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Singapore – Arbitration Agreements: Getting It Right From The Kick-Off.

25 February, 2015

 

When drafting dispute resolution clauses, parties typically focus on the law governing the contract and, where such clauses provide for arbitration, the curial law (or procedural law of the seat). It is, however, common for parties to fail to specify the law that will determine the validity of the arbitration clause itself.


If a party challenges the validity of the arbitration clause, a national court or tribunal must generally apply a conflict of laws analysis and determine whether the applicable law to that arbitration clause is (i) the law governing the contract; or (ii) the procedural law of the seat. The outcome of this decision will affect whether or not the arbitration proceeds.


As illustrated by a number of recent cases from different jurisdictions, national courts have been inconsistent in their approach to this issue which has led to confusion as to how the applicable law of the arbitration clause will be determined if the parties have not specified their choice in the arbitration clause itself (or reached a subsequent agreement).


An Uneven Playing Field


In the case of Sulamérica v Enesa Engenharia [2012] EWCA Civ 638 (Sulamérica), the English Court of Appeal was asked to determine the governing law of an arbitration clause contained in a Contractor’s All Risks insurance policy. The Court of Appeal held that the governing law is to be determined by adopting a three-stage test: (i) is there an express choice of law? (ii) if not, can a choice be implied?; (iii) in the absence of a choice, with which law does the arbitration clause have the ‘closest and most real connection’? In this case the parties had not made an express choice of law. As to whether a choice of law could be implied, the Court acknowledged that the law of the parent contract in which the arbitration clause was contained (in this case, Brazilian law) was a “strong pointer” of an intention that the same law would apply to the arbitration clause, unless other factors led to a different conclusion. Here, however, the parties’ choice of Brazilian law to govern the parent contract could not evidence an implied choice because there was a real risk that under Brazilian law the arbitration clause would be invalid, which would undermine the purpose of the arbitration clause. On assessing which law had the ‘closest and most real connection’, the Court concluded that the choice of London as the seat of the arbitration inevitably imported an acceptance that English law, not Brazilian law, would apply to the conduct and supervision of the arbitral proceedings which, in turn, provided further evidence of a shared intention that English law would govern the arbitration clause. It, therefore, concluded that English law should apply to the arbitration clause.

 

n the Singapore High Court case of Firstlink Investments Corp Ltd v GT Payment Pte Ltd [2014] SGHCR 12, the Court adopted a different approach and did not accept that the law governing the contract should automatically govern the arbitration clause. The Court found that it would be “rare” for the law of the arbitration clause to be different from the law of the seat of the arbitration because an arbitration clause has a closer and more real connection with the place where the parties have chosen to arbitrate than with the law governing their obligations under the contract.


In the case of Klöckner Pentaplast GmbH v. Advance Technology (HK) Company Limited HCA 1526/2010, the Hong Kong Court of First Instance emphasised the need to examine the surrounding circumstances to the parties entering into the contract. The substantive law of the contract in question was German law and the arbitration clause provided for any disputes to be submitted to arbitration in Shanghai pursuant to the ICC Rules. In that particular case, the Court found that the substantive law of the contract governed the arbitration clause based on its review of the circumstances without establishing any mandatory principle to be applied by the Courts when considering the issue.


The Indian Supreme Court was faced with a different challenge in Enercon India v Enercon GMBH Civil Appeal No. 2086 of 2014 (14 February 2014) in which the arbitration clause specified its governing law and the venue of the arbitration, but failed to specify the seat. Applying a test of the “closest and most intimate connection”, the Supreme Court held that, as the parties had specified that Indian law governed the arbitration clause, India was intended to be the seat of the arbitration and the procedural laws of India applied to the proceedings.


For arbitrations seated in the UAE (outside of the Dubai International Financial Centre (the “DIFC”)), the Civil Procedure Code, which applies to such arbitrations, is silent as to the law applicable to the arbitration clause. In Dubai Cassation Petition 293/1991, the governing law of the contract was deemed to apply to the arbitration clause; however, in the absence of any system of binding precedent and a lack of reported cases, it is uncertain whether this principle is applied consistently.


For arbitrations seated in the DIFC – a separate common law jurisdiction within the UAE – in the absence of an express agreement between the parties, the position adopted by the DIFC Courts when determining the parties’ choice of seat is likely to follow the approach adopted by the English Courts in Sulamérica.


Playing By The Rules


During Dubai Arbitration Week, the DIFC-LCIA recently announced the possibility of amending its rules to be consistent with the position set out under Article 16.4 of the LCIA Rules 2014 which provides that, unless the parties agree otherwise, the law of the arbitration clause will be the law of the designated seat.


The announcement by the DIFC-LCIA follows an emerging trend amongst arbitral institutions to address this issue. Recently, the HKIAC amended its model clause to require parties to specify the applicable law within the arbitration clause itself. Therefore, rather than specifying a “default” law in the absence of the parties’ agreement – as provided in the LCIA Rules 2014 (and as will likely be adopted in the DIFC-LCIA Rules) – the HKIAC’s approach is to encourage the parties themselves to make that decision.
These moves have all likely been prompted by the inconsistent jurisprudence emerging from national courts and are considered a positive step towards limiting the scope of disputes arising as to the applicable law of the arbitration clause.

 

In Conversation With Michael Hwang SC, Chief Justice Of The Courts Of The Dubai International Financial Centre (DIFC)


Sapna Jhangiani, Legal Director at Clyde & Co LLP, in conversation with Michael Hwang SC, Independent Arbitrator and Barrister, Singapore, who is also Chief Justice of the Courts of the Dubai International Financial Centre (DIFC)

 

The Development Of Arbitration In Singapore


SAPNA: As Chief Justice of the DIFC Courts, Head of the DIFC Dispute Resolution Authority, and a very well-known Senior counsel and arbitrator, you are a highly regarded member of the international disputes community. How did your career in arbitration develop?


MICHAEL: I served as a Judicial Commissioner in the Supreme Court of Singapore from 1991 to 1992. Around this time the Singapore International Arbitration Centre (SIAC) was established, with the International Arbitration Act being enacted in 1995. In light of this, when I returned to private practice in 1993, my firm suggested that, given my judicial experience, I should explore the world of international arbitration.


At the time we were able to learn (to a certain extent) from the experience of international arbitration in Hong Kong, given that it had already established the Hong Kong International Arbitration Centre (HKIAC) well before the opening of SIAC. When I retired from my old firm at the end of 2002, I knew that I wanted to go on to develop my practice as an international arbitrator.


SAPNA: As someone who has watched the development of international arbitration in Singapore, what do you perceive to be the main changes in arbitration practice from then to now?


MICHAEL: During the 1990s the number of arbitrations that passed through the SIAC was very low. When I returned to private practice in 1993 I was working both as senior counsel as well as arbitrator; the senior counsel work took up most of my time and arbitral appointments were an extra bonus.


I actually worked on more ICC cases than SIAC cases during the 1990s. The SIAC cases that I worked on tended not to be very large; however, towards the late 1990s we did see an increase in the number of SIAC arbitrations.


I recall an interesting and very large SIAC arbitration I heard during that period. The governing law was Malaysian Law and it was a dispute between a Malaysian party and a European party about a technology system that the Europeans supplied which the Malaysians rejected on the grounds of technical defects. Both parties apparently employed general counsel from the US who drafted the relevant agreement, and they inserted the dispute resolution clause which was, in my experience, rare if not unique. It provided that there would be full discovery and depositions pursuant to US laws of evidence and procedure. The parties were both represented by prominent American law firms, and the venue of the hearing was moved to New York. Depositions were taken and there were truckloads full of documents. It took three years for the case to come to a hearing, which took place in three tranches. Because of the extensive depositions and American style discovery which had taken place, counsel for the Malaysian party was able to refer to videotaped depositions to contradict the European witnesses’ oral testimony, and to rely on internal emails between the European party’s engineers working on the project showing their doubts about the design of the technology system. The European party’s witnesses were subject to brutal cross-examination, resulting eventually in a settlement. The Malaysian party’s lawyer told me later that his cross examination, which led to the settlement, would have been impossible without full American style discovery and depositions. So there may be a moral here somewhere.

 

SAPNA: It’s interesting how counsel and arbitrators bring their own training and litigation background with them to the arbitration table. For example, those trained in English litigation often seek to persuade tribunals to issue interim costs orders upon the determination of interim applications, but rarely succeed.


MICHAEL: Can I tell you why such orders are rarely issued? There are two reasons at least: one is philosophical and the other is practical. The practical reason is that most arbitrators are not ex-litigators, particularly if they come from civil law countries. They really have no understanding of how the system of costs works in some jurisdictions. When counsel put forward their interlocutory applications at the end of a hearing, many arbitrators simply do not feel comfortable with plucking numbers out of the air and issuing interim costs orders.


The philosophical reservations that some tribunals have is that, in dealing with applications for interim costs orders based on the principle that costs follow the event, there is a risk that the argument becomes heated and the tribunal makes an order which makes one party feel greatly aggrieved. This could lead to a palpable change of atmosphere in the relationship between counsel and the tribunal, which is not healthy. In a court situation, usually different judges will hear the case at different stages and they don’t have any proprietary feeling about the case, so they will hear each application on its own merits without having to suffer future unhealthy tensions between unhappy counsel and the Tribunal.


Singapore As A Regional Legal Hub: Establishing The Singapore International Commercial Court


SAPNA: You may recall that recently SIAC held a congress in Singapore where the main topic of discussion was the establishment of the Singapore International Commercial Court (SICC). There has been much comparison to the courts in the DIFC. Having practised in Dubai myself, and knowing that the legal landscape is very different to that of Singapore, I was expecting the drivers of the two projects to be very different. What do you think about the establishment of the SICC?


MICHAEL: It’s all part of the Singapore Government’s long term policy to make Singapore the legal hub of the region. The concept of “the region” is slowly expanding beyond ASEAN to include India and more broadly South Asia – it may even extend into North-East Asia to a certain extent.


I suppose the concept behind SICC is an idea waiting to happen and Singapore is as well-positioned as any other jurisdiction to make it happen. I don’t know of any other national court which has been solely designed to be an international court. For example, Hong Kong brings in overseas judges from great common law jurisdictions, which is not so much an attempt to internationalise the court system but more a way of developing their own law. Similarly, when compared to Singapore, the DIFC courts operate a more national court system, albeit whilst remaining aware of their largely international clientele. In comparison, if a case is classified as international in the Singapore Courts, it is subject to a different set of rules with international judges who will give the same mix of legal expertise which is usually found in international arbitration tribunals. It is unique in that way.


SAPNA: For it to get a big caseload I presume they are going to need cases in which parties opt in for dispute resolution by the Court?


The main concern that has been raised by practitioners and users is: if arbitration awards are enforceable in over 150 countries around the world under the New York convention, how is the Court going to make itself attractive to prospective users given the more limited enforceability of its judgments? What measures should be taken to ensure it is a success?


MICHAEL: If you compare the SICC with the DIFC Courts, the DIFC Courts are essentially national. A couple of years ago the law changed to allow the DIFC Courts to assume jurisdiction on an opt-in basis. The DIFC Courts have to persuade external (i.e. those situated outside the DIFC) users to buy-in to resolving their disputes in the DIFC and so opt for our jurisdiction. Hence, they face the same problems that all arbitration institutions face.


SIAC took 20 years to reach its current level of caseload. It’s going to be slow for the DIFC Courts, and it’s also going to be slow for the SICC, but the SICC is different from the DIFC Courts. There are two sources of cases coming into the SICC: one is the ‘opt-in’ cases, and that jurisdiction operates in the same way as in the DIFC Courts. The second source is cases being transferred from the existing domestic court system to the SICC in circumstances where the Chief Justice considers that the case is international, commercial and offshore. So there will


be an initial stream of cases into the SICC which should help to build its profile and people will then see how it works in practice and, hopefully, this will assist the Court to market itself and the “opt-in” aspects of its jurisdiction.


So in a sense the SICC is not really doing anything new because this feature already exist in the rules if both parties elect to give the Singapore Courts jurisdiction. The question of transferring cases out of the regular divisions of the Singapore High Court into SICC is simply a refinement of what is already there, in that international cases can already be heard in the High Court if they fulfil certain statutory requirements. Following the transfer to or filing of a case in the SICC, the Chief Justice will then decide whether or not the case should be tried in a different way because of its international elements. In this instance, there will be more international participation in the trying of cases, both in terms of the bench and the counsel that are allowed to appear.


Securing International Enfrocement Of SICC Judgements


MICHAEL: On the issue of how the SICC will fare when compared to the New York Convention, there are already existing measures that allow Singapore judgements to be recognised elsewhere without treaties. There is of course the common law action on the enforcement of a foreign judgment, which is not based on reciprocity; it is based on the so-called foreign court having jurisdiction over the defendant under the law of the enforcing court. That includes all common law countries, including the US. In fact, most of the important financial and commercial centres are covered by this doctrine alone.


There is the potential for the SICC to become significantly more important if the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters (Hague Convention) were to get a large number of sign-ups, which may allow for international enforcement of judgments. If, for example, the EU were to sign up and ratify, the addition of twenty-seven EU countries would give impetus for even more countries to sign-up. Hopefully there would be some countries from the Asia Pacific region which might sign up. If a bandwagon can be created, it would create a new prospect for mutual enforcement of court judgments.

 

SAPNA:sW This illustrates how important it is to have the support of the government of a state when seeking to establish new centres for dispute resolution.

Predictions For Arbitration In Asia: The Competitive Advantage Of Singapore


SAPNA Looking forward, what are your predictions for how the Singapore legal market will develop?


MICHAEL: Based on what I have seen, the Singapore legal profession, which includes both domestic and foreign lawyers, is making significant inroads into the handling of arbitration cases in Asia. When I first started hearing SIAC and ICC cases in Singapore, typically counsel would be from overseas, with hardly any involvement of Singaporean firms. Even when there was a change in law which made it compulsory for there to be the involvement of a Singaporean firm in Singapore law cases, the involvement of Singaporean firms remained low. I have seen a case governed by Singapore law which was argued entirely by foreign lawyers on both sides, with the Singaporean lawyers only appearing on day one of the proceedings.


There has been a turnaround in the last two or three years. I have observed this personally, and SIAC has put together statistics (which have not yet been published) validating this trend. In my experience, in the vast majority of SIAC cases, at least one of the parties will be represented by a Singaporean law firm. This happens in approximately 50% to 75% of SIAC cases.


Conversely, the Hong Kong arbitration market is dominated by offshore firms and local Chinese firms are not very visible in the arbitration space. In that respect, I think Singapore is way ahead. When comparing Singaporean lawyers and local Hong Kong lawyers, I think our lawyers have the edge. If Singaporean Chinese-speaking lawyers were able to exploit their Mandarin Chinese capabilities (something that not all Hong Kong lawyers can do), as well as their experiences of international arbitration, it may open up the arbitration market in China for Singaporean law firms.


What I hope to see in the next ten years, is for Singaporean firms to gain greater representation, at least in the Asian region.


SAPNA: How do you see arbitration developing in the next ten to fifteen years? Do you think we are seeing a change in trends now with regard to practice and procedure?


MICHAEL: I would like to see more civil law firms becoming active in international arbitration, as many of them already have experience in arbitration. When involved in international arbitration, civil law firms accept that they have to play the game by common law rules; they tend to argue in a way that matches their common law opponents and the arbitration is often conducted in English. I believe that some civil law firms could develop a significant presence in the international arbitration space.


For example, I think there may be greater involvement of civil law firms in international arbitration in the Korean market. The Korean Commercial Arbitration Bar is very strong in knowledge and ability and they are generally quite strong in English.


Dr. Jöerg Risse recently outlined ten drastic proposals which address ways in which to reduce the time and cost of arbitral proceedings; many of these ideas are very much in line with civil law practices. For example, having no witness statements at all, and instead interrogation of witnesses by the tribunal.


SAPNA: In Dubai local court proceedings there are actually no witnesses at all, they just rely on written submissions and documents. Under exceptional circumstances you can request witness evidence. However, I am not too sure how the court would in fact deal with witnesses.


MICHAEL I have worked on arbitration cases in China with CIETAC where there were no witnesses. A claim is submitted with some supporting documents and the lawyers turn up and argue the case without witnesses. The case is decided on counsel’s arguments and the discussion will essentially be based on the papers. CIETAC are fixated on delivering their awards within six months, so there is always pressure to prepare the draft award within the prescribed period because extensions of time are difficult to obtain.


However, CIETAC is becoming much more flexible. The challenge in the past was that the CIETAC Rules required the presiding arbitrator to be Chinese. In turn, presiding arbitrators tended to be trained in a traditional Chinese way and were not, therefore, very interested in oral witness testimony. They have now pledged to be more flexible in international cases.
SAPNA: One last question on regional developments, do you have any views on whether there will be more investment arbitrations in Asia in the next ten to twenty years?


MICHAEL: Are you asking me to predict how many Asian governments are going to be considered to be ignoring investors’ rights? From an outsider’s perspective, and from speaking to some of the players in the market, there are a few investor-state cases going around at the moment which, interestingly, many of the local Singaporean firms are pitching for. The market can only grow, since at the moment there are a relatively low number of investment arbitrations against Asian governments.


Remedying The Cost Issue: Fixing Fee-Scales And Limiting Discovery


SAPNA: I am increasingly hearing complaints by users that arbitration procedures have become too protracted and, subsequently, too expensive. Lord Mustill once said that it is surmised that the dinosaur became extinct because it got too large – it would be a shame if arbitration went the same way!


What are your views on these shifts in the way arbitrations are being carried out and their relative cost?


MICHAEL: On the issue of costs, I always feel that people are not asking the correct questions. The ICC carried out a survey a few years ago which showed that 18% of the costs incurred by their users were spent on the ICC’s administrative fees and the arbitrators. The remaining 82% was spent on legal fees and expert costs. For me, the issue clearly lies in the negotiation of fees between the clients and their lawyers. Clients need to be asking themselves: if my firm were to fight my case in a national court, would it be cheaper?


There may be some room for the international arbitration community to influence client-lawyer costs, by setting a scale for fees based on the total value of the claims in the arbitration. I have started to float this idea amongst colleagues: in the same way that institutions like the ICC and SIAC fix a scale for arbitrators’ fees, why not fix a scale for recoverable (i.e. party and party) counsel’s fees in terms of what is deemed to be a reasonable amount? If we are able to estimate a fee scale for arbitrators based on the number of hours that we think would be reasonable for them to work on a case given its value, then theoretically we should be able to estimate a similar scale of fees for counsel. I imagine that counsel’s fees would be higher than arbitrators’ fees; however, it would not be beyond the competence of the ICC and SICC to provide some guidance on this.


In fact, in Singapore many years ago, when I started practice in the District Court in Singapore, our fees were based on a scale which calculated costs on the basis of the value of the claim. Therefore, a system of scale fees (possibly subject to adjustment by the relevant institutions in exceptional cases) is possible. However, whether or not it would be successfully taken up would be a matter for the market.


SAPNA: Yes, the way that some courts have done this, for example the English Court, is to decide the hourly rate which is recoverable for lawyers’ costs based on a range which is deemed acceptable according to a scale. I suppose your idea goes a step further by bringing in the concept of a scale based on claim value.


The challenge with this approach is that not all clients may feel that the importance of a claim is reflected by its value. Secondly, counsel may have a number of points that they
want to advance to support their case. Some may be found to be good points, others not so good. I imagine that the benefits of having a fee scale would be that it encourages lawyers to rely on their best points rather than argue every point. On the other hand, it may be seen as limiting counsel’s ability to use all of their points in an arbitration, as the scale would put an upper boundary on the value of costs that could ultimately be recovered.


MICHAEL: I don’t believe that the system of arbitration owes it to the parties to give them full indemnity for legal costs incurred during the arbitration. Each party is at liberty to argue all the points that they want to and to incur as much costs as they want. How much of these costs might be recoverable is a question for them and should not necessarily be a deciding factor in the fee scale.


For policy reasons, a scale should be fixed based on what is believed to be reasonable as a contribution from the losing party. It should not be designed for 100% recovery of all costs charged by a winning party’s lawyers. However, many counsel often make arguments to the tribunal for 100% recovery and frequently get it (if the fees claimed seem low in relation to those claimed by the other side).


SAPNA: It’s a very good idea. When working on arbitrations, I have often experienced requests for full disclosure which are both time-consuming and costly, as well as clearly unnecessary. I think that people need to be more proportionate in how they run arbitrations. It is a frequent complaint but as of yet there have not been any solutions to it.


MICHAEL: The ICC released a very useful document this year which is a guide for in-house counsel in effectively managing arbitrations. The recommended measures are actually quite drastic. For example, they advise keeping down costs that are incurred by discovery, by contracting in the amount that can be spent on discovery from the start.


It is a very practical document. It asks parties to come to an agreement not to have, for example, three rounds of submissions, but instead to have two or even one. The document reminds us that there are a number of ways that you can reduce your costs, but you have to decide on your priorities.


SAPNA: Yes, I think that by publishing these guidelines the ICC are trying to encourage in-house counsel to take ownership over the process. If they find it too expensive, they can actually do something about it.



The Problem With Confidentiality
SAPNA: I wanted to talk to you about your book which was published last year. I was very pleasantly surprised when I discovered that you had made it free of charge, I think that was very kind of you. You described it as your 70th birthday present to yourself. Can you please tell us about it?


MICHAEL: All of the essays in the volume had been previously published elsewhere. I found that I was having difficulty keeping track of these essays, so I decided to memorialise them in a book. I was fortunate enough to be able to get a couple of my associates to help me to edit the book, as some of the articles were a little old and needed refreshing.


SAPNA: I have heard you speak before about the “Hwang Model Procedural Order”. In your book, you have an article regarding a Model Procedural Order you propose on confidentiality. Is the Hwang Model Procedural Order therefore only intended to address confidentiality, and not other aspects of the arbitral process?


MICHAEL: Only confidentiality. The article on the Model Procedural Order on confidentiality followed an earlier article I had written on confidentiality. Both were developed from public lectures that I had delivered in Hong Kong. In the first lecture, I attempt to outline the problem with confidentiality; namely that, while it is not so difficult to define the boundaries of what information is actually covered by confidentiality, it is difficult to define all the potential exceptions to confidentiality that may arise in the future. Exceptions are recognised by courts and tribunals and so develop incrementally. They do not lend themselves to recognition by applying a formula or a one sentence test.


The second lecture that I delivered in Hong Kong looked at finding a solution to the problem. Exceptions vary a great deal from jurisdiction to jurisdiction because they are typically founded in institutional rules, which in turn are very varied. So I suggested that parties should come together and decide on a code on confidentiality, which would be custom-made to the dispute in hand; hence a Model Procedural Order on Confidentiality.


The law is much clearer now. Undoubtedly, Singapore and HK (as common law jurisdictions) will continue to follow the UK. However, even in England and Wales there are a number of exceptions to the principle of confidentiality in arbitration. You will never be able to compile a complete list of exceptions to confidentiality because of the difficulty in finding an underlying principle that forms the juristic basis for allowing an exception

 

Clyde & Co

 

For further information, please contact:

 

Sapna Jhangiani, Clyde & Co

[email protected]

 

Clyde & Co Dispute Resolution Practice Profile in Singapore

 

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