Three recent decisions of the Courts of Appeal in Singapore and England provide an opportunity to revisit the common law approach to determining the proper law of the arbitration agreement. The proper law of the arbitration agreement is often overlooked in the drafting of arbitration clauses but is of primary importance where the validity of the arbitration agreement is in question.

The three decisions are:

1. BNA v BNB & Anor [2019] SGCA 84 (“BNA v BNB”);


2. Kabab-JI S.A.L v Kout Food Group [2020] EWCA Civ 6 (“Kabab v Kout”); and


3. Enka Insaat Ve Sanayi A.S. v OOO “Insurance Company Chubb” & Ors [2020] EWCA Civ 574 (“Enka v Chubb”).

Much has been written about BNA v BNB and Kabab v Kout already. Enka v Chubb was released more recently on 29 April 2020. In this re-evaluation I focus on whether the common law approach to determining the proper law of the arbitration agreement, as exemplified in these three cases and going back to the English Court of Appeal decision in Sulamérica Cia Nacional de Seguros SA & Ors v Enesa Engelharia SA & Ors [2012] EWCA Civ 638; [2013] 1 WLR 102 (“Sulamérica”), accords with the obligations in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) and the corresponding obligations in the UNCITRAL Model Law on International Commercial Arbitration (“the Model Law”).

I also consider whether courts, even the most international arbitration friendly ones like England and Singapore, give enough attention to the multifaceted interplay of choice of law in the interpretation of international arbitration agreements.

Given the brevity of this note for the form in which it is published, I only identify points where the common law approach diverges from the New York Convention and, in my view, insufficient attention has been given to the interplay of choice of law in the interpretation of international arbitration agreements, leaving a more in-depth discussion of these issues to a less succinct paper in future.

A                 BNA v BNB

The Court of Appeal in Singapore handed down the decision in BNA v BNB in December last year. The case concerned a tripartite arbitration in a takeout agreement for industrial gas. The parties were:

1. BNA – a PRC entity;


2. BNB – a South Korean entity; and


3. BNC – another PRC entity.

BNB was the original seller in the takeout agreement and BNA was the buyer. BNC, a related company to BNB, subsequently took over BNB’s obligations as seller by novation. BNB however remained jointly and severally liable for BNC’s failure to perform its obligations. PRC law was the governing law of the contract and therefore of the substance of the dispute.

The arbitration agreement provided for arbitration administered by the SIAC under the SIAC Rules with “arbitration in Shanghai”. Under PRC law:

1. two PRC parties, i.e. BNA and BNC, cannot agree to arbitrate disputes outside of the PRC; and


2. there is a serious question whether a foreign institution, i.e. the SIAC, can administer arbitration in the PRC.

A majority of the tribunal found, applying the validation principle, that Singapore law was the proper law of the arbitration agreement. The validation principle states that an arbitration agreement should be upheld as valid if it is valid under any of the laws that may potentially be applicable to it, even if it is not valid under other potentially applicable laws.[1] The validation principle is embedded in the pro-enforcement policy and choice of law provisions of the New York Convention (which are replicated in the Model Law).[2]

The majority award reasoned:

1. It made no commercial or logical sense for parties to intentionally select a law to govern an arbitration agreement which would invalidate it.


2. The words “arbitration in Shanghai” designated Shanghai as the venue (but not the seat or place) of the arbitration.


3. Singapore was the seat of the arbitration (presumably because of the choice of SIAC as administering institution).


4. Singapore law, as the law of the seat, was the proper law of the arbitration agreement.

The majority’s finding upheld the validity of the arbitration agreement.

The dissent by the third arbitrator opined that:

1. Shanghai was the designated seat or place of the arbitration.


2. There was nothing to displace PRC law as the proper law of the arbitration agreement (PRC law being both the governing law of the substantive contract and of the seat).


3. The dispute is classified as a domestic dispute under PRC law.


4. PRC law prohibits a foreign institution from administering an arbitration of a domestic dispute.

BNA applied to set aside the majority award in the Singapore High Court. The court applied the three stage inquiry set out in Sulamérica, which was endorsed by the Singapore High Court in BCY v BCZ [2017] 3 SLR 357 (“BCY v BCZ”). The court found:

1. Singapore was the seat of arbitration because the parties had expressly incorporated the SIAC Rules 5^th edition, 2013 (rule 18.1 of those rules specified Singapore as the default seat of the arbitration in the absence of the parties’ agreement).[3]


2. Since the arbitration agreement referred to two locations – Singapore (through rule 18.1) and Shanghai – in the absence of a clear selection of the seat by the parties, the words “arbitration in Shanghai” was taken to be designation of Shanghai as the venue and not the seat.[4] Singapore was therefore the seat by default, under rule 18.1.


3. Because Singapore was the seat, Singapore law displaced PRC law as the proper law of the arbitration agreement (since the validity of the arbitration agreement was in doubt under PRC law).

Although the court upheld the majority award, which had applied the validation principle, it expressly rejected the application of the principle in Singapore law. The court found the validation principle:

1. Was impermissibly instrumental.[5]


2. Could be inconsistent with the parties’ intentions.[6]


3. Was unnecessary because Singapore law already endorsed the principle in the Latin maxim verba ita sunt intelligenda ut res magis valeat quam pereate. words are to be understood in a manner that the subject matter be preserved rather than destroyed.[7]


4. Could create problems at the enforcement stage because article V(1)(a) of the New York Convention contains choice of law provisions for determining the proper law of the arbitration agreement, the starting point of which is the parties’ intentions, whereas the validation principle seeks to validate an arbitration agreement without “necessary regard to the parties’ choice of law”.[8]

With respect, it appears to me the court itself took an instrumental approach by reading “arbitration in Shanghai” as designation of venue and not seat, to arrive at the decision that the proper law of the arbitration agreement was Singapore law, to validate the arbitration agreement which would have been invalid under PRC law. In other words, the court applied a validation approach even though it would not endorse the validation principle.

The validation principle is not inconsistent with the parties’ intentions; it gives effect to the parties’ agreement to arbitrate. There is no conflict between the validation principle and article V(1)(a) (and article II) of the New York Convention as the validation principle is derived from the choice of law principles and pro-enforcement policy applicable to both articles II and V(1)(a).[9]

On appeal, the Court of Appeal reversed the High Court. The Court of Appeal held:

1. The natural reading of “arbitration in Shanghai” meant Shanghai was the seat selected by the parties.


2. Singapore is therefore not the competent court to decide jurisdiction.

As it was not necessary for the Court of Appeal to do so, it declined to address the application, in Singapore law, of the validation principle or the effective interpretation principle (a civil law concept which provides that where an arbitration clause can be interpreted in two different ways, the interpretation enabling the clause to be effective should be adopted in preference to that which prevents the clause from being effective).[10]

In arriving at its decision, the Court of Appeal also applied the three stage enquiry in Sulamérica, which stipulates that in determining the proper law of the arbitration agreement the court has to consider, in the order stated below:

1. Whether the parties had expressed a specific choice of law.


2. If not, does the arbitration agreement evince an implied choice of law (in Sulamérica the court held there was a rebuttable presumption that the governing law of the substantive contract is the implied choice in the absence of an express choice. This presumption could be rebutted, for example, if the arbitration agreement was invalid under the governing law of the contract, in which case the fall back implied choice was the law of the seat).


3. Failing determination of an implied choice, what law had the closest connection to the arbitration agreement.

The three stage test in Sulamérica applied English contract law precedent for determining the proper law of contracts generally.[11] The court did not consider whether this test accorded with the choice of law provisions in the New York Convention. The Sulamérica test departs from the New York Convention in one aspect. The New York Convention provides for the default selection of the law of the seat, not the law with the closest connection to the arbitration agreement, where no express or implied choice of law can be found.

Article V(1)(a) of the New York Convention contains choice of law provisions for determining the proper law of the arbitration agreement which are similar to, but as noted above, not identical with the three stage test in Sulamérica. Article V(1)(a) first points to:

1. “the law to which the parties have subjected it” (which includes both express and implied choices of law); and then


2. “failing any indication thereon”, “the law of the country where the award was made” (i.e. the law of the seat).

Article V(1)(a) deals with recognition and enforcement of arbitration awards. Article II of the New York Convention deals with recognition and enforcement of arbitration agreements. While there is no express choice of law provision in article II, it is implied in the scheme of the New York Convention that to avoid inconsistent decisions at the stage of recognition and enforcement of arbitration agreements and awards, the choice of law provisions in Art V(1)(a) are to be applied in Art II.[12]

The Court of Appeal’s approach to the determination of the proper law of the arbitration agreement did not, with respect, give sufficient consideration to the multifaceted interplay of choice of law in the interpretation of international arbitration agreements. The court did not give any apparent consideration to the law to be applied to interpretation of the arbitration agreement for the purposes of determining its proper law. The court applied Singapore law to construe the arbitration clause to determine the proper law. The court subsequently found the proper law was PRC law. As with as with any other contract, the arbitration agreement should be construed by its proper law, subject to the pro-arbitration policy and internationally accepted rules of construction mandated by the New York Convention.[13] This raises the question whether Singapore law was the appropriate law to apply when construing the arbitration agreement to determine its proper law.[14]

I was faced with a similar issue when sitting as an arbitrator in an ad hoc arbitration in Singapore. There was a dispute whether Singapore or India was the seat of the arbitration and hence, whether I had been properly appointed by the default appointing authority in Singapore as arbitrator. The dispute centred on whether the words “arbitration proceedings shall be held at Singapore” should be read as an express choice of Singapore as the seat, or a designation of venue.

The claimant argued it was only a designation of venue, and the arbitration was seated in India because Indian law was the governing law of the substantive contract and:

1. That express choice of law extended to the arbitration agreement.


2. Alternatively, Indian law was the implied choice of law, relying on the presumption in Sulamérica that the governing law of the contract was the implied choice of law for the arbitration agreement, in the absence of an express choice of law.


3. Also relying on Sulamérica, Indian law had the closest connection to the arbitration agreement.

As both the arbitration agreement and substantive contract were governed by Indian law, the arbitration was seated in India.

The respondent argued Singapore law was the proper law of the arbitration agreement as the express choice, or alternatively the implied choice, or the law with the closest connection with the arbitration agreement.

There was therefore a dispute as to the proper law of the arbitration agreement by which I was to determine whether the words “arbitration proceedings shall be held at Singapore” was an express choice of seat or designation of venue. The parties agreed, in response my enquiry, that the relevant principles of contractual interpretation would be the same under Singapore or Indian law. I decided it was not necessary for me to determine whether the governing law of the arbitration agreement was Indian or Singapore law at that stage and I reserved determination of the issue to a later stage should it become material. Applying the principles of contractual interpretation common to Indian and Singapore (and for that matter English) law, I found that the words “arbitration proceedings shall be held at Singapore” was an express choice of Singapore as the seat, and not just of venue:

1. The words “arbitration proceedings” encompass the entire conduct of the arbitration from the commencement of the arbitration to the final award and not just the hearing itself.


2. It would be odd for the parties to have gone to extent of specifying the location for the hearing but not where the arbitration would be seated – a concept of much greater significance.

My decision was, in effect, upheld by the Indian Supreme Court when it declined to appoint an arbitrator under section 11 of the Indian Arbitration and Conciliation Act 1996, on the assertion that the arbitration was seated in India.[15]

In retrospect, and considering the issue I raise above on the appropriate law to apply when construing the words of an arbitration clause to determine its proper law, it would have been appropriate for me to apply internationally accepted principles of construction (giving as much effect as possible to the pro-arbitration policy of the New York Convention) to the construction of the relevant words, and whether the parties had made an express choice as to seat, in order to determine whether Indian or Singapore law was the proper law of the arbitration agreement.

B                 Kabab v Kout

Kabab v Kout concerned a franchise development agreement (“FDA”) between Kabab and a company with the acronym AHFC. The arbitration agreement in the FDA provided for ICC arbitration in Paris. The governing law of the FDA was English law. AHFC subsequently became a subsidiary of Kout.

Kabab commenced arbitration against Kout under the arbitration agreement in the FDA. The tribunal had to consider a jurisdictional issue as to whether Kout was a party to the FDA (and the arbitration agreement). The majority of the tribunal found:

1. French law was the proper law of the arbitration agreement.


2. Whether Kout was bound by the arbitration agreement was a matter of French law (and it was).


3. Whether a transfer of substantive rights and obligations of the FDA took place was a matter of English law.


4. As a matter of English law, a novation making Kout the main franchisee could be inferred by conduct of the parties.

Kout applied to set aside the award in France. Kabab applied to enforce the award in England. In England, the High Court held:

1. There was an express choice of English law as the proper law of the arbitration agreement in article 14 of the FDA.


2. English law therefore governed whether Kout became a party to the arbitration agreement.


3. Under English law Kout did not become a party to the FDA.

On appeal, the Court of Appeal upheld the High Court decision:

1. Article 1, read with article 15 of the FDA, provided for the express choice of English law as the proper law of the arbitration agreement.


2. Article 1 made clear that “this Agreement” (capitalised) included all subsequent terms of the agreement, including the arbitration clause in section 14.


3. Article 15 expressly provided that “[t]his Agreement shall be governed and construed in accordance with the laws of England”, and by article 15 all terms of the agreement, including the arbitration agreement in article 14, were governed by English law.

The court recognized that, generally, governing law clauses in the substantive contract do not apply to the arbitration agreement,[16] but it did in this case because of articles 1 and 15 taken together.

The point of particular interest for me in Kabab v Kout was that the court questioned, but did not decide, whether the requirement of necessity for business efficacy before a term can be implied can be satisfied under the three stage test in Sulamérica, or the choice of law principles in the New York Convention, where there is a fallback default choice of either the law of the country:

1. with the closest connection; or


2. where the award was made.[17]

Counsel for Kabab submitted to the court that the test of implication set out in Sulamérica did not depend on showing the term to be implied was necessary for business efficacy. The court queried whether this was correct in light of the Supreme Court decision in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] AC 742:

“where the law on implication of terms was authoritatively restated by Lord Neuberger PSC at [14] to [32], that (save of course where terms are implied as matter of law) a term will only be implied into a contract if it is necessary for business efficacy.”[18]

This query stems from the English common law approach (as seen in Sulamérica) that general English contract law precedent for determining the proper law of a contract applies to the determination of the proper law of an arbitration agreement. This ignores, as I have noted above, the express choice of law principles in the New York Convention, which signatories to the New York Convention, including England, should adhere to. By only looking to English contract law precedent for determining the proper law of a contract, the court ignores that the New York Convention mandates choice of law principles, which includes consideration of an implied choice, in the absence of an express one. In my view, the law on implication on terms in English law should not be applied to the determination of the proper law of the arbitration agreement, which should adhere to the choice of law principles in the New York Convention.

C                 Enka v Chubb

This note was first conceived when BNA v BNB and Kabab v Kout had been released within short succession of each other. It would however be remiss of me not to include a postscript on Enka v Chubb, given its release at the time of writing this note.

Enka v Chubb concerned an anti-suit injunction for breach of an arbitration agreement (as did Sulamérica). The English Court of Appeal had to determine whether English or Russian law was the proper law of the arbitration agreement, as a step towards determining whether there was a valid arbitration agreement, and whether court proceedings commenced in Russia were in breach of this agreement.

The court noted English authority had not spoken “with one voice” on the relative weight to be given to the law of the seat of the arbitration and the law of the substantive contract in determining the proper law of the arbitration agreement,[19] it was time to “impose some order and clarity on this area”, and “the current state of the authorities does no credit to English commercial law which seeks to serve the business community by providing certainty.”[20]

The court surveyed the primary cases addressing this issue; including Sulamérica and Kabab v Kout. On Kabab v Kout the court said it would only be “in the minority of such cases where the language and circumstances of the case demonstrate that the main contract choice is properly to be construed as being an express choice” of the proper law of the arbitration agreement.[21] The court’s view was Kabab v Kout did not signal a shift towards a more expansive reading of the express choice of the substantive contract law to also cover the arbitration agreement.

The court endorsed the three stage test in Sulamérica, but differed from Sulamérica on the weight to be given to the law of the substantive contract versus the seat in the implication of the proper law of the arbitration agreement. The court summarized the principles for determining the proper law of the arbitration agreement as follows:[22]

1. The proper law of the arbitration agreement is to be determined by applying the three stage test required by English common law conflict of law rules:
   
   
   
   • Is there an express choice of law?
   
   
   • If not, is there any implied choice of law?
   
   
   • If not, with what system of law does the arbitration agreement have its closest and most real connection?
   
   
   
   


2. Where there is an express choice of law in the main contract it may amount to an express choice of the proper law of the arbitration agreement. Whether it does so will be a matter of construction of the whole contract, including the arbitration agreement, applying the principles of construction of the main contract law, if different from English law.


3. In all other cases there is a strong presumption that the parties have impliedly chosen the law of the seat as the proper law of the arbitration agreement. This is the general rule but may yield to another system of law governing the arbitration agreement where there are powerful countervailing factors in the relationship between the parties or the circumstances of the case.

The court gave primacy to the law of the seat, instead of the law of the substantive contract, for the following reasons:

1. The governing law of the substantive contract applies to the validity, interpretation and performance of the terms of the substantive contract, other than the terms of the separate arbitration agreement. This follows from the doctrine of separability of the arbitration agreement, which is determined by the law governing the arbitration (which is usually the law of the seat) and not the substantive law of the contract. The governing law of the substantive contract “has little if anything to say about the [choice of the proper law of the arbitration agreement] because it is directed to a different and separate agreement”. The validity, existence and effectiveness of the arbitration agreement is treated (by the separability doctrine) as separate from the main contract; therefore, the governing law should also be treated as separate.[23]


2. The overlap between the law governing the arbitration and the arbitration agreement strongly suggests that they should usually be the same.[24] The connection between the law of the arbitration agreement is closer to the law governing the arbitration than the law of the substantive contract. Businessmen should not be taken to have chosen a different law to apply to two closely related aspects of the arbitration (i.e. the law of the arbitration agreement and law of the arbitration).[25]

On the first reason above, the court itself recognized there is authority[26] and commentary[27] that separability of the arbitration agreement is limited to its validity, existence or effectiveness and does not make the arbitration agreement an entirely separate contract. As cited in Enka v Chubb, Moore-Bick LJ said in Sulamérica at [26]:

“The concept of severability itself, however, simply reflects the parties’ presumed intention that their agreed procedure for resolving disputes should remain effective in circumstances that would render the substantive contract ineffective. Its purpose is to give legal effect to that intention, not to insulate the arbitration agreement from the substantive contract for all purposes.”

Further, the Model Law and English Arbitration Act 1996 (“English Arbitration Act”) restrict the doctrine of separability to its existence and validity:

1. The Model Law states in article 16:

“The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

(Emphasis added)

2. The English Arbitration Act states in section 7:

“Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or had become ineffective, and it shall for that purpose be treated as a distinct agreement.”

(Emphasis added)

On the second reason above, the court recognized there is no conceptual difficulty if the seat court is to apply a foreign law to the arbitration agreement if that is what the parties have selected.[28] Further, where the seat adopts the Model Law[29] the seat court is required to determine the validity of the arbitration agreement according to the law “to which the parties have subjected it or, failing any indication thereon” the law of the seat.[30] The law of the seat is only applied by default where there is no express or implied selection of choice of law. There is no assumption in the scheme of the Model Law that the proper law of the arbitration agreement will be the same as the law of the seat.[31]

The court also recognized a conceptual problem may arise where no seat is chosen, because English conflicts rules do not recognize the concept of a floating proper law; the arbitration agreement must be governed by a system of law which is identifiable at the time the agreement is made.[32]

Even though the court said it was time to “impose some order and clarity on this area”, it is not clear the decision in Enka v Chubb achieves this. As the court noted, English authority has vacillated between giving primacy to the substantive law of the contract and the law of the seat, when implying the proper law of the arbitration agreement; with the caveat in both cases that the presumptive law may be rebutted if it invalidates the arbitration agreement.

The proper law of the arbitration agreement is most significant where it is invalid under one of the possible applicable laws. Instead of laying down a presumptive implied law, it makes more sense, and is more transparent, to apply the validation principle which expressly aims to validate the arbitration agreement. This not only gives effect to the parties’ commercial intentions – to agree an effective and workable international dispute resolution mechanism – it is also required by the terms and purposes of articles II and V(1)(a) of the New York Convention and articles 8, 34 and 36 of the Model Law.

D                 Conclusion

There is no space in this brief note to explore the issues I raise as to the obligations of the New York Convention, the divergence of the common law from these obligations, and also the insufficient appreciation of the interplay of choice of law issues in the interpretation of international arbitration agreements. This will have to be reserved for a format that allows a longer and more in-depth consideration of these issues. My intention in this note is to highlight the issues to spur discussion.

[1]     BNA v BNB [2019] SGHC 142 (“BNA HC”) at [51] citing Gary Born, “The Law Governing International Arbitration Agreements: An International Perspective” (2014) 26 SAcLJ 814 at [51].

[2]     As explained further below.

[3]     This provision was removed in the 6th edition of the SIAC Rules, 2016. The SIAC Rules now do not specify a default seat.

[4]     Arbitral tribunals are allowed to hold hearings in another location other than the seat for convenience – in arbitration parlance this is called the venue. The juridical seat does not change even if hearings are held in a different venue.

[5]     BNA HC at [53].

[6]     Ibid at [55].

[7]     Ibid at [62].

[8]     Ibid at [65].

[9]     Gary Born, “The Law Governing International Arbitration Agreements: An International Perspective” (2014) 26 SAcLJ 814 at [27], [56] and [59]. The choice of law provisions in articles II and V(1)(a) are discussed further below.

[10]    BNA v BNB at [95].

[11]    Sulamérica at [9] – it appears this point was not argued before the court and it was accepted as “common ground”.

[12]    Gary Born, “The Law Governing International Arbitration Agreements: An International Perspective” (2014) 26 SAcLJ 814 at [30] and [59].

[13]    International Commercial Arbitration, 2^nd Edition, Gary Born at §9.05.

[14]    Gary Born argues it is wrong to apply the law of judicial enforcement to interpretation of the arbitration agreement – International Commercial Arbitration, 2^nd Edition, Gary Born at §9.05. The same argument would apply to the law of the seat.

[15]    Pricol Limited v Johnson Controls Enterprise Ltd. & Ors, Arbitration Case (Civil) No. 30 of 2014, unreported.

[16]    Citing Arsanovia v Cruz City 1 Mauritius Holdings [2012] EWHC 3702 (Comm); [2013] 1 Lloyd’s Rep 235 at [21].

[17]    Kabab v Kout at [70].

[18]    Ibid at [53]. See also [54] for the court’s discussion on whether implication is possible as a matter of law (the court said that argument could “be dismissed immediately”. The issue was one of contractual interpretation “and terms will not be implied into an agreement was a matter of law”.)

[19]    Enka v Chubb at [69].

[20]    Ibid at [89].

[21]    Ibid at [90].

[22]    Ibid at [105].

[23]    Ibid at [92] and [94].

[24]    Ibid at [96].

[25]    Ibid at [99].

[26]    Sulamérica at [26]; and see also BCY v BCZ at [60] and [61].

[27]    “Choosing the Law Governing the Arbitration Agreement”, Glick and Venkatesan in Jurisdiction Admissibility and Choice of Law in International Arbitration (2018), Kaplan and Moser, at [9.05].

[28]    Enka v Chubb at [99].

[29]    Which applies the same choice of law principles to the proper law of the arbitration agreement as found in the New York Convention.

[30]    Article 34(2)(a)(i) of the Model Law.

[31]    See also BCY v BCZ at [64].

[32]    Enka v Chubb at [103].