When determining the seat of arbitration and the proper law of an arbitration agreement, is it relevant that the choice of a particular seat and/or law may invalidate the arbitration agreement? In BNA v. BNB, the Singapore Court of Appeal (“SGCA”) reached a result that effectively answered this question in the negative. Specifically, the Court held that the law of the People’s Republic of China (“PRC”) governed an arbitration agreement despite a real risk that the arbitration agreement would be rendered invalid as a result. In doing so, the Court reversed the decision of the Singapore High Court (“SGHC”), which had held that Singapore law governed the arbitration agreement.
This paper takes a closer look at the case and highlights three key takeaways relating to: (a) the express choice of law for an arbitration agreement; (b) the implied choice of law for an arbitration agreement; and (c) the relevance of the validation principle. It concludes that the SGCA’s decision was correct notwithstanding the unsatisfactory outcome for the party that relied on the arbitration agreement.
Summary of the Case
In BNA v. BNB, the Korean sellers commenced arbitration against a Chinese buyer for alleged non-payment of amounts due under a contract for the sale of industrial gases (the “Agreement”). Article 14.1 of the Agreement provided that “[t]his Agreement shall be governed by the laws of the People’s Republic of China”, while Article 14.2 provided for disputes to be “submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai, which will be conducted in accordance with its Arbitration Rules”.
The buyer objected to the tribunal’s jurisdiction. It contended that the arbitration agreement was invalid because: (a) the arbitration was seated in the PRC and the arbitration agreement governed by PRC law; (b) PRC law prohibited a foreign arbitral institution like SIAC from administering the arbitration of a domestic dispute; and (c) in any event, even if the dispute had sufficient foreign elements, PRC law nonetheless prohibited a foreign arbitral institution from administering an arbitration seated in the PRC.
The tribunal’s decision
The majority of the tribunal held that it had jurisdiction over the dispute because: (a) the arbitration was seated in Singapore; (b) the arbitration agreement was thereby governed by Singapore law; and (c) PRC law was therefore irrelevant on the question of jurisdiction. In reaching that decision, the majority applied the validation principle and effective interpretation principle, which it summarised as follows: “[I]t makes no commercial or logical sense for parties to intentionally select a law to govern an arbitration agreement which would then invalidate it.” The dissenting arbitrator, however, took the view that the tribunal lacked jurisdiction because: (a) the proper law of the parties’ arbitration agreement was PRC law; (b) the parties’ dispute was classified in PRC law as a domestic dispute; and (c) PRC law prohibited a foreign arbitral institution from administering the arbitration of a domestic dispute.
The SGHC’s decision
Dissatisfied with the tribunal’s jurisdictional decision, the buyer asked the SGHC to decide the issue pursuant to Section 10(3) of the Singapore International Arbitration Act. The SGHC upheld the tribunal’s jurisdiction on the basis of two key findings.
First, the court considered that the arbitration agreement referred not only to Shanghai, but also Singapore, as a potential seat of arbitration. Specifically, the reference to the SIAC Rules included Rule 18.1 thereof, which provided that if the parties did not agree on a seat of arbitration, then it shall be Singapore unless the tribunal determines otherwise. The question was therefore whether the phrase “arbitration in Shanghai” amounted to an agreement by the parties on the seat of arbitration. As a matter of construction, the court held that the reference to Shanghai merely identified the venue of arbitration and not a seat, as Shanghai was a city and not a law district. In contrast, the express reference to the SIAC Rules was “the clearest possible manifestation” of the parties’ intention to have their arbitrations seated in Singapore.
Having found that Singapore was the seat of arbitration, the SGHC turned to determine the proper law of the arbitration agreement, applying the three-stage choice of law analysis set out by the English Court of Appeal in Sulamérica v Enesa Engelharia SA: (a) Have the parties expressly chosen the proper law of their arbitration agreement? (b) If not, have they impliedly done so? (c) If there is no express or implied choice, then with what system of law does the arbitration agreement have its closest and most real connection?
Under the first stage, the court found that the express choice of law to govern the main contract did not amount to an express choice of law in respect of the arbitration agreement. Proceeding to the second stage, the court accepted that the starting point was that the proper law of the contract (PRC law) would also govern the arbitration agreement. It held, however, that this presumption was displaced in favour of the law of the seat (Singapore law). This was because the choice of PRC law “would defeat the parties’ manifest intention to resolve their disputes through arbitration”. Interestingly, the court did so despite having rejected the validation and the effective interpretation principles as being “nakedly instrumental”.
The SGCA’s decision
On appeal, the SGCA reversed the SGHC’s decision. The key point of departure for the SGCA was the SGHC’s interpretation of the phrase “in Shanghai” as referring merely to the venue of arbitration and not the seat. In the SGCA’s view, “where parties specify only one geographical location in an arbitration agreement, and particularly where, as here, the parties express a choice for ‘arbitration in [that location]’, that should most naturally be construed as a reference to the parties’ choice of seat”. The fact that Shanghai is not a law district was immaterial as commercial parties often only specify either the city or country in their arbitration agreements. Given that the parties had agreed on the PRC as the seat of arbitration, the default choice of Singapore as the seat under SIAC Rule 18.1 did not apply.
Turning to the proper law of the arbitration agreement, the Court held that the express choice of PRC law to govern the main contract did not constitute an express choice of law for the arbitration agreement. It did, however, amount to an implied choice of law for the arbitration agreement. There was nothing to displace this implied choice because the law of the seat was also PRC law. It followed that the validity of the arbitration agreement was to be determined by the PRC courts applying PRC law.
The SGCA’s decision is noteworthy for three points which are discussed further below.
Express choice of law for an arbitration agreement
The SGCA decided that an express choice of law in respect of the main contract does not, in and of itself, also constitute an express choice of the same law in respect of the arbitration agreement. The SGCA’s approach is consistent with the concept that the arbitration agreement is separable from the main contract and more specific words are required to make an express choice of law in respect of the arbitration agreement.
That said, no absolute rule can be laid down in this regard, and it is ultimately a matter of contract interpretation as to whether the parties have expressly chosen a law for their arbitration agreement. For instance, if the parties define the term “Agreement” in a manner that clearly includes the arbitration agreement therein and then subject the entire “Agreement” to a particular law, then that may amount to an express choice of law in respect of the arbitration agreement.
Implied choice of law for an arbitration agreement
Common law courts have diverged on the issue of whether the law of the main contract or the law of the seat should be presumed to be the implied choice of law for an arbitration agreement. In Singapore, an Assistant Registrar concluded that it should be the law of the seat, while other High Court decisions have ruled in favour of the law of the main contract. Likewise, in the recent UK case of Enka v. Chubb, the Court of Appeal and Supreme Court arrived at different conclusions on this issue – the former preferred the law of the seat, while the latter held in favour of the law of the main contract. The SGCA’s decision in BNA v. BNB confirms that, as a matter of Singapore law, the law of the main contract will presumptively be the implied choice of law for the arbitration agreement, and the choice of a different seat is insufficient to displace that presumption.
Relevance of validation principle
The SGCA purported not to address the validation principle when determining the proper law of the arbitration agreement, reasoning that it had no scope for operation in a case where both the law of the main contract and the law of the seat was PRC law. In this author’s view, however, the Court had implicitly rejected the validation principle when determining that the seat of arbitration was Shanghai. Specifically, the Court held that the potentially invalidating effect of PRC law was irrelevant when determining whether the phrase “arbitration in Shanghai” referred to the venue or the seat of arbitration. This was because there was no evidence that the parties were aware that the choice of proper law of the arbitration agreement could have an impact upon its validity. The Court’s reasoning here was arguably an implicit rejection of the validation principle, which “rests on the rational assumption that parties would prefer to have an agreement upheld than not” and does not require actual evidence that the parties had actually turned their minds to the issue of validity in a particular case.
It is submitted that the SGCA’s approach was correct. The validation principle cannot be used to override a clear and express term of the contract simply because giving effect to that term would invalidate the contract or part of it. In this case, the natural meaning of the phrase “arbitration in [city/country]” is that the specified location would be the seat of arbitration, as confirmed by numerous cases and commentaries. Had the word “Shanghai” been substituted with another city (e.g. London), a court or tribunal would undoubtedly have no difficulty with interpreting that phrase as designating the seat of arbitration. It would be unprincipled to depart from the parties’ express choice of the arbitral seat simply because that choice results in certain undesirable outcomes that they perhaps might not have foreseen.
The SGCA decided in BNA v. BNB that the words of an arbitration agreement should be given their natural meaning unless there are sufficient contrary indicia to displace that reading, and “the parties’ manifest intention to arbitrate is not to be given effect at all costs”. The decision was correct as it is not the function of the courts to save the parties from the consequences of poorly drafted or ill-advised arbitration clauses. It underscores the importance of choosing the seat of arbitration and proper law of the arbitration agreement with care.
Daniel Gaw is an LL.M. candidate (Vanderbilt Scholar) in the International Business Regulation, Litigation and Arbitration program at the NYU School of Law and an Associate in Dechert LLP’s International Arbitration group. He holds a Bachelor of Laws (First Class Honours) from the National University of Singapore and was formerly a Justices’ Law Clerk of the Supreme Court of Singapore.
  SGCA 84.
  SGHC 142.
 BNA v. BNB  SGHC 142 ¶ 8.
 BNA v. BNB  SGCA 84 ¶ 18.
 BNA v. BNB  SGHC 142 ¶ 104.
 Id. ¶ 108.
 Id. ¶ 109.
  1 WLR 102.
 BNA v. BNB  SGHC 142 ¶ 17.
 Id. ¶ 111.
 Id. ¶ 117.
 Id. ¶¶ 48 and 53.
 BNA v. BNB  SGCA 84 ¶ 65.
 Id. ¶ 92.
 Id. ¶ 61.
 Id. ¶ 62.
 Id. ¶ 94.
 Kabab-Ji SAL v Kout Food Group  EWCA Civ 6 ¶ 62.
 FirstLink Investments Corp Ltd v GT Payment Pte Ltd  SGHCR 12 ¶ 16.
 BCY v BCZ  SGHC 249 ¶ 65; Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd  SGHC 238 ¶ 31.
  EWCA Civ 574 ¶ 91.
  UKSC 38 ¶ 170(iv).
 BNA v. BNB  SGCA 84 ¶ 95.
 Id. ¶ 90.
 Enka v. Chubb  UKSC 38 ¶ 198 (dissenting judgment of Lord Burrows).
 BNA v. BNB  SGCA 84 ¶¶ 66-68.
 Id. ¶ 104.