Going South …. Singapore High Court diverges from English Court's position on governing law of the arbitration agreement

The recent decision of the Singapore High Court in FirstLink Investments Corp Ltd v. GT Payment Pte Ltd and others [2014] SGHCR 12 highlighted the importance of making an express choice as to the law governing an arbitration agreement, in addition to stating the governing law of the remainder of a contract. The decision raised some interesting questions as to the determination of the parties’ implied choice of proper law, in the absence of an express choice, and diverged from the English decision of SulAmerica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A..

The Singapore High Court found that, in the absence of indications to the contrary, parties will have impliedly chosen the law of the seat as the proper law to govern the arbitration agreement, in a direct competition between the chosen substantive law and the law of the chosen seat of arbitration.

The Dispute between the Parties

The Plaintiff and the Defendants (together the "Parties") entered into a contract in relation to the business of online payment services for global merchants and consumers.

The arbitration clause in the contract between the Parties read as follows: “Any claim will be adjudicated by Arbitration Institute of the Stockholm Chamber of Commerce. You and GTPayment [the parties] agree to submit to the jurisdiction of the Arbitration Institute of the Stockholm Chamber of Commerce. Both parties expressly agree not to bring the disputes to any other court jurisdictions, except as agreed here to the Arbitration Institute of the Stockholm Chamber of Commerce”.

When a dispute arose between the Parties, the Plaintiff attempted to commence court proceedings in Singapore against the Defendants, who in light of the arbitration clause sought a stay of those proceedings.

Decision

The main point of consideration in this case was the manner in which the proper law of an arbitration agreement could be determined in the absence of an express choice of law.

The Singapore High Court adopted the general methodology to determine the law governing an arbitration agreement which was set out in the decision of the English Court of Appeal in SulAmerica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A. [2012] 1 Lloyd’s Rep 671 (“SulAmerica”)(a three-stage enquiry into (i) the express choice; (ii) the implied choice in the absence of an express choice; and (iii) where the parties had not made any choice, the proper law would be the law with which the arbitration agreement has its closest and most real connection).

However, with regard to the determination of an implied choice as in step (ii) of the SulAmerica formula, the Singapore High Court departed from the English approach. In Sulamerica, the Court of Appeal created a rebuttable presumption that express substantive law of the contract would be taken as the parties’ implied choice of the proper law governing the arbitration agreement. It came to this decision on the reasoning that parties intended that the same law govern the entire relationship between them. The Singapore High Court disagreed with this and noted instead that “it cannot always be assumed that commercial parties want the same system of law to govern their relationship of performing the substantive obligations under the contract, and the quite separate (and often unhappy) relationship of resolving disputes” and stated that “the natural inference would instead be to the contrary”.

The High Court noted the importance of the arbitral seat in an international arbitration and held it to be the juridical centre of gravity which gives effect to an arbitration agreement and results in an enforceable award. It therefore agreed with the earlier English decision in C v. D [2007] EWCA Civ 1282, in which the court found (obiter) that an arbitration agreement has a closer and more real connection with the place where the parties have chosen to arbitrate than with the governing law of the main contract. Given that an arbitral award has to be valid under the law of the seat for it to be enforced irrespective of whether it is in accordance with the substantive law (pursuant to Article 34(2)(a)(i) of the UNCITRAL Model Law, which applies in Singapore by virtue of section 3 of the International Arbitration Act), the High Court emphasised its belief that rational businessmen would intend for arbitral awards to be binding and enforceable and therefore would be primarily focussed on the law of the seat.

The High Court therefore ruled that in the absence of indications to the contrary, parties will have impliedly chosen the law of the seat as the proper law to govern the arbitration agreement, in a direct competition between the chosen substantive law and the law of the chosen seat of arbitration. It determined that all things being equal, the mere fact of an express substantive law in the main contract would not in and of itself be sufficient to displace parties’ intention to have the law of the seat as the proper law of the arbitration agreement.

The High Court did however, condition its decision with the rider that the determination of the implied law ultimately remains a question of construction and each case would have to turn on its own facts.

Impact

This case serves as an important reminder of the importance of taking care in the drafting of arbitration agreements so as to ensure that they are enforceable. In particular, clients should ensure that arbitration agreements include an express clause confirming the applicable law for the arbitration agreement, to avoid the time and wasted cost in litigating the issue of the governing law of the arbitration agreement before going on to determine a substantive dispute.

For further information, please contact Alastair Henderson, Partner, Daniel Waldek, Senior Associate, or your usual Herbert Smith Freehills contact.