– Sonal Jain
When parties expressly include self-invalidating provisions in their arbitration agreements, to what extent can courts extrapolate such provisions and find the agreement valid to give effect to the parties’ intention to arbitrate?
In BNA v. BNB and another,  SGHC 142, the Singapore High Court was tasked to determine the validity of an arbitration agreement. Despite the court’s lengthy elucidation rejecting the “validation principle” as part of Singapore law, the Court effectively rewrote the parties’ arbitration agreement to find it valid. Instead of holding the agreement invalid under the correct applicable law, the court took a one step further– it interpreted an express provision in the arbitration agreement (“arbitration in Shanghai”) to mean an arbitration seated in Singapore with Shanghai merely the “venue” of the arbitration. Although the decision was successfully appealed before the Court of Appeal, its paradoxical nature makes it noteworthy.
In 2016, the Defendants commenced arbitration under a Takeout Agreement. Article 14 of this agreement stated that it would be governed by the law of the People’s Republic of China (“the PRC”). It also provided for the parties’ arbitration agreement. In the arbitration clause, the parties expressly stipulated that their disputes shall be “…finally submitted to Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai…” The Plaintiff challenged the Tribunal’s jurisdiction alleging the invalidity of the arbitration agreement under the applicable law– PRC law– stating that under PRC law, an arbitration between two domestic parties cannot be administered by a foreign arbitration institution. The majority of the Tribunal held the Tribunal had jurisdiction. Thereafter, the Plaintiff applied to the Singapore High Court under §10(3) of the Singapore International Arbitration Act to seek a de novo determination that the Tribunal does not have jurisdiction. The Court held that Singapore law applied to the arbitration agreement rendering it valid, therefore, the tribunal had jurisdiction.
The Court’s Findings
Law Applicable to the Arbitration Agreement
The Court reiterated that Singapore courts have adopted the three-step test formulated by the English Court of Appeal in Sulamérica. This approach requires an inquiry into three questions.
- Have the parties made an express choice of law to govern the arbitration agreement?
- In the absence of an express choice, have they impliedly chosen a law? (The law expressly chosen by the parties for the underlying contract is presumptively their implied choice of law for the arbitration agreement. However, the presumption is rebutted if the arbitration agreement is invalid under this law.)
- If the parties have not made an express or implied choice of law, with which system of law does the arbitration agreement have the closest and most real connection?
Rejection of the Validation Principle
According to the validation principle, while determining the law applicable to the arbitration agreement, courts must always apply the law that would validate the arbitration agreement, rather than potentially applicable choices of law that would invalidate the agreement. Previously, Singapore courts had not expressly dealt with the issue of whether the validation principle is part of Singapore law. Another decision of the High Court was interpreted to accommodate the validation principle in Singapore law. Thus, the Court’s decision in BNA is significant. The Court’s rejection of the validation principle is sound as a matter of principle and practice.
Principally, the rules of contractual interpretation in Singapore directly conflict with the “nakedly instrumental” objective of the validation principle. The Court of Appeal has previously held that arbitration agreements, like any other commercial contracts, should be interpreted in light of the words used by the parties, although to give effect to the parties’ intention to arbitrate. In this vein, the Court in BNA rightly stated that analysis under the three-step test is driven by a desire to give effect to the parties’ intention to arbitrate insofar as the language chosen by them makes it possible. The purpose of the analysis is not to achieve a predetermined objective of validating the agreement regardless.
Practically, if arbitration agreements are construed without actually giving effect to the parties’ intentions by interpreting the words chosen (as may be the case when applying the validation principle) there is a serious possibility that the award may not be enforced if the enforcing court finds that the arbitration agreement was invalid under the law applicable to it.
The Court’s Decision in BNA
Law Governing the Arbitration Agreement– The Three-step Test
The Court applied the three-step test to Article 14 of the Takeout Agreement and concluded the following:
- the parties had not made an express choice of law for the arbitration agreement; the choice of PRC law to the Takeout Agreement was insufficient to constitute an express choice of law to the arbitration agreement.
- PRC law presumptively applied to the arbitration agreement as parties’ implied choice. However, this presumption was rebutted because the arbitration agreement would be invalid under PRC law. Since the arbitration was seated in Singapore, the law of the seat– Singapore law– applied.
- there is no need to proceed to the third step having concluded Singapore law applies on the second step; assuming the inquiry under the third step ought to be conducted, Singapore law will still apply to the arbitration agreement.
Seat of Arbitration
The Court concluded that the seat of arbitration was Singapore notwithstanding the reference to Shanghai in the arbitration agreement. The parties expressly chose to conduct their arbitration according to the arbitration Rules of SIAC (“SIAC Rules 2013”). Rule 18.1 of the SIAC Rules 2013 (“Rule 18.1”) provides that the default seat of arbitration is Singapore, absent a contrary agreement of the parties or a contrary determination by the tribunal. The Court found that the arbitration agreement referred to two geographical locations– Singapore and Shanghai. It held that reference to Shanghai did not constitute a contrary agreement as contemplated in Rule 18.1, because “there
nothing in the words chosen by the parties to refer to Shanghai which compels the construction that the PRC is to be the seat.” Then, it justified itself by stating that out of the two geographical locations in the parties arbitration agreement, Singapore is a law district whereas Shanghai is merely a city.
As commendable the Court’s reasoning is for the rejection of the validation principle, its application of the three-step test to the facts of the case has failed to garner the same degree of fidelity. Particularly, the Court’s analysis on the seat of the arbitration is not only incongruent but also fraught with several difficulties.
To begin with, it is apparent from a plain reading of the arbitration agreement that there is a reference to only one geographical location in the agreement– Shanghai. Relying on the Court of Appeal’s decision in PT Garuda, the Court itself reckoned that “if an arbitration agreement provides for any future arbitration to take place in a single geographic location, that location will be the seat of the arbitration unless the parties otherwise agree.” There are other authorities that have interpreted such geographical references to mean a parties’ choice of “seat of arbitration”. In Naviera, the English Court of Appeal opined that the phrase “arbitration in London” is the “colloquial way of referring to London as the seat of the arbitration.” The Court should have concluded its inquiry in favor of Shanghai as the seat of the arbitration.
Likewise, the Court’s interpretation of Rule 18.1 is incoherent. As per Rule 18.1, first, the parties have a right to agree on a seat of arbitration. The default seat provision comes into effect only if at this first step there is no agreement between the parties. Instead, the court interpreted Rule 18.1 inversely. To determine if the phrase “arbitration in Shanghai” constituted a contrary agreement, the Court assumed first that there is no such agreement, consequently, the arbitration agreement referred to two geographical locations– Singapore and Shanghai. This is logically inconsistent. Accordingly, the Court should have first determined if the words “arbitration in Shanghai” constituted an agreement between the parties on the seat of arbitration, independent of the default seat provision.
Additionally, it is ambiguous which law the Court applied to interpret the arbitration agreement. The Court’s decision is devoid of any conflict-of-laws analysis to determine the law applicable to the interpretation of the arbitration agreement. Either PRC law or Singapore law could have applied to is (as the law governing the underlying contract or the lex fori, respectively). Assuming the Court applied Singapore law, its application of the law was erroneous due to a clear departure from the existing precedent. As regards PRC law, it may very well have been that PRC law would interpret “arbitration in Shanghai” to mean an arbitration seated in PRC. This would have been a question of foreign law, to be determined by way of expert evidence.
This case may also be understood to have created a presumption that lack of the word “seat,” or merely referring to a city (as opposed to a country) in the arbitration agreement, will not constitute a choice of seat. Such a presumption would open the floodgates for jurisdictional arguments on the question of choice of seat, as it is not uncommon for parties to fail to designate the geographical location as “seat,” or simply refer to a city while choosing the seat.
From the foregoing, the seat of the arbitration should have been decided as the PRC. Had the Court proceeded on that basis, it would have concluded on the second step of its three-step analysis that neither the law governing the underlying contract nor the law of the seat (both being PRC Law) would have applied to the arbitration agreement. The Court would have had to proceed to the third step and identified the law with which the arbitration agreement had the closest and most real connection. At this stage too, the Court should have concluded that PRC law governed the arbitration agreement because the proper law of the Takeout Agreement was PRC law and the seat of the arbitration was Shanghai. With this analysis, the court would have no alternative but to conclude that the arbitration agreement was invalid, and the tribunal lacked jurisdiction.
Accordingly, it is evident that the Court’s analysis in BNA was guided with the objective of finding the arbitration agreement valid. There is a clear dissonance between the Court’s jurisprudential discussion on the inapplicability of the validation principle in Singapore and its analysis in the present case. The Court effectively took the approach that would validate the arbitration agreement, despite the agreement’s apparent invalidity.
Although the Court’s decision is understandable due to Singapore’s pro-arbitration policy, the Court of Appeal rightly reversed the Court’s decision finding that PRC law applied to the arbitration agreement. In one of its conclusory remarks, the Court noted that the three-step inquiry may operate arbitrarily due to the mere choice of arbitral rules. In this author’s opinion, it is not arbitrary, although it may have been an “unintended effect”. Suppose the parties’ dispute arose just a year later and the SIAC Rules 2016 applied vis-à-vis SIAC Rules 2013, the parties’ arbitration agreement would have been invalid. Conversely, suppose PRC laws changed before the parties commenced their arbitration, the agreement would have been valid. These hypothetical outcomes do not reflect the arbitrariness of the judicial approach of determining the law applicable to the arbitration agreement. Instead, they remind the parties to survey their local laws before including self-invalidating provisions in their arbitration agreements and also to pay closer attention to drafting the clauses generally. After all, courts do not and should not be in the business of rewriting contractual bargains. Though the Court in BNA erred in its findings, it correctly stated that “there is only so much which the law can do to save an inapt and inept arbitration agreement.”
[This article was written when the Singapore Court of Appeals had not issued the written grounds of decision. The grounds of decision were released on 27 December 2019. This article should not be construed as a summation of the Court of Appeals decision.]
Jain is an LL.M. Candidate in the International
Business Regulation, Litigation and Arbitration Program at NYU School of
Law. Prior to enrolling at NYU, Sonal got her first degree in law from
ILS Law College, Pune (India).
 BNA v. BNB and another,  SGHC 142 (Singapore High Court) (Decision of July 1, 2019).
 See, Gary Born, International Commercial Arbitration(2nd ed., 2014) at p. 545.
 The grounds of appeal are awaited. See, Tom Jones, No Singapore seat for Chinese dispute, rules appeal court, Global Arbitration Review (22 October 2019), available at rb.gy/bqb1sn.
 BNA, supra n.1at  (emphasis added).
 However, this position is somewhat unclear. See, Arthur Ma et. al., GAR Know How: Commercial Arbitration: China: Infrastructure, ¶5 (last updated 2 May 2019), available at rb.gy/ndthzc; see also, Martin Rogers & Noble Mak, Foreign Administered Arbitration in China: The Emergence of a Framework Plan for the Shanghai Pilot Free Trade Zone, Kluwer Arbitration Blog (6 September 2019), available at rb.gy/gkrhwn.
 International Arbitration Act Cap. 134A (revised ed., 2002).
 Sulamérica Cia Nacional de Seguros SA v. Enesa Engelharia SA,  1 WLR 102 (English Court of Appeal); see, BCY v. BCZ,  SGHC 249 (Singapore High Court).
 See, Born, supra n.2.
 BCY, supra n.7.
 See, Leong & Tan, The Law Governing Arbitration Agreement: BCY v. BCZ and Beyond, (2018) 30 SAcLJ 70.
 See, BNA, supra n.1 at .
 Insigma Technology Co. Ltd. v. Alstom Technology Ltd., 3 SLR(R) 936, at ,  (Singapore Court of Appeal).
 BNA, supra n.1 at .
 Id. at .
 Under the New York Convention, Article V(1)(a) courts may refuse enforcement of an award if the parties’ arbitration agreement was invalid under the law parties have subjected it to. This clause includes both parties’ express and implied choice of law. See, Albert Jan van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Judicial Interpretation (1981) at p. 282.
 SIAC Rules (5th ed., 2013), available at rb.gy/nevm8v.
 BNA, supra n.1 at .
 PT Garuda Indonesia v. Birgen Air,  1 SLR(R) 401 (Singapore Court of Appeal).
 BNA, supra n.1 at  (emphasis supplied).
 Naviera Amazomica Peruana SA v. Compania Internacional de Seguros del Peru,  1 Lloyd’s Rep 116 (English Court of Appeal).
 Id. at 119; a similar interpretation ensued in ABB Lummus Global Ltd. v. Keppel Fels Ltd,  2 Lloyd’s Rep 24 (English High Court) (finding that “arbitration in London” or “arbitration in New York” is the ordinary language used to describe the seat of the arbitration); see also, Shagang South-Asia (Hong Kong) Trading Co. Ltd. v. Daewoo Logistics,  All ER (Comm) 545 (English Commercial Court) (finding that an arbitration clause with the phrase “arbitration in London” refers to a choice of seat of arbitration).
 Rule 18.1 reads, “the parties may agree on the seat of arbitration Failing such agreement, the seat of arbitration shall be Singapore…”, supra n.16.
 See, PT Garuda, supra n.18.
 See, BNA, supra n.1 at .
 See, Born, supra n.2 at pp. 2074, 2075 (citing cases wherein arbitration clauses making references merely cities, without any context, were held to be the seat of arbitration).
 Singapore Parl. Debates, Vol 63, Sitting No 7, Title: International Arbitration Bill, Cols. 625-627 [31 October 1994], available at rb.gy/tifhld; See also Harisankar K.S., International Commercial Arbitration in Asia and the Choice of Law Determination, (2013) 30 J. Int. Arb. 621 at p. 625.
 BNA, supra n.1 at .
 SIAC amended its rules in 2016 and eliminated the default seat rule in order to present a more global reach. See, Rule 21.1 SIAC Rules (6th ed., 2016), available at rb.gy/9z69x8; See also, Olga Boltenko and Priscilla Lua, The SIAC Rules 2016: a watershed in the history of arbitration in Singapore, Kluwer Arbitration Blog (July 12, 2016), available at rb.gy/ypfhtw.
 TMT Co. Ltd v The Royal Bank of Scotland plc,  SGHC 21, at  (Singapore High Court).