Parties should clearly specify the seat of arbitration as this can be a hotbed of contention when international disputes emerge, writes Tata Capital’s Rohan Thacker
The seat or situs of arbitration has long been a pivotal point steering the course of arbitration. In international arbitration, where multiple countries, laws, legal systems, procedures and questions of conflict of laws are involved, the seat assumes an even more pronounced role and becomes the deciding factor for many issues that are closely tied to the seat. Some of these are questions as to arbitrability of a dispute, the law governing the procedure of arbitration, interpretation of the arbitration agreement, costs, challenges to awards, etc.
The law governing the arbitration process, or the curial law, is generally the law of the seat of arbitration. This can be different from the law that governs the substance of the dispute, which is generally the law applicable to the contract from which the dispute has arisen, and the law governing the agreement to arbitrate, which too can be agreed upon by the parties or determined based on other factors.
It is also a settled position that “seat” is not necessarily the same as “venue”, which merely connotes the physical location where the arbitral proceedings are conducted. Two recent and significant decisions from the courts in Singapore have further underlined the importance of seat.
Determining arbitrability pre-award
In a decision of the High Court of Singapore on 26 October, 2021 in Westbridge Ventures II Investment Holdings v Anupam Mittal, the court declared that the law of the seat, and not the proper law of the arbitration agreement, would determine subject matter arbitrability at the pre-award stage.
In this case the plaintiff held 30.96% of the share capital of People Interactive, a private limited company registered in Mumbai, and the defendant, Anupam Mittal, who was the managing director, held 43.85%, and his cousins, Anand Mittal and Navin Mittal, also held some shares. The plaintiff, the defendant People Interactive, Anand and Navin entered into a shareholders’ agreement.
The arbitration clause in question specified Indian law as the law governing the agreement and its performance. It further provided for disputes relating to the management of the company or any of the matters set out in the agreement to be referred to arbitration if negotiations failed. The arbitration was to be carried out in accordance with the rules laid down by the International Chamber of Commerce (ICC), with Singapore stipulated as the place of arbitration. Disputes arose between the parties regarding the management of the company concerned, and appointment of nominee directors to the board of directors.
The relevant portions of the arbitration clause are extracted below:
“This agreement and its performance shall be governed by and construed in all respects in accordance with the laws of the Republic of India … The arbitration proceedings shall be carried out in accordance with the rules laid down by International Chambers of Commerce and the place of arbitration shall be Singapore.”
The high court was primarily concerned with whether the disputes between the parties were arbitrable. Related to this was the question as to whether the bringing of claims by the defendant before the National Company Law Tribunal was in breach of the arbitration agreement.
In determining the first issue, the court went into the question of what law would apply to determine the question of subject matter arbitrability at the pre-award stage – the law of the seat (i.e. Singapore law) or the law governing the arbitration agreement. In the case in question, if the law of the seat were to be applied, the disputes between the parties would be arbitrable, since shareholder disputes and minority oppression claims are arbitrable.
The court relied on four propositions for arriving at this conclusion:
(1) Subject matter arbitrability, when raised at the pre-award stage before the seat court, is essentially an issue of jurisdiction;
(2) The same law should be applicable to arbitrability issues at both the pre-award and post award stages;
(3) Applying the law of the seat at the pre-award stage is more consistent with the policy to promote international commercial arbitration; and
(4) The weight of authority leans in favour of the law of the seat being applied.
The court thus concluded that the arbitrability of disputes should be determined according to Singapore law and, accordingly, found that the disputes between the parties were arbitrable.
In an earlier decision in BNA v BNB and another (2019), finally determined by the Court of Appeal in Singapore, the parties had not specifically identified the seat but had designated the place of arbitration. While the Singapore High Court opined that the place was not chosen by the parties as the seat, the Court of Appeal took the view that the place was intended to be the seat, despite the fact that such construction of venue as seat would lead to possibility of the arbitration clause itself getting invalidated.
Location intended to be the seat?
In this case, the contract between BNA, the respondent to the arbitral proceedings and BNB (whose obligations were assigned to BNC, the claimant in the arbitral proceedings), contained an arbitration clause which read as under:
“14.1 This agreement shall be governed by the laws of the People’s Republic of China
14.2 …any and all disputes arising out of or relating to this agreement … shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai, which will be conducted in accordance with its arbitration rules. The arbitration award shall be final and binding on both parties.”
A dispute arose between the parties and the claimants filed a notice of arbitration pursuant to which the SIAC appointed a tribunal comprising three arbitrators. The respondent challenged the jurisdiction of the tribunal taking the position that Shanghai was the seat of arbitration and the law of the People’s Republic of China (PRC) was the proper law of the arbitration agreement. In view of this, the arbitration agreement was invalid, since PRC law did not permit a foreign arbitral institution like the SIAC to administer a PRC seated arbitration and also administer a domestic dispute like the one in question. The claimants, on the other hand, contended that Singapore law was the proper law.
Position of arbitrators, high court
The majority of the arbitrators were guided by the “validation principle” and “effective interpretation” principle by which it did not make commercial or logical sense for the parties to intentionally select a law to govern an arbitration agreement that would then invalidate it. They took the view that while PRC law, being the governing law of the agreement, would be the proper law of the arbitration agreement as well, this choice of PRC law was displaced by Singapore law because the application of PRC law may invalidate the arbitration agreement, which would, on the other hand, be valid if Singapore law, as the law of the seat, governed it.
The judge of the high court applied the three-stage framework set out by the high court earlier in BCY v BCZ, which was based on the principles set out by the English Court of Appeal in Sulamerica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others (2012). Applying the first stage, which required the judge to examine if the parties had expressly chosen a law to govern the arbitration agreement, the judge found that the parties had not made any such express provision.
Applying the second stage of examination, as to whether the parties had made an implied choice of proper law for the arbitration agreement, the judge found that “arbitration in Shanghai” did not mean Shanghai was the seat. The parties had expressly incorporated the SIAC rules, which provided that in the absence of an express provision the default seat would be Singapore.
Therefore, the judge took the view that Singapore was the seat and Shanghai was merely the venue chosen by the parties, and that the choice of Singapore law would displace the implied choice of PRC law as the governing law of the arbitration agreement.
Divergent view by court of appeal
While hearing the appeal, the Court of Appeal also considered the question as to which law should be applied by the seat court at the stage of setting-aside proceedings – the proper law of the arbitration agreement or the law of the seat, and the court held that the law of the seat would apply.
Consistent with the principles laid down in the BCY and Sulamerica cases, the Court of Appeal found that the judge was right in finding that the parties had not made an express choice of law for the arbitration agreement, and that an express choice of the proper law of the main contract did not, in and of itself, also constitute the proper law of the arbitration agreement, but was only a strong indicator of the governing law of the arbitration agreement unless there were indications to the contrary.
In analysing as to whether the law of the seat was materially different from the law governing the arbitration agreement, the court concluded that the arbitration clause only contained a reference to one geographical location, i.e. Shanghai, and that the natural meaning of the phrase “arbitration in Shanghai” was that Shanghai was the seat of arbitration.
The default choice of Singapore as the seat under the provisions of the SIAC rules would only apply in the absence of the parties’ agreement, i.e. if the reference to Shanghai was consigned as a reference to the venue and not the seat. Holding that the judge was wrong in finding Shanghai to be the venue, the court determined that Shanghai was the seat of arbitration.
Emphasis on intention of parties
The court held that between encouraging arbitration and giving effect to what the court felt was the intention of the parties, the intention of the parties must be given effect at all costs: “The parties did not only choose to arbitrate – they chose to arbitrate in a certain way, in a certain place … if the result of the process of construction is that the arbitration agreement is unworkable, the parties must live with the consequences of their decision.”
This approach by the court is noteworthy especially when considered in line with previous judgments. For instance, in the oft quoted and leading case of Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb (2020) (Enka), the UK Supreme court had laid down as one of the principles that if there is a risk of the arbitration agreement becoming ineffective if it is governed by the same law as the main contract, then evidence of such risk may negate an inference that the law of the contract would also apply to the arbitration agreement.
Non-application of validation principle
In this case, the court declined to consider the effectiveness or otherwise of the arbitration agreement as relevant in deciding whether or not Singapore was the seat, which was the approach taken by the lower court. Instead, the court laid emphasis on the intention of the parties interpreted by it from the wordings contained in the clause of the contract, and opined that such wordings must acquire preeminence over the intention of the parties to arbitrate.
On the premise that the parties who agreed on an arbitration clause in the contract intended the same to be valid, it can be argued that either the parties did not intend for Shanghai to be the seat, but only the venue, being aware of the consequences that may ensue if Shanghai were to be the seat; or the parties were simply unaware of the consequences of having Shanghai as the seat.
The parties could well have been cognizant of the fact that in absence of the parties’ express provision, the default seat as per the SIAC rules would be Singapore – the court rejected this possibility on the basis of absence of any evidence on this. In any case, there is no disputing the fact that the parties did not expressly agree upon the seat. The contract only mentioned a geographical location, which was differently interpreted by the various courts and arbitral tribunal as being the venue or as being the seat.
The applicability of the “validation” or “effective interpretation” principle was expressly overruled by the court based on its interpretation and finding the parties’ intent to be clear. Significantly, the applicability of the validity principle also rejected by the earlier high court judgement as being both unnecessary and inconsistent with the parties’ intentions.
The recent decision of the UK Supreme Court in Kabab-ji SAL (Lebanon) v Kout Food Group (Kuwait) on 27 October 2021 bears mention. Vide a franchise development agreement (FDA), the claimant, Kabab-ji Sal granted a licence to a Kuwaiti Company, Al Homaizi Foodstuff Company, and the claimant and Al Homaizi entered into 10 franchise outlet agreements (FOAs) under the FDA.
Pursuant to a corporate restructuring undergone by the Al Homaizi Group, Al Homaizi became a subsidiary of a company called Kout Food Group (KFG). A dispute arose which the claimant referred to arbitration under the rules of the ICC in Paris. The arbitration was commenced against KFG alone, and not Al Homaizi, and KFG took part in the arbitration under protest, maintaining that it was not a party to the FDA or FOA (together referred to as franchise agreements) or the arbitration agreements contained in them.
The arbitral tribunal of three arbitrators unanimously determined that it must apply French law as the law of the seat of arbitration to determine whether KFG was bound by the arbitration agreements, and found that KFG was a party to the arbitration agreements.
The court referred to the principles laid down in Enka and considered the fact that in Enka, the English common law rules were applied, whereas the instant case had to be decided based on section 103(2)(b) of the Arbitration Act, 1996.
However, the court found that once it is accepted that an express agreement as to the law, which is to govern an arbitration agreement, is not required, and that any form of agreement will suffice, a general choice of law clause in a written contract containing an arbitration clause will normally be a sufficient indication of the law to which the parties subjected the arbitration agreement. The court further found that the principles in Eka would also apply where the question of validity arises after an award has been made in the context of enforcement proceedings.
The court declined to apply the validation principle that contractual provisions, including any choice of law provisions, should be interpreted so as to give effect to, and not undermine, the presumed intention that an arbitration award will be valid and effective. If the validation principle had been followed, and if application of English law had led to the conclusion that there was no valid agreement, it would have been inferred that the choice of English law to govern the FDA did not extend to the arbitration agreement in the above-mentioned clause 14.
The court, however, opined that the validation principle cannot be extended beyond its proper scope and cannot be applied to decide the question as to whether any parties to a dispute have made any agreement at all with a presumption that they did so.
Applying English law thus, the court found that KFG did not become a party to the arbitration agreement and therefore upheld the judgment of the Court of Appeal refusing recognition and enforcement of the award.
Both in BNA and Kabab-ji, the application of the validation principle was refused and the decisions led to the invalidation of the arbitration proceedings. In BNA, the court found that the place of arbitration was itself the seat and therefore the presumption of the governing law of the contract also applying to the arbitration agreement was not negated. In Kabab-ji, although the law of the seat was different, the court found in view of the wordings of the clause that the choice of seat did not displace the said presumption.
In the judgments analysed above, the seat was at the fulcrum of the decisions. In the first, BNA, the arbitration clause mentioned a place of arbitration but did not specify whether or not it was the seat. The court, interpreting the clause, construed it to be the seat, which led to the arbitration clause getting invalidated since the clause was not valid as per the law of the seat. This was at a pre-arbitration stage.
In the Kabab-ji case, the court declined to apply the law of the seat and instead held that the law of the contract would apply to determine the question as to whether there is an enforceable arbitration agreement. Applying English law, it held that there is no valid arbitration agreement and consequently denied enforcement of the award. This was at the stage of enforcement of the award.
In Westbridge, the court held that the law of the seat would determine subject matter arbitrability at the pre-award stage and found that the disputes between the parties were arbitrable.
With this evolution in jurisprudence, the role of the seat in deciding issues relating to arbitration has only become more crucial, and parties can ill afford to have arbitration clauses where there are no express provisions regarding seat, or where the provisions are ambiguous.
The seat, moreover, should be specified in a manner as to leave no room for doubt that it is indeed the seat, and not merely the venue or place of arbitration. Parties would also need to examine the implications of choosing a particular place as seat in light of various laws that may become applicable to the arbitration at different stages, and weigh the pros and cons of their choice considering the various facets that hinge upon the seat.
Rohan Thacker is deputy vice president at Tata Capital.