Singapore High Court holds mandatory arbitration agreement in company constitution operative despite earlier litigation

The Singapore High Court ("Singapore Court") has clarified a number of issues concerning the content, scope and operability of arbitration agreements.  Of particular note is the Singapore Court's view on the extent to which a party's choice to subject a dispute, which may otherwise be the subject of an arbitration agreement, to litigation may act as a bar to that party subsequently choosing to refer the dispute to arbitration as a result of the doctrines of waiver or promissory estoppel. The Singapore Court also considered a number of additional issues which serve as a useful reminder as to best practice in drafting and enforcing arbitration agreements.   We discuss the case and the practical issues flowing from it in detail below. 

Facts

In BMO v BMP [2017] SGHC 127 the underlying dispute concerned the ownership of shares in a Vietnamese subsidiary of BMP (the "Subsidiary").  The Defendant, BMP, alleged that its shareholding in the Subsidiary had been substantially reduced by a series of unauthorized and unlawful share transfers which had eventually resulted in the Plaintiff, BMO, becoming the Subsidiary's majority shareholder.  The share transfers were purportedly effected by two individual shareholders in the Plaintiff, with the assistance of the Plaintiff itself.

In July 2014, the Defendant commenced litigation against the Plaintiff and the two individual shareholders in the courts of the British Virgin Islands in relation to the share transfers (the "BVI Litigation"). The Plaintiff acknowledged service of the claim and the parties made a series of interlocutory applications and filings in the courts of the British Virgin Islands.  Subsequently, in May 2015, the Defendant commenced arbitration against the Plaintiff alone (the "Arbitration"), pursuing the same cause of action and relief as it had sought against the Plaintiff in the BVI Litigation.

In March 2016, the BVI Litigation came to an end after the Defendant's claim was struck out.  In the Arbitration, the Plaintiff challenged the jurisdiction of the Tribunal to determine the Defendant's claims, on the basis that the Defendant had lost the right to arbitrate by its decision to pursue the BVI Litigation.  In April 2016, the Tribunal held that it had jurisdiction and ordered the Arbitration to proceed on the merits of the case.  The Plaintiff applied to the Singapore Court to set aside the Tribunal's ruling on its jurisdiction.

Decision of the Singapore High Court

The Singapore Court dismissed the Plaintiff's application and upheld the Tribunal's determination on jurisdiction.  In giving its decision, the Singapore Court discussed a number of important issues. 

1. Governing law where no express choice is made

The arbitration agreement in this case was contained in the Subsidiary's company charter (i.e. the Subsidiary's constitution), which included no express choice of governing law.  The Court therefore had to determine the proper law of the charter and the arbitration agreement within it. 

The Singapore Court considered the historically divergent case law on this topic, specifically the English case SulAmérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 and the Singapore case FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12.  In short, while SulAmérica stands for the proposition that there is a rebuttable presumption that an implied choice of governing law of the arbitration agreement is the law of the substantive contract, FirstLink took the position that in a competition between an expressly chosen substantive law and the law of the chosen seat of arbitration, it is the law of the chosen seat that prevails.  Both of those decisions have been recently considered by the Singapore Court in BCY v BCZ [2016] SGHC 249 and Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] 3 SLR 267.  In both BCY and Dyna-Jet, the Singapore Court preferred the approach taken in SulAmérica.  Those decisions were discussed previously on this blog (see posts on BCY and Dyna-Jet).

In this case, the Singapore Court determined that the parties had impliedly chosen Vietnamese law to govern the charter on the basis that the charter included references in certain clauses to the requirements of Vietnamese law and it is unlikely that that the parties would intend for different laws to govern different parts of the charter.  Thus, the Singapore Court again adopted the logic of SulAmérica and applied it to the facts of the case holding that, as the parties' impliedly chose Vietnamese law for the substance of the charter, Vietnamese law also governed the arbitration agreement contained within it.

2. Scope of the arbitration agreement contained in a company constitutional document

The Plaintiff argued that the Defendant's claims in the Arbitration did not fall within the scope of the arbitration agreement in the charter. The Singapore Court reaffirmed the broad approach to interpreting the scope of arbitration agreements, holding that arbitration agreements "should be generously construed such that all manner of claims, whether common law or statutory, should be regarded as falling within their scope unless there is good reason to conclude otherwise".

The Singapore Court also noted that the arbitration agreement used the phrase "all arising disputes" which could refer to all disputes "arising under", "arising out of", "in connection with", "connected with" or "relating to" the charter. The arbitration agreement was therefore wide enough to extend to disputes between the members of the Subsidiary that were not directly premised on the rights and duties created by the charter. 

3. Had the Defendant lost the right to arbitrate?

In advancing its case that the Tribunal did not have jurisdiction, the Plaintiff relied on the fact that the Defendant had commenced the BVI Litigation to support three legal arguments:

1. first, the Defendant had elected not to proceed to arbitration and had thereby waived its right to arbitrate;
2. second, the Defendant had committed a repudiatory breach of the arbitration agreement; and/or
3. third, the Defendant was estopped from relying on the arbitration agreement.

1. Waiver

The Plaintiff argued that by commencing the BVI Litigation, the Defendant had elected not to proceed to arbitration and had thereby waived its right to arbitrate.  The Singapore Court considered this issue and made the following key observations:

• The terms "waiver" and "election" share an immediate and intimate link: the consequence of election, if established, is the abandonment (i.e. the waiver) of a right.
• It follows that there can be no "election" when there is no choice to be exercised. There is only election when a party with knowledge of its rights chooses between two inconsistent rights.
• In the context of a breach of contract, waiver by election focuses on the conduct of the innocent party after the wrongdoing party's breach.  The choice between the two inconsistent rights belongs to the innocent party: namely, affirmation or termination of the contract.

Applying these principles, the Singapore Court held that there was no election available to the Defendant, as the party which had breached the contract by starting the BVI Litigation in breach of the arbitration agreement.  It was the Plaintiff, which then faced a choice between two inconsistent rights (to affirm or terminate) and which, if/when it exercised one of those rights, would be said to have made a waiver by election.  The Plaintiff's argument on waiver by election therefore failed.

The Singapore Court noted that if the arbitration agreement had given the Defendant a choice between arbitration and litigation, and if the Defendant had then initiated the BVI Litigation instead of choosing to arbitrate, this would have amounted to a different type of waiver, namely the unilateral waiver of one of two valid but inconsistent rights.  However, that was not the situation in this case.  Here, it was not correct to argue that a simple breach of contract could amount to a waiver by election.

2. Repudiation

The Plaintiff argued that the Defendant's commencement of the BVI Litigation was a repudiatory breach of the arbitration agreement, which the Plaintiff had accepted through its participation in the BVI Litigation.  The Singapore Court also rejected this view, finding that breach of an arbitration agreement is not necessarily repudiatory in nature if there was some reason for the breach, such as confusion as to the correct course of action to take to purse a claim.  As in any other case of repudiation, it is necessary to analyse the facts in order to understand whether they indicate an intention not to be bound by the contract.  If not, the breach is not repudiatory. 

In this case, the Singapore Court accepted that the reason for the Defendant's decision to commence the BVI Litigation was that it was simply not aware of its obligation to arbitrate and, therefore, that there was no repudiatory breach.  In reaching this decision, the Singapore Court was mindful that after the Arbitration commenced, the Defendant had applied for a stay of the BVI Litigation in favour of the Arbitration and, therefore, this was not a case where the Defendant was maintaining parallel proceedings in breach of the arbitration agreement.

3. Estoppel

Finally, the Singapore Court considered whether the Defendant, by commencing the BVI Litigation, had represented that it would no longer be relying on the arbitration agreement, such that it was precluded by promissory estoppel from taking a contrary position.

The Singapore Court clarified that the doctrine of promissory estoppel is applicable only in relation to a promise not to enforce legal rights.  The Defendant's commencement of the BVI Litigation was not a forgoing of any right and therefore the doctrine of promissory estoppel did not apply. Estoppel, like waiver by election, is an argument that may be raised against a party seeking to enforce its rights in response to another party's breach. The position here was reversed: the argument was raised by, not against, the party seeking to enforce its rights.

Conclusions and practical guidance

The decision in BMO v BMP provides a detailed legal analysis of a number of important issues with considerable practical impact.  Specifically, this case serves as a reminder of the following points:

• There is now a trend of the Singapore Courts preferring to adopt the position in SulAmérica in relation to the applicable choice of governing law for arbitration agreements.  However, it remains to be seen what position the Singapore Court of Appeal will take.  In any event, specifying – in addition to the chosen seat of the arbitration – what law should govern the arbitration agreement, will help avoid uncertainty.  Parties should therefore take great care to consider carefully what law should govern the arbitration agreement, regardless of whether the arbitration agreement is contained in a commercial contract, a shareholders' agreement or a company's constitutional documents.
• The Singapore Courts will continue to interpret arbitration agreements broadly so as to give maximum effect to parties' decision to arbitrate.  Parties should therefore carefully consider the precise scope of disputes which are intended to be the subject of an arbitration clause.  Where the scope is to be restricted, clear and effective language should be used to achieve any such restriction.
• When determining the most appropriate forum in which to commence proceedings in relation to a dispute, clients should carefully review all relevant documentation and obtain advice as whether the dispute is required to be commenced by arbitration or litigation.  Commencing a dispute in the wrong forum can result in wasted time and costs and, potentially, the loss of substantive as well as procedural rights.

For further information about this case or arbitration in general, please contact Alastair Henderson, Partner, Daniel Waldek, Senior Associate, or your usual Herbert Smith Freehills contact.