Mixing up modes of Dispute Resolution in Contracts – a Drafter’s Nightmare?

Mixing up modes of Dispute Resolution in Contracts – a Drafter’s Nightmare?

Ordinarily, a dispute resolution clause in a contract is meant to set out the manner in which any dispute in connection with a contract is supposed to be resolved.  A properly worded law and jurisdiction clause should make it clear which law is supposed to be the governing law, whether disputes arising from the contract should be resolved by way of litigation or arbitration as well as the proper forum for resolving the dispute.

It is therefore ironic that a badly worded dispute resolution clause may result in disputes on the dispute resolution clause itself.  This was what happened in the Singapore High Court case of Silverlink Resorts Ltd v. MS First Capital Insurance Ltd [2020] SGHC 251.

 

Facts of the case

The claim arose from an Industrial All Risks Policy (the “Policy”) issued by the Defendant.  The Plaintiff was the assured who claimed under the Policy for business interruption due to the Covid-19 pandemic.

The insurer rejected the claim on the basis that there must have been material damage to the insured properties before a claim can be made for business interruption.

The assured commenced legal proceedings in the High Court of Singapore.  The insurer then applied for a stay of proceedings on the basis that the claim is subject to arbitration.

The General Conditions which applied to the Policy contained a mediation clause at Clause 10 which provides that the parties shall attempt to resolve any dispute by mediation before commencing any arbitration proceedings.

The General Conditions further provides at Clause 11 that that “Any dispute arising out of or in connection with this contract … which is not settled pursuant to the Mediation General Condition …, shall be referred to arbitration …

It goes on to provide at Clause 13 that “Should any dispute arise between the Insured and the Insurers regarding the interpretation or application of this Policy the Insurers will, at the request of the Insured, submit to the jurisdiction of any competent Court in Singapore…

Apart from the General Conditions, the Policy included a Renewal Certificate which provides for choice of law and jurisdiction as “In the event of any dispute over interpretation of this Policy:  Law : Singapore.  Jurisdiction : Courts of Singapore.”

 

 The Court’s Decision

The court noted that the arbitration clause applied to any dispute arising out of or in connection with the Policy that was not settled pursuant to the mediation clause.  The jurisdiction clause was expressed to apply to any disputes regarding the interpretation or application of the Policy. 

As such, the question of whether the claim for business interruption is admissible without any physical damage to the properties could fall within the scope of both the arbitration clause and the jurisdiction clause.

The court followed the case of Fiona Trust which held that the Court should not adopt a technical approach but construe the dispute resolution clause based on the presumed intention of the parties as rational commercial parties.

The court also noted that the Singapore Court of Appeal had in the case of Rals International Pte Ltd v. Cassa di Risparmio di Parma e Piaccenza SpA adopted a generous approach in construing arbitration clauses.  It was held by the Court of Appeal therein that “essentially, the rule of construction is that all disputes between parties are assumed to fall within the scope of the arbitration clause unless shown otherwise.

The court went on to consider the Paul Smith approach which had been adopted in Singapore in previous cases.  In the Paul Smith approach, where the contract provides for both arbitration and the jurisdiction of the court, the inconsistency was resolved by interpreting the jurisdiction clause to mean that the court has a supervisory jurisdiction over the arbitration.

After examining the Paul Smith approach, the court noted that it is not the case that this approach will apply every time an agreement contains an arbitration clause and a jurisdiction clause.  Ultimately, the application of the arbitration and jurisdiction clauses are dependent on the construction of the clauses in the contract and the intention of the parties, objectively ascertained.

It was noted by the court that it was conceivable that parties could have intended for certain disputes to be referred to arbitration while other disputes could be subject to the jurisdiction of the court.  So long as the arbitration and jurisdiction clauses evince the intention of the parties to have different disputes resolved differently, the court observed that the parties’ intention should be respected and given effect to.

Another situation which could arise where the parties intended for certain disputes to be carved out of the arbitration agreement.  An example was found in the case of Transocean Offshore International Ventures Ltd v. Burgundy Global Exploration Corp.

In the carved-out approach, the rule of construction that the general clause should give way to the specific clause would apply in ascertaining the parties’ intention.

After examining the terms of the Policy, the Court eventually preferred to adopt the carved-out approach as opposed to the Paul Smith approach for this case and held that the dispute did not fall within the arbitration clause and that the application for stay of proceedings was dismissed.

 

Our Comments

This decision is based on the specific facts of this case and the wordings used in the Policy.  As interpretation of contract is very fact specific and fact sensitive, it is open for future cases to adopt either the Paul Smith approach or the carved-out approach depending on the specific facts of each case.

One observation that we have is that the Singapore courts continue to be pro-arbitration in its approach and will continue to adopt a generous approach in construing arbitration clauses.

This case also highlights how a carelessly worded dispute resolution clause may end up being the subject of the dispute.

It is not difficult to imagine that the insurer in this case simply relied on their standard terms and conditions without considering how it may impact on this particular Policy.

The one aspect of this case that is puzzling to us is the rationale behind the person who drafted the standard terms and conditions to include a mediation clause, an arbitration clause and a jurisdiction clause all in the same document.  What exactly was the drafter trying to achieve?

In our view, while there may be some situations where it would be commercially sensible to have different dispute resolution mechanisms for different aspects of a dispute, these situations are probably fairly rare and are specific to that particular contract.  If so, the particular dispute resolution clause must be worded very carefully so that there can be no ambiguity.

Unless there are commercially sensible reasons for having different dispute resolution mechanisms, it may cause more confusion and create more problems if the drafter of a contract inserts both an arbitration clause and a jurisdiction clause into a contract indiscriminately.

Please do not hesitate to contact us should you have any queries relating to the above. 

Photo by Mike Petrucci on Unsplash

 

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