In our August 2019 edition of Notes from the Bar, we looked at the Singapore High Court case of BNA v. BNB & Anor  SGHC 142. The matter went on to the Singapore Court of Appeal which rendered a decision partially overturning the High Court decision at BNA v. BNB & Anor  SGCA 84. We will examine the Court of Appeal’s decision in this article.
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.”
The High Court adopted the three-stage approach in ascertaining the governing law of the arbitration. We had in our August 2019 edition of Notes from the Bar described the three-stage approach.
While applying the three-stage approach, the High Court held that although the choice of PRC law to govern the contract was a strong indication that parties have chosen PRC law to be the governing law of the arbitration as well, the High Court held that this indication was displaced when it found that Singapore, and not Shanghai, was the seat of the arbitration.
The High Court reasoned that since the parties agreed that the arbitration be governed by the SIAC Rules, and there is a provision in the SIAC Rules that unless parties agree otherwise, the default seat of the arbitration is Singapore, therefore, the adoption of the SIAC Rules meant that the parties agreed to Singapore as the seat of the arbitration. The High Court tried to reasoned away the mention of Shanghai in the agreement by treating it as the physical venue as opposed to being the seat of the arbitration.
And by making a finding that Singapore was the seat of the arbitration, the High Court went on to make a finding that Singapore law was the governing law of the arbitration.
Firstly, the Court of Appeal agreed with the High Court that the proper approach to take in considering what is the proper law of the arbitration is the three-stage approach. Such an approach is in line with previous case authorities as well as consistent with cases on the determination of what is the proper law of a contract.
The Court of Appeal, however, disagreed with the High Court’s convoluted way in coming to the conclusion that Singapore was the seat of the arbitration. In particular, the Court of Appeal disagreed with the High Court’s interpretation of the words “arbitration in Shanghai” contained in the arbitration clause.
The Court of Appeal held that the High Court was wrong to make a distinction between PRC as a “law district” and that Shanghai was merely a city and not a “law district”. In making that artificial distinction, the High Court then went on to hold that the words “arbitration in Shanghai” meant that the parties did not intend Shanghai to be the seat of the arbitration but merely the physical venue for the hearing.
In the judgment of the Court of Appeal, the words “arbitration in Shanghai” ought to be given its natural meaning, i.e. that parties intended Shanghai to be the seat of the arbitration. The Court of Appeal went on to consider several English cases which held that the words “arbitration in London” meant that parties agreed that London shall be the seat, and the words “arbitration to be held in Hong Kong” meant that the parties intended Hong Kong to be the seat.
Therefore, unless there are strong indications otherwise, the words “arbitration in Shanghai” contained in the agreement must be read to mean that the parties agreed that Shanghai shall be the seat of the arbitration.
After holding that the words “arbitration in Shanghai” should be interpreted to mean that the parties intended Shanghai to be the seat of the arbitration, the Court of Appeal went on to consider whether there are any other factors that might displace the natural meaning of these words.
One of the arguments raised by the Respondent to displace that natural meaning was that if Shanghai was the seat of the arbitration, and if PRC law was the governing law of the arbitration, then the arbitration agreement would be void as it was contrary to PRC law which does not allow a domestic arbitration to be administered by a foreign body. It was argued that the parties cannot have intended to choose a system of law which would invalidate their arbitration agreement. Therefore, the argument is that it would be absurd if the parties are held to have chosen Shanghai as the seat, which in turn meant that PRC law would be the governing law of the arbitration, which in turn effectively result in the arbitration agreement being invalid.
The Court of Appeal did not accept that argument. In essence, an arbitration agreement is no different from any other agreements. While the Courts will try to interpret an agreement in a way which upholds the validity of the agreement, it is not the Court’s role to try to save an agreement when the agreement is invalid.
The same applies here in the sense that if the wording of the arbitration clause is such that it renders the arbitration clause invalid, the Court will not give it a strained interpretation simply to save the arbitration clause. The parties take the risk of the clause being unenforceable based on the wordings that they have chosen.
The interpretation of the words “arbitration in Shanghai” given by the High Court judge is definitely a great cause for concern and may result in a great deal of uncertainty operationally. It is therefore a relief that the Court of Appeal overruled the High Court on this point and gave the words their plain and natural meaning.
The Court of Appeal’s guidance that while the Court will try to interpret an arbitration clause to uphold the validity of the clause, the Court will not give the clause a strained or illogical reading just to save it is a welcomed holding. An arbitration clause is basically the outcome of an agreement between the parties. There is no reason why the Court should uphold an agreement if the wording of the agreement turns out to be unsuitable or may result in the agreement being invalidated or void.
It is to be noted that after making the finding that Shanghai is the seat of the arbitration and that PRC law is the governing law of the arbitration, the Court of Appeal went on to state expressly that the Court of Appeal makes no order in terms of the jurisdiction of the arbitration tribunal in this case. The simple logic being that since Shanghai is the seat of the arbitration, the Singapore courts no longer have any supervisory jurisdiction over the arbitration. It would therefore be for the Shanghai courts to consider the issue of whether the arbitration tribunal constituted in this case has the proper jurisdiction.
What this means is that the parties would have to face another round of legal challenge in the Shanghai courts as to the validity of the jurisdiction of the arbitration tribunal. The amount of legal cost incurred and time spent would have been avoided if the parties had put their minds to the wording of the arbitration clause when the contract was signed, or obtained proper legal advice before signing it.
This brings us to our final comment that it would always be in the parties’ interests to consult their lawyers to ensure that the wordings of an arbitration clause in their contract are properly worded to avoid unnecessary and potentially costly challenges to the jurisdiction of the arbitration tribunal.
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.