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Singapore – Recent High Court Decision On Arbitration Clause Controversial In Light Of 2012 ICC Rules.

6 April, 2013

 

Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution

 

The Singapore High Court (the “Court“) considered whether an arbitration clause which stipulated that disputes were to be settled by arbitration under the ICC Rules in Singapore administered by a non-existent institution was inoperable. The Court ruled that the arbitration clause in question was workable provided that an arbitral institution in Singapore agreed to conduct the arbitration.

 

The judgment in this case appears to be in line with a previous judgment of the Singapore Court of Appeal which upheld an arbitration clause that provided for the Singapore International Arbitration Centre (“SIAC“) to administer an arbitration under the ICC Rules.

 

However, in between this judgment and the previous ruling, a new set of rules was adopted by the ICC (the “2012 ICC Rules“). Rules 1(2) and 6(2) of the 2012 ICC Rules state:

 

“The [International] Court [of Arbitration] is made the only body authorised to administer arbitrations under the ICC Rules”

 

and

 

“By agreeing to arbitration under the [ICC] Rules, the parties have accepted that the arbitration shall be administered by the Court.”

 

The Court did not discuss the 2012 ICC Rules or how Rules 1(2) and 6(2) could raise implications for an arbitration conducted under the 2012 ICC Rules being administered by an arbitral institution that was not the ICC. The Court, therefore, did not address whether the parties had impliedly excluded the possibility of an institution besides the ICC administering the arbitration by adopting the 2012 ICC Rules.

 

While the SIAC previously agreed to administer an arbitration under the ICC Rules, it is yet to be seen whether the SIAC, or any other arbitral institution, will agree to do so given the introduction of Rules 1(2) and 6(2) in the 2012 ICC Rules. It is also uncertain whether the Court’s ruling will be appealed and whether the judgment will stand.

 

Background

 

Section 6(2) of the International Arbitration Act (the “IAA“) provides that a court shall make an order, upon such terms or conditions as it may think fit, staying court proceedings so far as the proceedings relate to a matter which is the subject of an arbitration agreement, unless the court is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed.

 

Facts

 

HKL Group Co Ltd (“HKL“) entered into an agreement with Rizq International Holdings Pte Ltd (“Rizq“) for the sale of sand (the “Agreement“).

 

Pursuant to the Agreement HKL issued invoices to Rizq for amounts owed, which Rizq failed to pay. HKL then commenced court proceedings in Singapore against Rizq.

 

The Agreement contained the following clause:

 

Any dispute shall be settled by amicable negotiation between [the] two Parties. In case both Parties fail to reach [an] amicable agreement, all dispute [sic] out of in connection with the contract shall be settled by the Arbitration Committee at Singapore under the rules of The International Chamber of Commerce [the ICC Rules] of which awards shall be final and binding [on] both parties . . .

 

Given the inclusion of this clause in the Agreement, Rizq sought to have the court proceedings stayed in favour of arbitration.

 

HKL resisted Rizq’s application for a stay arguing that the arbitration clause was inoperable as there was no entity in Singapore named the “Arbitration Committee“. Rizq countered that although the arbitration clause was “defective“, the parties’ intention to arbitrate was clear.

 

The Court’s decision

 

Comments on pathological arbitration clauses generally

 

The Court stated that the normal approach in relation to potentially pathological arbitration clauses should be that if the contractual requirements for the validity of an arbitration clause are met and the court can discern the meaning of the clause by applying “general principles of contractual interpretation“, the arbitration clause will be found to be workable (as long as any conditions stipulated in the arbitration agreement are complied with). However, if the court cannot discern the meaning of the clause, either in part or entirely, then the clause will not be considered workable.

 

The Court stated that the general approach when faced with a potentially pathological arbitration clause is to give effect to the clause if possible. The Court noted the Singapore Court of Appeal’s previous judgment of Insigma Technology Co Ltd v Alstom Technology Ltd. In this case the Court of Appeal stated:

 

[W]here the parties have evinced a clear intention to settle any dispute by arbitration, the court should give effect to such intention, even if certain aspects of the agreement may be ambiguous, inconsistent, incomplete or lacking in certain particulars . . . so long as the arbitration can be carried out without prejudice to the rights of either party and so long as giving effect to such intention does not result in an arbitration that is not within the contemplation of either party . . .”

 

The Court of Appeal continued that this approach was on par with the principle of effective interpretation in international arbitration law; “where a clause may be interpreted in different ways, the interpretation which enables the clause to be effective should be adopted in preference to the others which lead to contrary effect.”

 

In the present case, the Court noted that whether an arbitration clause will be found to be pathological should be decided on a “case by case basis“. Nonetheless, the Singapore courts should “give primacy to the decision of the parties to arbitrate and will seek to resolve the various pathologies with the aid of the principle of effective interpretation.”

 

The Court’s determination

 

In this particular case the “defect” in the arbitration clause was that the clause made reference to the non-existent “Arbitral Committee at Singapore“.

 

The Court stated that “an incorrect reference to the arbitral institution has not prevented the courts from referring the matter to arbitration.”

 

In the present case, the Court found that

 

the arbitration clause is operative and workable for the following reasons. First, it clearly evinces the intention of the parties to resolve any dispute by arbitration. Second, it provides for mandatory consequences in that if a dispute arises, the matter has to be referred to arbitration. Third, it states the place of the arbitration, namely, Singapore. Fourth, it provides that the arbitration is to be governed by a particular set of rules, namely, the ICC rules.”

 

However, a further issue arose in relation to whether the reference to the ICC Rules in the arbitration clause rendered the clause inoperable (as there is no National Committee of the ICC in Singapore to conduct the arbitration). The Court ruled that even though the arbitration clause was uncertain in relation to which arbitral institution was to administer the arbitration, the parties could approach any arbitral institution in Singapore in relation to conducting the arbitration in accordance with ICC Rules. The Court discussed the Insigma case in which the Court of Appeal noted that the SIAC “was able and willing, for that particular case, to conduct a hybrid arbitration, applying the ICC rules.”

 

Based on this analysis, the Court stayed the court proceedings in favour of arbitration on “the condition that parties obtain the agreement of the SIAC or any other arbitral institution in Singapore to conduct a hybrid arbitration applying the ICC rules, with liberty to apply should they fail to secure any such agreement.

 

The Court also considered an ancillary issue of whether a dispute had arisen within the meaning of the arbitration clause, and determined that one had.

Conclusion

 

The Court, by applying the general principles of contractual interpretation, decided that the arbitration clause in the Agreement was workable, in spite of the fact that the arbitration clause referenced a non-existent institution to conduct the arbitration. The Court also concluded that an arbitral institution in Singapore, besides the ICC, could administer the arbitration under the ICC Rules as long as that arbitral institution agreed to do so.

 

Comment

 

The judgment in this case appears to be in line with the Insigma judgment, in which the Court of Appeal upheld an arbitration clause that provided for the SIAC to administer an arbitration under the ICC Rules.

 

However, following the Insigma judgment a new set of rules was adopted by the ICC, the 2012 ICC Rules. Rules 1(2) and 6(2) of the 2012 ICC Rules state:

 

The [International] Court [of Arbitration] is made the only body authorised to administer arbitrations under the ICC Rules

 

and

 

By agreeing to arbitration under the [ICC] Rules, the parties have accepted that the arbitration shall be administered by the Court.”

 

The Court did not discuss the 2012 ICC Rules or how Rules 1(2) and 6(2) could raise implications for an arbitration conducted under the 2012 ICC Rules being administered by an arbitral institution that was not the ICC. The Court, therefore, did not address whether the parties had impliedly excluded the possibility of an institution besides the ICC administering the arbitration by adopting the 2012 ICC Rules.

 

The Court could have decided that the term ‘the Arbitration Committee‘ was not meant to be a reference to an arbitral institution at all but rather was an inaccurate reference to the tribunal that would ultimately decide the case in Singapore. Nonetheless, the Court found that the reference to ‘the Arbitration Committee‘ related to the designation of an unspecified administering institution. Therefore the SIAC (or any other arbitral institution in Singapore which the parties approach to conduct the arbitration) will have to determine if it can and will administer the arbitration under the ICC Rules.

 

While the SIAC previously agreed to administer an arbitration under the ICC Rules in the Insigma case, it is yet to be seen whether the SIAC, or any other arbitral institution, will agree to do so given the introduction of Rules 1(2) and 6(2) in the 2012 ICC Rules (as well as the controversy that followed the Insigma ruling). It is also uncertain whether the Court’s ruling will be appealed and whether the judgment will stand.

 

Case: HKL Group Co Ltd v Rizq International Holdings Pte Ltd

 

For further information, please contact:

 
Peter Godwin, Managing Partner, Herbert Smith Freehills
peter.godwin@hsf.com
 
Paula Hodges, Partner, Herbert Smith Freehills

paula.hodges@hsf.com

 

Charles Kaplan, Partner, Herbert Smith Freehills

charles.kaplan@hsf.com

  

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