“Arbitration In Shanghai” Means Shanghai is Seat – Singapore CA Overturns HC

On 9th July 2019, we reported the decision of the Singapore High Court in BNA v BNB (see here), where the Court interpreted a provision for “arbitration in Shanghai” to be an agreement for a Singapore-seated arbitration with hearings in Shanghai.  Leave to appeal the decision was granted.

The Court of Appeal heard the appeal on 15 October 2019, and on 27 December 2019, in BNA v BNB [2019] SGCA 84, the Singapore Court of Appeal delivered its written judgment overturning the High Court’s decision, finding that Shanghai was clearly intended as the seat of arbitration. Steven Chong JA delivered the judgment of the Court of Appeal. At para 4, the Court set out the issue:

“This appeal arose from a dispute over the proper interpretation of an arbitration agreement that was indeed the product of negotiations and compromise between the parties. It came before the Singapore courts because the majority of the tribunal in its jurisdictional decision found Singapore to be the seat of the arbitration. This finding was affirmed by the High Court. We heard the appeal on 15 October 2019 and allowed it to the extent that we found that Shanghai was the seat of the arbitration instead. The impact of our decision made it inappropriate for us to decide whether the arbitration agreement was invalid under what we determined to be the governing law of the arbitration agreement, ie, the law of the People’s Republic of China (the “PRC”). In our view, any such determination should rightly be decided by the relevant PRC court as the seat court applying PRC law.”

The crux of the jurisdictional dispute before the tribunal was whether the proper law of the arbitration agreement was Singapore law, or PRC law. The relevant arbitration agreement provided, inter alia:

“…it is agreed by both parties that such disputes shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai, which will be conducted in accordance with its Arbitration Rules…”

The appellant took the position that PRC law was the proper law, but the respondents contended that it was Singapore law instead. The CA noted that it was common ground before the High Court that the appropriate legal framework for determining the proper law of an arbitration agreement was the three-stage framework set out by the High Court in BCY v BCZ [2017] 3 SLR 357, being: (i) whether the parties had expressly chosen a law to govern the arbitration agreement; (ii) whether the parties had made an implied choice of proper law for the arbitration agreement; and (iii) if the parties have made no express or implied choice of proper law that the proper law will be the system of law with which the contract has the closest and most real connection.

The Appellant’s case

  • That the dispute could be resolved at the first stage of the BCY framework. Its position was that an express choice of PRC law to govern the arbitration agreement had been made by the parties, because Art 14.1 expressly provided that the Takeout Agreement “shall be governed by the laws of the [PRC]”, and Art 14 was a provision entitled “Disputes”, thus extending that choice of law not only to the substantive contract, ie, the Takeout Agreement, but also to the arbitration agreement in Art 14.2. The appellant also disagreed with the Judge that separability had any role to play when neither party challenged the validity of the Takeout Agreement.
  • Alternatively, the appellant contended that the parties had made an implied choice of PRC law as the proper law at the second stage of the BCY inquiry. The starting point was that the law of the Takeout Agreement, PRC Law, applied to the arbitration agreement, and there was nothing to displace it. The seat of the arbitration was Shanghai, and the mere reference to the SIAC Rules did not make Singapore the seat. The appellant also agreed with the Judge’s refusal to admit evidence of the parties’ pre-contractual negotiations because these were excluded by the entire agreement clause and the evidence was, in any event, unreliable.
  • If it was necessary to go to the third stage of the BCY inquiry, the appellant also contended that the law with the closest and most real connection to the dispute was PRC law.

The Respondent’s Case

  • The Judge was correct in finding at the first stage of the BCY inquiry that no express choice of the proper law of the arbitration agreement had been made.
  • At the second stage of the BCY framework, the respondents also aligned themselves with the Judge’s analysis that the selection of the SIAC Rules had also incorporated the default choice of Singapore as the seat of the arbitration. The respondents went further, however, in also arguing that the Judge should have admitted the evidence of the parties’ pre-contractual negotiations, which would have strengthened this finding. Citing BQP v BQQ [2018] 4 SLR 1364 (“BQP”), the respondents contended that there was, in fact, no prohibition against such material being admitted, because the exclusionary rule did not apply at all in a case arising out of arbitration such as this. The pre-contractual negotiations would show that the parties had always intended to have their disputes arbitrated in a neutral forum, which in this case meant Singapore.

The Court of Appeal

The CA affirmed the BCY framework for determining the proper law of the arbitration agreement, mirroring the framework set out by the English Court of Appeal in Sulamérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102. It is worth setting out the CA’s comments in respect of each of the stages:

“At the first stage of the test, the Court examines whether the parties had expressly chosen the proper law of the arbitration agreement. If they have, the inquiry ends there. This is uncontroversial and is nothing more than giving effect to the parties’ agreement that that law should govern the arbitration agreement.” [46]

“At the second stage of the test, in the absence of an express choice, the Court examines if the parties had made an implied choice of the proper law to govern their arbitration agreement. We note that both parties accepted that the starting point in determining the implied choice ought to be the law of the substantive contract where the arbitration agreement was integrated into and formed part of the substantive contract. This is also in line with two other High Court decisions. In Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] 3 SLR 267 (“Dyna-Jet”), Vinodh Coomaraswamy J noted, with regard to an arbitration agreement found in a contract governed by English law, that that meant that the arbitration agreement, too, was governed by English law. Citing Sulamérica, Coomaraswamy J observed that “there [was] no reason… to move beyond the starting assumption that the parties intended their arbitration agreement to be governed by the proper law of the broader contract in which it is found”: Dyna-Jet at [31]. Similarly, in BMO v BMP [2017] SGHC 127, Belinda Ang Saw Ean J aligned herself with BCY and considered that BCY provided “useful guidance for courts tasked with determining the law governing arbitration agreements”: at [39]. Although the appeal against the BMO decision was allowed, our grounds did not question the correctness of BCY: see Marty Ltd v Hualon Corp (Malaysia) Sdn Bhd (receiver and manager appointed) [2018] 2 SLR 1207.” [47]

“If neither an express choice nor an implied choice of the proper law of the arbitration agreement can be discerned, the third stage of the BCY framework provides that the system of law with which the arbitration agreement has its closest and most real connection will be the proper law: see BCY at [40], citing Sulamérica at [9] and [25]. We accept that this last step does involve the judicial imputation of a choice of law for the arbitration agreement, because the court only arrives at this stage of the analysis if it has found that the parties have entirely failed to select a proper law themselves, whether expressly or impliedly: GD at [56]. We agree with the Judge below that this judicial imputation is justified, however, because it rests on the underlying premise that the parties would have, if they had addressed their minds to it, selected the law which has the closest and most real connection to the arbitration agreement. The third stage permits the court to impute to the parties “only that law which can plausibly be imputed to the parties”.” [48]

Applying the BCY framework, the Court of Appeal found:

  • That the Judge was right to find that the parties had not made an express choice of law for the arbitration agreement, this despite the fact that the relevant clause provided that the underlying agreement expressly stated that it would be governed by PRC law. The CA stated [59] that by:

“merely specifying in Art 14.1 that the Takeout Agreement “shall be governed by the laws of the [PRC]” is, in our view, insufficient to constitute an express choice of the proper law of the arbitration agreement in Art 14.2.”

And [61]:

“…the approaches of the courts in BCY and Sulamérica reveal that an express choice of the proper law of the main contract does not, in and of itself, also constitute the proper law of the arbitration agreement. Instead, because it is possible for parties to expressly provide for a proper law of the arbitration agreement (BCY at [59]), and because it is only a “natural inference” – and not a legal conclusion in and of itself – that in the absence of such specific provision the law governing the substantive contract is also presumed to govern the arbitration agreement (Sulamérica at [11]), the express choice of the proper law of the main contract is only a “strong indicator of the governing law of the arbitration agreement unless there are indications to the contrary”: BCY at [65].”

  • That the Judge was wrong in relation to the application of stage 2 of the test. At [65] the CA stated:

In our judgment, the natural meaning of the phrase “arbitration in Shanghai” is that Shanghai is the seat of the arbitration…. The seat of an arbitration is essential to arbitration law. Its significance lies in the fact that for legal reasons the arbitration will be regarded as situated in the state or territory of the seat, and the choice of seat also identifies the state or territory whose laws will govern the arbitral process, ie, the curial law of the arbitration: Birgen Air at [24]. The seat will also be considered to be the jurisdiction in which the arbitral award is “made” for the purposes of the New York Convention. The venue(s) where an arbitration might be held, on the other hand, have far less significance. The venue is simply the physical place where the arbitral tribunal will have to hold its hearings and meetings, if the parties so provide for it. It is not common for parties to do so, and it is certainly not essential that parties specify a venue; the choice of venue is likely to be motivated by mundane considerations of logistical and practical convenience and cost. For the same reason, venues of the arbitration, unlike a seat, can change in the life of any arbitral process. Given the stark contrast in the legal significance of the seat as compared to that of the venue, we think therefore that where parties specify only one geographical location in an arbitration agreement, and particularly where, as here, the parties express a choice for “arbitration in [that location]”, that should most naturally be construed as a reference to the parties’ choice of seat.”

The CA stated that its view was fortified by a line of authorities which have construed similar geographical references in substantially the same way, referring to:

  • Naviera Amazonica Peruana SA v Compania Internacional de Seguros del Peru [1988] 1 Lloyd’s Rep 116, where the phrase “arbitration in London” was construed as a colloquial way of referring to London as the seat of the arbitration;
  • ABB Lummus Global Ltd v Keppel Fels Ltd [1999] 2 Lloyd’s Rep 24, where the phrase “arbitration in London” or “arbitration in New York” was construed as ordinary or colloquial language describing the seat of the arbitration.
  • Shagang South-Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics [2015] 1 Lloyd’s Rep 504, where the Court took the view that the phrase “Arbitration to be held in Hong Kong. English Law to be applied” ordinarily carried with it an implied choice of Hong Kong as the seat of the arbitration, and of the application of Hong Kong law as the curial law, and that clear words or significant contrary indicia would be necessary to establish that some other seat or curial law had been agreed, and the provision that English law was to be applied was insufficient to amount to such contrary indicia.

The CA also referred to academic commentaries [68]:

“In addition, the approach we take also finds support in the academic commentaries. David Joseph at para 6.40 notes that “certain expressions such as ‘arbitration in London’ or ‘arbitration in New York’ will without more be taken as colloquial expressions for a choice of seat”. Notably as well, Gary Born, International Commercial Arbitration (Kluwer Law International, 2014, 2nd Ed) states the following (at pp 2074–2075):

“… [P]arties sometimes refer merely to a geographic location, without specifying for what purpose (e.g., as the arbitral seat, location for hearings, location of an arbitral institution, or something else.) In general, courts and arbitral institutions interpret such references as specifying the arbitral seat. For example, an arbitration clause which read “Arbitration: Hamburg” with no explanation, has been held to constitute an agreement on the place of arbitration. [emphasis added in italics and bold italics].”

The situation at hand is precisely that described in the extract above. Article 14.2 provides for “arbitration in Shanghai” without specifying the purpose of the reference to Shanghai. The general approach therefore is to interpret the reference as specifying Shanghai as the seat.”

The CA accepted, as Hamblen J did in Shagang, that the natural reading could be displaced by contrary indicia, but that no such contrary indicia existed on the facts.

The CA concluded [94]:

“The sum result of the above analysis is that Shanghai is the seat. The natural reading of the phrase “arbitration in Shanghai” is that Shanghai is the seat of the arbitration, and there are no contrary indicia to point away from this natural reading. This in turn means that the law of the seat and the parties’ implied choice of proper law of the arbitration agreement are one and the same: PRC law. It follows that PRC law is the proper law of the arbitration agreement. Hence the question whether the implied choice of PRC law as the proper law should be displaced by the law of the seat in order not to nullify the parties’ intention to arbitrate simply does not arise. There is also no need to go into the third stage of the BCY framework.”

And [104]:

“The essential point we make is that the parties’ manifest intention to arbitrate is not to be given effect at all costs. The parties did not only choose to arbitrate – they chose to arbitrate in a certain way, in a certain place, under the administration of a certain arbitral institution. Those all have to be given effect to by a process of construction which critically gives the words of the arbitration agreement their natural meaning, unless there are sufficient contrary indicia to displace that reading. If the result of this process of construction is that the arbitration agreement is unworkable, then the parties must live with the consequences of their decision.”

See also the review by Herbert Smith Freehills, who conclude:

“The COA’s decision provides a welcome confirmation that the Singapore courts will not uphold the validity of an arbitration clause at all costs.  The case also highlights some important takeaways:

First, when it comes to drafting arbitration agreements it is critical to be as clear as possible as to the choice of legal seat and the law that governs the arbitration agreement (in addition to the law governing the balance of a contract). It is particularly important to include drafting on the choice of governing law where the law of the seat and the law governing the contract are different, as is common in many cross border transactions.

Second, parties should take extra care to seek advice on the negotiation and drafting of arbitration clauses for China related contracts….

Third, if a party wishes to rely on extrinsic evidence to support arguments in relation to the validity of an arbitration clause where the seat of arbitration is in Singapore, it should attempt to do so during the arbitration and not belatedly during any jurisdictional review or set aside proceedings before the Singapore courts. Proceedings before the HC or the COA are not proceedings “before an arbitrator” and, therefore, the parol evidence rule in the Evidence Act may prevent the admissibility of such evidence.

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Hong Kong Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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