– 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:
- 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.
- 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.
- 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).
[1] BNA v. BNB and
another, [2019] SGHC 142 (Singapore High Court) (Decision of July 1, 2019).
[2] See, Gary Born,
International Commercial Arbitration(2nd 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 (5th
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 (6th 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).
