In this inaugural edition of our Notes from the Bar, we take a look at a recent Singapore High Court decision of BNA v. BNB & Anor [2019] SGHC 142 where the Court applied the three-stage approach in determining what is the proper law of the parties’ arbitration agreement.
Summary of the facts
The Plaintiff entered into an agreement with the 1st Defendant, known as the Takeout Agreement. The Takeout Agreement expressly provides that the governing law of the agreement was the law of the People’s Republic of China.
The arbitration clause in the Takeout Agreement provides as follows;
“14.1 This Agreement shall be governed by the laws of the People’s Republic of China.
14.2 With respect to any and all disputes arising out of or relating to this Agreement, the Parties shall initially attempt in good faith to resolve all disputes amicably between themselves. If such negotiations fail, it is agreed by both parties that such disputes shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai, which will be conducted in accordance with its Arbitration Rules. The arbitration shall be final and binding on both Parties.”
Notice of arbitration was submitted to the SIAC and the SIAC appointed a tribunal of three arbitrators. The Plaintiff went on to challenge the Tribunal’s jurisdiction. By a majority decision, the Tribunal held that it had jurisdiction. In the dissenting judgment, it was held that the Tribunal lacked jurisdiction because (i) the proper law of the arbitration agreement was PRC law, (ii) the parties’ dispute is classified in PRC law as a domestic dispute, and (iii) PRC law prohibits a foreign arbitral institution from administering the arbitration of a domestic dispute.
Thereafter, the Plaintiff filed an application to the High Court of Singapore for a declaration that the Tribunal had no jurisdiction.
Findings of the Court
The Court distilled 4 critical issues to be decided for this case. For the purpose of this article, we look only at two of these issues, namely, (i) what is the proper law of the parties’ arbitration agreement, and (ii) what is the seat of the arbitration.
Proper law of the arbitration
The Court held that in determining the proper law of the arbitration agreement, the Singapore courts have adopted the three-stage approach.
- Was there an express agreement?
- Absent an express agreement, was there an implied agreement?
- What is the system of law that the arbitration agreement have its closest and most real connection?
In this case, although clause 14.1 provides that the Takeout Agreement was to be governed by PRC law, the Court found that clause 14.2 which provides for disputes to be referred to arbitration did not contain an express choice of the system of law governing the arbitration.
This would probably be puzzling to non-lawyers, but there is a distinct difference between the law governing the substantive aspects of a contract, and the law governing the validity and conduct of the arbitration, and that these two may not be the same.
The choice of PRC law as the governing law of the Takeout Agreement at clause 14.1 does not necessarily mean that there was an express agreement for PRC law to be the law governing the arbitration.
Having found that there was no express choice, the Court went on to ascertain if a choice could be implied. In this regard, the Court held that an express choice of PRC law as the governing law of the contract would be a strong indication that the parties similarly intended that PRC law be the governing law of the arbitration. That however was just a starting point in the analysis.
The Court went on to find that the seat of the arbitration was Singapore and not Shanghai. As the seat was Singapore, the Court held that the starting presumption that PRC law was the implied choice was displaced, and that Singapore law was the implied governing law of the arbitration.
What appeared to have some bearing on this decision was that if PRC law was the governing law of the arbitration, then the arbitration agreement would be invalid as it is contrary to PRC law. The Court opined that a finding that PRC law was the implied choice of law governing the arbitration, it would defeat the parties’ intention to resolve their disputes via arbitration.
Having decided that there was an implied choice of Singapore law as the law of the arbitration, the Court held that it was unnecessary to go to the third stage of ascertaining which system of law has the closest and most real connection, although the Court said obiter that the law of the seat of the arbitration would ordinarily be the closest and most real connection.
Seat of the Arbitration
The Court had to choose between Singapore or Shanghai as the seat of the arbitration.
Although Clause 14.2 expressly provided that the dispute shall be submitted to the SIAC for arbitration in Shanghai, the Court decided that the seat of the arbitration was Singapore and not Shanghai.
A distinction must be made between the seat of the arbitration and the venue where the arbitration was to be conducted. Certain legal consequences arise from a location being the seat of the arbitration. This must differentiated from a location being named as the venue where the physical hearing was to be conducted. An arbitration may be conducted in a venue that is not the seat of the arbitration.
In this case, the Court held that the parties expressly provided that the SIAC Rules shall apply. Rule 18.1 provides that absent any agreement otherwise, the default seat was Singapore.
And in construing clause 14.2, the Court held that the reference to “arbitration in Shanghai” did not amount to an agreement that the seat was to be Shanghai because there were no words in clause 14.2 that suggested parties intended Shanghai to be the seat of the arbitration.
Our comments
Very often, parties do not give much thought to the arbitration clause when negotiating a contract. It is very common to see contract simply stating “arbitration in Singapore” or “arbitration in Hong Kong” without further elaboration.
A failure to apply their minds to the arbitration clause may lead to a whole host of procedural issues when arbitration is finally commenced.
But between having a one-liner arbitration clause, and one where it was drafted without proper consideration or advice, the latter tends to create a lot more problems.
Like in the BNA v. BNB case, a significant amount of time and legal cost would have been incurred in arguing the jurisdiction of the arbitration tribunal that was appointed by the SIAC. The matter is pending appeal to the Singapore Court of Appeal. By the time the issue of jurisdiction is finally determined, at least a year or two would have pass and hundreds of thousands of dollars in legal cost incurred without parties being anywhere nearer the determination of the substantive part of the dispute between them.
If you have any queries on the above, please feel free to contact us.
Disclaimer : This article is for general information only and not intended to constitute legal advice. We shall not be liable for any errors or omissions, nor shall we be liable for reliance on the contents of this article.
Photo used in this article taken by Pang Yuhao on Unsplash
