Published date01 December 2014
AuthorAndrew CHAN Chee Yin LLB (Hons) (National University of Singapore); Partner, Allen & Gledhill LLP. Jonathan CHAN Tuan San JD (Singapore Management University); Associate, Allen & Gledhill LLP. Jo TAY Yu Xi LLB, BBM (Finance) (Singapore Management University); LLM (Cantab); Associate, Allen & Gledhill LLP. Alexander Lawrence YEO Han Tiong LLB (Hons) (National University of Singapore); Senior Associate, Allen & Gledhill LLP.
Date01 December 2014

The globalised and cross-jurisdictional nature of commercial business means that the effects of insolvencies are often felt across multiple jurisdictions. Further, the ubiquity of arbitration clauses in commercial contracts means that the likelihood of interaction between the traditionally distinct areas of arbitration and insolvency law is increasing. For example, what are the effects of a foreign insolvency event on arbitrations seated in Singapore? This article attempts to examine the interaction and impact of cross-border insolvencies on arbitration proceedings from a Singapore law perspective, which is timely given Singapore's continued growth as a leading arbitration and established international finance centre.

I. Introduction

1 The interaction between the law of arbitration and cross-border insolvency laws is of particular importance given Singapore's status as both a leading arbitration centre and an established international

finance centre. This article will deal broadly with the impact of cross-border insolvency on arbitration proceedings from a Singapore law perspective.

2 There are a number of scenarios in which these areas of law may come into contact. One example is where arbitration proceedings are ongoing in Singapore, but insolvency proceedings are commenced before a foreign court against the respondent in the arbitration. If the foreign courts order a stay of all proceedings against the respondent, does the arbitral tribunal in Singapore stay proceedings? Who has locus standi to appear for the respondent? Should the tribunal continue to hear management? Or should the tribunal hear the insolvency practitioner appointed by the foreign court? What happens in the event that the foreign insolvency appointee disclaims the agreement in which the relevant arbitration clause is housed?

3 This interaction — one could almost say clash — between cross-border insolvency law and arbitration law on some of the above issues may be particularly difficult to resolve, due to the almost diametrically opposed legal philosophies underpinning both concepts. The Singapore Court of Appeal in Larsen Oil and Gas Pte Ltd v Petroprod Ltd1 (“Larsen Oil”) aptly described this tension:

Arbitration and insolvency processes embody, to an extent, contrasting legal policies. On the one hand, arbitration embodies the principles of party autonomy and the decentralisation of private dispute resolution. On the other hand, the insolvency process is a collective statutory proceeding that involves the public centralisation of disputes so as to achieve economic efficiency and optimal returns for creditors.

4 This article aims to identify areas of interaction in a cross-border context between the two areas of law, and suggest the outcome of these interactions. The article examines the topic from the perspective of Singapore law, but some of the concepts and discussion may also be relevant to other common law jurisdictions.

II. The impact of cross-border insolvency proceedings/orders/ resolutions per se on the substantive validity of an arbitration agreement

5 Is an arbitration agreement providing for arbitration in one jurisdiction revoked upon the occurrence of insolvency proceedings or procedures (including orders and resolutions) in a different jurisdiction? The answer depends on a number of variables, some of which are analysed in turn below.

A. Validity of an arbitration agreement under Singapore insolvency laws

6 Under Singapore law, Singapore insolvency proceedings do not per se affect the validity of arbitration agreements entered into prior to the commencement of the insolvency proceedings.2 In the context of personal bankruptcy, s 148A of the Bankruptcy Act,3inter alia, gives the Official Assignee the option to either disclaim or adopt a contract containing an arbitration agreement.

7 There is no statutory equivalent of s 148A of the Bankruptcy Act in corporate insolvencies. Nevertheless, corporate insolvencies also do not per se invalidate arbitration agreements. Consistent with such a view, the Singapore Court of Appeal in Larsen Oil4 proceeded on the basis that an arbitration agreement entered into pre-liquidation may well continue to be “observed”, such as to enable arbitration of prior private inter se disputes (ie, disputes that are solely between the parties).5 This presupposes that insolvency does not itself terminate an arbitration agreement. However, it is also open for a liquidator to disclaim certain contracts if, for example, the agreement within which the arbitration agreement is housed constitutes an “unprofitable contract”.6

8 In the event of Singapore insolvency proceedings, a Singapore-seated arbitration tribunal would be bound by the insolvency law provisions affecting the substantive arbitration agreement, and would therefore be bound to find the arbitration agreement invalid if Singapore insolvency law so provides. This is because Singapore insolvency should be regarded as part of the forum mandatory rules,7“replete with public policy considerations”8 whose primary intent is to protect a large class of persons — the general body of unsecured creditors. The above insolvency provisions are also not unique to Singapore, but have equivalents in the insolvency laws of many

jurisdictions. As a comparison, tribunals in several International Chamber of Commerce (“ICC”) awards have held that they are bound to take into account the insolvency law of the seat of the arbitration, once insolvency proceedings are filed in that jurisdiction.9

B. Impact of foreign insolvency proceedings on substantive validity of an arbitration agreement

9 How would the above answers change in the event of a foreign insolvency? Particularly where the foreign insolvency prescribes that the arbitration agreement is annulled upon insolvency? One notable example can be found from the Vivendi/Elektrim10 cases arising in Europe. Elektrim was a Polish company that had entered into an investment agreement with two French companies. The agreement provided for arbitration in London. Elektrim was made bankrupt under Polish law. Polish bankruptcy law provides that an arbitration agreement is annulled upon the onset of insolvency.11 Should the tribunal give effect to this consequence of Polish (or other) insolvency law that invalidates the arbitration agreement?

10 The English line of Elektrim decisions held that English law, and not Polish law, applied to determine validity. The English decisions turned on the interpretation of certain provisions of the European insolvency regulations.12 Would the position be similar under common law conflict of laws rules? The question of the effect of foreign insolvency on the continued substantive validity of an arbitration seated in a common law country (say, Singapore) does not appear to have been fully worked out. This part of the article seeks to provide a working framework or some ideas as to what the position in Singapore could be.

11 First, the start point should be that foreign proceedings should not by themselves be held to invalidate a valid arbitration agreement. As discussed above, Singapore insolvency law does not automatically

invalidate an arbitration agreement and the presumption is that foreign law is similar to Singapore law unless proven otherwise.13 This is, however, only a rule of evidence, which may be rebutted on the presentation of appropriate evidence that the foreign insolvency would substantively affect the arbitration agreement.

12 Second, foreign insolvency laws have no force of law or automatic application in Singapore, a proposition that should be self-evident. Consistent with this view, it has been observed in the recent Singapore Court of Appeal decision of Beluga Chartering GmbH v Beluga Projects (Singapore) Pte Ltd14 (“Beluga CA”) that the Singapore courts are not bound by stays of legal proceedings flowing from a foreign winding-up order, “premised on the fundamentally territorial nature of jurisdiction”.15

13 Third, it would follow that in order for the effects of foreign insolvency law to substantively invalidate an arbitration agreement, there necessarily must be a legal basis which applies, as a matter of conflict of laws principles, the said foreign law.

14 Fourth, it should not be presumed that a tribunal would apply the same conflict of laws principles as those applicable in the Singapore court to determine whether to give effect to the foreign insolvency laws that might affect the substantive validity of the arbitration agreement. In this respect, a start point for a tribunal seated in Singapore should be Art 28 of the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law on International Commercial Arbitration16 (“Model Law”) (in the case where the International Arbitration Act17 (“IAA”) applies) and s 32 of the Arbitration Act18 (“AA”) (in the case where the AA applies).19 The provisions essentially require the tribunal

to apply to the substance of the dispute the law chosen by the parties as applicable to the substance of the dispute.20 However, where parties have not chosen a law applicable to the dispute, the tribunal is to determine the substantive law with reference to “the conflict of laws rules which it considers applicable”. 21 In such instances the tribunal has a “free hand” in deciding what conflict of laws rules apply in determining what substantive law applies.22 However, it is the experience and understanding of the authors that in such situations, Singapore-seated tribunals would often apply Singapore conflict of laws principles.

15 The effect of Art 28 of the Model Law is that the tribunal will have to decide what law applies to the substance of the dispute. In this respect, the tribunal will invariably among other things determine what laws govern the arbitration agreement, which may not necessarily be the same governing law as the main contract within which the arbitration agreement...

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