English law and New York law are frequently chosen to govern international contracts. However, parties will not always want their disputes to be heard there. Increasingly, parties in international trade are turning to disputes hubs such as Singapore, Hong Kong and Dubai.
This can give rise to drafting issues, particularly if parties have chosen arbitration as their disputes forum. Most jurisdictions treat the arbitration agreement as being separable from the underlying contract. Referred to as the doctrine of separability, this means that the arbitration clause remains effective even if the underlying contract is found to be invalid.
However, this can also result in the governing law of the arbitration agreement being different to that of the underlying contract. This is not usually an issue where the governing law and seat are the same (contract governed by Singapore law and arbitration in Singapore). The governing law of the contract will apply to both.
But what if the two are not the same? In the absence of an express choice of law for the arbitration agreement, which takes precedence – the law of the seat or the law of the underlying contract? The High Court of Singapore recently had to consider this question. This decision, which departs from the position previously taken in Singapore, highlights the importance of providing for the law of the arbitration agreement where the seat and the law of the underlying contract are not the same.
Facts
BCY (the plaintiff) and BCZ (the defendant) negotiated, but never signed, a Sale and Purchase Agreement. The SPA was never executed. Subsequently, BCZ brought arbitration proceedings against BCY in relation to disputes arising under the SPA.
BCZ argued that although the SPA was never executed, the parties had agreed to arbitrate any disputes arising under it. As such, the doctrine of separability meant that the arbitration agreement remained valid and binding regardless of the SPA.
In terms of which law governed the arbitration agreement (and therefore determined issues relating to the validity and existence of the arbitration agreement), BCZ argued that New York law (as the law governing the SPA) and not Singapore law (the law of the seat of arbitration) applied. Although determination of the question would have negligible impact on the decision, the Court took the opportunity to express its view on the issue, the points having been fully argued and in light of the divergent authorities and academic opinions on the topic.
The Court's decision
The governing law of an arbitration agreement is to be determined through a three-stage test:
- the parties' express choice;
- the parties' implied choice as gleaned from their intentions at the time of contracting; or
- the system of law with which the arbitration agreement has the closest and most real connection.
As there was no express choice, here the dispute focused on the second stage of the test: implied choice. The cases had taken different approaches to the issue of what constitutes the starting point in determining the parties' implied choice:
- The Sulamerica approach (English position) which takes the law of the contract as its starting point – where the arbitration agreement forms part of the contract, parties are presumed to have intended the same law to govern both the arbitration agreement and the underlying contract.
- The FirstLink approach (Singapore position) which takes the law of the seat as its starting point - parties are presumed to want a different (neutral) law to apply in the event of a dispute.
The Court preferred the Sulamerica approach. Where the arbitration agreement is a clause forming part of a main contract, the governing law of the contract is a strong indicator of the governing law of the arbitration agreement. The choice of a different seat from that of the governing law is not, in itself, sufficient to displace that starting presumption. If the parties had intended otherwise then specific provision should have been made for a different law to apply. In this regard, the Court disagreed that the FirstLink approach represents the law in Singapore.
It had been suggested that a different law is supported by the doctrine of separability. The Court disagreed. The doctrine of separability serves the narrow purpose of ensuring that the arbitration clause (and therefore the parties' choice of forum for any dispute) remains effective even if the underlying contract is found to be invalid. It does not mean that the arbitration clause is independent from the underlying contract.
Drafting implications
The decision will be welcomed in Singapore as there were concerns that Singapore's approach was out of line with the widely accepted English approach.
However, it should not be taken as an indication that the law of the underlying contract will always prevail where the law of the seat and the underlying contract are different. As Sulamerica itself illustrates, if there are "powerful factors" that point the other way, the law of the seat may be chosen. In that case, the underlying contract was governed by Brazilian law. The seat of the arbitration was London. The fact that the parties had chosen another country as the seat of arbitration, and therefore agreed that the arbitration law of that country would apply to the proceedings, indicated that they intended English law to govern all aspects of the arbitration agreement.
So, where the law of the underlying contract and the seat differ, parties should always expressly state the law that will govern the arbitration agreement. Most leading institutions already provide for this in their specimen arbitration clauses. Or specific reference to the arbitration agreement could be made in the governing law provisions.
Cases referred to:
BCY -v- BCZ [2016] SGHC 249
Sulamerica Cia Nacional De Seguros S.A. and Ors -v- Enesa Engenharia S.A. [2012] 12.EWCA Civ 638
FirstLink Investments Corp Ltd -v- GT Payment Pte Ltd and others [2014] SGHCR
