Applicable law of arbitration agreements: Singapore revisits the English case of Sulamérica

In the recent case of BCY v BCZ [2016] SGHC 249, the Singapore High Court considered whether there was a valid and binding arbitration agreement in the context of a negotiated but unsigned contract. The Court comprehensively summarised Singapore's position on determining the governing law of an arbitration agreement, holding that there is a strong presumption that this will be the governing law of the main contract unless this would negate the arbitration agreement.  The judgment provides clarity for clients negotiating contracts which provide for disputes to be resolved by Singapore seated arbitration.

Background

The case concerned a proposed sale of shares between the Plaintiff (a foreign bank and owner of the shares), the Defendant (a special-purpose vehicle incorporated specifically for the transaction) and Y (a related foreign company). A Sale and Purchase Agreement ("SPA") was negotiated, seven drafts of which were circulated between the parties as discussions progressed.

The first draft SPA provided for New York law as the governing law of the SPA. This choice remained the same throughout all seven drafts. The first draft also provided for any disputes arising out of or in connection with the SPA to be referred to the New York courts. Following a series of discussions between the parties, a second draft was sent to the Plaintiff providing instead for arbitration under the ICC Rules "in Singapore". By the fourth draft of the SPA, the clause had been amended to specify that "[t]he seat of the arbitration shall be Singapore", and a third party, W, was added to the SPA.

No further amendments were made to the dispute resolution clause, and a sixth draft was sent to the Plaintiff's external legal counsel, copied to the Defendant, stating that the SPA was "ready to sign". However, W replied on the same day that its legal counsel was still "finalising the draft", and further negotiations ensued. A seventh draft was circulated by W as the “final and agreed SPA” which the Defendant and W were "available to sign". However, the Plaintiff stated that it had decided not to proceed with the sale, and the SPA was never executed.

The Arbitration

The Defendant and Y commenced ICC arbitration against the Plaintiff claiming (amongst others) damages for breach of the SPA. The Plaintiff objected to the Tribunal's jurisdictional on the basis that no arbitration agreement (or SPA) had been concluded between the parties.

In order to determine whether there was an arbitration agreement, the Tribunal had to first determine whether the law governing the putative arbitration agreement was New York law (as the intended governing law of the SPA) or Singapore law (as the law of the seat). Following Sulamérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 (discussed below), the Tribunal found that the arbitration agreement was governed by New York law.

Applying New York law on contract formation accordingly, the Tribunal found that an arbitration agreement came into existence between the Plaintiff and the Defendant (but not W) when the Plaintiff indicated its preparedness to sign the sixth draft of the SPA.

The Plaintiff appealed this decision to the Singapore High Court under Article 10(3) of the International Arbitration Act (Cap 143A, 2002 Rev Ed), contending that the Tribunal lacked jurisdiction due to the lack of any valid agreement to arbitrate under Singapore law as the law of the seat.

Singapore Court's decision

The Court first considered the governing law of the putative arbitration agreement, this being a necessary precursor to deciding whether an agreement had come into existence under that law. While both parties acknowledged that there was no material difference between New York and Singapore law on the formation of an arbitration agreement, the Court nonetheless considered the issues given the divergence of authorities and academic opinion on the subject.

Law governing the arbitration agreement – governing law vs seat

It was common ground that the governing law of an arbitration agreement is determined by a three-step test (per Sulamérica) of: (1) the parties' express choice; (2) the implied choice of the parties as gleaned from their intentions at the time of contracting; or (3) the system of law with which the arbitration agreement has the closest and most real connection. Since there was no express choice in the SPA, the dispute concerned the application of the second stage, and whether the parties impliedly chose the intended governing law of the SPA (New York law) or the law of the seat of the arbitration (Singapore law). 

The Court confirmed that that the correct position is that stated in Sulamérica: in the absence of any indication to the contrary, parties are assumed to have intended the whole of their relationship to be governed by the same system of law, and the natural inference is that the proper law of the main contract should also govern the arbitration agreement. While seat choice could be a mitigating factor, it would be insufficient in and of itself to negate this presumption.

The Court emphasised that the governing law of the main contract is a "strong indicator" of the governing law of the arbitration agreement. In particular, where an arbitration agreement is a clause forming part of a main contract (as opposed to a free-standing agreement), it is reasonable to assume that the parties intend their entire relationship to be governed by the same system of law – if the intention was otherwise it is not unreasonable to expect them to specifically provide so. Further, the Court noted that "the governing law of the main contract should only be displaced if the consequences of choosing it as the governing law of the arbitration agreement would negate the arbitration agreement even though the parties have themselves evinced a clear intention to be bound to arbitrate their disputes".

The Court's decision marks a different approach to that taken in the previous first instance case in Singapore: FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12, which we previously considered here. In brief, FirstLink held that the presumption is that the law of the seat should be the governing law of the arbitration agreement, rather than the parties' chosen substantive governing law.

The Court in BCY "disagree[d] … that FirstLink represents the law in Singapore". It considered that the departure in that case from Sulamérica was "strictly unnecessary", and highlighted that while the law of a chosen seat may be neutral from a procedural perspective, it does not necessarily follow that it is neutral from a  substantive perspective, i.e. when determining the formation of an arbitration agreement. The Court found that the approach in Sulamérica was supported by authority and "is, in any event, preferable as a matter of principle".

The Court thus found that the arbitration agreement was clearly intended to be part of the SPA. There was therefore a presumption was that it was governed by New York law, which had not been rebutted. Applying New York law to the arbitration agreement, the High Court found that the facts were not sufficient to create a binding arbitration agreement between the parties, and accordingly, the Tribunal did not have the jurisdiction to hear the claims.

Separability

Interestingly, the Court also considered the relevance of the doctrine of separability, and whether the principle (i.e. that an arbitration agreement is separable from the main agreement) could justify preferring the law of the seat as the law governing the arbitration agreement. However, the Court found that the purpose of separability is to give effect to parties' expectation that their arbitration clause will survive even if the main agreement falls away, for example due to alleged or actual invalidity. Separability does not provide for a separate and distinct agreement in and of itself from the time the main contract is formed – this would not reflect commercial reality. In this sense the arbitration agreement is separable, not separate.

Comment

Disputes relating to the law governing an arbitration agreement are relatively uncommon, and this is reflected by a historical lack of judicial attention to the topic. However, as this case demonstrates, it can become an issue of pivotal and strategic importance.

This issue is increasingly recognised by arbitral institutions, some of which have started including provisions in their model clauses which provide for the parties to stipulate the applicable law. For example, the HKIAC recently amended its model arbitration clause to specify "[t]he law of this arbitration clause shall be ...". On the other hand, the new SIAC Rules 2016 have not adopted the same clarification.

To avoid any uncertainty over the issue, arbitration clauses should specify – in addition to the main governing law of the contract and the seat of the arbitration – what law should govern the arbitration agreement.

Singapore's approach to procedural issues in arbitration is of particular relevance given its prominence as a choice of seat. The Court's decision in BCY v BCZ disapproves of the previous position in FirstLink, and strongly suggests that the Singapore approach mirrors that in Sulamérica. However, as both FirstLink and BCY are first-instance decisions of the High Court, it remains to be seen what the final word of the Singapore Court of Appeal will be.

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