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The Singapore Law Gazette

What is the Basis for the Validation Principle in International Arbitration?

The validation principle has been framed in both positive and negative terms. The former seeks to impute an implied choice of law that would validate the arbitration agreement while the latter operates to negate an implied choice of law that would invalidate the arbitration agreement. In this article, we seek to explain that there is no persuasive justification for a positive formulation of the validation principle, and why a negative formulation of the validation principle is better aligned to the principle of party autonomy which is sacrosanct in international arbitration.

Introduction

  1. The validation principle has been described as a general principle of contractual interpretation which seeks to uphold the validity of an arbitration agreement. It has been framed in both positive and negative terms:
    1. Positive Conception: If an 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;1Gary B Born, The Law Governing International Arbitration Agreements: An International Perspective (2014) 26 SAcLJ 814 (“Gary Born“) at (51); see also Enka Insaat ve Sanayi AS v OOO “Insurance Co Chubb” (2020) 1 WLR 4117 (“Enka“) at (198). and
    2. Negative Conception: Where the governing law of the contract would render the arbitration clause invalid, the putative invalidity of an arbitration clause may at least negate an inference that the law generally applicable to the contract was intended to apply to the arbitration clause.2Enka at (97).
  2. The exercise to determine if the parties had made an implied choice of law to govern the arbitration agreement and the application of the validation principle would be relevant in circumstances where parties did not make an express choice of law. The Positive Conception and Negative Conception are different in that: (i) the former seeks to displace an implied choice of law in favour of another law that would validate the arbitration agreement, (ii) whereas the latter negates an implied choice of law and leads to the conclusion that there was no implied choice of law in respect of the arbitration agreement.
  3. In this article, we examine the theoretical basis underpinning the validation principle, and seek to explain that a Negative Conception should be favoured over a Positive Conception.

Theoretical Basis Underpinning the Validation Principle

  1. In this section, we examine whether and the extent to which the validation principle can be justified on the basis of:
    1. the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (New York Convention)3Convention of the Recognition and Enforcement of Foreign Arbitral Awards (1958): https://www.newyorkconvention.org/11165/web/files/original/1/5/15432.pdf (accessed 24 May 2023). and the UNCITRAL Model Law on International Commercial Arbitration (1985) (Model Law);4UNCITRAL Model Law on International Commercial Arbitration (1985): https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/06-54671_ebook.pdf (accessed 24 May 2023). and/or
    2. the principle of party autonomy.

The New York Convention and Model Law Do Not Mandate the Application of the Validation Principle

  1. It has been suggested that the New York Convention and the Model Law mandate the application of the validation principle5Gary Born at (56). for the following reasons:
    1. Article II of the New York Convention and Article 8 of the Model Law set forth a substantive rule that arbitration agreements are presumptively valid and enforceable;6Gary Born at (14)-(15) and (59).
    2. Article 16 of the Model Law provides for the presumptive separability of arbitration agreements, which implicitly recognises that the arbitration agreement and underlying contract may be governed by different laws;7Gary Born at (15). and
    3. Article V(1)(a) of the New York Convention and Articles 34 and 36 of the Model Law provide for the application of the law to which parties have subject the arbitration agreement to, and this encompasses both express and implied choices of law.8Gary Born at (61)-(63).
  2. We respectfully disagree. In our view, the New York Convention and Model Law do not mandate the application of a validation principle. In particular, the justifications advanced on the basis of the New York Convention and the Model Law are in fact premised on the principle of party autonomy, i.e., that there was an implied choice of law by parties that the arbitration agreement would be governed by a law that would give effect to the arbitration agreement. The extent to which party autonomy may serve to justify the imposition of the validation principle will be discussed in further detail at Section II.B. below.
  3. We begin by addressing the argument that Article V(1)(a) of the New York Convention and Articles 34 and 36 of the Model Law encompasses both express and implied choices of law.9Gary Born at (61); Enka at (129). Even if this was true,10In this regard, see Enka at (129) which recognises that there is a division of opinion among commentators over whether the first limb of Article V(1)(a) applies only where there is an express choice of law to govern the arbitration agreement, or whether it also encompasses a choice that is implied. The UKSC found that the latter interpretation represented the better view. the application of an implied choice of law analysis does not necessarily lead to the conclusion that the arbitration agreement was valid. On the contrary, the express language of Article V(1)(a) of the New York Convention and Articles 34 and 36 of the Model Law recognises that an arbitration agreement may not be valid under the law to which parties have subjected it. Accordingly, any suggestion that the aforesaid provisions mandate the application of the validation principle is incorrect.
  4. In respect of the argument that Article II of the New York Convention and Article 8 of the Model Law advance a principle of substantive or presumptive validity,11Gary Born at (14)-(15). this is, with respect, a strained interpretation of these provisions. The plain reading of these provisions suggests that a court should refer parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed. Article II of the New York Convention and Article 8 of the Model Law therefore do not provide for the substantive or presumptive validity of the arbitration agreement, and this remains a question to be determined by the Court or arbitral tribunal.
  5. On this note, the UK Supreme Court has also clarified in Enka Insaat ve Sanayi AS v OOO “Insurance Co Chubb” [2020] 1 WLR 4117 (Enka) that “Article II does not itself specify rules for identifying the law by which the validity of the arbitration agreement is to be determined“.12Enka at (130). While there is a persuasive argument that Article II of the New York Convention should be interpreted in a manner that is consistent with Article V of the same,13Enka at (130). Article V does not mandate the application of a validation principle for the reasons set out at paragraph 7 above.
  6. Lastly, the argument that Article 16 of the Model Law provides for the presumptive separability of an arbitration agreement from its underlying contract14Gary Born at (15). does not justify the application of the validation principle. Article 16 of the Model Law is intended to give effect to the principle of Kompetenz-Kompetenz, such that: (i) an arbitral tribunal may rule on its own jurisdiction; and (ii) the invalidity, non-existence or ineffectiveness of the main contract would not entail ipso jure the invalidity of the arbitration clause. Importantly, Article 16 does not specify the law which an arbitral tribunal should apply to determine the possible issues relating to its jurisdiction.15Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration at p. 38: https://undocs.org/en/A/CN.9/264 (accessed on 29 May 2023); see also BBA v BAZ (2020) 2 SLR 453 at (78) which clarifies that arguments as to the validity of the arbitration agreement is a question of jurisdiction. This accords with the observation by the UK Supreme Court in Enka that the separability principle “tells one nothing about the legal system which the parties intended or might reasonably have expected to govern the interpretation of the arbitration agreement as part of the main contract“.16Enka at (275), see also (232)-(233). In this regard, the Singapore High Court has also observed that the doctrine of separability is intended to serve the narrow purpose of ensuring that any challenge that the main contract is invalid would not, in itself, affect the validity of the arbitration agreement.17BCY v BCZ (2017) 3 SLR 357 at (60)-(61). Accordingly, the separability of an arbitration agreement from its underlying contract does not provide any indication regarding the law governing the arbitration agreement or justify the application of a validation principle.
  7. For the reasons set out above, the New York Convention and Model Law do not mandate the application of a validation principle.

The Principle of Party Autonomy Does Not Justify a Positive Conception of the Validation Principle

  1. In our view, the validation principle is better justified on the basis of party autonomy. As explained by the Singapore High Court in BNA v BNB [2019] SGHC 142, the fundamental purpose of construing an arbitration agreement is to give effect to the parties’ intention.18BNA v BNB (2019) SGHC 142 at (23). In this regard, it may be argued rather persuasively that parties included an arbitration clause because they intended to arbitrate their disputes, and in the belief that the obligation to arbitrate would be valid and effective.19Gary Born at (54); Enka at (277). On that premise, it follows that parties would not have made an implied choice of law which would invalidate the arbitration agreement.20However, insofar as the parties had made an express choice as to the law which should govern the arbitration agreement, the court or tribunal should give effect to that express choice of law even if this would invalidate the arbitration agreement; see Anupam Mittal v Westbridge Ventures II Investment Holdings (2023) SGCA 1 at (54).
  2. This appears to accord with the principle of contractual interpretation that an interpretation which upholds the validity of a transaction is to be preferred to one which would render it invalid or ineffective.21Enka at (95). Nonetheless, there is arguably an important distinction − unlike the case where the Court or tribunal is seeking to discern the meaning or effect of a particular contractual provision, the exercise to determine an implied choice of law only arises in the absence of an express provision setting out the law governing the arbitration agreement. Accordingly, the argument that parties must necessarily have made an implied choice of law (that would validate an arbitration agreement) is weaker as compared to the scenario where the exercise is to ascribe meaning to an express contractual provision.
  3. The difficulty with the Positive Conception lies in the false dichotomy between (i) a choice of law that would operate to invalidate the arbitration agreement, and (ii) a choice of a law that would uphold the validity of the arbitration agreement.22In this regard, see also the extract from Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International, 1999) (Emmanuel Gaillard & John Savage eds) at p 258, reproduced in Insigma Technology Co Ltd v Alstom Technology Ltd (2009) 3 SLR(R) 936 at (31), that cites the French Civil Code for the proposition that “the interpretation enabling the clause to be effective should be adopted in preference to that which prevents the clause from being effective“. Further to these two possibilities, it is entirely possible that parties had not given any thought as to the law which should govern the arbitration agreement.
  4. To that end, insofar as the objectively discerned implied choice of law would operate to invalidate the arbitration agreement, it may be preferable to apply a Negative Conception to negate the implied choice of law. This recognises that parties are unlikely to have made an implied choice of law which would invalidate the arbitration agreement, while also furthering the principle of party autonomy which is sacrosanct in international arbitration. It prevents the courts or tribunals from imputing a choice of law which was not intended by parties, and avoids the unsatisfactory outcome where parties may be compelled to arbitrate particular issues, or in a manner which may not have been contemplated by the parties. In other words, the Positive Conception may potentially superimpose a system of law that would validate the arbitration agreement even though this runs the risk of overriding the parties’ intention.
  5. At this juncture, it bears highlighting that the negation of an implied choice of law does not necessarily lead to the conclusion that the arbitration agreement is invalid or inoperative. To the extent that the court is unable to discern an express or implied choice of law, it will proceed to determine the proper law of the arbitration agreement based on the system of law with which the arbitration agreement has its closest and most real connection with (the Closest Connection Test).23BNA v BNB (2020) 1 SLR 456 at (48). This is consistent with cases such as Sulamèrica Cia Nacional de Seguros SA v Enesa Engelharia SA [2012] EWCA Civ 638 (Sulamèrica) which were not decided on the basis of an implied choice of law but on the Closest Connection Test.24Sulamèrica Cia Nacional de Seguros SA v Enesa Engelharia SA (2012) EWCA Civ 638 at (31)-(32).
  6. For the reasons set out above, the Positive Conception runs the risk of overriding the parties’ intention and is therefore not justifiable on the principle of party autonomy. Insofar as case law and the principles of contractual interpretation require that the arbitration agreement be interpreted in a manner that would not invalidate it, this may be achieved through the Negative Conception which is better aligned with the principle of party autonomy.

Further Observations and Implications

  1. It has been suggested that the Positive Conception of the validation principle has been applied in a number of jurisdictions such as Switzerland, Algeria, Spain, Austria, France and the United States of America.25Gary Born at (65)-(66), (73) and (77)-(84).
  2. In contrast, the position in Singapore is arguably more unsettled as the validation principle has not been explicitly affirmed or rejected by the apex court in Singapore.26See BNA v BNB (2020) 1 SLR 456 at (95), where the Singapore Court of Appeal did not see a need to comment on the applicability of the validation principle at that juncture.
  3. Nonetheless, it may be argued that the Singapore Court of Appeal’s (SGCA) recent decision in Anupam Mittal v Westbridge Ventures II Investment Holdings [2023] SGCA 1 (Anupam Mittal)27Please note that Wong & Leow LLC acted for the Appellant in this case. represents an implicit endorsement of the Negative Conception. In particular, the SGCA considered that Indian law would have been the implied choice of law to govern the arbitration agreement,28Anupam Mittal at (70). but that said implication was negated as the choice of Indian law would frustrate the parties’ intention to arbitrate all their disputes.29Anupam Mittal at (74). Significantly, after holding that the implied choice of Indian law was negated, the SGCA did not proceed to find that parties intended for Singapore law (i.e., the law of the seat in that case) to govern the arbitration agreement, but proceeded to apply the Closest Connection Test.30Anupam Mittal at (75).
  4. The approach adopted by the SGCA in this specific context (i.e., leaving aside the merits of the decision in Anupam Mittal) is preferable because:
    1. the third stage of the framework to determine the governing law of an arbitration agreement, i.e., the Closest Connection Test,31BCY v BCZ (2017) 3 SLR 357 at (40). would be rendered otiose and redundant insofar as the Positive Conception is to be applied; and
    2. a Negative Conception seeks to better ascertain the parties’ intention and is not merely a means to a prescribed outcome (i.e., the validation of an arbitration agreement).32See BNA v BNB (2019) SGHC 142 at (53)-(54) which criticises the (Broader Conception) of the validation principle as being “nakedly instrumental“.
  5. Lastly, it may perhaps be argued that the differences between the Positive Conception and Negative Conception may be more superficial than real as the court or tribunal may ultimately still find that there was a valid arbitration agreement after applying the Closest Connection Test. Nonetheless, such an approach is preferable in our view as the Closest Connection Test rests on the judicial imputation of a choice of law,33BNA v BNB (2020) 1 SLR 456 at (48). and does not seek to uphold an arbitration agreement on the artificial basis that parties had purportedly made an implied choice of law.

Conclusion

  1. Based on the foregoing, we respectfully suggest that there is no persuasive justification for the imposition of the Positive Conception of the validation principle. To the extent that party autonomy and the principles of contractual interpretation require a determination of an implied choice of law (if any) that would not invalidate the arbitration agreement, this may be achieved through the Negative Conception of the validation principle. Nonetheless, the nomenclature used is arguably a misnomer as the Negative Conception does not explicitly seek to validate the arbitration agreement, but merely to negate an implied choice of law.

Endnotes

Endnotes
1 Gary B Born, The Law Governing International Arbitration Agreements: An International Perspective (2014) 26 SAcLJ 814 (“Gary Born“) at (51); see also Enka Insaat ve Sanayi AS v OOO “Insurance Co Chubb” (2020) 1 WLR 4117 (“Enka“) at (198).
2 Enka at (97).
3 Convention of the Recognition and Enforcement of Foreign Arbitral Awards (1958): https://www.newyorkconvention.org/11165/web/files/original/1/5/15432.pdf (accessed 24 May 2023).
4 UNCITRAL Model Law on International Commercial Arbitration (1985): https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/06-54671_ebook.pdf (accessed 24 May 2023).
5 Gary Born at (56).
6 Gary Born at (14)-(15) and (59).
7 Gary Born at (15).
8 Gary Born at (61)-(63).
9 Gary Born at (61); Enka at (129).
10 In this regard, see Enka at (129) which recognises that there is a division of opinion among commentators over whether the first limb of Article V(1)(a) applies only where there is an express choice of law to govern the arbitration agreement, or whether it also encompasses a choice that is implied. The UKSC found that the latter interpretation represented the better view.
11 Gary Born at (14)-(15).
12 Enka at (130).
13 Enka at (130).
14 Gary Born at (15).
15 Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration at p. 38: https://undocs.org/en/A/CN.9/264 (accessed on 29 May 2023); see also BBA v BAZ (2020) 2 SLR 453 at (78) which clarifies that arguments as to the validity of the arbitration agreement is a question of jurisdiction.
16 Enka at (275), see also (232)-(233).
17 BCY v BCZ (2017) 3 SLR 357 at (60)-(61).
18 BNA v BNB (2019) SGHC 142 at (23).
19 Gary Born at (54); Enka at (277).
20 However, insofar as the parties had made an express choice as to the law which should govern the arbitration agreement, the court or tribunal should give effect to that express choice of law even if this would invalidate the arbitration agreement; see Anupam Mittal v Westbridge Ventures II Investment Holdings (2023) SGCA 1 at (54).
21 Enka at (95).
22 In this regard, see also the extract from Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International, 1999) (Emmanuel Gaillard & John Savage eds) at p 258, reproduced in Insigma Technology Co Ltd v Alstom Technology Ltd (2009) 3 SLR(R) 936 at (31), that cites the French Civil Code for the proposition that “the interpretation enabling the clause to be effective should be adopted in preference to that which prevents the clause from being effective“.
23 BNA v BNB (2020) 1 SLR 456 at (48).
24 Sulamèrica Cia Nacional de Seguros SA v Enesa Engelharia SA (2012) EWCA Civ 638 at (31)-(32).
25 Gary Born at (65)-(66), (73) and (77)-(84).
26 See BNA v BNB (2020) 1 SLR 456 at (95), where the Singapore Court of Appeal did not see a need to comment on the applicability of the validation principle at that juncture.
27 Please note that Wong & Leow LLC acted for the Appellant in this case.
28 Anupam Mittal at (70).
29 Anupam Mittal at (74).
30 Anupam Mittal at (75).
31 BCY v BCZ (2017) 3 SLR 357 at (40).
32 See BNA v BNB (2019) SGHC 142 at (53)-(54) which criticises the (Broader Conception) of the validation principle as being “nakedly instrumental“.
33 BNA v BNB (2020) 1 SLR 456 at (48).

Principal, Dispute Resolution Practice Group
Baker McKenzie Wong & Leow

Ashish is qualified to practise law in England & Wales, India, New York and Singapore and is a Fellow of the Chartered Institute of Arbitrators.

His area of practice focuses on international arbitration and cross-border commercial disputes. He has represented parties with respect to disputes across a wide range of industries including technology, telecommunications as well as infrastructure projects, hospitality and renewable energy. In particular, Ashish has significant experience as to commercial disputes arising out of M&A transactions, joint ventures and shareholder agreements in the Asia Pacific region.

Associate, Dispute Resolution Practice Group
Baker McKenzie Wong & Leow

Kai Tai has acted in a number of high profile cases (both reported and non-reported), and frequently appears as counsel at the Singapore Court of Appeal and High Court. Beyond Kai Tai’s focus on complex cross-border disputes, he also advises and acts for a variety of multinational clients on matters of fraud, restructuring and insolvency, employment, and international investment disputes.

Associate, Dispute Resolution Practice Group
Baker McKenzie Wong & Leow

Yong Li has been involved in a number of cross-border disputes and has acted for clients situated in various different jurisdictions and as well as locally in Singapore. His experience includes representing clients and providing advice in relation to joint venture disputes, restructuring and insolvency, employment matters and corporate disputes.

Trainee, Dispute Resolution Practice Group
Baker McKenzie Wong & Leow

Jia Xin will join the team as an associate upon being called to the Bar in August 2023. Her interests lie in commercial dispute resolution as well as restructuring and insolvency.