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The Singapore Law Gazette

The ABC’s of Choosing a Proper Law: Implied Choice, Contrary Indicia and the Validation Principle

Examining the Singapore Court of Appeal’s Decision in BNA v BNB and BNC [2020] 1 SLR 456

This article examines the Singapore Court of Appeal’s decision in BNA v BNB and BNC [2020] 1 SLR 456 released on 27 December 2019 and certain issues in relation to the Singapore courts’ approach in determining the proper law of an arbitration agreement; namely, whether the Singapore courts implicitly recognise the validation principle, and whether there is merit in ensuring coherence in the proper law of the substantive contract, the seat of the arbitration, and relevant arbitral rules.

Introduction

The choice of the proper law of an arbitration agreement is an important one. It relates to the validity and scope of the arbitration agreement, and in turn, the jurisdiction of the tribunal constituted to hear the dispute. Yet, commercial parties tend to omit an express choice of law for their arbitration agreements, only providing for the proper law of the substantive contract. This has been attributed to the legal fiction of separability of the arbitration agreement being a concept to which ordinary commercial parties would not typically consider; as they would expect that the proper law of the substantive contract applies equally to the arbitration agreement (which is simply another contractual clause) contained therein.1Although recent English court decisions have favoured the application of the proper law of the substantive contract to the arbitration agreement unless it would cause invalidity, there is no overriding jurisprudence constante amongst the English courts and tribunals seated in England. Decisions in the United States courts remain divided on this position as well. Professor Gary Born elaborates in the leading textbook, Gary Born, International Commercial Arbitration (Wolter Kluwers, 2014, 2nd ed) (International Commercial Arbitration) at pp 506-541; and Gary Born, The Law Governing International Arbitration Agreements: An International Perspective, (2014) 26 SAcLJ 814 (Born) at (38)-(40).

As a result, jurisprudence on how the proper law of an arbitration agreement should be determined is divided – in essence, whether it is the proper law of the substantive contract that applies, or the law of the seat of arbitration. In Singapore, the courts have held that when there is no express choice, the law of the arbitration agreement is presumed to follow the law of the substantive contract.2In this article, we discuss only arbitration agreements which are clauses forming part of a substantive contract, instead of “free-standing” arbitration agreements. The distinction between the two is recognised in both Sulamerica (at (26)) and BCY (at (66)-(67)), and gives rise to a different approach – where the law of a “free-standing” arbitration agreement is not expressly provided for, the presumed implied choice is the law of the seat of the arbitration. The courts in England and Wales, however, have released conflicting judgments on the same issue.

The Singapore Approach

The Singapore High Court, in BCY v BCZ [2017] 3 SLR 357 (BCY), had followed the approach of the English Court of Appeal’s decision in Sulamerica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 (Sulamerica) and held that the parties’ implied choice of law would presumptively be the proper law of the underlying substantive contract. Amongst other reasons, the Honourable Justice Steven Chong (as he then was) held that if the contractual agreement is governed by one system of law, the natural inference was that parties intended for the express choice of law to govern all the clauses in the contract, including the arbitration agreement.3BCY v BCZ (2017) 3 SLR 357 at (59) Accordingly, the doctrine of separability of the arbitration agreement was to be interpreted narrowly in that separability could not displace the presumption that the law of the arbitration agreement followed the law of the substantive contract absent very specific circumstances.4Ibid at (60)-(61)

The foregoing notwithstanding, the court in BCY held that the presence of “contrary indications” would serve to rebut the presumption outlined above. Where the proper law of the substantive contract would invalidate the arbitration agreement despite the parties’ clear intention to arbitrate, the Court would choose to apply a law that upholds the arbitration agreement.5Ibid at (74) This would usually be the law of the seat of the arbitration, being the law with the “closest and most real connection” to the arbitration agreement.6Ibid at (44)-(45)

The recent Singapore Court of Appeal decision in BNA v BNB and BNC [2020] 1 SLR 456 (BNA) clarifies the Singapore courts’ approach in determining the law of arbitration agreements, and raises two interesting issues which we will examine in turn, namely:

  1. Do the Singapore courts implicitly recognise the validation principle, which gives effect to an arbitration agreement as long as it is substantively valid under any of the laws that may be potentially applicable to it?
  2. Is there merit in parties ensuring that the proper law of the substantive contract coheres with the seat of arbitration and the relevant arbitral rules?

Background

In BNA, the parties had provided for their contract to be governed by PRC law. However, the arbitration agreement stipulated that disputes arising out of or relating to their contract “shall be finally submitted to the … SIAC for arbitration in Shanghai”. This gave rise to a challenge as to whether the arbitration agreement was valid. A majority of the arbitral tribunal found that the arbitration agreement was indeed valid and determined that the tribunal had jurisdiction because the arbitration was seated in Singapore and governed by Singapore law. This was disputed by the Plaintiff, who brought a challenge before the Singapore High Court under section 10(3) of the International Arbitration Act.

The Plaintiff’s position was that the arbitration agreement was governed by the proper law of the substantive contract, i.e., PRC law. In accordance with PRC law at the time the arbitration was commenced, the Plaintiff argued that the arbitration agreement was invalid because it envisioned the arbitration of a domestic dispute by a foreign arbitral institution. Therefore, the tribunal lacked jurisdiction and the Defendants must go to litigation in the PRC courts. In contrast, the Defendants argued that the tribunal had jurisdiction – the proper law of the arbitration agreement was Singapore law, implied from the parties’ choice of the seat of arbitration as Singapore, because parties could not have intended for their arbitration agreement to be invalidated by a choice of PRC law.

The Singapore High Court determined the question of jurisdiction de novo, in accordance with BCY. Justice Vinodh Coomaraswamy found that the following two factors were sufficient to displace the indication that the proper law of the substantive contract should apply as the law of the arbitration agreement:

  1. The arbitration agreement referred to two geographical locations, Shanghai and Singapore. Based on Rule 18.1 of the 2013 SIAC Rules, the default seat had to be Singapore. The High Court also found that there was nothing in the words chosen by the parties that referred to Shanghai as the seat, and considered Shanghai to merely be the venue for hearings.
  2. Unlike Singapore, Shanghai was only a city and not a law district.

These factors were indicative of the parties’ contrary intent that PRC law should not apply as the law of the arbitration agreement.

The case was then heard by the Singapore Court of Appeal. The Court of Appeal also applied the BCY framework7Parties had agreed that the BCY framework was the proper framework for determining the proper law of the arbitration agreement in the appeal. It should be noted that the Singapore Court of Appeal has not definitively affirmed the BCY framework, its applicability never having been an issue considered before it. to determine the parties’ implied choice of law of the arbitration agreement and found as follows:

  1. The High Court adopted a “somewhat strained interpretation” of the arbitration agreement by consigning the reference to Shanghai as a reference to the venue in order to invoke the default choice of Singapore as the seat per Rule 18.1 of the 2013 SIAC Rules.8BNA v BNB (2020) 1 SLR 456 (“BNA (CA)”) at (64) Given the greater legal significance of the arbitration seat as opposed to its venue, the Court of Appeal held that where parties specified only one geographical location and, especially, where parties expressed a choice for “arbitration in [that location]”, this should most naturally be construed to refer to the parties’ chosen seat of arbitration.9Ibid at (65) Therefore, “arbitration in Shanghai” meant that Shanghai was the seat.
  2. There was no contrary indicia to displace the Court of Appeal’s interpretation of the phrase. In particular, the invalidating effect of PRC law on the arbitration agreement could not be a relevant factor when there was no evidence that this consideration operated in the parties’ minds at all.10Ibid at (90)
  3. Accordingly, since Singapore was not the seat of arbitration, the Court of Appeal did not go further in determining the validity of the arbitration agreement, this being a matter for the PRC Courts to decide as the supervisory court.

Do the Singapore Courts Recognise the validation Principle?

Having found that the applicable law to the arbitration agreement was PRC law, and no indication to the contrary giving rise to a competing proper law which could be juxtaposed against PRC law, the Court of Appeal held that the issue of the validation principle did not arise for consideration.11Ibid at (95) While pragmatic, we respectfully submit that this was regrettably a missed opportunity for Singapore’s apex court to comment on a novel legal issue, which is almost certain to re-emerge in the future, as evinced by the English Court of Appeal’s recent departure from Sulamerica in Enka Insaat Ve Sanayi A.S v OOO Insurance Company Chubb [2020] EWCA Civ 574 (Chubb),12The English Court of Appeal has departed from their earlier position in Sulamerica, finding instead that there should be a presumption in favour of the law of the seat when determining the parties’ implied choice of law of their arbitration agreement. Notably, the Court had considered that this presumption may “yield to specific contrary factors… for example if the arbitration agreement would be invalid under the law of the seat (at (104)). now pending an appeal before the UK Supreme Court.

We thus refer to the High Court’s decision in BNA, being the first Singapore decision which discussed the validation principle in detail, with Coomaraswamy J himself having briefly dismissed an argument which relied on this principle four years earlier, in Cassa di Risparmio di Parma e Piacenza SpA v Rals International Pte Ltd [2016] 1 SLR 79.13Cassa di Risparmio di Parma e Piacenza SpA v Rals International Pte Ltd (2016) 1 SLR 79 at (89)

The High Court had rejected the Defendant’s reliance on the validation principle, which provides that “if an international arbitration agreement is substantively valid under any of the laws that may potentially be applicable to it, then its validity will be upheld, even if it is not valid under any of the other potentially applicable choices of law”.14The validation principle as formulated by Professor Born is intended to be a “more consistent, principled solution” to the problems created by the “arbitrary and unpredictable” application of choice of law rules in international arbitration, which have “little or no regard to the real objectives and commercial expectations of the parties” (Born (n 1) at (51)-(53)). See also International Commercial Arbitration (n 1) at pp 542-549. Coomaraswamy J held that the principle is not part of Singapore’s arbitration law for four reasons:15BNA v BNB and BNC (2019) SGHC 142 (BNA (HC)) at (50)-(66)

  1. Its nakedly instrumental objective to achieve a prescribed outcome “fundamentally misstates” the court’s objective in construing the proper law of an arbitration agreement;
  2. The above is also inconsistent with authority, such as Sulamerica and BCY;
  3. It is unnecessary, given that there exists a general principle of construction in Singapore contract law that words are to be understood in such a manner that the subject-matter be preserved rather than destroyed (verba ita sunt intelligenda ut res magis valeat quam pereat, i.e., the “ut res magis” principle); and
  4. It would only create problems in the future at the enforcement stage.

However, although the High Court had rejected it as being a standalone principle in Singapore’s arbitration law, we submit that the courts do apply the validation principle in effect when determining the proper law of the arbitration agreement.

Chong J in BCY had considered that “the governing law of the main contract should only be displaced if the consequences of choosing it as the governing law of the AA would negate the AA even though the parties have themselves evinced a clear intention to be bound to arbitrate their disputes”.16Supra n 5 Although this situation did not arise on the facts of BCY,17Ibid. Chong J found that “the potential inconsistency of New York law under the (substantive contract) is not of a character that fundamentally undercuts the arbitration agreement altogether”, and did not have an “invalidating effect” which would have rebutted the presumption of the proper law of the substantive contract applying as the proper law of the arbitration agreement. Hence, there was no need to look further for a “validating” law. he found that this was “precisely what happened in Sulamerica”.18Ibid

In Sulamerica, if the proper law of the substantive contract – Brazilian law – applied to the arbitration agreement, then only one party could elect to arbitrate. The English Court of Appeal found that such a consequence would have undermined the arbitration agreement and rendered it invalid; it could not have been the parties’ intention. Hence, the Court decided that the parties could not have impliedly chosen Brazilian law as the law of the arbitration agreement, and proceeded to consider the law with the closest and most real connection to the arbitration agreement (i.e., the law of the seat).

Indeed, Coomaraswamy J in BNA recognised that the dispute before him would not even have arisen in the first instance if, between the time the parties had entered into the arbitration agreement and the time they commenced the arbitration, PRC law had changed such that the arbitration agreement would have been valid under PRC law. The presumption that PRC law applied to the arbitration agreement was not rebutted because the law of the purported seat was different, but because of its invalidating effect. Hence, to the extent that the BCY framework allowed the courts to give effect to the parties’ intentions when the arbitration was commenced so as to find a validating law, he suggested that the framework could be said to simply be Professor Born’s wider validation principle in disguise.19BNA (HC) at (123)

This implicit application of the validation principle by the Singapore courts would not be unprincipled. Where the starting point of the courts’ analysis is already that parties to an arbitration agreement intend for it to be upheld, as all commercial parties to a contract do,20BNA (HC) at (57), where Coomaraswamy J observed that “whether the parties’ arbitration agreement would be valid under a hypothetical proper law is a weighty factor to be considered … because, as a matter of general contract law and as a matter of common sense, parties are presumed to have intended their contracts to be binding”. the validation principle would not be “nakedly instrumental” so long as it is applied in conjunction with contractual principles of interpretation (which apply equally to arbitration agreements21BNA (HC) at (55)). In this regard, the validation principle and the “ut res magis” principle of construction applied by Coomaraswamy J may be said to be two sides of the same coin.

As both the Singapore courts have cautioned, the parties’ intention, as determined, is really their choice to arbitrate “in a certain way, in a certain place, under the administration of a certain arbitral institution”.22BNA (CA) at (104) This is given effect to by a process of construction, and if the result is that the arbitration agreement is unworkable despite the parties’ best intentions, then parties must live with the consequences of their decision.23Ibid

The validation principle applied as part of BCY framework goes no further than this – the court does not construe a choice of law when no other competing law is available;24Supra n 9 it simply favours the law which would validate the arbitration agreement between the proper law of the substantive contract or the law of the seat.25The proper law of the substantive contract being the parties’ likely implied choice of law, and if not, the law of the seat being the law with the closest and most real connection to the arbitration agreement. To-date, the Singapore courts have not considered a third law in their application of the BCY framework. Where there are no validating laws applicable at the end of the inquiry, the necessary conclusion is that the arbitration agreement is pathological and cannot be saved. This does not depart from the Court of Appeal’s dedication to ensuring the principled determination of the proper law of the arbitration agreement, avoiding any tautological reasoning employed to achieve a prescribed outcome. The mere recognition of the validation principle does not oblige the courts to always give effect to the parties’ manifest intention to arbitrate “come what may”.26BNA (HC) at (53)

Coherence in the Substantive Law of Contract, the Choice of Seat and the Arbitral Rules

In BNA, the parties had provided for the substantive law of the contract to be PRC law, the administering arbitral institution as the SIAC (and therefore the SIAC’s 2013 arbitral rules on the default seat to apply), and for arbitration “in Shanghai”.

It was this formulation of the arbitration clause that led to a jurisdictional objection during the arbitration itself, and two hearings before the Singapore High Court and Court of Appeal respectively spanning a time period between 2016 when the arbitration was commenced until the Court of Appeal’s judgment in December 2019. The parties expended considerable time and costs just to determine the preliminary issue of what law governed the arbitration agreement, and its consequent validity.

Furthermore, the Court of Appeal’s holding that the PRC courts have supervisory jurisdiction (Shanghai being the seat of arbitration) entails yet another round of litigation before the Chinese courts.

This example necessitates a re-examination of whether there is merit in ensuring coherence in the choice of law of the substantive contract, the law of the seat, and the relevant arbitral rules.

The amendments to the 2016 SIAC Rules had notably removed the provisions on Singapore being the default seat of arbitration. However, the 2014 LCIA Arbitration Rules and the 2018 HKIAC Administered Arbitration Rules still retain provisions on default seats in London and Hong Kong respectively.27Article 16.2 of the 2014 LCIA Arbitration Rules; Article 14.1 of the 2018 HKIAC Administered Arbitration Rules. This does not mean that parties may not choose arbitration institutions that are located in jurisdictions different from the seat or the country of substantive law, but it does mean that parties should, at the very least, conduct the following checks to avoid the risk of a suit such as in BNA:

  1. First, parties should check if the substantive law of the contract, seat of arbitration, and arbitral institution cohere. If they do, then no conflicting choice-of-law issues arise.
  2. Second, if the substantive law of the contract and seat of arbitration cohere, but the arbitration clause provides for a foreign arbitral institution to administer the dispute (e.g., English law to govern the contract, London as the seat of the arbitration, but for the SIAC to administer the dispute), parties should check that the substantive law of the contract allows for a foreign arbitral institution to administer the dispute.
  3. Third, if the substantive law of the contract, seat of arbitration, and arbitration rules are different (e.g., Thai law to govern the contract, Singapore as the seat of arbitration, and for HKIAC rules to apply), the parties must check whether the substantive law of the contract allows for a foreign arbitral institution to administer the dispute, and the approach of the courts of the seat in determining jurisdictional challenges.

In fact, if parties already undertake the above checks, there is no reason not to take a slight step further by providing for an express choice of the law of the arbitration agreement. The law in this area remains poised for change; by expressly providing for the law of their arbitration agreement, parties need not worry that their intended choice of law may not be upheld in the event that the Singapore Court of Appeal chooses to depart from the BCY presumption in favour of the proper law of the substantive contract (as the English Court of Appeal had done in Chubb). The SIAC may do well to lead the way by suggesting the provision of “the law of this arbitration clause” in their Model Clause,28The SIAC presently only suggests that “Parties should also include an applicable law clause”, i.e., “This contract is governed by the laws of ___________”. The 2018 HKIAC Administered Arbitration Rules however, have a suggestion that the model clause could contain the following language: “The law of this arbitration clause shall be _________” as an optional clause when the law of the substantive contract and the law of the seat are different. as the HKIAC has done.

Conclusion

In sum, we make the following points. First, the validation principle gives primacy to the enforceability of the arbitration agreement as a means of providing an efficient and neutral means of dispute resolution. This neatly sidesteps the white noise arising from the discussion of the proper law of the substantive contract being different from the law of the seat – which as the courts have observed, should have no effect on the proper law of the arbitration agreement. As Singapore continues her efforts in becoming a leading dispute resolution hub, there is no reason to shy away from expressly recognising this policy.

Second, while it may seem onerous, it remains worthwhile for parties to ensure coherence in their choice of laws and rules when drafting the arbitration agreement. As the cautionary tale of BNA has demonstrated, it is best to conduct the necessary due diligence on the ABC’s, otherwise unnecessary efforts, emotional energy, and costs could be spent litigating an 11-word phrase – “submitted to the Singapore International Arbitration Centre for arbitration in Shanghai”.

The opinions contained in this article reflect the authors’ own views and are not to be understood as reflecting the views of the authors’ employers or colleagues.

Endnotes   [ + ]

1.Although recent English court decisions have favoured the application of the proper law of the substantive contract to the arbitration agreement unless it would cause invalidity, there is no overriding jurisprudence constante amongst the English courts and tribunals seated in England. Decisions in the United States courts remain divided on this position as well. Professor Gary Born elaborates in the leading textbook, Gary Born, International Commercial Arbitration (Wolter Kluwers, 2014, 2nd ed) (International Commercial Arbitration) at pp 506-541; and Gary Born, The Law Governing International Arbitration Agreements: An International Perspective, (2014) 26 SAcLJ 814 (Born) at (38)-(40).
2.In this article, we discuss only arbitration agreements which are clauses forming part of a substantive contract, instead of “free-standing” arbitration agreements. The distinction between the two is recognised in both Sulamerica (at (26)) and BCY (at (66)-(67)), and gives rise to a different approach – where the law of a “free-standing” arbitration agreement is not expressly provided for, the presumed implied choice is the law of the seat of the arbitration.
3.BCY v BCZ (2017) 3 SLR 357 at (59)
4.Ibid at (60)-(61)
5.Ibid at (74)
6.Ibid at (44)-(45)
7.Parties had agreed that the BCY framework was the proper framework for determining the proper law of the arbitration agreement in the appeal. It should be noted that the Singapore Court of Appeal has not definitively affirmed the BCY framework, its applicability never having been an issue considered before it.
8.BNA v BNB (2020) 1 SLR 456 (“BNA (CA)”) at (64)
9.Ibid at (65)
10.Ibid at (90)
11.Ibid at (95)
12.The English Court of Appeal has departed from their earlier position in Sulamerica, finding instead that there should be a presumption in favour of the law of the seat when determining the parties’ implied choice of law of their arbitration agreement. Notably, the Court had considered that this presumption may “yield to specific contrary factors… for example if the arbitration agreement would be invalid under the law of the seat (at (104)).
13.Cassa di Risparmio di Parma e Piacenza SpA v Rals International Pte Ltd (2016) 1 SLR 79 at (89)
14.The validation principle as formulated by Professor Born is intended to be a “more consistent, principled solution” to the problems created by the “arbitrary and unpredictable” application of choice of law rules in international arbitration, which have “little or no regard to the real objectives and commercial expectations of the parties” (Born (n 1) at (51)-(53)). See also International Commercial Arbitration (n 1) at pp 542-549.
15.BNA v BNB and BNC (2019) SGHC 142 (BNA (HC)) at (50)-(66)
16.Supra n 5
17.Ibid. Chong J found that “the potential inconsistency of New York law under the (substantive contract) is not of a character that fundamentally undercuts the arbitration agreement altogether”, and did not have an “invalidating effect” which would have rebutted the presumption of the proper law of the substantive contract applying as the proper law of the arbitration agreement. Hence, there was no need to look further for a “validating” law.
18.Ibid
19.BNA (HC) at (123)
20.BNA (HC) at (57), where Coomaraswamy J observed that “whether the parties’ arbitration agreement would be valid under a hypothetical proper law is a weighty factor to be considered … because, as a matter of general contract law and as a matter of common sense, parties are presumed to have intended their contracts to be binding”.
21.BNA (HC) at (55)
22.BNA (CA) at (104)
23.Ibid
24.Supra n 9
25.The proper law of the substantive contract being the parties’ likely implied choice of law, and if not, the law of the seat being the law with the closest and most real connection to the arbitration agreement. To-date, the Singapore courts have not considered a third law in their application of the BCY framework.
26.BNA (HC) at (53)
27.Article 16.2 of the 2014 LCIA Arbitration Rules; Article 14.1 of the 2018 HKIAC Administered Arbitration Rules.
28.The SIAC presently only suggests that “Parties should also include an applicable law clause”, i.e., “This contract is governed by the laws of ___________”. The 2018 HKIAC Administered Arbitration Rules however, have a suggestion that the model clause could contain the following language: “The law of this arbitration clause shall be _________” as an optional clause when the law of the substantive contract and the law of the seat are different.

Associate
WongPartnership LLP
E-mail: [email protected]

Elisabeth Liang has interest in international commercial and investment arbitration. She holds a LLB (Honours) from the National University of Singapore.

Research and Development Operations Lead
Singapore International Dispute Resolution Academy, Singapore Management University School of Law
Associate Counsel, RevLaw LLC
E-mail: [email protected]

Rachel Tan is an Advocate and Solicitor of the Supreme Court of Singapore. Rachel also teaches legal skills at the National University of Singapore as an adjunct instructor. She holds degrees from the National University of Singapore.