arbitration”.[12] Interestingly, the court did so despite having rejected the validation and the effective interpretation principles as being “nakedly instrumental”.[13]   

The SGCA’s decision

On appeal, the SGCA reversed the SGHC’s decision. The key point of departure for the SGCA was the SGHC’s interpretation of the phrase “in Shanghai” as referring merely to the venue of arbitration and not the seat. In the SGCA’s view, “where parties specify only one geographical location in an arbitration agreement, and particularly where, as here, the parties express a choice for ‘arbitration in [that location]’, that should most naturally be construed as a reference to the parties’ choice of seat”.[14] The fact that Shanghai is not a law district was immaterial as commercial parties often only specify either the city or country in their arbitration agreements.[15] Given that the parties had agreed on the PRC as the seat of arbitration, the default choice of Singapore as the seat under SIAC Rule 18.1 did not apply.

Turning to the proper law of the arbitration agreement, the Court held that the express choice of PRC law to govern the main contract did not constitute an express choice of law for the arbitration agreement.[16] It did, however, amount to an implied choice of law for the arbitration agreement.[17] There was nothing to displace this implied choice because the law of the seat was also PRC law.[18] It followed that the validity of the arbitration agreement was to be determined by the PRC courts applying PRC law.

Analysis

The SGCA’s decision is noteworthy for three points which are discussed further below. 

Express choice of law for an arbitration agreement

            The SGCA decided that an express choice of law in respect of the main contract does not, in and of itself, also constitute an express choice of the same law in respect of the arbitration agreement. The SGCA’s approach is consistent with the concept that the arbitration agreement is separable from the main contract and more specific words are required to make an express choice of law in respect of the arbitration agreement. 

That said, no absolute rule can be laid down in this regard, and it is ultimately a matter of contract interpretation as to whether the parties have expressly chosen a law for their arbitration agreement. For instance, if the parties define the term “Agreement” in a manner that clearly includes the arbitration agreement therein and then subject the entire “Agreement” to a particular law, then that may amount to an express choice of law in respect of the arbitration agreement.[19] 

Implied choice of law for an arbitration agreement

Common law courts have diverged on the issue of whether the law of the main contract or the law of the seat should be presumed to be the implied choice of law for an arbitration agreement. In Singapore, an Assistant Registrar concluded that it should be the law of the seat,[20] while other High Court decisions have ruled in favour of the law of the main contract.[21] Likewise, in the recent UK case of Enka v. Chubb, the Court of Appeal and Supreme Court arrived at different conclusions on this issue – the former preferred the law of the seat,[22] while the latter held in favour of the law of the main contract.[23] The SGCA’s decision in BNA v. BNB confirms that, as a matter of Singapore law, the law of the main contract will presumptively be the implied choice of law for the arbitration agreement, and the choice of a different seat is insufficient to displace that presumption.

Relevance of validation principle

The SGCA purported not to address the validation principle when determining the proper law of the arbitration agreement, reasoning that it had no scope for operation in a case where both the law of the main contract and the law of the seat was PRC law.[24] In this author’s view, however, the Court had implicitly rejected the validation principle when determining that the seat of arbitration was Shanghai. Specifically, the Court held that the potentially invalidating effect of PRC law was irrelevant when determining whether the phrase “arbitration in Shanghai” referred to the venue or the seat of arbitration. This was because there was no evidence that the parties were aware that the choice of proper law of the arbitration agreement could have an impact upon its validity.[25] The Court’s reasoning here was arguably an implicit rejection of the validation principle, which “rests on the rational assumption that parties would prefer to have an agreement upheld than not”[26] and does not require actual evidence that the parties had actually turned their minds to the issue of validity in a particular case.

It is submitted that the SGCA’s approach was correct. The validation principle cannot be used to override a clear and express term of the contract simply because giving effect to that term would invalidate the contract or part of it. In this case, the natural meaning of the phrase “arbitration in [city/country]” is that the specified location would be the seat of arbitration, as confirmed by numerous cases and commentaries.[27] Had the word “Shanghai” been substituted with another city (e.g. London), a court or tribunal would undoubtedly have no difficulty with interpreting that phrase as designating the seat of arbitration. It would be unprincipled to depart from the parties’ express choice of the arbitral seat simply because that choice results in certain undesirable outcomes that they perhaps might not have foreseen.  

Conclusion

The SGCA decided in BNA v. BNB that the words of an arbitration agreement should be given their natural meaning unless there are sufficient contrary indicia to displace that reading, and “the parties’ manifest intention to arbitrate is not to be given effect at all costs”.[28] The decision was correct as it is not the function of the courts to save the parties from the consequences of poorly drafted or ill-advised arbitration clauses. It underscores the importance of choosing the seat of arbitration and proper law of the arbitration agreement with care. 

Daniel Gaw is an LL.M. candidate (Vanderbilt Scholar) in the International Business Regulation, Litigation and Arbitration program at the NYU School of Law and an Associate in Dechert LLP’s International Arbitration group. He holds a Bachelor of Laws (First Class Honours) from the National University of Singapore and was formerly a Justices’ Law Clerk of the Supreme Court of Singapore.

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[1] [2019] SGCA 84.

[2] [2019] SGHC 142.

[3] BNA v. BNB [2019] SGHC 142 ¶ 8.

[4] BNA v. BNB [2019] SGCA 84 ¶ 18.

[5] Id.

[6] BNA v. BNB [2019] SGHC 142 ¶ 104.

[7] Id. ¶ 108.

[8] Id. ¶ 109.

[9] [2013] 1 WLR 102.

[10] BNA v. BNB [2019] SGHC 142 ¶ 17.

[11] Id. ¶ 111.

[12] Id. ¶ 117.

[13] Id. ¶¶ 48 and 53.

[14] BNA v. BNB [2019] SGCA 84 ¶ 65.

[15] Id. ¶ 92.

[16] Id. ¶ 61.

[17] Id. ¶ 62.

[18] Id. ¶ 94.

[19] Kabab-Ji SAL v Kout Food Group [2020] EWCA Civ 6 ¶ 62.

[20] FirstLink Investments Corp Ltd v GT Payment Pte Ltd [2014] SGHCR 12 ¶ 16.

[21] BCY v BCZ [2016] SGHC 249 ¶ 65; Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2016] SGHC 238 ¶ 31.

[22] [2020] EWCA Civ 574 ¶ 91.

[23] [2020] UKSC 38 ¶ 170(iv).

[24] BNA v. BNB [2019] SGCA 84 ¶ 95.

[25] Id. ¶ 90.

[26] Enka v. Chubb [2020] UKSC 38 ¶ 198 (dissenting judgment of Lord Burrows).

[27] BNA v. BNB [2019] SGCA 84 ¶¶ 66-68.

[28] Id. ¶ 104.

Introduction

The doctrine of separability, which provides that the invalidity of the substantive commercial contract does not affect the validity of the arbitration agreement except if the arbitration agreement itself is directly impeached as void ab initio, has been widely accepted in the arbitration jurisprudence.

[1] However, it has been adopted by the Indian Supreme Court (“Court”) only recently. By way of its judgment in N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Others (“N.N. Global Judgment”), the Court has for the first time answered in negative – “Whether an arbitration agreement would be non-existent in law, invalid or un-enforceable, if the underlying contract was not stamped as per the relevant Stamp Act?”[2]

The N.N. Global Judgment is noteworthy as by applying the doctrine of separability of arbitration agreement from the underlying contract, the Court has undertaken a complete departure from its previous decisions. It has declared that its previous judgments which held that the non-payment of stamp duty on a commercial contract would invalidate even the arbitration agreement and render it non-existent in law and un-enforceable, are bad in law.[3] In fact, since this is the first time the Court has adopted a diametrically opposite view on this issue in complete dismissal of the precedent set by its co-ordinate bench, the issue has now been referred to a Constitution Bench of five judges of the Court so that the law may be authoritatively settled.[4]   

Factual and Procedural Background

Indo Unique had entered into a contract with the Karnataka Power Corporation Ltd. (“KPCL”) pursuant to an open tender. Subsequently, Indo Unique executed a sub-contract, being Work Order dated September 28, 2015 (“Work Order”), with M/s N. N. Global Mercantile Pvt. Ltd. (“Global Mercantile”) for transportation of coal. Clause 10 of the Work Order incorporated an arbitration clause providing for resolution of disputes by an arbitrator appointed by mutual consent. Further, in satisfaction of the requirements of Clause 9 of the Work Order, Global Mercantile had furnished a bank guarantee for INR 33.6 million in favor of the State Bank of India, the banker of Indo-Unique. Thereafter, certain disputes arose between Indo Unique and KPCL. Consequently, Indo Unique invoked the bank guarantee furnished by Global Mercantile under the Work Order.

In response, Global Mercantile filed a commercial suit against Indo Unique and its banker seeking a declaration that Indo Unique was not entitled to fraudulently encash the bank guarantee as the Work Order had not been acted upon and no loss was suffered by Indo Unique as a result. Pursuant thereto, Indo Unique filed an application before the Commercial Court under Section 8 of the Arbitration and Conciliation Act (“Arbitration Act”) seeking reference of the dispute to arbitration. This was opposed by Global Mercantile as not maintainable since the bank guarantee was an independent contract. By way of judgment dated January 18, 2018, the Commercial Court accepted Global Mercantile’s argument and rejected the application while holding that its jurisdiction was not ousted by the arbitration agreement in the Work Order.

Challenging the decision of the Commercial Court, Indo Unique approached the Bombay High Court with a writ petition[5]. The High Court, by way of judgment dated September 30, 2020, set aside the Commercial Court’s judgment. It held that it was the admitted position that there was an arbitration agreement between the parties and therefore the application under Section 8 was maintainable. The High Court further held that the issue that the non-stamping of the Work Order rendered the arbitration agreement unenforceable could be raised by Global Mercantile before a court under Section 11[6] of the Arbitration Act or before the arbitral tribunal. Aggrieved by the decision of the High Court, Global Mercantile approached the Court.

Analysis Of The N.N. Global Judgment

Numerous issues were raised by Global Mercantile before the Court, however this paper concentrates on the findings of the Court on the issue – “Whether an arbitration agreement would be enforceable and acted upon, even if the Work Order dated 28.09.2015 is unstamped and un-enforceable under the Stamp Act?”[7]. Global Mercantile argued that the application under Section 8 of the Arbitration Act for reference of disputes to arbitration was not maintainable. It contended non-maintainability on the ground that the Work Order not being stamped as per the relevant Stamp Act could not be received in evidence or acted upon, thus, the arbitration clause contained therein also could not be enforced. On the other hand, Indo Unique contended that non-payment of stamp duty on the Work Order was a curable defect and did not render the Work Order unenforceable. Therefore, opportunity should be granted to Indo Unique to cure the defect by paying the deficient stamp duty.  

The Court, while arriving at its holdings in the N.N. Global Judgment, analyzed the development of the doctrine of separability internationally through judgments delivered in the United Kingdom[8], United States[9] and France[10]. The Court acknowledged that Section 16 of the Arbitration Act recognizes the doctrine of separability and kompetenz-kompetenz in India. Further, Section 5 and Section 11 of the Arbitration Act enshrine the legislative policy of minimal judicial intervention. A conjoint reading of Section 5 and Section 16 of the Arbitration Act reveals that the issue whether the main contract is voidable is to be resolved through arbitration. On a careful perusal of the relevant Stamp Act, the Court opined that stamp duty is not chargeable on an arbitration agreement and is only payable on the main contract. The non-payment of stamp duty on the Work Order did not invalidate it but only created a deficiency which could be cured by payment of the requisite stamp duty.

The Court held that on an application of the doctrine of separability – (a) the arbitration agreement contained in the Work Order being independent and distinct from the underlying contract; and (b) no stamp duty being chargeable on it – the arbitration agreement would survive independent of the Work Order. Arbitration agreement would not be rendered invalid or unenforceable on the ground that the contract containing it cannot be acted upon due to non-payment of stamp duty. The N.N. Global Judgment declared that the previous judgments on this issue are bad in law for not upholding the doctrine of separability. Further as a co-ordinate three-judges’ bench of the Court had previously arrived at a contrary decision, in deference to the doctrine of stare decisis, the issue was referred to a Constitution Bench of the Court for authoritative determination.

Comments On The N.N. Global Judgment

The issue of enforceability of an arbitration agreement contained in an unstamped agreement has previously been addressed by the Court in numerous judgments. The Court in SMS Tea Estates Pvt. Ltd. v. M/s Chandmari Tea Co. Pvt. Ltd.[11] held that until the payment of stamp duty with penalty, a court cannot act upon the contract which means consequently the court cannot act upon the arbitration agreement contained in the contract. This issue also came up for the consideration of the Court in 2019 in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited[12] wherein it was held that the Stamp Act applies to the whole contract, hence, it is impossible to separate the arbitration clause contained in the contract from the remainder of the contract to give the arbitration clause an independent existence. This position of the Court was further cited with approval by a three judges’ bench in Vidya Drolia & Ors. v. Durga Trading Corporation[13], which held that arbitration agreement presupposes the existence of a valid and enforceable agreement, so it does not exist when a party cannot sue and claim rights based on an unenforceable agreement.

The Court by way of the NN Global Judgment was right in declaring the judgment in SMS Tea Estates Pvt. Ltd. and Garware Wall Ropes Limited as bad in law and doubt the correctness of the view adopted in Vidya Drolia & Ors. as these judgmentscompletely disregard the well-established doctrine of separability.[14]The doctrine of separability is incorporated in Article 16(1) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) which provides that a decision of the arbitral tribunal that a contract is null and void will not automatically render the arbitration clause invalid. The Arbitration Act was codified and implemented in India with a view to implement the Model Law to create a unified legal framework for the fair and efficient settlement of disputes.[15] In fact the doctrine of separability contained in Article 16(1) of the Model Law is codified in Section 16(1) of the Arbitration Act. Therefore, the previous judgments of the SC clearly failed to appreciate that the doctrine of separability is the mandate of the codified law in India and are thus bad in law. 

The legislative policy of promoting arbitration by limiting judicial intervention in arbitration can be gleaned from the 2015 amendment to Section 11 of the Arbitration Act. The Court has interpreted the amendment to reflect the legislative intent that at the pre-reference stage, courts seized of the matter must exercise minimal judicial intervention and only decide on the issue of existence of arbitration agreement.[16] The Court has repeatedly emphasized that under the now amended Section 11(6A) of the Arbitration Act, in deference to the doctrine of kompetenz-kompetenz embodied in Section 16, the scope of court’s examination is limited to determining the existence of the arbitration agreement and all other preliminary / threshold issues are to be decided by the arbitrator.[17] Thus, once a court has prima facie determined that an arbitration agreement exists, issues regarding the invalidity of the agreement due to non-stamping have to be referred to an arbitrator in terms of the arbitration agreement.

Further, the stamp duty is only a fiscal measure to secure revenue and not a weapon of technicality, so there is no bar on an unstamped instrument being acted upon once the defect is cured.[18] In any event, under the Stamp Act no stamp duty is levied on an arbitration agreement. Hence, non-stamping of the main agreement (a) does not affect the validity of the arbitration agreement; and (b) does not render the main agreement void and is only a technical defect which can be cured by payment of stamp duty and penalty. This being the case, a party cannot be permitted to misuse the Stamp Act to deny the other party the pre-agreed remedy of arbitration.  

The N.N. Global Judgment, by accepting the doctrine of separability, has finally brought the Indian arbitration law in line with the international practices. The UK Court of Appeal, while accepting that the principle of separability exists in English Law, had held that if the arbitration clause is not directly impeached it is capable of surviving the invalidity of the contract so that the arbitrator has the jurisdiction to determine the initial validity of the contract.[19] When the validity of the contract is challenged, the arbitration agreement is treated as an autonomous procedural contract and not as an element of a material-legal contract.[20] The internationally accepted doctrine of separability has finally been accepted and applied by India’s apex court.

Conclusion

In recent times, the Court has adopted a policy to promote India as an arbitration-friendly nation. This is evident from its decision in A. Ayyasamy v. Parmasivam & Ors., wherein it held – “The Arbitration and Conciliation Act, 1996, should in my view be interpreted so as to bring in line the principles underlying its interpretation in a manner that is consistent with prevailing approaches in the common law world. Jurisprudence in India must evolve towards strengthening the institutional efficacy of arbitration. Deference to a forum chosen by parties as a complete remedy for resolving all their claims is but part of that evolution.”[21] The N.N. Global Judgment is another in a series of pro-arbitration judgments of the Court aimed at evolving a robust framework of Indian arbitration law, benchmarked against the best international practices. The World Bank’s Doing Business 2020 report reveals that India ranks 63^rd in the ‘Ease of Doing Business Rankings’.[22] Promoting India as an arbitration-friendly jurisdiction is vital for attracting more investments and the N.N. Global Judgment is a welcome step in that direction.

Ananya Dhar Choudhury is an LL.M. candidate in the International Business Regulation, Litigation and Arbitration program at the NYU School of Law. Prior to attending NYU, she worked as an Associate with the Litigation and Disputes Resolution team at Cyril Amarchand Mangaldas, a leading full-service law firm in India.

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[[1]] Tibor Varady et al., International Commercial Arbitration: A Transnational Perspective 192 (7th ed. 2019).

[[2]] N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Others, 2021 SCC OnLine SC 13 at ¶1.

[[3]] Id. at ¶12.

[[4]] Ibid.

[[5]] Under Article 226 of the Constitution of India, every High Court has the power to issue to any person, in its territories, any direction for the enforcement of any of the rights and for any other purpose. Further, Article 227 of the Constitution of India bestows the High Court with supervisory jurisdiction over all courts and tribunals throughout its territorial jurisdiction. Therefore, in this case the Bombay High Court had supervisory jurisdiction over the Commercial Court to pass any direction it deems fit.

[[6]] If the parties fail to agree on the appointment of an arbitrator or tribunal, then either party may approach the court under Section 11 of the Arbitration Act requesting the court to make such an appointment. The decision of the court, pursuant to such a request, is final.

[[7]] N. N. Global Mercantile Pvt. Ltd., supra at ¶2.

[[8]] The House of Lords in Fili Shipping Co. Ltd. and others v. Premium Nafta Products Ltd. and Others, [2007] UKHL 40 held that the main agreement and the arbitration agreement must be treated as having been separately concluded. The arbitration agreement can be invalidated only on a ground which relates to the arbitration agreement and not as a mere consequence of the invalidity of the main agreement.

[[9]] The US Supreme Court in in Buckeye Check Cashing, Inc. v. Cardegna et. al., US SC 440 (2006) held that challenge to the contract does not prevent a court from enforcing a specific agreement to arbitrate contained therein.

[[10]] The French Cour de Cassation in Gosset v. Caparelli, Cass. Civ. Lere, 7 May 1963 (Dalloz, 1963), 545 held that the arbitration agreement is completely autonomous in law and remains unaffected by the possible invalidity of the main contract.

[[11]] (2011) 14 SCC 66 at ¶19.

[[12]] (2019) 9 SCC 209 at ¶19, 22.

[[13]] (2021) 2 SCC 1 at ¶147.

[[14]] N. N. Global Mercantile Pvt. Ltd., supra at ¶6.10, 6.12.

[[15]] Preamble to the Arbitration Act; Harpreet Kaur, The 1996 Arbitration and Conciliation Act: A Step Toward Improving Arbitration in India, 6 Hastings Bus. L.J. 261, 264 (2010).

[[16]] Duro Felguera v. Gangavaram Port Ltd., (2017) 9 SCC 729 (affirmed by a three-judge bench of the Court in Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714).

[[17]] Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd, (2020) 2 SCC 455 at ¶7.8, 7.10.

[[18]] Hindustan Steel Limited v. M/s Dilip Construction Company, (1969) 1 SCC 597 at ¶7.

[[19]] Harbour Assurance v. Kansa General International Insurance, [1993] 1 Lloyd’s Rep. 455 (CA).

[[20]] Sojuznefteexport v. Joc Oil Limited, 15 Yearbk. Comm. Arb’n 384 (1990).

[[21]] A. Ayyasamy v. Parmasivam & Ors., (2016) 10 SCC 386 at ¶53.

[[22]] World Bank Group, Doing Business 2020, World Bank, https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf.

INTRODUCTION

In its recent decision, The Russia Federation v. Luxtona Limited,[1] the Ontario Superior Court addressed the standard of review applicable to a challenge to an arbitral tribunal’s jurisdictional decision under Article 16(3) and 34(2)(a)(iii) of the UNCITRAL Model Law on International Commercial Arbitration. The Court notably dealt with the inclusion of fresh evidence[2] as part of that challenge. The Court ruled that the judicial review of an arbitral tribunal’s jurisdiction takes the form of a review on a “correctness” standard, not a trial de novo. Consequently, while a court may review questions of law to reach the correct decision, it must defer to the arbitral tribunal’s factual findings, unless the challenging party shows the tribunal made a “clear and overriding” error in its appraisal of the facts.[3] As such, parties must obtain leave of the Court to adduce fresh evidence.[4]

This decision breaks from tradition. Ontario case law, like in other Model Law jurisdictions has generally tended more toward a trial de novo approach granting courts unfettered original jurisdiction to determine an arbitral tribunal’s jurisdiction, including the right to make factual findings and rehear witnesses.[5] As such, parties could file fresh evidence as of right.

The Ontario Court’s decision in Luxtona is a welcome evolution. Its outcome achieves an appropriate balance between holding a trial de novo and giving full deference to an arbitral tribunal’s jurisdictional ruling. While the decision regrettably fails to address the strongest arguments from jurisdictions having adopted the trial de novo approach, which opens it up to future challenges, stronger reasons can be offered in support of the “correctness” review approach.

1. SUMMARY OF THE DECISION

In Luxtona, the plaintiff, Luxtona Limited initiated arbitral proceedings against the Russian Federation pursuant to the Energy Charter Treaty for failing to protect its investment in Yukos, one of Russia’s largest oil companies at one point. While Russia signed the Treaty, it had never ratified it. Luxtona argued that Russia was bound by the Treaty and its arbitration clause,[6] since signatories of the Treaty also agree to its provisional application pending ratification.[7] Russia argued that the provisional application of the Treaty is inconsistent with Russian law and therefore, does not apply. Following an initial arbitration hearing in Toronto in which Russian law experts testified for both sides, the arbitral tribunal determined that it had jurisdiction to hear the dispute.[8]

Russia challenged the ruling in the Ontario Superior Court under Articles 16(3) and 34(2)(a)(iii) of the Model Law, in force in Ontario.[9] In support of its application, Russia filed additional expert evidence. Luxtona objected to its inclusion. A first Superior Court judge, Dunphy J., ruled that the evidence could be admitted as of right,[10] referring to the precedent of United Mexican States v. Cargill, Inc.[11] rendered by the Ontario Court of Appeal in 2011. In Cargill, the Court had stated that correctness review “is consistent with the reasoning in [Dallah Real Estate Holdings v. Pakistan].”[12] In that case, rendered months before Cargill, the Supreme Court of the United Kingdom set aside an arbitral award on the basis that the arbitral tribunal did not have jurisdiction to render an award on the parties’ dispute. In reaching its conclusion, the Court heard additional evidence including expert evidence on French law.[13]

The second judge, Penny J., took over the proceedings and ordered submissions from the parties on the standard of review and admissibility of the fresh evidence. At trial, Penny J. ruled that review on a “correctness” standard applies. As such, the court must consider whether the arbitral tribunal has reached the correct decision on jurisdiction. Normally, this will entail deference to the evidence on the arbitral record and thus, a party must obtain leave of the court to submit fresh evidence on a review of the type found under Article 16(3) of the Model Law.[14] Penny J. ruled that a party seeking to adduce fresh evidence must show that the evidence: (1) “could not have been obtained using reasonable diligence, (2) would probably have an important influence on the case, (3) is apparently credible, and (4) is such that, if taken with the other evidence adduced in the arbitration, it would be expected to have affected the result.”[15] Russia conceded that its evidence would be inadmissible under this test.

2. APPRAISAL

Luxtona adopts an appropriately deferential standard of review for a tribunal’s jurisdictional decision. While the decision suffers from its failure to address the strongest arguments for the trial de novo approach, “correctness review” remains appropriate, nonetheless.

First, a review on a “correctness” standard is appropriate to resolve challenges to jurisdictional decisions under Article 16(3) of the Model Law. Under this approach, a court retains the power to overturn an arbitral tribunal while giving deference to the arbitral tribunal’s factual findings. This protects the parties’ consent to arbitrate only disputes agreed upon in advance, while, at the same time, promoting the finality and effectiveness that arbitration seeks to promote.[16]

While the trial de novo approach protects consent to arbitration, this approach overstates the court’s importance in ensuring that the parties’ consent is being respected and devalues the arbitral tribunal’s ability. Indeed, an arbitral tribunal will often be just as capable if not more capable than a court to rule on its jurisdiction. A tribunal is often constituted with three arbitrators who are experts in the subject area of the dispute, whereas a domestic court judge usually sits alone and has no expertise.[17] Reviewing a jurisdictional decision on a “correctness” standard gives proper weight to the arbitral tribunal’s factual findings. It recognizes, first, that the arbitral tribunal has assessed the credibility of witnesses and considered the evidence at length, while at the same time giving the court the power to overturn its decision if it finds legal errors. Second, “correctness” review focuses the court’s analysis on specific challenges to the arbitral tribunal’s legal reasoning. Contrary to a trial de novo, which demands completely rehearing the jurisdictional question, including the factual findings, from a practical point of view, “correctness” review forces the challenging party to point out specific legal errors made by the arbitral tribunal.[18]

Second, while Penny J. regrettably fails to address significant arguments usually put forward by courts applying the trial de novo approach, “correctness” review remains appropriate and can withstand these objections. The most consistently stated argument put forward for adopting the trial de novo approach is that Article 16(3) of the Model Law states that, after an arbitral tribunal has ruled on its jurisdiction, a party may request that a domestic court “decide the matter”.[19] No provision in Article 16 or the Analytical Commentary supports this interpretation.[20]

Another objection is that if the court was limited to a process of review, “it might be reviewing the decision of a tribunal that itself had no jurisdiction to make such a finding.”[21] This argument ignores the arbitral tribunal’s competence-competence, that is, its capacity to “rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement” [our emphasis] enshrined in Article 16(1) of the Model Law. A trial de novo sterilizes this principle and wastes significant party resources. Since, under Article 8 of the Model Law, a court must refer the parties to arbitration at one party’s request, this forces the parties to obtain an initial jurisdictional ruling from the arbitral tribunal, which a court may completely disregard if a party decides to challenge it.

Finally, commentators argue that a court is not in a worse position to make assessments than the tribunal and should therefore be able to examine witnesses in the usual way.[22] As explained earlier, several reasons can make an arbitral tribunal’s factual findings of higher quality.

CONCLUSION

Luxtona paves the way for future challenges to arbitral jurisdiction being resolved through a review on the “correctness” standard. This is an appropriate break from Model Law jurisdictions which conduct the jurisdictional analysis de novo. While properly ensuring that parties have consented to arbitration, a review leaves space for domestic courts to overturn findings of arbitral tribunals. This promotes the efficiency that makes arbitration desirable in the first place.

Laurent Crépeau is an LL.M Candidate in the International Business Regulation, Litigation and Arbitration specialization at New York University School of Law. He holds a Bachelor of Civil Law and Juris Doctor from McGill University’s Faculty of Law.

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[1] The Russia Federation v. Luxtona Limited, 2019 ONSC 7558 (Can. Ont.).

[2] Fresh evidence is evidence that was not submitted during the arbitration but is submitted at the review stage.

[3] In Canada, this has been elaborated in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65.

[4] Luxtona, 2019 ONSC 7558, para. 66.

[5] See United Mexican States v. Cargill, Inc., 2011 ONCA 622 (Can.). See also Insigma Technology Co. Ltd. v. Alstom Technology Ltd. [2008] SGHC 134 (Sing.); M/s. Schlumberger Asia Services Ltd. v. Oil & National Gas Corporation Ltd. FAO(OS) No. 712/2006 (India Delhi HC). See also; Bowen Construction Limited (in receivership) v. Kelly’s of Fantane (Concrete) Limited (in receivership) [2019] IEHC 861 (Ir.); S Co. v. B Co., [2014] 6 H.K.C. 1436 (C.F.I.). Contra Government of the Lao People’s Democratic Republic v. Sanum Investment Ltd. [2016] SGCA 57; M/s Emkay Global Financial Services Ltd. v. Girdhar Sondhi, (2018) 9 SCC 49.

[6] Energy Charter Treaty art. 26(3)(a), Dec. 17, 1994, 2080 UNTS 95.

[7] Id. at art. 45.

[8] See Luxtona, 2019 ONSC 7558, para. 1-7.

[9] International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sch. 5. See UNCITRAL Model Law on International Commercial Arbitration, arts. 16(3), 34.

[10] The Russia Federation v. Luxtona Limited, 2018 ONSC 2419, para. 28 (Can.).

[11] United Mexican States v. Cargill, Inc., 2011 ONCA 622 (Can.).

[12] Cargill, supra para. 43.

[13] Dallah Real Estate and Tourism Holding Company v. Pakistan[2010] UKSC 46, para. 14.

[14] The Russia Federation v. Luxtona Limited, 2019 ONSC 7558, para. 66. (Can.).

[15] Id., para. 69.

[16] See William W. Park, Why Courts Review Arbitral Awards, in Law of International Business and Dispute Settlement in the 21st century: Liber Amicorum Karl-Heinz Böckstiegel 595, 596 (Robert Briner ed., 2001).

[17] See Emilia Onyema, The Jurisdictional Tension between Domestic Courts and Arbitral Tribunals, in International Arbitration and the Rule of Law: Contribution and Conformity(Andrea Menaker, ed., 2017), 481, 484-85.

[18] See Luxtona, supra note 15, para. 67.

[19] See e.g. Insigma Technology Co. Ltd. v. Alstom Technology Ltd. [2008] SGHC 134, para. 21 (Sing.).

[20] See Ilias Bantekas et al. UNCITRAL Model Law on International Commercial Arbitration: A Commentary (Cambridge University Press, 2020), 312 (stating the lack of clearly indicated standard of review for challenges under Art. 16(3)).

[21] See Insigma at para. 22.

[22] Id.

Professor Franco Ferrari, the Center’s Director, has just edited a book entitled “Due Process as a Limit to Discretion in International Commercial Arbitration”, co-edited with Friedrich Rosenfeld, a Global Adjunct Professor of Law at NYU Law in Paris and a lecturer for investment arbitration at the Bucerius Law School in Hamburg, and Dietmar Czernich, an attorney and Adjunct Professor based in Vienna. The book offers a comprehensive study on dueprocess as a limit to arbitral discretion useful to anybody involved in international arbitration. Based on 19 country reports (authored by Julio Cesar Rivera (h), Rafael Alves, Andrea Bjorklund & Benjamin Jarvis, Zheng Sophia Tang, Soterios Loizou, Caroline Kleiner, Dr. Friedrich Rosenfeld, Jennifer Lim & Charlotte Lelong, Aditya Singh & Zehaan Trivedi, Francesca Ragno, Koji Takahashi, Nayla Comair-Obeid & Zeina Obeid, Jacob van de Velden & Abdel Zirar, Giuditta Cordero-Moss, Mikhail Batsura, Jonathan Lim, Simon Hohler, Hattie Middleditch, Ina Popova & Duncan Pickard) and a detailed general report authored by the three editors, the book explores how courts in major arbitration jurisdictions apply due process guarantees when performing their post-award review.

Professor Franco Ferrari, the Center’s Director, is known for his work on the United Nations Convention on Contracts for the International Sale of Goods (CISG), one of the most successful uniform contract law instruments. In his most recent paper, published in a book edited by Professors Iacyr de Aguilar Vieira and Gustavo Cerqueira  to celebrate the CISG’s 40^th anniversary and entitled “La Convention de Vienne en Amérique/The Vienna Convention in America”, Professor Ferrari identifies two trends in recent case law interpreting the CISG: the homeward trend and the outward trend, both of which are disruptive of the goal behind the CISG. The paper analyses the trends and suggests how to tackle them to promote a uniform application of the CISG.

Professor Pedro J. Martinez-Fraga, a leading practitioner in the field of investor-State international arbitration, international commercial arbitration, and transnational litigation, the co-leader of Bryan Cave Leighton Paisner LLP’s International Arbitration Team, and Adjunct Professor at NYU School of Law, has just published the second edition of his acclaimed book entitled “The American Influence on International Commercial Arbitration” with Cambridge University Press. As Professor Jose Alvarez, NYU’s Herbert and Rose Rubin Professor of International Law, states, “Pedro J. Martinez-Fraga begins his masterful work on the United States’ influence on international commercial arbitration with the original vision of arbitration suggested by Goya’s painting ‘Duel with Clubs’ in the Museo del Prado. The idea that arbitration is as blunt an instrument for ‘dispute settlement’ as two men using deadly force against each other – admittedly efficient, expedient, and final – has, he says, been eclipsed by the recognition that arbitration has much in common with judicial proceedings. His book is an argument, driven by a careful examination of history, case law, and statute, that the actions and views of common law courts has had much to do with this change. His is a general (and rare) defense of what some would decry, namely the ‘Americanization’ of international arbitration. Readers should welcome this new up-to-date edition. It continues to be a valuable contribution to a healthy, ongoing debate.’’ According to Gary Born, the chair of WilmerHale’s International Arbitration Practice Group, the book contains a “thoughtful and provocative analysis of a very timely subject – replete with keen observations and original analysis.”

The book traces the contours of select US common law doctrinal developments concerning international commercial arbitration. The new edition supplements the foundational work contained in the first edition in order to produce a broader and deeper work. Professor Martinez-Fraga explores how the US common law may help bridge cross-cultural legal differences by focusing on the need to address these contrasting approaches through the nomenclature and goal of securing equality between party-autonomy and arbitrator discretion in international commercial arbitration. The book thus focuses on the common law development of arbitrator immunity, as well as the precepts of party-initiative and –autonomy forming part of the US common law discovery rubric that may contribute to promoting expediency, efficiency and transparency in international commercial arbitration proceedings. It does so by carefully analyzing, among other things, the International Bar Association (IBA) Rules on Evidence Gathering, the Prague Rules, and the role of 28 USC. §1782 in international arbitration.

– Sonal Jain

Introduction

When parties expressly include self-invalidating provisions in their arbitration agreements, to what extent can courts extrapolate such provisions and find the agreement valid to give effect to the parties’ intention to arbitrate?

In BNA v. BNB and another, [2019] SGHC 142,[1] the Singapore High Court was tasked to determine the validity of an arbitration agreement. Despite the court’s lengthy elucidation rejecting the “validation principle”[2] as part of Singapore law, the Court effectively rewrote the parties’ arbitration agreement to find it valid. Instead of holding the agreement invalid under the correct applicable law, the court took a one step further– it interpreted an express provision in the arbitration agreement (“arbitration in Shanghai”) to mean an arbitration seated in Singapore with Shanghai merely the “venue” of the arbitration. Although the decision was successfully appealed before the Court of Appeal,[3] its paradoxical nature makes it noteworthy.

Background

In 2016, the Defendants commenced arbitration under a Takeout Agreement. Article 14 of this agreement stated that it would be governed by the law of the People’s Republic of China (“the PRC”). It also provided for the parties’ arbitration agreement. In the arbitration clause, the parties expressly stipulated that their disputes shall be “…finally submitted to Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai…”[4] The Plaintiff challenged the Tribunal’s jurisdiction alleging the invalidity of the arbitration agreement under the applicable law– PRC law– stating that under PRC law, an arbitration between two domestic parties cannot be administered by a foreign arbitration institution.[5] The majority of the Tribunal held the Tribunal had jurisdiction. Thereafter, the Plaintiff applied to the Singapore High Court under §10(3) of the Singapore International Arbitration Act[6] to seek a de novo determination that the Tribunal does not have jurisdiction. The Court held that Singapore law applied to the arbitration agreement rendering it valid, therefore, the tribunal had jurisdiction.

The Court’s Findings

Law Applicable to the Arbitration Agreement

The Court reiterated that Singapore courts have adopted the three-step test formulated by the English Court of Appeal in Sulamérica.[7] This approach requires an inquiry into three questions.

• Have the parties made an express choice of law to govern the arbitration agreement?
• In the absence of an express choice, have they impliedly chosen a law? (The law expressly chosen by the parties for the underlying contract is presumptively their implied choice of law for the arbitration agreement. However, the presumption is rebutted if the arbitration agreement is invalid under this law.)
• If the parties have not made an express or implied choice of law, with which system of law does the arbitration agreement have the closest and most real connection?

Rejection of the Validation Principle

According to the validation principle, while determining the law applicable to the arbitration agreement, courts must always apply the law that would validate the arbitration agreement, rather than potentially applicable choices of law that would invalidate the agreement.[8] Previously, Singapore courts had not expressly dealt with the issue of whether the validation principle is part of Singapore law. Another decision of the High Court[9] was interpreted to accommodate the validation principle in Singapore law.[10] Thus, the Court’s decision in BNA is significant. The Court’s rejection of the validation principle is sound as a matter of principle and practice.

Principally, the rules of contractual interpretation in Singapore directly conflict with the “nakedly instrumental” objective of the validation principle.[11] The Court of Appeal has previously held that arbitration agreements, like any other commercial contracts, should be interpreted in light of the words used by the parties, although to give effect to the parties’ intention to arbitrate.[12] In this vein, the Court in BNA rightly stated that analysis under the three-step test is driven by a desire to give effect to the parties’ intention to arbitrate insofar as the language chosen by them makes it possible.[13] The purpose of the analysis is not to achieve a predetermined objective of validating the agreement regardless.[14]

Practically, if arbitration agreements are construed without actually giving effect to the parties’ intentions by interpreting the words chosen (as may be the case when applying the validation principle) there is a serious possibility that the award may not be enforced if the enforcing court finds that the arbitration agreement was invalid under the law applicable to it.[15]

The Court’s Decision in BNA

Law Governing the Arbitration Agreement– The Three-step Test

The Court applied the three-step test to Article 14 of the Takeout Agreement and concluded the following:

1. the parties had not made an express choice of law for the arbitration agreement; the choice of PRC law to the Takeout Agreement was insufficient to constitute an express choice of law to the arbitration agreement.
2. PRC law presumptively applied to the arbitration agreement as parties’ implied choice. However, this presumption was rebutted because the arbitration agreement would be invalid under PRC law. Since the arbitration was seated in Singapore, the law of the seat– Singapore law– applied.
3. there is no need to proceed to the third step having concluded Singapore law applies on the second step; assuming the inquiry under the third step ought to be conducted, Singapore law will still apply to the arbitration agreement.

Seat of Arbitration

The Court concluded that the seat of arbitration was Singapore notwithstanding the reference to Shanghai in the arbitration agreement. The parties expressly chose to conduct their arbitration according to the arbitration Rules of SIAC (“SIAC Rules 2013”). Rule 18.1 of the SIAC Rules 2013 (“Rule 18.1”) provides that the default seat of arbitration is Singapore, absent a contrary agreement of the parties or a contrary determination by the tribunal.[16] The Court found that the arbitration agreement referred to two geographical locations– Singapore and Shanghai. It held that reference to Shanghai did not constitute a contrary agreement as contemplated in Rule 18.1, because “there

[was]

nothing in the words chosen by the parties to refer to Shanghai which compels the construction that the PRC is to be the seat.”[17] Then, it justified itself by stating that out of the two geographical locations in the parties arbitration agreement, Singapore is a law district whereas Shanghai is merely a city.

Comment

As commendable the Court’s reasoning is for the rejection of the validation principle, its application of the three-step test to the facts of the case has failed to garner the same degree of fidelity. Particularly, the Court’s analysis on the seat of the arbitration is not only incongruent but also fraught with several difficulties.

To begin with, it is apparent from a plain reading of the arbitration agreement that there is a reference to only one geographical location in the agreement– Shanghai. Relying on the Court of Appeal’s decision in PT Garuda,[18] the Court itself reckoned that “if an arbitration agreement provides for any future arbitration to take place in a single geographic location, that location will be the seat of the arbitration unless the parties otherwise agree.”[19] There are other authorities that have interpreted such geographical references to mean a parties’ choice of “seat of arbitration”. In Naviera,[20] the English Court of Appeal opined that the phrase “arbitration in London” is the “colloquial way of referring to London as the seat of the arbitration.”[21] The Court should have concluded its inquiry in favor of Shanghai as the seat of the arbitration.

Likewise, the Court’s interpretation of Rule 18.1 is incoherent. As per Rule 18.1, first, the parties have a right to agree on a seat of arbitration. The default seat provision comes into effect only if at this first step there is no agreement between the parties.[22] Instead, the court interpreted Rule 18.1 inversely. To determine if the phrase “arbitration in Shanghai” constituted a contrary agreement, the Court assumed first that there is no such agreement, consequently, the arbitration agreement referred to two geographical locations– Singapore and Shanghai. This is logically inconsistent. Accordingly, the Court should have first determined if the words “arbitration in Shanghai” constituted an agreement between the parties on the seat of arbitration, independent of the default seat provision.

Additionally, it is ambiguous which law the Court applied to interpret the arbitration agreement. The Court’s decision is devoid of any conflict-of-laws analysis to determine the law applicable to the interpretation of the arbitration agreement. Either PRC law or Singapore law could have applied to is (as the law governing the underlying contract or the lex fori, respectively). Assuming the Court applied Singapore law, its application of the law was erroneous due to a clear departure from the existing precedent.[23] As regards PRC law, it may very well have been that PRC law would interpret “arbitration in Shanghai” to mean an arbitration seated in PRC. This would have been a question of foreign law, to be determined by way of expert evidence.[24]

This case may also be understood to have created a presumption that lack of the word “seat,” or merely referring to a city (as opposed to a country) in the arbitration agreement, will not constitute a choice of seat. Such a presumption would open the floodgates for jurisdictional arguments on the question of choice of seat, as it is not uncommon for parties to fail to designate the geographical location as “seat,” or simply refer to a city while choosing the seat.[25]

From the foregoing, the seat of the arbitration should have been decided as the PRC. Had the Court proceeded on that basis, it would have concluded on the second step of its three-step analysis that neither the law governing the underlying contract nor the law of the seat (both being PRC Law) would have applied to the arbitration agreement. The Court would have had to proceed to the third step and identified the law with which the arbitration agreement had the closest and most real connection. At this stage too, the Court should have concluded that PRC law governed the arbitration agreement because the proper law of the Takeout Agreement was PRC law and the seat of the arbitration was Shanghai. With this analysis, the court would have no alternative but to conclude that the arbitration agreement was invalid, and the tribunal lacked jurisdiction.

Accordingly, it is evident that the Court’s analysis in BNA was guided with the objective of finding the arbitration agreement valid. There is a clear dissonance between the Court’s jurisprudential discussion on the inapplicability of the validation principle in Singapore and its analysis in the present case. The Court effectively took the approach that would validate the arbitration agreement, despite the agreement’s apparent invalidity.

Closing Remarks

Although the Court’s decision is understandable due to Singapore’s pro-arbitration policy,[26] the Court of Appeal rightly reversed the Court’s decision finding that PRC law applied to the arbitration agreement. In one of its conclusory remarks, the Court noted that the three-step inquiry may operate arbitrarily due to the mere choice of arbitral rules. In this author’s opinion, it is not arbitrary, although it may have been an “unintended effect”.[27] Suppose the parties’ dispute arose just a year later and the SIAC Rules 2016[28] applied vis-à-vis SIAC Rules 2013, the parties’ arbitration agreement would have been invalid. Conversely, suppose PRC laws changed before the parties commenced their arbitration, the agreement would have been valid. These hypothetical outcomes do not reflect the arbitrariness of the judicial approach of determining the law applicable to the arbitration agreement. Instead, they remind the parties to survey their local laws before including self-invalidating provisions in their arbitration agreements and also to pay closer attention to drafting the clauses generally. After all, courts do not and should not be in the business of rewriting contractual bargains.[29] Though the Court in BNA erred in its findings, it correctly stated that “there is only so much which the law can do to save an inapt and inept arbitration agreement.”

[This article was written when the Singapore Court of Appeals had not issued the written grounds of decision. The grounds of decision were released on 27 December 2019. This article should not be construed as a summation of the Court of Appeals decision.]

Sonal Jain is an LL.M. Candidate in the International Business Regulation, Litigation and Arbitration Program at NYU School of Law.  Prior to enrolling at NYU, Sonal got her first degree in law from ILS Law College, Pune (India).

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[1] BNA v. BNB and another, [2019] SGHC 142 (Singapore High Court) (Decision of July 1, 2019).

[2] See, Gary Born, International Commercial Arbitration(2^nd ed., 2014) at p. 545.

[3] The grounds of appeal are awaited. See, Tom Jones, No Singapore seat for Chinese dispute, rules appeal court, Global Arbitration Review (22 October 2019), available at rb.gy/bqb1sn.

[4] BNA, supra n.1at [3] (emphasis added).

[5] However, this position is somewhat unclear. See, Arthur Ma et. al., GAR Know How: Commercial Arbitration: China: Infrastructure, ¶5 (last updated 2 May 2019), available at rb.gy/ndthzc; see also, Martin Rogers & Noble Mak, Foreign Administered Arbitration in China: The Emergence of a Framework Plan for the Shanghai Pilot Free Trade Zone, Kluwer Arbitration Blog (6 September 2019), available at rb.gy/gkrhwn.

[6] International Arbitration Act Cap. 134A (revised ed., 2002).

[7] Sulamérica Cia Nacional de Seguros SA v. Enesa Engelharia SA, [2013] 1 WLR 102 (English Court of Appeal); see, BCY v. BCZ, [2016] SGHC 249 (Singapore High Court).

[8] See, Born, supra n.2.

[9] BCY, supra n.7.

[10] See, Leong & Tan, The Law Governing Arbitration Agreement: BCY v. BCZ and Beyond, (2018) 30 SAcLJ 70.

[11] See, BNA, supra n.1 at [53].

[12] Insigma Technology Co. Ltd. v. Alstom Technology Ltd.,[2009] 3 SLR(R) 936, at [30], [31] (Singapore Court of Appeal).

[13] BNA, supra n.1 at [55].

[14] Id. at [53].

[15] Under the New York Convention, Article V(1)(a) courts may refuse enforcement of an award if the parties’ arbitration agreement was invalid under the law parties have subjected it to. This clause includes both parties’ express and implied choice of law. See, Albert Jan van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation (1981) at p. 282.

[16] SIAC Rules (5^th ed., 2013), available at rb.gy/nevm8v.

[17] BNA, supra n.1 at [109].

[18] PT Garuda Indonesia v. Birgen Air, [2002] 1 SLR(R) 401 (Singapore Court of Appeal).

[19] BNA, supra n.1 at [103] (emphasis supplied).

[20] Naviera Amazomica Peruana SA v. Compania Internacional de Seguros del Peru, [1988] 1 Lloyd’s Rep 116 (English Court of Appeal).

[21] Id. at 119; a similar interpretation ensued in ABB Lummus Global Ltd. v. Keppel Fels Ltd, [1999] 2 Lloyd’s Rep 24 (English High Court) (finding that “arbitration in London” or “arbitration in New York” is the ordinary language used to describe the seat of the arbitration); see also, Shagang South-Asia (Hong Kong) Trading Co. Ltd. v. Daewoo Logistics, [2015] All ER (Comm) 545 (English Commercial Court) (finding that an arbitration clause with the phrase “arbitration in London” refers to a choice of seat of arbitration).

[22] Rule 18.1 reads, “the parties may agree on the seat of arbitration Failing such agreement, the seat of arbitration shall be Singapore…”, supra n.16.

[23] See, PT Garuda, supra n.18.

[24] See, BNA, supra n.1 at [116].

[25] See, Born, supra n.2 at pp. 2074, 2075 (citing cases wherein arbitration clauses making references merely cities, without any context, were held to be the seat of arbitration).

[26] Singapore Parl. Debates, Vol 63, Sitting No 7, Title: International Arbitration Bill, Cols. 625-627 [31 October 1994], available at rb.gy/tifhld; See also Harisankar K.S., International Commercial Arbitration in Asia and the Choice of Law Determination, (2013) 30 J. Int. Arb. 621 at p. 625.

[27] BNA, supra n.1 at [122].

[28] SIAC amended its rules in 2016 and eliminated the default seat rule in order to present a more global reach. See, Rule 21.1 SIAC Rules (6^th ed., 2016), available at rb.gy/9z69x8; See also, Olga Boltenko and Priscilla Lua, The SIAC Rules 2016: a watershed in the history of arbitration in Singapore, Kluwer Arbitration Blog (July 12, 2016), available at rb.gy/ypfhtw.

[29] TMT Co. Ltd v The Royal Bank of Scotland plc, [2017] SGHC 21, at [68] (Singapore High Court).

Xin MA

The Supreme People’s Court of the People’s Republic of China (SPC) and the government of Hong Kong Special Administration Region (HKSAR) signedthe Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administration Region (hereinafter Arrangement) on April 2, 2019. This Arrangement came into force on October 1, 2019 both in Mainland China and in the HKSAR. The SPC promulgated it in the form of Judicial Interpretation,[1] according it national mandatory force.[2] This Arrangement for the first time allows the People’s court to order interim measures in aid of commercial arbitral proceedings[3] outside Mainland China,[4] though limited to those seated in Hong Kong.

Up to now, the SPC and the HKSAR have already signed six arrangements[5] in relation to mutual judicial assistance in civil and commercial matters. In addition to this Arrangement, the SPC intends to strengthen Hong Kong as a unique seat for Sino-related alternative dispute resolution in the Asia-Pacific area. This short article tries to clarify several implications of this Arrangement for foreign parties, in the context of negotiating and drafting arbitration clauses with a Sino party, and in the context of seeking court-ordered interim measures in a People’s court against a Sino party.

What Interim Measures Can Be Ordered by A People’s Court?

While the HKSAR is a common law jurisdiction and has adopted the Model Law, Mainland China is a civil law jurisdiction and its arbitration law does not resemble the Model Law. Thus, “Interim Measure” as defined in the Model Law, does not exactly correspond to its Mainland China counterpart.

Article 1 of this Arrangement defines Interim Measure in Mainland China as “property preservation, evidence preservation, and conduct preservation.”[6] If because of one party’s conduct, or for other reasons, enforcing an arbitral award becomes difficult, or any other damage may be caused to the applicant, the applicant may apply for the preservation of that party’s property, or for an order compelling that party to perform certain conduct or abstain from certain conduct.[7] If there is a likelihood that evidence may be destroyed, or lost, or difficult to obtain later, the applicant may apply for the preservation of evidence.[8] Parties can apply for such interim measures before or after the relevant arbitral institution or permanent office has accepted the arbitration case.[9] However, applications before the start of the arbitral proceedings face stricter judicial review in regard to the urgency of the circumstances.[10]

Ad hoc vs. Institutional Arbitration & Which Arbitral Institution to Choose?

Two issues should be considered when negotiating an arbitration clause in light of this Arrangement. First, Mainland China has not yet allowed ad hoc arbitration in its own jurisdiction.[11] Its attitude towards ad hoc arbitration is also reflected in this Arrangement: only institutional arbitral proceedings seated in Hong Kong are qualified to seek court-ordered interim measures in a People’s court. Though the award of ad hoc arbitration seated in Hong Kong could be enforced by a People’s court,[12] if a foreign party intends to fully benefit from Hong Kong’s preferential arrangements with Mainland China, institutional arbitration in Hong Kong would be a more valuable choice than ad hoc arbitration.

Shanghai Marine Court granted the first application pursuant to this Arrangement on October 8, 2019 for a settlement agreement enforcement arbitration submitted to HKIAC.[13] Notice, however, that the parties initially conducted an ad hoc arbitration to solve the original contract dispute and reached that settlement agreement agreeing upon HKIAC arbitration thereof. If such an institutional arbitration clause had not been negotiated and included in that settlement agreement, this application could not have been granted.  

Second, the choice of arbitration institution should be deliberately considered because not all of the institutional arbitration seated in Hong Kong is entitled to such court-ordered interim measure aid. The arbitral institutions or permanent offices which administer “arbitral proceeding in Hong Kong” for the purpose of this Arrangement have to satisfy certain requirements,[14] then apply to the HKSAR government and obtain mutual confirmation from both the SPC and the HKSAR government to be qualified.[15] The first confirmed arbitral institutions have been promulgated[16] and other arbitral institutions can be confirmed upon application in the future. Of those first six arbitral institutions or permanent offices, CIETAC Hong Kong office and SCIAC (Hong Kong) are permanent offices of arbitral institutions which are organized and registered in Mainland China. They excel in Chinese arbitration practice. Compared to ICC Asia Office and HKIAC, however, they may be less attractive because they are from the same jurisdiction as Sino parties. 

Practical Concerns When Seeking Interim Measures in A People’s Court

Some specific and practical concerns should also be addressed when seeking interim measures in a People’s court. Procedural as they may be, they can affect the success of the application. The first concern is to decide to which court to apply. The applicant may apply to the Intermediate People’s Court of the place of residence of the party against whom the application is made, or to the Intermediate People’s Court of the place where the property or evidence is situated.[17] However, this Arrangement requires that the People’s court which accepts the interim measure application be the same as the one to accept the enforcement application.[18] This requirement comes out of consideration for judicial efficiency; the ultimate purpose of interim measures is to guarantee the enforcement of the arbitral award.[19] Thus, there may be a trade-off between one court that is more advantageous for ordering interim measures and another that is more convenient for enforcing the arbitral award. Considering the urgency required for the interim measure, it might be practical to apply to the court where the interim measure can be directly implemented, since it has no need to ask for further assistance from another court, which may prolong the implementation process.      

The second concern is with regard to the notarization and authentication requirement. A foreign applicant’s documents of identity, as part of the materials for the interim measure application,[20] must be notarized and authenticated before their submission. The People’s Court bears a fairly rigid judicial attitude towards evidence formed outside Mainland China, requesting that all such evidence, including documents of identity, be notarized and authenticated.[21] Note that although notarization and authentication are a matter of formality, failing to complete those steps in a timely manner would jeopardize an application.

Another concern is with regard to security provision. The People’s courts may at their discretion require the foreign applicant to provide security for ordering property preservation or conduct preservation. Further, if such application is made before the relevant institution or permanent office has accepted the arbitration case, security must be provided.[22] Though there are legitimate policy justifications for requiring security provision, and Sino applicants face the same requirement,[23] it may in reality constitute an obstacle to the application’s success. Once required by the People’s court, failure to provide security may lead to the refusal to grant an interim measure.[24] Nevertheless, the foreign applicant may own no property in Mainland China, or the value of such property located in Mainland China may be not sufficient to satisfy the security requirement. Thus, a practical solution may be to ask a local or national guarantee company to provide security at some consideration; however, to do so entails hasty and expeditious negotiations at costs. It still remains to be seen how the People’s courts will exercise their discretion pursuant to this Agreement in regard to security provision. However, it is wiser for foreign applicants to prepare themselves in advance for such a security provision request.

On the other hand, certain conveniences related to the “pass-on” requirement in light of this Arrangement are noteworthy. Article 3 paragraph 2 of this Arrangement requires interim measure application materials produced by the applicant to be passed on to the relevant arbitral institution or permanent office, together with a pass-on letter addressed by such relevant arbitral institution or permanent office to the People’s court.[25] However, in practice, the SPC allows applicants submitting the interim measure application materials with the pass-on letter to proceed directly to the relevant People’s court, considering that the rigidity of the pass-on requirement may, given the urgency of the circumstances, jeopardize the application since Hong Kong is located outside Mainland China.[26] In the first application under this Arrangement, this is how HKIAC and the applicant proceeded.[27]

Conclusion

In light of this Arrangement, institutional arbitration is recommended. Parties should deliberately consider the suitable arbitration institution during arbitration clause negotiation, and choose the suitable court among the competent People’s courts for granting an interim measure. Besides other procedural concerns this article has mentioned, an applicant should prepare well in advance for how to satisfy the possible security provision requirement to ensure a successful application. Nevertheless, this Arrangement’s importancefor Sino-related arbitration “cannot be overstated”,[28] as Sarah Grimmer, Secretary-General of HKIAC has commented. Hong Kong will surely become a more attractive arbitration seat henceforth. 

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[1] Judicial Interpretation〔2019〕No.14

[2] As the highest court in the People’s Republic of China, the SPC also functions as a de-facto rule-making power holder. Its judicial interpretation has played an important role directing judicial practice in Mainland China. Regarding the legal status, functions and limits of the SPC’s Judicial Interpretation, please see Li Wei, Judicial Interpretation in China, 5 Willamette J. Int’l L. & Dis. Res. 87 (1997).

[3] Investment arbitrations between a state party and a private party are not covered by this Arrangement.

[4] Please see Part One of《<最高人民法院关于内地与香港特别行政区法院就仲裁程序相互协助保全的安排>的理解与适用》(The Interpretation and Application of the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administration Region), (Sep. 26, 2019),

http://rmfyb.chinacourt.org/paper/html/2019-09/26/content_160433.htm?div=-1.

[5] The Arrangement on Mutual Entrustment in Service of Judicial Documents in Civil and Commercial Matters 1998; the Arrangement Concerning Mutual Enforcement of Arbitral Awards 1999; the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters Pursuant to Choice of Court Agreements between Parties Concerned 2006; the Arrangement on Mutual Taking of Evidence in Civil and Commercial Matters 2016; the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters (signed in January 2019, but has not come into force yet. The Choice of Court Arrangement will be superseded upon its commencement). Another arrangement is the Reciprocal Recognition and Enforcement of Civil Judgments in Matrimonial and Family Cases 2017.

[6] See Interim Measure Arrangement, Article 1, “Interim measure” referred to in this Arrangement includes, in the case of the Mainland, property preservation, evidence preservation and conduct preservation.

[7] See Article 100 of the Civil Procedure Law of PRC.

[8] See Article 81 ofthe Civil Procedure Law of PRC.

[9] See Id. Article 81, Article 100.

[10] See Wang, Shizhou, Civil Procedure in China 159 (2014).

[11] Article 16 of the Arbitration Law of PRC requires that an arbitration agreement must contain a designated arbitration commission; otherwise the agreement will be invalid. Regarding the consensus that ad hoc arbitration is not admitted in Mainland China, please see Shahla F. Ali & Tom Ginsburg, International Commercial Arbitration in Aisa 88-90 (2013).

[12]《最高人民法院关于香港仲裁裁决在内地执行的有关问题的通知》法［2009］415号 (Notice of the Supreme People’s Court on Issues concerning the Execution of Hong Kong Arbitral Awards in the MainlandNo. 415 [2009]).

[13] See “全国首例！上海海事法院裁定准许香港仲裁程序中的保全申请”, (the First Instance! Shanghai Marine Court Granted an Interim Measure Application in Aid of A Hong Kong Arbitral Proceeding), (Oct. 9, 2019),

https://shhsfy.gov.cn/hsfyytwx/hsfyytwx/spgk1356/spdt1420/2019/10/09/09b080ba6dac0657016dae2f47970000.html?tm=1574068535096.

[14] See Interim Measure Arrangement, Article 2 paragraph 1.

[15] See Interim Measure Arrangement, Article 2 paragraph 2.

[16] These arbitral institutions are: Hong Kong International Arbitration Centre, China International Economic and Trade Arbitration Commission Hong Kong Arbitration Center, The Asia Office (Hong Kong) of the International Chamber of Commerce (ICC) International Court of Arbitration, Hong Kong Maritime Arbitration Group, South China International Arbitration Center (Hong Kong) and eBRAM International Online Dispute Resolution Centre.

[17] See Interim Measure Arrangement, Article 3 paragraph 1.

[18] See Supra note 4, (4) of Part Two.

[19] Id.

[20] See Interim Measure Arrangement, Article 4 paragraph 1, paragraph2.

[21] Wang, Shizhou, Supra note 10, at 23-24.

[22] Id. at 159-160.

[23] Id. at 160.

[24] Id.

[25] See Article 272 of the Civil Procedure Law of PRC.

[26] See Supra note 4, (2) of Part Five.

[27] “HKIAC Receives Five Applications under Hong Kong-Mainland Arrangement on Interim Measures”, (Oct.11, 2019), https://www.hkiac.org/news/five-interim-relief-applications-under-new-arrangement.

[28] Id.