By Christine Ong and Tan Yi Lei - Virtus Law LLP, with assistance from Michelle Lam
Nature of Matter
Setting aside of Arbitral Award
Case Summary
The plaintiff, a Hong Kong company, was in the business of distributing and remarketing the defendant’s consumer goods in Russia. The defendant, also a Hong Kong company, was a wholly-owned subsidiary of a Singapore company (the "Parent Company").
The defendant commenced arbitration proceedings in October 2015, alleging that the plaintiff owed it a total of US$36.4m. The plaintiff rejected the tribunal’s jurisdiction from the outset of the arbitration and declined to participate further. The tribunal held an evidential hearing in May 2017 in the plaintiff’s absence and issued its final award in July 2017, finding in favour of the defendant on both jurisdiction and the merits of the defendant’s substantive claim. The plaintiff’s primary argument before the Singapore High Court was that the award should be set aside under Art 34(2)(a)(i) of the Model Law because the tribunal lacked jurisdiction to determine the dispute between the parties. It was, however, the defendant's position that both its substantive rights against the plaintiff and its rights to resolve that claim by way of arbitration were the result of a series of subsequent assignments and novations. The plaintiff alternatively argued that the award should be set aside under Art 34(2)(a)(iv) of the Model Law, stating that even if the tribunal had jurisdiction, the composition of the tribunal was not in accordance with the agreement of the parties.
Ruling
The Singapore High Court dismissed the plaintiff’s application to set aside an arbitral award issued in favour of the defendant.
Issues on Jurisdiction
The High Court in determining the plaintiff’s challenge to jurisdiction analysed the parties’ complicated legal relationship which was set out in eight related contracts.
The paramount question was whether the plaintiff and defendant were parties to an arbitration agreement within the meaning of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“IAA”) when the defendant issued its notice of arbitration. The plaintiff denied it was a party to any arbitration agreement with the defendant and argued that it was not bound by the Parent Company’s assignment and novation of the Distributor Agreement to the defendant pursuant to the Assignment and Novation Agreement.
The plaintiff argued that the Distributor Agreement expired on 26 December 2012 before the parties entered into the Assignment and Novation Agreement which meant that the Parent Company could not have assigned and/or novated the arbitration agreement to the defendant as the Distributor Agreement would have ceased to have contractual force whereas the defendant argued for a different construction – that the Distributor Agreement was extended automatically for successive one-year periods or alternatively, that the Distributor Agreement would not expire so long as the plaintiff continued ordering goods from the counterparty to that agreement and the counterparty continued supplying goods in response. The High Court agreed with the plaintiff and found that the Distributor Agreement did expire on 26 December 2012, rejecting both the defendants’ arguments on construction.
Nonetheless, the High Court found that the arbitration agreement survived the expiry of the Distributor Agreement as it would generally be presumed that parties would intend a dispute resolution clause to survive the substantive contract ceasing to have contractual force. The High Court clarified that this is not a legal presumption and further found that there were no circumstances from which it could be suggested that that parties did intend the arbitration agreement to cease to have contractual effect on 26 December 2012.
The High Court also found an implied contract on identical terms as the Distributor Agreement arose between the plaintiff and the Parent Company after 26 December 2012 given the continued course of dealing between the plaintiff and the Parent Company after 26 December 2012. This made it clear that the plaintiff and the Parent Company considered themselves to be bound by a contract on the terms set out in the Distributor Agreement after its expiry. Similarly, the conduct of the plaintiff and the defendant after entering into the Assignment and Novation Agreement made clear that they considered themselves to be bound by a contract on the terms set out in the Distributor Agreement on and after 25 January 2013. The High Court also considered the issue of whether an arbitration agreement contained in an implied contract satisfied the requirement of being “in writing” under s 2A(3) of the IAA. The High Court, citing AQZ v ARA [2015] 2 SLR 972, held that the arbitration agreement in an oral contract satisfied the statutory requirement of writing because it was on terms identical to the Distributor Agreement.
The High Court also accepted the defendant’s argument that the plaintiff was estopped from asserting that the Distributor Agreement expired on 26 December 2012, and estopped from denying the existence of the arbitration agreement given that the defendant supplied goods to the plaintiff in 2013 and 2014 on the basis that the parties continued to be bound by the terms set out in the Distributor Agreement. The plaintiff accepted the goods supplied and it would therefore be unconscionable for the plaintiff to assert that such reliance was mistaken.
Two final points on jurisdiction
The plaintiff raised two final points as to the existence and validity of an arbitration agreement with the defendant. First, the plaintiff argued that the defendant’s claims on the invoices were not governed by the terms of the Distributor Agreement even if the Distributor Agreement continued to have contractual force after 24 December 2012, on the basis that separate and distinct contracts for sale arose every time the plaintiff ordered products and the defendant invoiced the plaintiff for those products. The High Court rejected the plaintiff’s argument, stating that ‘[i]t would be absurd if, having gone to the trouble of novating the Distributor Agreement to the defendant, the parties then intended for another standard form contract – containing matters already covered in the Distributor Agreement – to govern the individual contracts of sale.’
Second, the plaintiff argued that the arbitration agreement in cl 25.9 was unworkable because it conflicted with cl 25.8 of the Distributor Agreement. The relevant portions of the two clauses are as follows:
- 25.8 Governing Law, Jurisdiction and Venue. This Agreement shall be governed by and interpreted in accordance with the laws of Singapore, except for its rules regarding conflict of laws. The jurisdiction and venue for any legal action between the parties hereto arising out of or connected with this Agreement, or the Services and Products furnished hereunder, shall be in a court located in Singapore. …
- 25.9 Disputes. Disputes arising out of or in connection with this Agreement shall be finally settled by arbitration which shall be held in Singapore in accordance with the Arbitration Rules of Singapore International Arbitration Center (“SIAC Rules”) then in effect. …
The High Court disagreed that cl 25.8 and 25.9 gave rise to an ‘irreconcilable inconsistency’. The High Court noted that ‘even in cases involving pathological or bare arbitration clauses, so long as the intent to arbitrate is not in doubt, the court strives to give effect to that intention, preferring an interpretation that renders the clause workable over one that does not.’ The High Court referred to Paul Smith Ltd v H&S International Holding Inc [1992] 2 Lloyd’s Rep 127 where Steyn J stated that it is a “drastic and very unattractive result” to find “the total failure of the agreed method of dispute resolution in an international commercial contract” (at 129). While the High Court recognised that the Paul Smith approach to construing arbitration and jurisdiction clauses together was not perfect, the ‘only practical’ solution was to adopt the Paul Smith approach and hold that the parties intended to resolve substantive disputes in arbitration under cl 25.9 and to resolve disputes arising out of any such arbitration in the Singapore courts in the exercise of their supervisory jurisdiction under cl 25.8. The Court further highlighted that ‘this approach is consistent with the underlying trend in Singapore arbitration jurisprudence that a clear intent to arbitrate disputes manifested in an international commercial contract should, as far as possible, be upheld.’
Alternative ground: composition of the tribunal
The plaintiff sought to set aside the award under Art 34(2)(a)(iv) of the Model Law, on the basis that the composition of the tribunal was not in accordance with the parties’ agreement. The plaintiff argued that it ought to have been allowed to nominate an arbitrator out of time because the right to appoint an arbitrator is a fundamental right which, in this arbitration, only the defendant had enjoyed. The High Court rejected the plaintiff’s argument on the basis that the Tribunal was constituted in accordance to the parties’ arbitration agreement. There was ‘no principle of general application which justifies construing an arbitration agreement in “a fair and equitable” manner in order to determine whether a ground for setting aside an arbitration award under Article 34 has been established. An arbitration agreement would be construed like any other contract: by applying a contextual interpretation to the words chosen by the parties to ascertain objectively what the parties intended.’ The High Court further stated that the plaintiff, ‘[h]aving made a strategic choice not to exercise its right to nominate an arbitrator and … to abstain from the contractually-stipulated appointment process,’ could not ‘now turn around and say that the SIAC or the tribunal should nevertheless have constituted a three-member tribunal’.