Singapore court considers law of arbitration agreement

Rakesh Nelson of Pinsent Masons, the law firm behind Out-Law, was commenting after the Singapore Court of Appeal considered how to interpret an arbitration clause in a contract for the sale of industrial gases.

The contract stipulated that it was governed by the laws of the People’s Republic of China (PRC) and contained an arbitration clause that stated that "disputes shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai" under the SIAC Rules.

When a dispute arose under the contract, the seller under the contract raised arbitration proceedings before the SIAC. However, the buyer challenged whether the SIAC's arbitral tribunal had jurisdiction to hear the case on the basis that PRC law governed the arbitration agreement and under PRC law, arbitration agreements are invalid if they provide for a foreign arbitral institution such as the SIAC to administer a PRC-seated arbitration or a purely domestic dispute.

The arbitral tribunal arrived at a split decision on the question of its jurisdiction, with the majority determining the issue in favour of the seller. The tribunal considered that it would have made no commercial or logical sense for parties to have intentionally selected a law to govern the arbitration agreement which would then invalidate it. It also considered that Singapore was the seat of the arbitration and that Shanghai was merely the venue of the arbitration. The majority therefore concluded that Singapore law governed the arbitration agreement.

The buyer then applied to the Singapore High Court for a declaration that the tribunal lacked jurisdiction to hear the dispute. In considering that application, the High Court judge reflected on case law which requires a three-stage assessment to be undertaken to determine the proper law of an arbitration agreement.

The assessment requires Singapore's courts to first determine whether the parties have made an express choice of law. If the parties have not made an express choice of law, the second part of the test requires courts to assess whether the parties have made an implied choice of law. If the parties have not made an express or implied choice of law, the third stage of the assessment requires courts to determine the system of law that an arbitration agreement has its "closest and most real connection" to.

On the first stage the High Court ruled that the parties in this case had not made an express choice of the law of the arbitration agreement.

On the second and third stages the High Court found that PRC law, as the governing law of the contract, would ordinarily serve as the starting point of the parties implied choice of the proper law of the arbitration agreement. However, the High Court held that, in the present case, Singapore was the seat of the arbitration, and Singapore law, as the law of the seat, would displace PRC law as the parties' implied choice as otherwise the parties' arbitration agreement was likely to be invalid.

In the appeal against the High Court's decision, the Singapore Court of Appeal agreed that the parties had not made an express choice of law for the arbitration agreement and that the starting point of the parties implied choice of the proper law of the arbitration agreement was PRC law.  However, the Court of Appeal disagreed with the High Court's view that Singapore was the seat of the arbitration and that Singapore law should displace the PRC law as the parties' implied choice.

In its ruling the Court of Appeal held that the natural reading of the phrase "arbitration in Shanghai" pointed to Shanghai as the seat, and there was no "contrary indicia" to suggest otherwise. According to the Court of Appeal, where parties have specified only one geographical location in an arbitration agreement, and particularly where the choice had been expressed as "arbitration in [that location]", that should most naturally to be construed as a reference to the parties’ choice of seat. This approach, it said, was confirmed by a number of cases and academic commentaries that had dealt with the issue in the same way.

Reaching that view meant in  turn that the law of the seat, and the parties’ implied choice of proper law of the arbitration agreement, was one and the same – PRC law. This meant that the question of whether the implied choice of PRC law as the proper law should be displaced by the law of the seat so as not to nullify the parties’ intention to arbitrate simply did not arise, it said.

The buyer's appeal was therefore allowed to a limited extent, as the Court of Appeal reversed the High Court's finding that Singapore was the seat of the arbitration but did not express a final view as to whether the arbitral tribunal did or did not have jurisdiction to hear the case. Any dispute over the tribunal’s jurisdiction would have to be litigated in courts in China, it said.

"This decision demonstrates that the Singapore courts will not give effect to parties’ manifest intention to arbitrate at all costs," said Rakesh Nelson of Pinsent Masons. "The Singapore Court of Appeal has emphasised that where the proper construction of an arbitration agreement is that the arbitration agreement is unworkable then the parties would have to live with the consequences of their decision."