E-briefing: Resolving uncertainties in arbitration clauses – what will be the governing law of the arbitration agreement and seat of arbitration if it is not expressed?

Resolving uncertainties in arbitration clauses – what will be the governing law of the arbitration agreement and seat of arbitration if it is not expressed?

Why is this important: What happens when you do not expressly state the governing law of your arbitration agreement? What is the interplay between the governing law of the substantive agreement, the seat and the governing law of the arbitration agreement? Will the choice of governing law of the substantive agreement or the seat influence the determination of the governing law of the arbitration agreement?

Key things to note

What does “arbitration in Shanghai” mean? In BNA v BNB [2019] SGHC 142, the Singapore High Court interpreted this as a Singapore seated arbitration with the physical hearing to be held in Shanghai. Such interpretation is in line with the Singapore’s pro-arbitration policy.

Background facts

Parties entered into a Takeout Agreement which expressly provided that the governing law of this agreement would be the law of the People’s Republic of China (“PRC Law”).

The Takeout Agreement also contained an arbitration agreement which stipulated that  the dispute shall be “submitted to the SIAC for arbitration in Shanghai, which will be conducted in accordance with its Arbitration Rules”.

In 2016, the Defendant commenced arbitration. The Plaintiff sought to challenge the tribunal’s jurisdiction:

• The Plaintiff asserts that the arbitration agreement is invalid under PRC Law, the governing law of the arbitration agreement. Under PRC Law, the parties’ dispute would be regarded as a domestic dispute. PRC Law prohibits foreign arbitral institutions from administering domestic disputes; and
• The Plaintiff also believes that the seat of the arbitration is Shanghai. PRC Law prohibits foreign arbitral institutions from administering Shanghai-seated arbitration.

Findings of the tribunal on the Plaintiff’s jurisdictional challenge

The SIAC constituted a three-member tribunal. The tribunal heard the parties on the Plaintiff’s jurisdictional challenge and the majority determined that the tribunal had jurisdiction because:

• The arbitration is seated in Singapore;
• The arbitration agreement is thereby governed by Singapore law; and
• PRC Law is irrelevant on the question of jurisdiction.

Dissatisfied with the tribunal’s decision, the Plaintiff made an application to the Singapore High Court under Section 10(3) of the International Arbitration Act for a declaration that a three-member tribunal constituted by the SIAC has no jurisdiction to hear the dispute.

Summary of the Singapore High Court findings

Proper law of the arbitration agreement

The approach to adopt in relation to determining the proper law of the arbitration agreement is the three-step approach laid down in the English Court of Appeal decision in Sulamérica Cia Nacional de Seguros SA v Enesa Engelharia SA [2013] 1 WLR 102 (“Sulamérica”) in the following order:

• Is there an express choice of law?
• If there is no express choice of law, is there an implied choice of law?
• If there is no express and implied choice of law, what is the system of law with which the arbitration agreement has the closest and most real connection?

In ascertaining the proper law of the arbitration agreement, the High Court reiterated the doctrine of separability. An arbitration agreement is separate and independent from the underlying contract. Therefore, the proper law of the underlying contract need not be the same as the proper law of the arbitration agreement. This echoes the principle laid down by the High Court in FirstLink Investments Corp Ltd v GT Payment Pte Ltd [2014] SGHCR 12 where the learned Assistant Registrar Shaun Leong observed that it cannot be assumed that parties want the same system of law to govern their performance of the substantive contract and their dispute resolution process.

If parties have selected the law governing the underlying contract without specifying the law of the arbitration agreement, in the absence of evidence to the contrary, the proper law of the arbitration agreement is likely to be the same as the proper law of the underlying contract. Such evidence to the contrary can arise in the terms of the arbitration agreement itself or from the fact that the arbitration agreement would be ineffective under the proper law of the underlying contract.

The High Court also rejected Gary Born’s validation principle that where parties have subjected their underlying contract to a law that would, if applied to their arbitration agreement, invalidate that agreement, the separability presumption provided sound analytical reason not to apply that law to the parties’ arbitration. The High Court’s rejection of the validation principle can be summarised as follows:

• The validation principle tells us what the proper law of an arbitration is not, but does not tell us what it is; and
• It is not the court’s role to direct parties to arbitration without ascertaining their true intention as borne out by the text of the agreement. This is inconsistent with existing jurisprudence. It is clear from Sulamérica and the line of Singapore cases affirming the approach in Sulamérica that the three-step approach is not a prescribed outcome in favour of arbitration but to ascertain the intention of parties from the text of the arbitration agreement.

Notwithstanding the fact the parties have expressly chosen PRC law as the proper law of the underlying contract, the High Court concluded that the proper law of the arbitration agreement was Singapore law. If PRC law were the proper law of the arbitration agreement, the arbitration may be rendered invalid under PRC law.

Seat of the arbitration

It is a well-established principle that the seat of the arbitration is distinct from the place of the arbitration.

The arbitration agreement makes reference to arbitration in Shanghai as well as the SIAC arbitration rules (2013 version). Rule 18.1 of the SIAC (2013) Rules provides that if parties do not agree on the seat of the arbitration, the seat shall be Singapore unless the Tribunal determines that another seat is more appropriate.

Having expressly selected the SIAC Rules, parties have expressly agreed that the seat is Singapore. Since an arbitration cannot be seated in two jurisdictions simultaneously, the phrase “arbitration in Shanghai” must mean the venue of the hearing.

What does it mean for parties

Rule 18.1 of the SIAC (2013) Rules does not exist in the SIAC (2016) Rules. This has been replaced with Rule 21.1 of the SIAC (2016) Rules which provides that “the parties may agree on the seat of the arbitration. Failing such an agreement, the seat of the arbitration shall be determined by the Tribunal, having regard to all the circumstances of the case”.

The presumption that the seat shall be Singapore in the absence of any express provisions are not part of the current set of rules. Therefore, if parties arbitrating today do not specify the seat of arbitration, parties place themselves at risk of jurisdictional challenges. To avoid such uncertainties, it is important for parties to state in clear and express terms the governing law of the arbitration agreement and the seat of the arbitration agreement.

This decision is a clear rejection of the validation principle in favour of the three-step approach in Sulamérica. However, it is arguable that the validation principle is not meant to be a normative rule to guide the court’s decision making. Instead, it can be seen as a descriptive rule which describes our judicial policy as observed from the jurisprudence. The High Court has given leave to appeal its decision to the Court of Appeal. It remains to be seen whether the Court of Appeal will uphold the High Court’s approach and conclusion.

The full text of the decision may be accessed here.

Eversheds Harry Elias International Arbitration Group

Eversheds Harry Elias regularly provides advice on complex international commercial disputes. We have extensive experience in advising and successfully representing multinational entities in commercial arbitration. As a full-service Singapore law firm, we have full rights of audience before all tiers of Singapore Courts. We are therefore well placed to advise and support our clients in any arbitration-related court applications before the Singapore Courts.