By YEO BOON TAT - Partner, Pinsent Masons MPillay LLP and TAN HAI SONG - Associate, MPillay
In this issue, we discuss two decisions, as follows:
- BCY V BCZ [2016] SGHC 249
- Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza Spa [2016] 5 SLR 455
These decisions highlight the pragmatic and commercially sensible approach taken by the Singapore Courts when asked to hear matters relating to on-going international arbitration proceedings.
BCY V BCZ [2016] SGHC 249
What law ought to govern an arbitration agreement, particularly where the law of the seat differs from the governing law of the main contract?
In a very well-reasoned decision, the High Court held that there is a presumption that the proper law of an arbitration agreement is the same as that of the main contract, preferring the approach of Moore-Bick LJ in Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] EWCA Civ 638 (“Sulamerica”) over its previous approach in FirstLink Investments Corp Ltd v GT Payment Ltd and other [2014] SGHCR 12 (“First Link”).
Background Facts
This matter concerned an International Chamber of Commerce (“ICC”) arbitration commenced by the Defendant against the Plaintiff ("Arbitration"). The Plaintiff is a foreign bank and was at all material times the owner of certain shares in a company (“Shares”). The Defendant was a special-purpose vehicle incorporated to be the contracting party to a share purchase agreement (“SPA”) to be entered into with the Plaintiff for the sale of the Shares. The director and sole shareholder of the Defendant is one Mr. Z, who is also the director and sole shareholder of another foreign related company, Y. Y and the Defendant were the claimants in the arbitration.
The dispute arose when the Plaintiff backed out of the proposed sale of the Shares and refused to execute the SPA. Throughout the course of negotiations, Mr. Z and his lawyers did not expressly distinguish whether they were negotiating on behalf of Y or the Defendant. Prior to the breakdown of negotiations, seven drafts of the SPA, which incorporated an ICC arbitration clause, were circulated and negotiated. As the changes between each draft of the SPA and the circumstances surrounding each draft had a significant bearing on the Arbitrator’s – and eventually, the High Court’s - decision, it is worth describing the drafts briefly below:
- The first draft was sent by Mr. Z to the Plaintiff on 17 June 2013. Article 9.13 was the dispute resolution clause. Article 9.13.1 provided for New York law as the governing law of the agreement. This choice remained the same in all seven drafts of the SPA. Article 9.13.2 provided for any disputes arising out of or in connection with the agreement to be resolved in the New York Courts.
- On 25 June 2013, the second draft was sent by the Defendant to the Plaintiff and another bank which was intended to become a co-purchaser of the Shares (“W”). Notably, Article 9.13.2 was replaced with an arbitration clause which provided that any disputes arising out of or in connection with the SPA shall be settled under “the Rules of Arbitration of the [ICC] by one or more arbitrators appointed in accordance with the Said Rules”, and that the arbitration shall take place in Singapore.
- The third draft was circulated by the Defendant to the Plaintiff and W on 26 June 2013. It was in this draft that W was added as a co-purchaser. Article 9.13 remained unchanged.
- The fourth draft was circulated by the Plaintiff to the Defendant and W on 12 July 2013. Two amendments were made to Article 9.13.2. First, it now stated that any dispute was to be referred to only one arbitrator. Second, it specified Singapore as the seat of arbitration.
- The fifth and sixth drafts were circulated on 17 and 18 July 2013 respectively, with no major changes to the dispute resolution clause i.e. Article 9.13. Along with the sixth draft on 18 July 2013, the Plaintiff’s investment specialist indicated in the cover email that the Plaintiff was “ready to sign” the SPA. W however replied saying that its legal counsel was still finalizing the draft.
- The seventh draft was circulated by W to the Plaintiff and Defendant on 25 July 2013. The draft however contained what were purportedly significant changes to the SPA, including amendments to key terms.
Thereafter, the Plaintiff informed Mr. Z that it had decided not to proceed with the sale of the Shares due to “recent changes in the business climate”. The Defendant and Y then commenced arbitration pursuant to ICC Rules, seeking the following relief: damages for breach of the SPA; a claim for promissory estoppel based on the alleged promise of the Plaintiff to sell the Shares; and a claim for unjust enrichment based on actions taken in reliance on the promise. A sole arbitrator ("Arbitrator") was then appointed pursuant to the ICC Rules.
The Plaintiff raised a preliminary objection to the Arbitrator’s jurisdiction on the basis that no arbitration agreement had been concluded between the Plaintiff and the Defendant and/or Y.
The Arbitration
In the Arbitration, the Defendant took the position that the arbitration agreement was concluded prior to the purported conclusion of the SPA itself, either on 25 June 2013 (date of 2nd draft SPA), or at the very latest, by 18 July 2013 (date of the 6th draft SPA), on the basis of the Plaintiff's words and conduct which indicated that it assented to be bound by the arbitration clause.
The Arbitrator found that the proper law of the arbitration agreement was New York law. He applied Sulamerica, which held that if parties did not identify an express choice of law for the arbitration agreement, then a rebuttable presumption would arise in that their implied choice of law was the governing law of the main contract. Since the governing law of the main contract was New York law, the proper law of the arbitration agreement would likewise be the same given that there were no factors displacing that rebuttable presumption.
Applying New York law, the Arbitrator found that on the basis of the words and conduct of the parties, the arbitration agreement had come into existence by 18 July 2013 when the Plaintiff indicated that it was "ready to sign" the SPA.
The Singapore Proceedings
The Plaintiff, dissatisfied with the Arbitrator's decision, applied to the Singapore High Court for a declaration that the Arbitrator had no jurisdiction to hear and determine any claim advanced by the Defendant, or in the alternative, that the Arbitrator only had jurisdiction to hear the claim for breach of the unexecuted SPA (but not the promissory estoppel or unjust enrichment claims).
Before the High Court, the Plaintiff submitted that the governing law of the arbitration agreement was Singapore law, while the Defendant took the position that New York law ought to govern the arbitration agreement. The Defendant also took the position that a valid and binding arbitration agreement was formed on 18 July 2013, as held by the Arbitrator.
The Court found that the issue of the governing law of the arbitration agreement was in fact a red herring as the answer would have "negligible, if any, influence on the primary question of whether an arbitration agreement was formed" (at [39]), given that both parties acknowledged there were no material differences between New York law and Singapore law on the formation of an arbitration agreement. Nevertheless, it proceeded to give a very helpful exposition on the seemingly divergent cases and authorities on this issue.
The Court was of the view that the starting point should be that the governing law of an arbitration agreement is to be determined in accordance with a three-step test, as follows:
- First, where parties have expressly chosen their choice of law, such law would govern the arbitration agreement;
- Second, absent such express choice of law, the implied choice of the parties as gleaned from their intentions at the time of contract would then govern the agreement;
- Finally, in a case where both express and implied choices of law are nowhere to be found, then the system of law with which the arbitration agreement has the closest and most real connection would apply.
The test set out above is one that is generally applicable to conflict of law issues relating to contract law, and is largely uncontroversial. What remains to be determined, and which is the subject of controversy, though, is what the "implied choice of law" ought to be in the context of arbitration agreements. In this regard, there were two main contrasting views, represented primarily by the approaches taken in Sulamerica and FirstLink respectively.
Sulamerica vs. FirstLink
The High Court first considered Sulamerica, in which Moore-Bick LJ drew a distinction between two scenarios:
- The first scenario is where there was a "free-standing agreement to arbitrate". Such scenarios would arise when, for instance, parties execute a separate arbitration agreement providing for the arbitration of disputes relating to several contracts, or when parties conclude an arbitration agreement after a dispute has arisen. In such a scenario, it is unlikely that there would be sufficient basis for finding an implied choice of law (by reference to the governing law of the substantive contract) and the law of the seat would most likely be the governing law of the arbitration agreement applying the third limb of the test.
- The second scenario is where the arbitration agreement formed part of a substantive contract. The express choice of proper law governing the substantive contract would be a "strong indication of the parties' intentions in relation to the agreement to arbitration", with the result that the implied choice of law for the arbitration agreement was likely to be the same as the expressly chosen law of the substantive contract. This is however merely a presumption, which can be displaced by the terms of the arbitration agreement itself or the consequences of choosing the proper law of the substantive contract to govern the arbitration agreement.
The High Court then turned its attention to FirstLink. In FirstLink, the Assistant Registrar disagreed with Moore-Bick LJ's view in Sulamerica that there should be a rebuttable presumption that the express substantive law of the contract would be taken as the parties' implied choice of proper law governing the arbitration agreement. Instead, the AR took the view 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 accordingly, in a situation of "direct competition between the chosen substantive law and the law of the chosen seat of arbitration", the default position is that the latter should be the governing law of the arbitration agreement (see [48]).
The High Court in BCY preferred the approach adopted in Sulamerica, and expressed the view that the presumption adopted there - that the choice of law for the arbitration agreement should be the same as the expressly chosen law of the substantive contract – "is supported by the weight of authority" and "preferable as a matter of principle" (at [49]). The High Court reviewed the cases following Sulamerica and FirstLink, and highlighted that more cases appear to favour the Sulamerica approach. The Court also expressed the view that where the arbitration agreement is a clause forming part of the main contract, "it is reasonable to assume that the contracting parties intend their entire relationship to be governed by the same system of law" (see [59]). For completeness, the Court also addressed the doctrine of separability, which is frequently raised to support the FirstLink approach. The Court expressed the view that the doctrine's narrow - albeit important – purpose is to ensure that any challenge to the validity of the main contract does not, in itself, affect the validity of an arbitration agreement. The doctrine was never meant to "insulate the arbitration agreement from the substantive contract for all purposes" (see [61]).
The High Court's decision
Interestingly, whilst the High Court agreed with the Arbitrator and the Defendant and found that the arbitration agreement was clearly intended to be part of the SPA and therefore New York law applied (following Sulamerica), it went on to grant the orders sought by the Plaintiff on the basis that there was no valid and binding arbitration agreement concluded between the parties.
The Court found that the Defendant did not satisfy the evidential burden of proving on a balance of probabilities that parties intended and concluded a binding arbitration agreement on 18 July 2013 prior to the conclusion of the SPA. There was simply "no objective evidence of the parties' mutual intention to be bound by the arbitration clause" (see [91]).
RALS INTERNATIONAL PTE LTD V CASSA DI RISPARMIO DI PARMA E PIACENZA SPA [2016] 5 SLR 455
In this matter, the Singapore Court of Appeal was asked to consider the issue of whether an assignee of bills of exchange had an obligation to arbitrate disputes contained in the underlying contract, in the context of an application to stay court proceedings commenced in Singapore. Upholding the High Court's decision to dismiss the stay application, the Court of Appeal held that a negotiable instrument is not governed by an arbitration agreement in the contract pursuant to which the instrument was issued, unless the agreement has been expressly incorporated in that instrument. Accordingly, the assignee was not obliged to refer the dispute to arbitration and there was no basis to grant the stay.
Background Facts
The Appellant is a company incorporated in Singapore. The Appellant entered into a supply agreement with an Italian supplier, O ("Supply Agreement"), to buy certain equipment to process cashew nuts. The Supply Agreement provided for payment to be made partly in cash and partly by promissory notes issued to O ("Notes"). The Supply Agreement also contained a clause providing for parties to refer all disputes to arbitration.
The Notes were subsequently assigned to the Respondent at a discount to face value. The Appellant however dishonoured the Notes when the Respondent later presented the Notes for payment, after which the Respondent commenced proceedings in the Singapore High Court. In response, the Appellant applied for a stay of the Respondent's claim under section 6(1) read with section 6(5) of the International Arbitration Act ("IAA"), which provides that the Court must order a stay of proceedings where:
(i) the claimant in the proceedings is a party to an arbitration agreement either directly or because he is claiming “through or under” such party (the "Party Issue"); and
(ii) the subject matter of the proceedings (i.e. the Appellant's obligation to pay under the Notes) is the subject of the arbitration agreement (the "Subject Matter Issue").
Proceedings Below
The Appellant succeeded at first instance before an Assistant Registrar, who granted a stay of the Singapore proceedings on the following basis:
(i) as regards the Party Issue, there was at least an arguable case that the assignment of the credit under the Supply Agreement by O to the Respondent would render the Respondent a "direct" party to the arbitration agreement given its knowledge of the same. Alternatively, the Respondent was a party claiming "through or under" O as it was an assignee of O's credit under the Supply Agreement.
(ii) as regards the Subject Matter Issue, the Assistant Registrar held that it could be inferred that parties had intended that disputes over the Notes would, like any other disputes over the performance of the Supply Agreement, be subject to the arbitration agreement unless specifically excluded.
The Respondent's knowledge of the underlying Supply Agreement when it accepted the assignment therefore appeared to be the common thread through the Assistant Registrar's findings.
On appeal, however, the High Court reversed the Assistant Registrar's decision. The High Court agreed with the Assistant Registrar on the outcome of the Party Issue, albeit on a different basis. It held that in the context of a section 6 application, a party to an agreement had to be a party in the contractual sense (i.e. the knowledge of a party of the underlying agreement is not sufficient to make such party a "direct" party). However, it considered the Respondent to be claiming "through or under" O, as it had received (by virtue of the assignment) not only the right to receive the purchase price under the Supply Agreement, but also the burden to arbitrate any disputes.
That being said, the High Court decided the Subject Matter in favour of the Respondent, on the basis that the rights and obligations under the Supply Agreement were separate and independent from the statutory contract represented by the Notes. In other words, it took the view that the subject matter of the proceedings could be distinguished from the subject matter under the arbitration agreement. Accordingly, the Assistant Registrar's decision was reversed.
Appeal before the Court of Appeal
The Appellant's primary ground of appeal before the Court of Appeal related solely to the Subject Matter issue. It relied heavily on the decision of Larsen Oil and Gas Pte Ltd v Petropod Ltd [2011] 3 SLR 414 ("Larsen"), where it was held that arbitration clauses ought to be construed generously such that all claims as between the contracting parties would generally fall within their ambit. Accordingly, the Appellant posited that the inclusion of a widely-drafted arbitration clause in the Supply Agreement meant that O and the Appellant must have intended for the Notes, "which were an "inextricabl[e] part of the Supply Agreement" to fall within its scope" (at [21]).
In turn, the Respondent's arguments were two-fold.
First, it argued that as between O and the Appellant, a claim on the Notes did not fall within the scope of the arbitration agreement. Since it is clear that the Respondent - as assignee of the rights under the Supply Agreement - could not be in a worse position than O, a claim by the Respondent on the notes would likewise not fall within the scope of the arbitration agreement.
Second, the Respondent argued that even if the Notes did fall within the scope of the arbitration agreement as between O and the Claimant, the Respondent's status as an indorsee of the Notes rendered its claim outside the scope of the arbitration agreement.
The Court of Appeal found for the Respondent and dismissed the appeal, on the basis that the obligations under the Notes were separate and autonomous from those arising out of the Supply Agreement. While it agreed that the position in Singapore is that as established in Larson, there are limits to its application as in the present case. Namely, where there are compelling reasons, commercial or otherwise, that may displace any assumed intention of the parties that claims of a particular kind were to fall within the scope of an arbitration clause, the court should be slow to conduct the exercise of contractual construction from the starting point in Larson. Particularly, in respect of bills of exchange, the Court of Appeal was of the view that it is difficult to see as a matter of commercial common sense why any right-thinking merchant would choose to give up his right to choose his preferred mode of dispute resolution (see [45]).
The Court of Appeal left open the question of whether an assignee to a negotiable instrument is bound to arbitrate if and once it elects to exercise its assigned right to arbitrate. This theory operates on the premise that the assignee would be deemed to have submitted to arbitration in such a case, thereby giving its consent (albeit impliedly) to arbitrate its disputes. The Court of Appeal however also recognized that the theory may potentially conflict with the doctrine of privity by allowing non-parties to an arbitration agreement to avail themselves of the right to arbitration.