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Which law governs your arbitration clause? You decide: An update from the Singapore perspective

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Summary: A recent Singapore High Court decision, BCY v BCZ, looks at which law governs an arbitration agreement (in the absence of an express choice). The case marks a departure from previous caselaw such as Firstlink, and brings the approach of the Singapore courts into line with that of the English courts in Sulamérica.

Introduction

As explained in our previous article What law governs your arbitration clause? You decide, prior to the recent decision in BCY v BCZ, the Singaporean and English courts’ approaches to the question of which law governs an arbitration agreement (in the absence of an express choice) differed. These differences were demonstrated by the Singaporean case of Firstlink Investments Corp Ltd v GT Payment Pte Ltd and Others [2014] and the English case of Sulamérica CIA Nacional de Suguros SA and others v Enesa Engenharia SA and others [2012] EWCA.

Sulamérica and Firstlink

In Sulamérica the English Court of Appeal adopted the following three-stage test to determine the law applicable to an arbitration agreement:

  1. that expressly chosen by the parties; or
  2. in the absence of an express choice, that impliedly chosen by the parties as gleaned from their intentions at the time of contracting; or
  3. in the absence of an express or implied choice, that with which the arbitration agreement has the closest and most real connection.

Applying this test, the English court drew a distinction between two types of arbitration agreement:

  • “Free-standing” arbitration agreements (i.e. those not contained within an underlying contract).  Assuming that the parties did not make an express choice, the next step was to go straight to the third limb of the test, bypassing the second.  This was because there was unlikely to be any basis on which to identify an implied choice of law. The choice of seat would be of “overwhelming” significance, and, as a result, the law of the seat is most likely to be the law with the closest and most real connection to the arbitration agreement.
  • Arbitration agreements forming part of an underlying contract. Again, assuming the parties have made no express choice, the choice of law relating to the underlying contract is a “strong indication” of the parties’ intentions in relation to the agreement to arbitrate. Applying the second limb of the test, the law of the underlying contract would be deemed to be the implied choice of law of the arbitration agreement.

On the facts of Sulamérica, although the arbitration agreement formed part of an underlying contract, the presumption that the parties had made an implied choice of law was rebutted. The court therefore applied the third limb and concluded that the applicable law was that of the seat of arbitration. 

In contrast, although ultimately reaching the same result, in FirstLink the Singapore High Court took the view that, absent the counterparties’ express choice, the applicable law of an arbitration agreement was the law of the seat of the arbitration.

The legal position following BCY v BCZ

The recent Singapore High Court decision in the anonymised judgment of BCY v BCZ [2016] SGHC 249 signals a departure from the position in Firstlink and aligns its approach with the English courts by applying the three-stage test in Sulamérica.  

The Singapore High Court, applying the Sulamérica three-stage test and departing from FirstLink (having considered the reasoning of both cases in the judgment), held that, absent an express agreement, the governing law of the underlying contract remains a strong indicator of the arbitration agreement’s governing law. The judgment makes it clear that where nothing suggests some other intention, the court’s starting point is to assume that the parties intended the same system of law to govern their entire relationship. The fact that the law of the seat differed from that of the underlying contract was not enough to displace this presumption. The court held that when applying the test’s second limb, the governing law of the underlying contract should only be displaced where the consequences of choosing it as the governing law of the arbitration agreement would “negate” the arbitration agreement.

Arbitration agreement is severable, not separate

The judgment also contains noteworthy remarks on the separability of the arbitration agreement from the underlying contract. The court’s reasoning makes it clear that the arbitration agreement is severable but not, from the outset, separate. Although the facts of BCY v BCZ involved an unsigned contract, the judgment clarified that when an underlying contract is signed, the arbitration agreement contained therein is not to be considered automatically and immediately separate in all respects. Finding otherwise was said not to reflect commercial reality. Concurring with Sulamérica, the court in BCY v BCZ  stated that the doctrine of separability does not “insulate” the arbitration agreement from the main contract. Its “narrow but vital purpose” is to ensure that any challenge to the existence of the underlying contract does not affect the validity of the agreement to arbitrate. The doctrine of separability should only be applied where the parties intend an arbitration agreement to survive, even where the underlying contract is found not to do so. In this case, an arbitration clause within an SPA which was never executed was held not to be a free-standing arbitration agreement. The second and not the third limb of the test was applicable in deciding its governing law. Accordingly, no arbitration agreement existed and the arbitrator who had been appointed under the clause lacked jurisdiction to hear claims.

BLP Perspective

The Singapore court’s decision, in departing from FirstLink, heralds a change in approach in Singapore to which law governs an arbitration agreement in the absence of express provisions. It brings the position into line with English law, albeit that since both BCY v BCZ and FirstLink are first instance decisions, some uncertainty remains until the issue is addressed by the Singapore Court of Appeal.

As before, parties should carefully consider and specify the governing law of their arbitration agreement, as well as the law of the contract itself, from the outset of any new business relationship. It is also advisable to specify the seat of the arbitration and, where appropriate, the applicable procedural rules. Taking these steps will mitigate the risk of time-consuming and costly side disputes and satellite litigation.

Arbitral institutions are as alive as practitioners to the need to specify the governing law of an arbitration agreement. Some institutions now provide assistance to parties to help them avoid becoming embroiled in distracting side disputes regarding the governing law of their arbitration agreements. For example, the HKIAC amended its model arbitration clause in 2013 to include optional choice of law provisions and the LCIA rules also provide for such a question arising by stating that, unless otherwise agreed, the governing law of the arbitration agreement will be the same as the law of the seat.

Arbitration agreements are sadly often referred to as “midnight clauses” because they are decided at the last minute and form part of the boilerplate wording. Parties often spend insufficient time considering them. However, given the potential consequences of failing to consider these clauses from the outset, disputes provisions should always be given proper attention at negotiation stage.

Prepared with the assistance of Pamela Rosindale, Trainee

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