Be Careful What You Draft: Parties’ Intention to Arbitrate will not be Given Effect “At All Costs”
In BNA v BNB and Another,  SGCA 84, the Singapore Court of Appeal reversed the ruling of the Singapore High Court and confirmed that the phrase “arbitration in Shanghai” meant that Shanghai was the seat of arbitration, not simply the venue of arbitration. This decision meant that the laws of the People’s Republic of China (“PRC”), not Singapore, governed the arbitration agreement. Further, it created a risk that the arbitration agreement would be found invalid under PRC law.
The dispute arose out of an agreement (the “Takeout Agreement”) after the appellant buyer failed to make certain payments to the respondent sellers for the products they purchased and delivered under the Takeout Agreement. The Takeout Agreement contained an arbitration agreement in Article 14:
ARTICLE 14: DISPUTES
14.1 This Agreement shall be governed by the laws of the People’s Republic of China.
14.2 With respect to any and all disputes arising out of or relating to this Agreement, the [p]arties shall initially attempt in good faith to resolve all disputes amicably between themselves. If such negotiations fail, it is agreed by both parties that such disputes shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai, which will be conducted in accordance with its Arbitration Rules. The arbitration award shall be final and binding on both [p]arties.
Notably, the arbitration agreement did not include an express choice of law.
The respondents initiated arbitral proceedings administered by the Singapore International Arbitration Centre (“SIAC”), which appointed a three-person arbitral tribunal. The appellant challenged the jurisdiction of the arbitral tribunal on the grounds that the proper law of the arbitration agreement was the law of the PRC, which rendered the agreement invalid, as PRC law did not permit a foreign arbitral tribunal, such as the SIAC, to administer a PRC-seated arbitration or domestic dispute. The majority of the tribunal ruled that the tribunal did have jurisdiction.
The appellant appealed to the High Court of Singapore for a declaration that the tribunal lacked jurisdiction to hear the dispute. The High Court ruled that “arbitration in Shanghai” referred to the venue of the arbitration and that the parties implicitly chose Singapore as the arbitral seat and Singapore law to govern the arbitration agreement.
The Appeal Decision
The Court of the Appeal disagreed with the High Court and held that the natural meaning of “arbitration in Shanghai” is that Shanghai is the seat of arbitration and not the venue. Given the stark contrast in the legal significance of the seat as compared to the venue, the Court found that where parties specify only one geographical location in an arbitration agreement, that should most naturally be construed as a reference to the parties’ choice of seat.
In arriving at its decision, the Court of Appeal accepted that contrary indicia could displace the natural reading that “arbitration in Shanghai” was a reference to the seat of arbitration. However, the Court concluded that none of the indicia raised by the respondents could be taken into account.
First, the Court of Appeal concluded that evidence of the parties’ pre-contractual negotiations, particularly their concern that the arbitration be seated in a neutral forum, such as Singapore, was inadmissible because of the parol evidence rule. The Court confirmed it is bound to apply the parol evidence rule and its exceptions, even in cases arising out of an arbitration. Therefore, pre-contractual evidence that was not admitted before the arbitral tribunal was inadmissible in the subsequent proceeding.
Second, the Court of Appeal did not consider the fact that the arbitration agreement could potentially be invalid if governed by PRC law because there was no evidence that the parties were aware that the proper law of the arbitration agreement could impact its validity.
Finally, the Court of Appeal concluded the fact that Shanghai is not a law district was irrelevant. The Court acknowledged that commercial parties often only specify either a city or a country as the arbitral seat in their arbitration agreements, although it is best practice to specify both the city and the country. Therefore, where parties only specify one geographical location in an arbitration agreement, it ought to be construed as a reference to the parties’ choice of seat, rather than as a reference to the parties’ choice of venue.
The Court of Appeal concluded that the parties’ manifest intention to arbitrate is not to be given effect at all costs. The parties chose to arbitrate in a certain way, in a certain place and under the administration of a certain arbitral institution and those choices must be given effect by a process of construction. The words of the arbitration agreement must be given their natural meaning unless there are sufficient contrary indicia to displace that reading. If the result of this process of construction is that the arbitration agreement is unworkable, then the parties will be bound by the consequences of their decision.
The Court of Appeal allowed the appeal, but only to the extent that Singapore was not the seat of arbitration. It did not take any concluded view as to whether the tribunal did or did not have jurisdiction.
The Court of Appeal’s decision is an important reminder for parties to ensure their arbitration agreements explicitly specify both the arbitral seat and the proper law of the arbitration agreement, as poorly drafted arbitration agreements may be invalid or result in an unenforceable award. If the arbitration agreement is invalid, the parties may find themselves before one or more national courts which is arguably what the parties sought to avoid when they included an arbitration agreement in their contract in the first place.
arbitration international arbitration commercial arbitration jurisdiction arbitration clauses