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Focus: Arbitration Round-up

7 May 2013

In this issue: we look at the fifth edition of the Singapore International Arbitration Centre's rules; the willingness of the Singapore High Court to give effect to pathological arbitration clauses; a case that reinforces the broad discretion of arbitral tribunals in deciding procedure and case management in Hong Kong; whether an agreement to negotiate in good faith in a multi-tiered dispute resolution clause is enforceable in different jurisdictions; and a court's refusal to recognise an arbitral award where the underlying agreement was executed under duress. This issue has been edited by Partner Andrea Martignoni (view CV), Special Counsel Nicola Nygh and Senior Associate James Morrison.

New rules for arbitration in Singapore

In brief: The Singapore International Arbitration Centre recently released the fifth edition of its arbitration rules. The new rules came into effect on 1 April 2013 and provide for a new Court of Arbitration, to oversee the centre's case administration and arbitral appointment functions. Lawyer Tom Levi reports.

SIAC Court of Arbitration

Until now, the Board of Directors of the Singapore International Arbitration Centre (SIAC) was responsible for both its management and direction, as well as performing the role of Registrar, under the SIAC Rules. From 1 April 2013, the new Court of Arbitration has taken on the responsibility of managing cases administered by SIAC. Australian arbitration practitioner Dr Michael Pryles is President of the court, which comprises 16 leading arbitration practitioners from around the world.

Under the new SIAC Rules, the President of the court will perform the following functions:

  • appointing arbitrators (where the parties are unable to agree on, or fail to appoint, any arbitrator);
  • removing arbitrators who refuse to act or are not fulfilling their functions;
  • appointing emergency arbitrators; and
  • determining applications to conduct arbitrations according to the expedited procedure.

The court will perform the following functions:

  • deciding challenges to arbitrators; and
  • deciding prima facie whether a valid arbitration agreement may exist (without affecting the tribunal's power to rule on its own jurisdiction).

The Registrar retains a general case-management role under the SIAC Rules.

Other changes to the SIAC Rules

Additionally, under the new SIAC Rules:

  • the arbitral tribunal has the power to decide any issue not raised in the submissions filed by the parties, provided the issue has been clearly brought to the notice of the other party and they have had the opportunity to respond; and
  • SIAC may publish redacted versions of any award.
Comment

The new SIAC Rules are, undoubtedly, a response to the centre's increasing caseload. They will not have a significant impact on the manner in which arbitrations are conducted at SIAC but should provide a more streamlined process.

Singapore continues to keep pathological arbitration clauses alive

In brief: The Singapore High Court has held to be valid and enforceable an arbitration clause that referred disputes to a non-existent arbitral institution, applying the ICC Rules of Arbitration. This decision, which follows a previous decision of the Singapore Court of Appeal, is a further example of the willingness of Singapore courts to give effect to agreements providing for arbitration under the rules of a specific arbitral institution but administered by a different arbitral institution. Senior Associate James Morrison and Lawyer Rowan Platt report.

How does it affect you?

  • Although Singapore courts will generally seek to give effect to pathological clauses, contracting parties should take care to ensure that the correct arbitral institution and rules are designated in their arbitration clause, to avoid the potential for costly and time-consuming jurisdictional challenges.
The facts

HKL Group Co Ltd entered into an agreement with Rizq International Holdings Pte Ltd, for the sale of sand to be shipped from Cambodia to Singapore (the agreement).

The arbitration clause contained in the agreement provided as follows:

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 of which awards shall be final and binding [on] both parties.

A dispute emerged over Rizq's alleged failure to pay certain invoices and HKL commenced court proceedings in the Singapore High Court, to recover these amounts.1.

Rizq applied for a stay of the court proceedings in favour of arbitration under the arbitration clause in the agreement, which the High Court was required to grant under the Singapore International Arbitration Act (the IAA) unless it was satisfied that the arbitration agreement was null and void, inoperative or incapable of being performed.

HKL resisted Rizq's stay application, arguing that the arbitration clause was inoperable, on the basis that there was no entity in Singapore named the 'Arbitration Committee'.

Rizq argued that, although the arbitration clause was defective, it was clear that the parties' intention was to arbitrate the matter in Singapore. On this basis, Rizq submitted that the High Court should rely on the principle of effective interpretation to find that the parties could still agree to refer the matter to an arbitral institution in Singapore – for instance, the Singapore International Arbitration Centre (SIAC) – for ad-hoc arbitration applying the ICC Rules of Arbitration.

The High Court's decision

The Singapore High Court explained that a pathological clause is essentially a defective clause, the meaning of which the court is unable to discern, either partially or entirely. The court further explained that:

  • the broad aim is to keep pathological clauses alive, by adopting an interpretation that enables the clause to be effective, in preference to an interpretation that does not; and
  • whether a pathological clause may be upheld will depend on the nature and extent of the pathology.

In deciding to stay the court proceedings, the court noted that the following elements were clear and certain from the arbitration clause in the agreement:

  • the intention of the parties was to resolve any dispute by arbitration;
  • the mandatory consequence of a dispute arising would be the referral of that dispute to arbitration;
  • the place of arbitration would be Singapore; and
  • any arbitration would be governed by the ICC Rules of Arbitration.

On this basis, notwithstanding any uncertainty as regards the arbitral institution, the arbitration clause was operative for the purposes of the IAA, to the extent the parties were able to secure the agreement of an arbitral institution in Singapore, such as the SIAC, to administer the arbitration, applying the ICC Rules of Arbitration.

In making this finding, the High Court recognised that it is by no means easy for any arbitral institution not established for the purpose of conducting an arbitration under the ICC Rules of Arbitration to do so, given the unique rules and structures that apply. However, referring to the Singapore Court of Appeal's decision in Insigma Technology Co Ltd v Alstom Technology Ltd 2, where the relevant arbitration clause provided for the SIAC to administer the ICC Rules of Arbitration, the High Court noted that, in that case, the SIAC was able and willing to administer an arbitration, applying the ICC Rules of Arbitration.

Accordingly, the High Court proceedings were stayed, on the condition that the parties obtained the agreement of an arbitral institution in Singapore to administer the arbitration, applying the ICC Rules of Arbitration.

Comment

Singapore is increasingly designated as the place of arbitration in international contracts and this decision again affirms the commitment of the Singaporean courts to support the arbitral process. However, this case also demonstrates that considerable time and cost may be saved by clear and certain drafting, which can protect arbitration clauses from challenges such as the one brought by HKL.

The ICC Rules of Arbitration were amended in 2012, to provide expressly that the ICC International Court of Arbitration is the only body authorised to administer arbitrations under the ICC Rules of Arbitration.3 However, it is unclear the extent to which this amendment, which occurred after the decision in Insigma and was not considered by the High Court in HKL Group Co Ltd v Rizq International Holdings Pte Ltd, will affect, if at all, the approach of the Singapore courts to pathological arbitration clauses requiring the ICC Rules of Arbitration to be administered by a different arbitral institution.

Procedural discretion of arbitral tribunals protected in Hong Kong

In brief: The broad discretion of arbitral tribunals in deciding procedural and case management issues has recently been upheld by the Hong Kong courts, which narrowly applied the due process ground to setting aside arbitral awards. Senior Associate Jim Morrison and Lawyer Theodore Souris consider the decisions in the Pacific China v Grand Pacific litigation.

How does it affect you?

  • The setting-aside procedure cannot be used by parties to appeal procedural or case management decisions by arbitral tribunals, unless there has been a serious or egregious inability of a party to present its case.
Background

Pacific China Holdings Ltd owed Grand Pacific Holdings Ltd US$40 million, under a loan agreement governed by New York law and containing an ICC arbitration clause providing for Hong Kong as the place of arbitration.

On 24 August 2009, Grand Pacific, having commenced an International Court of Arbitration (the ICC) arbitration, was subsequently awarded the sums owed by Pacific China.

In 2010, Pacific China sought to have the award set aside in Hong Kong, on the alleged basis that it was unable to present its case according to the parties' agreement, contrary to Article 34(2)(a)(ii) of the UNCITRAL Model Law on International Arbitration (the Model Law).

The Court of First Instance

Before the Court of First Instance4, Pacific China raised three grounds in support of its application to set aside the award:

  • the arbitral tribunal granted Grand Pacific 10 additional days to finalise its pre-hearing submissions, during which time it had access to Pacific China's pre-hearing submissions;
  • the arbitral tribunal rejected Pacific China's application to submit three additional legal authorities without having properly considered whether they were admissible; and
  • the arbitral tribunal rejected an application by Pacific China to submit a reply to Grand Pacific's response to Pacific China's submissions on Hong Kong law, which response, Pacific China alleged, went beyond its own submissions.

Justice Saunders of the Court of First Instance found in favour of Pacific China and held that Pacific China was unable to present its case by reason of each of the three grounds in breach of Article 34(2) of the Model Law. Justice Saunders also held that he was unable to exercise his discretion to refuse the application to set aside the award because he was unable to say that the result would have been the same but for the breach of the parties' agreement. The award was, therefore, set aside.

The Court of Appeal

Grand Pacific appealed5 the decision of the Court of First Instance to the Court of Appeal, which unanimously overturned the decision to set aside the award.

The Court of Appeal reasoned that the procedure for setting aside awards is not an appeal, and that a court can only look at the process and the structural integrity of the arbitration proceedings.

Further, the conduct complained of must be serious, or even egregious, before a court can find that a party was 'otherwise unable to present his case' under Article 34(2)(a)(ii) of the Model Law. Specifically, the Court of Appeal reasoned that the conduct must be 'sufficiently serious or egregious so that one could say a party has been denied due process'.

In applying this test, the Court of Appeal found that none of the three grounds raised by Pacific China was sufficiently serious or egregious for the purposes of Article 34(2)(a)(ii), including as follows:

  • the arbitral tribunal was best placed to consider the fairness of the extension of time requested by Grand Pacific for submitting its pre-hearing submissions;
  • the Court of First Instance was not entitled to interfere with the arbitral tribunal's decision rejecting Pacific China's application to submit additional legal authorities, being a decision fully within the arbitral tribunal's discretion; and
  • the arbitral tribunal was entitled to refuse Pacific China's application to respond to Grand Pacific's response to Pacific China's legal submissions, especially considering that Pacific China had already been provided two opportunities to make submissions on the relevant issues.

As there had been no breach by the arbitral tribunal in terms of Pacific China's ability to present its case, it was unnecessary for the Court of Appeal to consider the Court of First Instance's decision not to exercise its discretion to refuse to set aside the award. The Court of Appeal confirmed, however, that a court could refuse to set aside an award if it was satisfied that the outcome could not have been different, notwithstanding a breach of Article 34(2)(a)(ii).

The leave application in the Court of Final Appeal

Pacific China applied for leave to appeal to the Court of Final Appeal6

In rejecting Pacific China's application, the Court of Final Appeal reasoned that the arbitral tribunal's decisions were procedural or related to case management and, therefore, within the arbitral tribunal's discretion. Further, the court considered that the rulings reflected the arbitral tribunal's assessment of the requirements of procedural fairness in the circumstances of the case.

In light of the Court of Final Appeal's decision not to grant leave to appeal, the Court of Appeal's decision remains the law in Hong Kong.

Implications

This decision confirms that in arbitrations taking place in Hong Kong, the discretion of an arbitral tribunal in procedural and case management issues is broad and will be supported by the Hong Kong courts. The facts of this case, and the reasoning applied by the Court of Appeal in requiring a breach of due process to be 'sufficiently serious or egregious' before a court will set aside an award under Article 34(2)(a)(ii), demonstrate the continuing robust approach by the Hong Kong courts to upholding arbitration awards rendered there.

The 'good faith' requirement in multi-tiered dispute resolution clauses

In brief: Multi-tiered dispute resolution clauses frequently require parties to engage in 'good faith' negotiations before a formal dispute resolution mechanism is engaged. When a dispute arises, there is often a question as to whether this gives rise to any enforceable obligation. In Australia, the answer will likely be 'yes', provided the clause is sufficiently clear and certain. However, recent decisions in England and Singapore demonstrate that the answer may differ from jurisdiction to jurisdiction. Senior Associate Edward Martin and Lawyer Alice Dillon comment on the implications for contracting parties.

How does it affect you?

  • Unclear, ambiguous or uncertain multi-tiered dispute resolution (MTDR) clauses are unlikely to be enforceable, so the use of optional language (such as the word 'may') when drafting MTDR clauses should be avoided in favour of clearly articulated steps.
  • Australian courts have shown a tendency to interpret obligations to 'negotiate in good faith' requirements as being enforceable, and recent case law from Singapore suggests that such clauses are seen as substantive contractual promises.
  • Careful thought should be given to the law governing the contract, however, as courts in England have found 'good faith' negotiation clauses, without more, too uncertain to be enforceable.
Background

MTDR clauses are contractual provisions that set out a staged and escalating process for parties to follow in a dispute. Often, MTDR clauses will require, as a first step, that the parties 'negotiate in good faith'. This has been a vexed area of the law, and English courts have historically found such clauses to be analogous to agreements to agree and unenforceable.

The position in Australia

In United Group Rail Services Ltd v Rail Corporation New South Wales7, the NSW Court of Appeal considered the enforceability of a long and detailed MTDR clause. The clause stipulated that certain disputes be referred to expert determination, while other disputes be referred to negotiation between senior representatives who were required to 'meet and undertake genuine and good faith negotiations with a view to resolving the dispute...'.

The trial judge found that the content of the obligation to 'undertake genuine and good faith negotiations' was sufficiently certain as to make the clause valid and enforceable, and the Court of Appeal unanimously affirmed this decision. President Allsop (as he then was) reinforced the proposition that what 'good faith' will entail in a particular case will depend on the context and terms of the contract, but it is 'not a concept foreign to the common law...it has been an underlying concept in the law merchant for centuries'8 and it is not without meaning9. The obligation to negotiate in good faith would still allow the parties to act in self-interest but, in doing so, their conduct would be constrained by an obligation to undertake the negotiations in an honest and genuine manner.

Contrasting approaches in other jurisdictions

The English courts have consistently declined to enforce MTDR clauses that compel the parties to engage in 'good faith' negotiations. This approach was recently confirmed in the English High Court case of Wah v Grant Thornton 10. In that case, a dispute arose between a former member firm of the Grant Thornton accountancy and audit network, of which Tang Chung Wah was a partner. Ultimately, the matter proceeded to arbitration. The issue in dispute was whether the pre-arbitration steps in the MTDR clause requiring the Chief Executive to attempt to settle any dispute by 'amicable conciliation or an informal nature' were a condition precedent to the commencement of the arbitration. Justice Hildyard found that their terms were 'too equivocal in terms of the process required and too nebulous in terms of the content of the parties' respective obligations...'11. Accordingly, that part of the MTDR clause was found to be unenforceable. In obiter, Justice Hildyard said, '...agreements to negotiate in good faith, without more, must be taken to be unenforceable; good faith is too open-ended a concept...to provide sufficient definition of what such an agreement must as a minimum involve and when it can objectively be determined to be properly concluded'12.

The Singapore Court of Appeal, however, considered the contractual duty to negotiate in good faith quite differently in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd 13. The issue in dispute in that case was whether International Research Corp PLC (IRCP), a party to a subsequent agreement, could be joined to an arbitration under the original arbitration agreement between Lufthansa and Datamat (to which IRCP was not a party). While that case stands for a different proposition (that a third party can be a party to an arbitration agreement in certain circumstances), the court acknowledged that 'good faith' clauses have a certain cultural meaning in Asia, which the legal system should promote and uphold:

From a traditional Asian perspective, a 'confer in good faith' or 'friendly negotiation' clause represents an executory contractual promise no less substantive in content than a price, payment or delivery term...14

Comments

The decision in United Group Rail Services Ltd indicates that, in Australia, a duty to negotiate in 'good faith' in an MTDR clause, properly formulated, is effective and should be observed by the parties. The comments in the Singaporean International Research case suggest that this approach is in line with the expectation of commercial parties in Asia. It is important, however, when considering how to approach an MTDR clause at the start of a dispute to keep in mind the approach generally taken by English courts of finding 'good faith' negotiation clauses to be unenforceable and to remember that the enforceability of these clauses will depend on the jurisdiction of the contract. Of course, each case will turn on its own facts.

Due process 1 – duress 0

In brief: The United States District Court has refused to recognise a China International Economic and Trade Arbitration Commission arbitration award, on the basis that the underlying contract was entered into under duress. Senior Associate Tom Randall and Lawyer Sally Keenan report.

How does it affect you?

  • The US District Court refused to enforce an award where the contract that was the subject of the award was executed under duress.
  • Article V of the New York Convention sets out when recognition and enforcement of a foreign arbitral award may be refused. This includes when where to do so would be contrary to the public policy of the state where enforcement is sought.
Background

Eastern Tools imports and distributes gasoline-powered generators and equipment, and purchased the majority of its equipment from Changzhou AMEC. Eastern Tools claimed that Changzhou supplied it with defective goods, and sought damages. In December 2006, the parties settled the dispute, on the basis that Eastern Tools would keep the goods and pay Changzhou AMEC US$2 million. The agreement was not signed. In February 2007, Changzhou AMEC filed for bankruptcy.

The agreements

In April 2007, the police arrested and jailed Eastern Tools' president, Mr Fan, in Changzhou, China. While Mr Fan was in custody, Changzhou AMEC's bankruptcy administrator visited him to discuss a new agreement. Mr Fan was permitted a visit from a lawyer; however, the lawyer was only allowed to advise him to sign the new agreement and was pushed out of the room when discussions turned to Mr Fan's arrest. Mr Fan was told that he would not be released until he signed the new agreement.

The new agreement provided that Eastern Tools would pay US$2.5 million to Changzhou AMEC by way of six monthly instalments, and, if the payments were not made, Eastern Tools was required to pay US$6 million.

After Mr Fan signed the agreement and the first instalment was paid, he was released from custody.

In July 2007, Mr Fan was directed by the police to return to Changzhou, to sign a slightly revised agreement. He believed that that unless he signed it, the police would detain him again.

The agreements specified that all disputes would be submitted to arbitration before the China International Economic and Trade Arbitration Commission (CIETAC) in Shanghai.

In February 2008, Eastern Tools made a second payment, of US$250,000.

CIETAC arbitration

In May 2008, Changzhou AMEC initiated CIETAC arbitration to enforce the July 2007 agreement. Mr Fan contested the validity of the agreement, on the grounds that he signed it under duress. In December 2009, the CIETAC panel ruled in favour of Changzhou AMEC and awarded it US$5.6 million.

US District Court decision

In March 2011, Changzhou AMEC, under the New York Convention, brought proceedings in the US District Court to enforce the award. Eastern Tools opposed this, on the basis that the contract that was the subject of the award was signed under duress.

Under Article V(1)(a), a court may refuse to enforce an award if 'the parties to the agreement ... were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made'.

The court held that Article V(1)(a) did not apply. Since the CIETAC arbitration panel applied Chinese law, there was no basis to rule on a duress defence under American law 'unless the [arbitrator] manifestly disregarded the parties' agreement or the law'. This standard is a high one; it must be clear that the arbitrators knew of the applicable law and ignored it. CIETAC's application of Chinese law in ruling on Eastern Tools' duress defence was not a 'manifest disregard' of the law.

Article V(2)(b) of the New York Convention states that recognition and enforcement of a foreign arbitral award 'may be refused' if 'enforcement of that award would be contrary to the public policy of that country'.

The court was unable to find any prior case in which there had been a refusal to recognise a foreign arbitral award on the basis of duress; however, a number of cases indicated that 'enforcement would violate this country's "most basic notions of morality and justice" if the defendant's due process rights had been violated'. Under California law, 'duress generally exists whenever one is induced by the unlawful act of another to make a contract or perform some other act under circumstances that deprive him of the exercise of free will'.

The court found that the threatening circumstances surrounding Mr Fan's signing of the July 2007 agreement strongly suggested that he did not assent freely to the agreement. On this basis, the court refused to recognise and enforce the award.

Comment

The decision is consistent with the Convention's goal of encouraging the recognition and enforcement of foreign arbitral awards and the viability of international commercial arbitration as a form of commercial dispute resolution. Arbitration relies for validity on the commercial submission of the parties to the process. The enlistment of a country's courts to enforce an award against a party whose consent was not freely given is not only contrary to widely held norms of a free society but to the policy of party autonomy and consent that underpins arbitration.

Footnotes
  1. HKL Group Co Ltd v Rizq International Holdings Pte Ltd [2013] SGHCR 5.
  2. [2009] 3 SLR(R) 936.
  3. Article 1(2) of the ICC Rules of Arbitration.
  4. Pacific China Holdings Ltd (in liq) v Grand Pacific Holdings Ltd [2011] 4 HKLRD 188, delivered on 29 June 2011.
  5. Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1, delivered on 9 May 2012.
  6. Reasons handed down on 21 February 2013 in FAMV No. 18 of 2012.
  7. [2009] NSWCA 177.
  8. Ibid., at [58].
  9. Ibid., at [73].
  10. [2012] EWHC 3198 (Ch).
  11. Ibid., at [72].
  12. Ibid., at [57].
  13. [2012] SGHC 226.
  14. Ibid., note at [92] (Justice Chan Seng Onn citing the Court of Appeal's consideration of 'Rethinking the Role of Law and Contracts in East-West Commercial Relationships' in HSBC Institutional Trust Services (Singapore) v Toshin Development Singapore Pte Ltd [2012] SGCA 48).

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