Background
The Appellant (“BNA”), a corporation incorporated under the laws of the People’s Republic of China (“PRC”), entered into a Takeout Agreement dated 7 August 2012, as the buyer, with the First Respondent (“BNB”), a Korean company, for the supply of industrial gases (“Products”) manufactured and delivered in the PRC. The First Respondent was the original seller in the Takeout Agreement.
On 1 February 2013, an Addendum to the Takeout Agreement was executed between Appellant, First Respondent, and the Second Respondent (“BNC”), a PRC company, assigning all rights and obligations of First Respondent under the Takeout Agreement to Second Respondent, with the Addendum forming an indivisible part of the contract and to prevail over the Takeout Agreement. The Takeout Agreement required Appellant to purchase specified quantities of the Products and make monthly payments and contained an arbitration clause (Article 14) providing for PRC law as the governing law and disputes to be resolved via SIAC arbitration “in Shanghai” .
Appellant defaulted on payments under the Takeout Agreement, prompting the Respondents to file a Notice of Arbitration on 2 March 2016. Appellant in response challenged the tribunal’s jurisdiction. The principal dispute centred on whether the proper law of the arbitration agreement was PRC law or Singaporean law. Appellant contended that PRC law governed and rendered the arbitration agreement invalid because (i) PRC law did not permit a foreign institution such as SIAC to administer a PRC-seated arbitration, and (ii) the PRC Law also do not permit foreign administration of a purely domestic dispute. The Respondents maintained that Singaporean law applied, thereby preserving the validity of the arbitration agreement.
SIAC constituted a three-member tribunal which determined jurisdiction as a preliminary issue. By majority, the tribunal held Singapore to be the seat and Singaporean law to be the proper law of the arbitration agreement, relying on the “validation principle” and construing “arbitration in Shanghai” as designating the venue rather than the seat. The dissenting arbitrator held that Shanghai was the seat, and that there is nothing to displace PRC law as the proper law of the arbitration agreement. The dissenting arbitrator noted that the Takeout Agreement had several connections to PRC, including conclusion, manufacturing, supply, delivery and the place of performance. Thus, choice of PRC Law as the law governing the Takeout Agreement also extended to the arbitration agreement and the reference to SIAC cannot change that.
Appellant applied to the Singapore High Court under Section 10(3) of the International Arbitration Act (“IAA”) challenging the tribunal’s jurisdiction and seeking a declaration that the arbitration agreement was invalid. The High Court dismissed the application, holding Singapore law to be the proper law of the arbitration agreement and affirming the tribunal’s jurisdiction. Leave to appeal was granted under Section 10(4) of the IAA, limited to the question of the proper law and seat of the arbitration agreement, bringing the matter before the Court of Appeal.
Issues and Decision
What is the proper law of the Arbitration Agreement and the seat of the arbitration?
There was no dispute between the parties that the three-stage framework laid down in BCY v BCZ (“BCY”)[i] is applicable to determine the proper law of the arbitration agreement.
The Appellant contended that the dispute could be resolved at the first stage of the BCY framework. It argued that Article 14.1, providing that the Takeout Agreement “shall be governed by the laws of the PRC,” constituted an express choice of PRC law extending to the arbitration agreement in Article 14.2, as both formed part of the “Disputes” clause. It further submitted that the doctrine of separability had no application where the validity of the Takeout Agreement itself was not in issue.
Alternatively, the Appellant argued that the second stage of the BCY framework is also established since the parties had made an implied choice of PRC law as the proper law of the arbitration agreement. It maintained that the governing law of the Takeout Agreement presumptively applied and no factor was shown to displace it. The seat was asserted to be Shanghai, with the reference to the SIAC Rules insufficient to confer Singapore as the seat.
At the third stage, the Appellant submitted that PRC law had the closest and most real connection to the arbitration agreement, given the contract’s execution, performance, and subject matter being entirely within the PRC. It reiterated that under PRC law, the arbitration agreement was invalid as SIAC could not administer a PRC-seated and purely domestic arbitration.
The Respondents, on the other hand, supported the finding of the single Judge in the High Court that no express choice of law governing the arbitration agreement was made by the parties. At the second stage, they aligned with the Judge that incorporating the SIAC Rules imported Singapore as the default seat but further argued that pre-contractual negotiations should have been admitted, citing BQP v BQQ,[ii] (“BQP”) to contend that the parole evidence rule did not apply all cases arising out of arbitration. Such evidence, they claimed, would show the parties’ intention for a neutral forum, namely Singapore.
They further submitted that although PRC law governed the Takeout Agreement, there were compelling factors displacing its application to the arbitration clause. The parties’ emphasis on neutrality and the “serious risk” that PRC law would have invalidated the agreement at the time of contracting. Additionally, they argued that even if PRC law applied today, the arbitration agreement would remain valid due to changes in PRC law since the agreement was concluded.
The Court with regards to the applicable framework accepted and applied the BCY three-stage framework (mirroring Sulamérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others[iii]) to identify the proper law of the arbitration agreement, i.e., through (1) express choice; (2) implied choice; (3) closest and most real connection if neither express nor implied choice is found [¶44–48].
No express choice of law for the arbitration agreement
The Court rejected the contention that Article 14.1 (“This Agreement shall be governed by [PRC] law”) was an express choice for the arbitration agreement. Art 14.1 governs the contract; it does not, by its terms, expressly extend to the arbitration agreement in Article 14.2. The Court also noted that the clause 14 in the present case is similar to the two-part clause in BCY, wherein also it was decided that there was no express choice of law for the arbitration agreement. Hence, stage one of BCY was not satisfied [¶56–61].
Implied choice & the seat of arbitration
(A) Natural reading: “arbitration in Shanghai” designates the seat
Reading Article 14.2 in context and by reference to established authority, the Court held that the parties’ reference to “arbitration in Shanghai” naturally indicated seat, not merely venue. This aligns with authorities such as Naviera Amazonica Peruana SA v Compania Internacional de Seguros del Peru,[iv] Shagang South-Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics,[v] which treat a named place in an arbitration clause as the juridical seat absent contrary indicia [¶64 – 69].
(B) Contrary indicia argued and rejected
Evidence of Pre-contractual negotiations not inadmissible: The Court declined to rely on pre-contractual negotiations to identify seat or implied proper law. It distinguished BQP, as in this case the evidence was led before the Arbitral Tribunal, whereas in the present case it was led only before the High Court, and proceedings before High Court could not be “proceedings before an arbitrator” which is excluded from the application of parole evidence rule under Evidence Act. Furthermore, the Respondents could not satisfy the threshold for admitting extrinsic evidence in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd,[vi], i.e. of relevance, availability to all parties, clear or obvious context. [¶71–88].
Effect of PRC law cannot drive seat/proper-law analysis: Arguments that PRC law, at the time of contracting, posed a “serious risk” of invalidity was rejected, since the Respondents did not evidence that the parties were aware of any such concern, whereas, evidence, in fact shows that this concern was not all in the minds of the parties. [¶89–90].
SIAC Rules / Rule 18.1 : The High Court’s inference that selecting the SIAC Rules made Singapore as the default seat was rejected by the Court. The Court held that the default rule operate subject to the agreement between the parties, which in this case was present. [¶64].
The Court concluded that the natural and ordinary meaning of the phrase “arbitration in Shanghai” was that Shanghai was the juridical seat of the arbitration, and there were no contrary indicators suggesting otherwise. Consequently, PRC law, as the law of the seat, also became the parties’ implied choice of the proper law governing the arbitration agreement. This rendered unnecessary any inquiry into whether the implied choice should be displaced to preserve the parties’ intention to arbitrate and likewise obviated the need to proceed to the third stage of the BCY framework.
In light of this conclusion, it was also unnecessary to consider the Judge’s reliance on the validation principle or the principle of effective interpretation, since such principles would only be relevant if there were a competing system of law in play for governing law, which was not the case here. For the same reason, the Court found it unnecessary to opine on the applicability of the doctrine of separability where the validity of the main contract was not challenged. On a proper application of the BCY analysis, all factors pointed to PRC law as the governing law of the arbitration agreement [¶94–95].
Orders and Disposition
The Court allowed the appeal in part and declared that Shanghai, not Singapore, is the seat of the arbitration, but it expressly declined to express any concluded view on whether the tribunal ultimately has jurisdiction. The judges explained that once Singapore is no longer the seat any decision of the Singapore courts on jurisdiction would not bind the tribunal (because the Singapore courts would lack supervisory jurisdiction), and that Section 10 of the IAA does not compel the court to make a definitive finding on jurisdiction once the seat issue is dispositive, the seat determination was a necessary preliminary step to assess whether the law of the seat might displace the law of the main contract [¶96–98].
As the Court found PRC law to be the proper law of the arbitration agreement and the parties were not agreed on how PRC law operates (and the PRC position was described as “fraught with difficulty and rapidly evolving”), the Court held that the question whether the arbitration agreement is valid under PRC law is one best determined by the PRC courts; accordingly, the Court left it to the parties to decide whether to pursue that course, to seek SIAC arbitration under PRC supervision if possible, or to litigate in PRC courts and noted that the tribunal’s earlier majority finding of jurisdiction (which rested on an assumed Singapore seat) may no longer stand in light of the Court’s seat determination. The Court, thuss limited its order to the seat declaration and practical directions for the parties to pursue resolution of validity and jurisdiction in the appropriate forum [¶99–102].
Significance
This judgment is significant as it clarifies how Singapore courts apply the BCY framework to identify the proper law of an arbitration agreement. By holding that “arbitration in Shanghai” meant Shanghai was the seat and PRC law governed, the Court reinforced party autonomy and the primacy of the seat. It also highlighted the limits of the validation principle, showing that commercial intention to arbitrate cannot override clear contractual wording. The case stands as a guide for drafting precise arbitration clauses to avoid uncertainty.
Case Details
Citation Codes: [2019] SGCA 84
Date of Judgement: 27 December 2019
Forum: Singapore Court of Appeal
Bench: Sundaresh Menon CJ, Judith Prakash JA and Steven Chong JA
[i] [2017] 3 SLR 357
[ii] [2018] 4 SLR 1364
[iii] [2013] 1WLR 102
[iv] [1988] 1 Lloyd’s Rep 116
[v] [2015] 1 Lloyd’s Rep 504
[vi] [2008] 3 SLR(R) 1029
Author(s)
Shimit Patni
Student at NLU, Jodhpur