THE LAW GOVERNING ARBITRATION AGREEMENTS: BCY V BCZ AND BEYOND

• Citation: (2018) 30 SAcLJ 70
• Published date: 01 December 2018
• Date: 01 December 2018
• Author: LEONG Hoi Seng Victor LLB (Hons) (National University of Singapore); Justices' Law Clerk, Supreme Court of Singapore. TAN Jun Hong LLB (summa) (Singapore Management University); Justices' Law Clerk, Supreme Court of Singapore.

Determining the law governing the arbitration agreement has been a vexed question for arbitral tribunals and courts alike. The Singapore courts, following the footsteps of the UK courts, have clarified in recent decisions such as BCY v BCZ that the parties will be presumed to have impliedly chosen the proper law of the underlying contract as the law of the arbitration agreement. This article examines these decisions, with an emphasis on what has come to be known as the validation principle.

I. Introduction

1 The choice of law governing an arbitration agreement is a critical preliminary question to be answered in many situations, for instance, when a tribunal's jurisdiction is challenged. This law governs numerous grounds of challenge, including those relating to the validity and scope of the arbitration agreement, the identity of the parties to the agreement, as well as the question of whether the parties have been discharged from any obligation to arbitrate further disputes.1 Yet, many Singapore decisions have not dealt with this question in detail.2 It is therefore refreshing that in BCY v BCZ3 (“BCY”), this question was revisited at length, and the prevailing Singapore position on this choice-of-law question was restated. The reasoning in BCY will be scrutinised below, but for present purposes, it should be noted that BCY was a departure – a volte-face, in fact – from FirstLink Investments Corp Ltd v GT Payment Pte Ltd4 (“FirstLink”), a decision just two years prior. That

such a departure occurred within such a short span of time is indicative of how thorny this choice-of-law question is.

2 This article will begin by discussing the recent developments in Singapore. It then looks at the feasibility of recognising the validation principle – a principle which prefers a law of the arbitration agreement that would not render the arbitration agreement invalid – in Singapore jurisprudence, given that this principle has not yet been considered in local decisions. This article proposes that the principle be incorporated into the second stage of the Sulamérica5 analysis (that is, as a factor in determining the parties' implied choice of law). This article will then turn to issues concerning the express choice of the governing law of the arbitration agreement, including what constitutes an “express” choice of the law of the arbitration agreement and what happens where the underlying contract contains no express choice-of-law provision.6

II. Developments in Singapore

A. FirstLink

3 It is apposite to begin the discussion with FirstLink for it marks the first occasion on which the Singapore courts have considered this issue at length. In FirstLink, the arbitration agreement was in favour of the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”). The arbitration agreement contained no express choice of law. The underlying contract, however, provided that the contract be governed by and interpreted under the laws of SCC – an aberration, since parties usually choose national laws to govern the substantive terms of the contract.

4 In order to determine the law governing the arbitration agreement, the learned assistant registrar in FirstLink began by accepting that the three-stage enquiry in Sulamérica Cia Nacional de Seguros SA v Enesa Engelharia SA7 (“Sulamérica”) ought to apply. The Sulamérica enquiry first looks at whether an express choice had been made by the parties and, in the absence of an express choice, whether an

implied choice had been made; and finally, where the parties had not made any choice (express or implied), the proper law would be the law that the arbitration agreement had the closest and most real connection with. After examining a few English decisions post-dating Sulamérica, the assistant registrar observed that this line of authorities boils down to the following principle:8

[I]n a competition between the chosen substantive law and the law of the chosen seat of arbitration, all other facts being equal (in a situation where there are no sufficiently strong indications to the contrary), the law will make an inference that the parties have impliedly chosen the substantive law to be the proper law applicable to the arbitration agreement …

In other words, the law of the arbitration agreement presumptively follows the law of the underlying contract.

5 The assistant registrar made clear that he was departing from these authorities, including Sulamérica. He took the view that the implied choice of law should presumptively be the law of the seat instead. He based his decision on two reasons. First, he challenged the view that commercial parties would want the same system of law to govern their relationship of performing the substantive obligations under the contract, and the separate relationship of resolving disputes when problems arise. In relation to the latter, he reasoned that having abandoned their initial positions relating to the primary obligations of the contract, parties would desire neutrality above all else and accordingly, primacy ought to be accorded to the neutral law selected by the parties to govern the dispute resolution proceedings.9

6 Secondly, the assistant registrar reasoned that parties would impliedly choose the law of the seat to be the law governing the arbitration agreement so as to ensure that any subsequent arbitral award obtained would be given effect to and enforced.10 On this note, he referred to Art V(1)(a) of the Convention on the Recognition and

Enforcement of Foreign Arbitral Awards11 (“New York Convention”), as well as Arts 34(2)(a)(i) and 36(1)(a)(i) of the UNCITRAL Model Law on International Commercial Arbitration12 (“Model Law”). Under these provisions, the enforcement of an award may be refused, or an award may be set aside, if the arbitration agreement is not valid – either under the law to which the parties have subjected it or, in the absence of any such indication, under the law of the seat. This second reason, that the parties would not have chosen a law to govern the arbitration agreement that would jeopardise the enforcement of the eventual arbitration award, bears some resemblance to the validation principle.13 He also observed that since the law of the seat applies to circumscribe the supervisory powers of the courts at the seat of the arbitration, it would be entirely conceivable that parties would demand to have consistency between both the law and the procedure of determining the validity of the arbitration agreement.14

B. BCY

7 Slightly more than two years later, in BCY, Steven Chong J (as his Honour then was) reconsidered the presumptive position taken in FirstLink, and adopted the view espoused in Sulamérica instead – that is, the parties' implied choice of law would presumptively be the substantive law of the underlying contract instead. In BCY, the parties expressly chose Singapore to be the seat of the arbitration, and for the main contract to be governed in accordance with New York law. Chong J's comments on the parties' implied choice of law for the arbitration agreement were obiter given that the parties agreed that there was no difference between Singapore and New York law when applied to the facts.15 Nonetheless, Chong J considered the issue since the parties had furnished full and well-developed arguments on this point.

8 Chong J considered the authorities and found that the proper law of the contract was to be preferred as a matter of both precedent and principle. On precedent, Chong J referred to the High Court decisions in Piallo GmbH v Yafriro International Pte Ltd16 and Cassa di Risparmio di Parma e Piacenza SpA v Rals International Pte Ltd,17 both of which preferred this position as well. These cases, however, merely stated that

the law of the arbitration agreement would follow the parties' express choice of law for the main contract, without fully addressing the tenability of adopting such a position.18

9 Apart from precedent, Chong J supplemented his decision by explaining why the Sulamérica position was preferable in principle as well. Following Arsanovia Ltd v Cruz City 1 Mauritius Holdings19 (“Arsanovia”), an English decision which pre-dated FirstLink but which the assistant registrar in that case did not consider, Chong J found that where the contract stipulates that the “agreement” is to be governed by one system of law, the natural inference is that the parties intended for the express choice of law to govern all the clauses in the contract, including the arbitration agreement contained within.20 The term “agreement” is wide enough to cover both primary and secondary obligations, and there is no reason why the parties would want to artificially constrain its plain meaning.21 This plain meaning should be further upheld especially since such clauses are typically negotiated as part of the main contract and are unlikely to be negotiated independently.22 However, Chong J also accepted that should the arbitration agreement be a freestanding one, then the seat law would be indicative as there would be no governing law of the contract to refer to.23

10 Chong J then addressed the arguments made in FirstLink. First, on the issue of consistency across arbitration issues, Chong J found that Arts 34 and 36 of the Model Law merely prescribed the seat law as the default fall-back position when the parties had not made a choice; hence, the question that remains unanswered is the prior question of what the parties' implied choice of law is.24 Second, Chong J disagreed with the analysis on neutrality because while parties may desire neutrality when disputes arise, it does not necessarily follow that the seat law will take precedence. The parties may have selected the substantive law for reasons of neutrality as well.25 Finally, Chong J in BCY also pre-emptively noted that the doctrine of separability could not be used

to justify preferring the seat law over the substantive law. This is because separability...