FEATURE


How Should “Bare” Arbitration Clauses be Enforced by the Courts?1



K.V.C. Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd [2017] SGHC 32
 
In K.V.C. Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd [2017] SGHC 32, the Singapore High Court enforced so-called “bare” arbitration clauses, ie, clauses that specify neither the place of arbitration nor the means of appointing arbitrators. This note questions the Court’s suggestion that, even when the place of arbitration is unclear or not yet determined, the IAA nevertheless allows the President of the SIAC Court to act as the statutory appointing authority. Could the case have been decided differently?

In Singapore, the President of the SIAC Court of Arbitration is designated as the statutory appointing authority under Section 8(2) of Singapore’s International Arbitration Act (‘IAA’) (Cap. 143A) and Article 11(3) of the Model Law. Critically, Article 11(3) applies only if the place of arbitration is Singapore.
 
In K.V.C. Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd and another suit [2017] SGHC 32, the Singapore High Court enforced so-called “bare” arbitration clauses, ie clauses that specify neither the place of arbitration nor the means of appointing arbitrators. In so doing, the Court considered that, even when the place of arbitration is unclear or not yet determined, the IAA nevertheless allows the President of the SIAC Court to act as the statutory appointing authority.
 
While the ultimate pro-arbitration ruling will not come as a surprise to readers, it is not an easy decision. This note briefly highlights three select issues which may have affected the outcome of the case:
 
1. Does Article 11(3) of the Model Law apply when there is no agreement that Singapore is the place of arbitration?
 
2. What condition could the Courts have applied when granting a stay in favour of a “bare” arbitration clause?
 
3. What is the basis for applying Singapore law when examining the arbitration clauses at hand?
 
Facts
 
The case involved two contracts for the sale and purchase of rice. Under each contract, the sellers were different, but the buyer was the same. Each of the two contracts contained an arbitration clause. Both arbitration clauses are similar. The arbitration clause in the first contract reads as follows:
 
The Seller and the Buyer agree that all disputes arising out of or in connection with this agreement that cannot be settled by discussion and mutual agreement shall be referred to and finally resolved by arbitration as per Indian Contract Rules.
 
The arbitration clause in the second contract reads as follows:
 
The Seller and the Buyer agree that all disputes arising out of or in connection with this agreement that cannot be settled by discussion and mutual agreement shall be referred to and finally resolved by arbitration as per Singapore Contract Rules.
 
Disputes arose between the sellers and buyer. Initially, both sellers proposed ad hoc arbitration in Singapore with a sole arbitrator. The buyer refused to cooperate. This led to the sellers commencing litigation before the Singapore courts. The buyer applied for a stay of proceedings in favour of arbitration under s 6 of the IAA.
 
The High Court characterised the arbitration clauses as “bare” arbitration clauses which do not specify either the place of arbitration or the means of appointing arbitrators. The Court observed that the enforcement of “bare” arbitration clauses would give rise to practical difficulties over how the arbitral tribunal would be appointed. Under s 8 of the IAA and Article 11(3) of the Model Law, the President of the SIAC Court of Arbitration is statutorily designated as the appointing authority. By virtue of Article 1(2) of the Model Law, this power applies “only if place of arbitration is [Singapore]”. It is unclear whether Article 11(3) applies where the place of arbitration is unclear or not yet determined.
 
Issues
 
The Court framed two issues as follows:
 
First, whether, notwithstanding the absence of provisions in the IAA empowering the President of the SIAC Court of Arbitration or the Court to make appointments in cases where the place of arbitration is unclear or not yet determined, avenues exist under Singapore law to break a deadlock between parties concerning the appointment of the arbitral tribunal.
 
Second, whether the inability to establish the arbitral tribunal without the cooperation of the buyer renders the arbitration clauses in question “incapable of being performed”.
 
The Court reviewed the travaux of the Model Law carefully. The Court’s decision can be summarised as follows:
 
First, the effect of Article 11(3) is that the President of the SIAC Court cannot act in a case where it is clear that the place of arbitration is not Singapore. However, it does not necessarily follow that the President of the SIAC Court is powerless to assist in cases where the place of arbitration is unclear or not yet determined.
 
Second, notwithstanding the silence in the IAA and Model Law, there is a prima facie case that, even when the place of arbitration is unclear or not yet determined, the President of the SIAC Court can still act as the “statutory appointing authority”.
 
Third, before the President of the SIAC Court exercises his statutory powers, he needs to be satisfied that there is a prima facie case that Article 11(3) applies, viz Singapore is the place of arbitration.
 
Fourth, considering the arbitration clauses at hand, the President of the SIAC Court can form a prima facie view that his powers of appointment under Article 11(3) applies.
 
Fifth, even if the President of the SIAC Court declines to appoint the arbitrators for whatever reason, the Singapore court retains “residual jurisdiction” to ensure that the arbitration under both arbitration clauses proceed notwithstanding any deadlock between the parties on the appointment of arbitrators.
 
As the Court answered the first issue in the affirmative, the Court stated that the second issue did not arise.
 
Before the Court, the buyer’s position was that, the President of the SIAC Court can appoint the arbitrator in the absence of mutual agreement. The Court ultimately ordered a stay but on a condition. The condition was that the buyer will raise no objections to the President of the SIAC Court’s jurisdiction to appoint an arbitrator under Article 11(3) of the Model Law in the event that the parties cannot reach agreement on the appointment. 
 
Further, if the President of the SIAC Court declines to make an appointment, either party may apply for further orders or directions as part of the Court’s “residual jurisdiction”.
 
Comments
 
A. Can Article 11(3) of the Model Law apply when there is no agreement on the place of arbitration?
 
In the Court’s view, the travaux suggests that the answer is yes.
 
In this writer’s view, the travaux can be read differently. Where there is no agreement on the place of arbitration, such as the case at hand, Article 11(3) arguably does not apply — this is left to domestic laws. Unlike French and English arbitration laws, there is no other provision in Singapore’s IAA empowering the President of the SIAC Court to act as the appointing authority.
 
As the Court recognised, the travaux states that “the prevailing view was that the model law should not deal with court assistance to be available before the determination of the place of arbitration”. The USSR and United States representatives in particular expressed the view that “the case where the place of arbitration had not yet been agreed upon should remain outside the scope of the Model Law”. 
 
In a paragraph not cited by the Court, the travaux records that “[i]n the subsequent discussion concerning the territorial scope of application of the model law, the Commission decided not to extend the applicability of articles 11, 13, 14 to the time before the place of arbitration was determined”2
 
B. Could a different condition have been imposed by the Court in granting the stay?
 
Ultimately, the Court enforced the arbitration clauses under a condition that the buyer will raise no objections to the SIAC President’s jurisdiction to appoint an arbitrator under Article 11(3) of the Model Law in the event that the parties cannot reach agreement on the appointment. 
 
There are a number of difficulties. First, it is doubtful whether Article 11(3) is applicable in the first place. Second, it is unclear how Article 11(3) should be applied because Article 11(3), on its terms, requires clarity on the number of arbitrators. It is further unclear on what basis the Court assumed that the Tribunal(s) in this case should comprise a sole arbitrator. If that assumption was based on section 9 of the IAA read with Article 10 of the Model Law, by virtue of Article 1(2) of the Model Law, section 9 and Article 10 arguably applies only if the place of arbitration is Singapore — which has not yet been determined in this case. 
 
Given the difficulties surrounding the applicability and application of Article 11(3), it is arguable the Court could have enforced the arbitration clauses on the facts of this case without having to invoke Article 11(3). Neither was it necessary to find that the Court enjoys some kind of “residual jurisdiction” not otherwise expressed in the IAA.
 
Returning to first principles, the Singapore apex Court in Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2015] SGCA 57 held that, a Court hearing a stay application under the IAA should grant a stay in favour of arbitration if the applicant can establish a prima facie case that:
 
1. there is a valid arbitration agreement between the parties to the Court proceedings;
 
2. the dispute in the Court proceedings (or any part thereof) falls within the scope of the arbitration agreement; and
 
3. the arbitration agreement is not null and void, inoperative or incapable of being performed.
 
To satisfy the first and third limbs above, in a case where the arbitration clause is a typical “model” arbitration clause commended by major arbitral institutions, an applicant seeking a stay likely does not have to do much more than show the existence of that clause in a contract signed by both parties. 
 
However, in a case where the arbitration clause is a “bare” arbitration clause, the applicant seeking a stay could be asked how the “bare” arbitration clause could be capable of being performed. After a position is taken by the applicant on that issue, assuming all other requirements for a stay are met, a stay could be granted on the condition that the applicant abide by the position it had taken before the Court.3
 
For instance, in the present case, the buyer took the position that the clause was capable of being performed because the President of the SIAC Court could appoint the arbitrator. There appears to have been no dispute between the parties that any arbitral tribunal under each of the arbitration clauses shall comprise a sole arbitrator. Given these particular facts, the Court could have ordered a stay on the condition that the buyer will consent should the seller(s) propose that the parties appoint SIAC as the appointing authority to appoint a sole arbitrator under each of the arbitration clauses. 
 
Major arbitral institutions, such as SIAC and ICC, offer their services as appointing authority for ad hoc arbitrations upon the agreement of the parties and upon the payment of certain fees to the institution. Such powers of appointment can be consensual and not statutory in nature. Any appointment by the President of the SIAC Court would be based on the consensual subsequent agreement of the parties, and not pursuant to Article 11(3) of the Model Law. 
 
An additional benefit of this approach is that the President of the SIAC Court would not be left with the unenviable task of having to determine whether his statutory powers under Article 11(3) apply, and if so, how he should apply Article 11(3) when there is no clarity on the number of arbitrators in the first place.
 
C. Would there be a difference if foreign law was applied?
 
The Court examined both arbitration clauses in question through the lens of Singapore law. It is not obvious that Singapore law would be the law governing the arbitration agreements. The application of foreign law may have made a difference. Having said that, this case exposes the limits of the current choice-of-law methodology adopted by the Singapore and English courts.
 
The Singapore High Court has in recent decisions4 adopted the English choice-of-law rule in Sulamérica Cia Nacional de Seguros SA v Enesa Engelharia SA [2013] 1 WLR 102 for ascertaining the governing law of an arbitration agreement. That law is to be determined in accordance with a three-step test: 
 
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.
 
In those recent decisions, the Singapore High Court also endorsed the reasoning in Sulamérica, whereby if the arbitration clause was part of a main contract, the governing law of the main contract would generally be a strong indicator of the governing law of the arbitration agreement. The governing law of the main contract would be displaced, for example in favour of the law of the seat, if the consequences of choosing it as the governing law of the arbitration agreement would negate the arbitration agreement when the parties had evinced a clear intention to arbitrate. 
 
In the present case, not only did the arbitration clauses fail to stipulate the place of arbitration, the main contracts did not have an express governing law provision. The only connections with Singapore were that Singapore was the buyer’s place of incorporation and consequently payment would be effected in Singapore. The contracts otherwise involved Thai sellers delivering rice from Thailand to Africa.
 
In the case where the arbitration clause referred to “Indian Contract Rules”, it is arguable that was an express (albeit ineloquent) choice of Indian law to govern the main contract. Under the Sulamérica three-step test, that would be a strong indication that Indian law was an implied choice of the governing law of the arbitration agreement. One of the sellers, who was resisting the stay application, tendered a legal opinion by an Indian law firm. The legal opinion advised that no arbitration would lie in India nor would any Indian courts entertain any applications for arbitration by either of the parties under Indian arbitration law. The buyer did not tender any evidence to the contrary. It is therefore arguable that the Court should not grant a stay on the premise that the arbitration agreement was invalid under the law governing the arbitration agreement. 
 
On the other hand, it is arguable that the Court should not apply Indian law as the governing law of the arbitration agreement. This is because, even though the arbitration clause is “bare”, the clause evinces a clear intention to arbitrate. The application of Indian law as an implied choice of the governing law of the arbitration agreement should be displaced because it would negate the arbitration agreement when the parties had evinced a clear intention to arbitrate. What law should apply then? The parties did not stipulate a place of arbitration; it is not obvious that the law which the arbitration agreement had the closest and most real connection is, in fact, Singapore law.
 
It is unclear whether Singapore law was applied in this case for reasons of practicality, or by way of a presumption of similarity of laws in the absence of proof of foreign law. In any event, a choice-of-law analysis may have made a difference. Assume arguendo the buyer can show that the arbitration agreement is also invalid under the law which the arbitration agreement has the closest and most real connection. Sulamérica does not go so far to say that the Court can “displace” the law which the arbitration agreement has the closest and most real connection. On this analysis, the arbitration agreement would remain invalid. 
 
However, this is by no means a foregone conclusion. While one can deduce the law which the main sales contract has the closest and most real connection, it is not easy to discern — especially in the absence of a stipulated seat — the law which the arbitration agreement has the closest and most real connection. This case exposes the limits of the choice-of-law rule in Sulamérica.
 
Commentators have criticised the closest connection approach as one that is “characterised by an ex ante uncertainty coupled with an ex post unprincipled and arbitrary choice between the law of the seat or that governing the underlying contract”.5 Instead of applying such an unpredictable choice-of-law rule, commentators have argued that the Singapore courts should apply a “validation principle”6 embodied, for instance, by Article 178(2) of the Swiss Law on Private International Law. Article 178(2) provides as follows:
 
As regards its substance, an arbitration agreement shall be valid if it conforms either to the law chosen by the parties or to the law governing the subject matter of the dispute, in particular the law governing the main contract, or if it conforms to Swiss law. (emphasis added)
 
Should the choice-of-law rule embodied in Article 178(2) be accepted as part of Singapore law, it would provide a principled basis for the application of Singapore law in cases where the closest connection test in Sulamérica does not validate the arbitration agreement. One may have to await another occasion for the Singapore apex Court to grapple with the limits of Sulamérica.


 
Darius Chan
    Ascendant Legal LLC
    E-mail: [email protected]com
 
Notes

1 See Gary B Born, “The Law Governing International Arbitration Agreement: An International Perspective” (2014) 26 SAcLJ 814.

2 See Report of the UNCITRAL on the work of its 18th Session, 3-21 June 1985, UNCITRAL, Yearbook Volume XVI, U.N. Doc. A/CN.9/SER.A/1985, paragraph 111, accessible at https://documents-dds-ny.un.org/doc/UNDOC/GEN/N85 /325/11/PDF/N8532511.pdf?OpenElement

3 The Singapore High Court in Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] 3 SLR 267 highlighted there may be a potential inconsistency on the burden of proof articulated in Tomolugen and an earlier decision of the Singapore apex court in Tjong Very Sumito and others v Antig Investments Pte Ltd [2009] 4 SLR(R) 732. In Tjong Very Sumito, the Singapore apex court earlier held that the burden is on the party resisting the stay to show that the arbitration agreement is incapable of being performed. According to the High Court in Dyna-Jet, the party resisting the stay must establish that “no other conclusion on this issue is arguable”. Even if the legal burden may ultimately rest on the party resisting the stay, it would not be inconsistent for the applicant to articulate its position on how the “bare” arbitration clause could be capable of being performed.

4 BCY v BCZ [2017] 3 SLR 357; Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] 3 SLR 267. These cases took a different view from the earlier decision of FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12.

5 See Gary B Born, “The Law Governing International Arbitration Agreement: An International Perspective” (2014) 26 SAcLJ 814.

6 Ibid.