In order to decide whether or not the tribunal in the arbitration lacked jurisdiction because the arbitration clause was invalid, the Singapore High Court has determined the law governing an arbitration clause.
The decision came out in BNA v BNB and another [2019] SGHC 142 is a strong reminder for parties to give careful attention to the drafting of their arbitration clauses and to state their intentions clearly.
Case Facts
The parties’ dispute arose out of a Takeout Agreement (“TA“). The agreement expressly stated that it was governed by PRC law. The arbitration clause provided for disputes to be finally “submitted to the Singapore International Arbitration Centre (“SIAC“) for arbitration in Shanghai”, which would be conducted in accordance with the SIAC Arbitration Rules. However, the arbitration clause didn't contain an express choice of law provision.
The defendants herein started SIAC arbitration proceedings against the plaintiff. The plaintiff in return challenged the tribunal’s jurisdiction on the basis that the arbitration agreement was invalid under PRC law. PRC law prohibits a foreign arbitral institution such as the SIAC from administering PRC-seated arbitration. Majority of the tribunal held that the tribunal had jurisdiction in the arbitration as the arbitration was seated in Singapore and the arbitration clause was thereby governed by Singapore law. PRC law was irrelevant to the question of jurisdiction.
The plaintiff begin proceedings in Singapore under Section 10(3) of the International Arbitration Act seeking a declaration that the tribunal lacked jurisdiction as the arbitration clause was invalid under PRC law.
High Court’s Verdict
The Court in its effort to determine the proper law of the arbitration clause applied the three-stage inquiry found in the English Court of Appeal decision in Sulamérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 that was comprised of the following stages:
- Have the parties expressly chosen the proper law of their arbitration agreement?
- If not, have the parties chosen the proper law impliedly?
- If not, with what system of law does their arbitration agreement have its closest and most real connection?
Stage I
The Court held that mere fact that the parties expressly chose PRC law to govern the TA was not solely enough to constitute an express choice of law for the arbitration clause. The first stage would only be satisfied if the parties had expressly provided that the law of the arbitration clause was PRC law.
Stage II
The Court found that starting point was that the proper law of the arbitration clause was PRC law being the proper law of the TA but that the parties had also chosen Singapore to be the seat of arbitration. However, since the Court accepted that it was likely that the arbitration clause was invalid if governed by PRC law, it found that the strong indication in favor of PRC law as the proper law of the arbitration clause was displaced in favor of Singapore law.
The Court in determining the seat of arbitration chosen by the parties found that the arbitration clause referred to two geographical locations, named as Singapore and Shanghai. The arbitration clause didn't expressly state whether Shanghai was the legal seat or merely the venue. The seat determines which law governs the arbitration proceedings and which Courts supervise them. By contrast, the factual venue is merely the geographical location in which hearings and other proceedings take place.
The Court further noted that SIAC Rules, which had been incorporated into the arbitration clause by reference, provided that in the absence of a contrary agreement by the parties or a contrary determination by the tribunal, the seat of any arbitration under the SIAC Rules was Singapore.
The Court concluded that the express reference to the SIAC Rules was the clearest possible manifestation of the parties’ intention to have all future arbitrations under their arbitration clause seated in Singapore.
The Court duly placed significance on the fact that the parties’ arbitration clause merely referred to Shanghai, being a city, instead of the PRC, being a “law district” which could be construed as a reference to a venue rather than a seat. The Court contrasted this with an indirect reference made to Singapore, a law district, as the seat under the SIAC Rules.
Since the Court concluded on the second stage that Singapore law was the proper law of the arbitration clause, it was not nnecessary to go to the third stage. Nonetheless, the Court noted that it had to analyze the third stage, it would have concluded that the arbitration clause had the closest and most real connection with Singapore law.
General Significant of the Judgement
The Judgement was strongly driven by the fact that the arbitration clause was likely to be invalid if governed by PRC law. It remains to be seen whether this outcome will be upheld on appeal.
In any event, the problems that arose, in this case, can be avoided as follows:
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Designate the proper law of the arbitration clause. The law of the arbitration clause governs important matters such as the validity and interpretation of the clause. Absent an express designation, it will be for a tribunal or court to determine the proper law. This can be a complex, time-consuming and costly exercise that should be avoided.
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Designate the seat of arbitration and do so in clear terms: e.g., “The seat of arbitration shall be Singapore”. Avoid mere references to geographical locations without designating them as the “seat”: e.g., “arbitration in Shanghai”.
When designating the seat, parties must also check whether restrictions under any applicable national law may apply. For example, under PRC law, domestic disputes must be arbitrated in China (and administered by an authorized Chinese arbitration commission), while parties are permitted to arbitrate their disputes outside China only if the dispute is “foreign-related”.
One interesting argument placed was that the tribunal lacked jurisdiction because the proper law of the arbitration clause was PRC law and since PRC law prohibited a foreign institution like SIAC to administer arbitrations seated in China (whether domestic or foreign-related), the arbitration clause was invalid.
The other angle was that even if the Court’s decision in BNA v BNB is upheld on appeal and the seat of arbitration was Singapore, this may not be the end of the story.
There remains a risk that if a SIAC award is rendered in the arbitration and enforcement is subsequently sought in China, the PRC Courts may refuse enforcement if they find that the dispute is indeed purely domestic and the award thus in violation of the “domestic rule” under PRC law.
This has, for example, occurred in the case Beijing Chaolaixinsheng Sports and Leisure Co., Ltd v Beijing Suowangzhixin Investment Consulting Co., Ltd (2013) Er Zhong Min Te Zi No. 10670, where the Beijing No. 2 Intermediate Court refused enforcement of a South Korean award. In that case, the court held that the arbitration clause in a contract entered into between a South Korean owned Foreign Invested Enterprise registered in Beijing and another PRC incorporated company violated the “domestic rule”.
The decision was based on the findings that both parties were domestic entities, the subject-matter of the contract was located in China, and the contract was concluded and performed in China.
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