Parties to an arbitration agreement are expected to abide by it. Where a party commences court proceedings against the other party, then that other party may apply to the court to stay its proceedings in order that the dispute may be resolved by arbitration pursuant to the parties’ agreement. In Singapore, this is provided for in section 6 of the International Arbitration Act (Cap. 143A). Nevertheless, it stands to reason that where the arbitration agreement is for some reason null or void or incapable of being performed, then there is no reason for the court to stay its proceedings. This is provided for in section 6(2) of the IAA.

One of the most basic doctrines of international arbitration is that of Kompetenz-Kompetenz i.e. the competence of the arbitral tribunal to rule on its own jurisdiction or the lack thereof (see Article 16 of the UNCITRAL Model Law, read with section 3 of the IAA). It follows that to the extent that an arbitral tribunal has remit to determine its jurisdiction, this should include a determination of whether the arbitration clause is indeed valid or otherwise.

In light of these seemingly conflicting principles, the question faced by a court is therefore the standard of proof on the part of the party seeking the stay as to the validity of the arbitration clause. Does it suffice for parties seeking a stay to simply show an arguable case that the arbitration agreement is valid?

This issue arose before the English High Court in the recent decision of Joint Stock Company “Aeroflot Russian Airlines” v Berezovsky & Ors [2012] EWHC 1610 (Ch). The plaintiff, Aeroflot, resisted a stay application brought by one of the defendants on the basis that the arbitration agreement between them was “null and void“. The English High Court dismissed the stay application on the basis that it was insufficient for the defendant to simply raise an arguable case as to the validity of the arbitration agreement in order to obtain a stay of the English court proceedings. 

Aeroflot, the Russian state owned airline company had started proceedings in the English courts claiming that it was the victim of frauds perpetuated on it by the first and second defendant through the use of companies owned by them i.e. the third to seventh defendants. The third to fifth and seventh defendants (the sixth took no part at all) all filed applications for stay of the English proceedings.

One of the defendants sought a stay on the basis that the relevant contract between itself and the plaintiff (which was separate from the other contracts between the plaintiff and the other defendants) stipulated that the Lussuane courts would have jurisdiction over that contract. This defendant’s application for a stay was granted.

Another of the defendants applied for a stay on the basis of a Swiss jurisdiction clause and another on the basis of an arbitration clause governed by Swiss law and providing for ICC arbitration in Zurich, Switzerland. The remaining applicants relied on the argument that if those two applicants were successful then it would not be expedient for the English courts to hear the proceedings against them either or that the applicant would not be a “necessary or proper party” to the English proceedings.

 With regard to the stay application for arbitration, section 9 of the UK Arbitration Act 1996 provides in material part as follows.

“(1) A party to an arbitration agreement against whom legal proceedings are brought…in respect of a matter which under the agreement is to be referred to arbitration may…apply to the court in which the proceedings have been brought to stay the proceedings as far as they concern that matter.

…

(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.”

This language is substantially similar to section 6(1) and (2) of the IAA.

The High Court held that “the court must first decide whether there is an arbitration agreement, and whether the agreement covers the matters in issue in the litigation (section 9(1)). If the court decides these questions in the affirmative, and there is no assertion that the agreement is “null and void, inoperative, or incapable of being performed” (section 9(4)), a stay is mandatory. If any of these matters is asserted, however, the court will have to go on to decide them, and if satisfied as to any of them, will refuse the statutory stay” (see paragraph [64]).

The relevant defendant argued that that it was sufficient for them to defeat section 9(4) if they could “show an arguable case that the agreement was not null and void or inoperative” (see paragraph [67]). In this respect, the defendant applicants relied on the judgment of Potter LJ in Downing v. Al Tameer Establishment [2002] EWCA Civ 721 who decided that,

“The burden of proving that any of the grounds in s.9(4) has been made out lies upon the claimant and, if the defendant can raise an arguable case in favour of validity, a stay should be granted: Hume v AA Mutual International Insurance Co Ltd [1996] LRLR 19.”

In this respect, the applicant was seeking to limit the holding of Lightman J in Albon (trading as NA Carriage Co) v Naza Motor Trading SDN BHD (No 3) [2007] EWHC 665 (Ch); [2007] 2 All ER 1075, that the activation of section 9(1) requires the court to find that there is indeed a concluded arbitration agreement and not merely an arguable case that there was such an agreement.

The English High Court declined to follow the supposed authority of Downing v Al Tameer Establishment, for the following reasons and rejected the applicant’s argument (see paragraph [70]).

1. Neither party were able to point to anything in the case of Hume v AA Mutual to support Potter LJ’s proposition in Downing v Al Tameer Establishment.
2. The applicants failed to put forward any reason why in the usual case an applicant had to prove the existence of an arbitration agreement (as opposed to merely an arguable case for its existence) but that this should not apply to whether an arbitration agreement was null and void,  inoperative, or incapable of being performed.
3. Potter LJ’s proposition was dictum (see paragraph [71]).

In this respect, the party resisting the stay had the burden of establishing one or more of the matters in section 9(4) to the clear satisfaction of the court i.e. the court “must come to [a] clear conclusion that the agreement is null and void, inoperative or incapable of performance” (see paragraph [73]).

The English High Court also considered the proper approach as to whether the court would determine the issue of whether the arbitration agreement was valid or whether it would stay proceedings in the exercise of its inherent jurisdiction in order to allow the arbitrators to determine that issue instead.

As a preliminary point, the High Court noted that such a stay would not be granted under section 9 of the Arbitration Act 1996 as that required, as a pre-condition, the court to find the existence of such an arbitration agreement. However, the court may decide to do so in an exercise of its inherent jurisdiction (see paragraph [75], citing Al Naimi v Islamic Press [2000] Lloyd’s LR 522 at 525).

The learned judge considered that stay proceedings to allow the arbitrator to determine the issue of whether there was an arbitration agreement or the scope of that agreement between parties as being appropriate in “a case where there was little risk that the matter would have to return to the court following a decision by the arbitrator” and accordingly per Lightman J in Albion v Naza Motor,

“The court may in exercise of its inherent jurisdiction in its discretion order such a stay both where the issue is as to the conclusion or as to the scope of the arbitration agreement. But the court should only exercise its inherent jurisdiction to order such a stay and decline to decide the issue of the conclusion of the arbitration agreement or of the scope of the arbitration agreement in an exceptional case. The inherent jurisdiction should be exercised with particular caution where the issue is as to the conclusion of the arbitration agreement. The court may very exceptionally order such a stay e.g. if virtually certain that the arbitration agreement was concluded. Exceptional but less compelling circumstances (e.g. overwhelming considerations of convenience and cost) may justify such a stay where the issue of the scope of the arbitration agreement is in issue e.g. when the issue is closely bound up with the issues in the arbitration: see Al Naimi at 525 and El Nasharty v. J Sainsbury [2004] 1 LI Rep 309 at paragraphs 28-9.”

On the basis of the parties’ expert’s submission on Swiss law, and on the parties’ agreement that the application could be heard without the need to hear oral evidence, the High Court found that the arbitration clause was null and void because it violated the Swiss doctrine of abuse of right (see paragraphs [84] to [92] and [111]).

Conclusion

According to PLC, leave to appeal has been granted although it is still unclear whether the High Court’s decision on section 9(4) is being appealed.

In light of the English Court of Appeal’s decision in Downing v Al Tameer Establishment, and the departure by the English High Court in this case, any further developments would be worth watching.

It would appear that the Singapore courts have not taken a definitive position with regard to this issue. In Sembawang Engineers and Constructors Pte Ltd v Covec (Singapore) Pte Ltd, [2008] SGHC 229, a stay application was sought by the plaintiff against the defendant’s counterclaim on the basis of a unilateral arbitration clause which gave the plaintiff the right to choose to litigate or arbitrate its claims. The stay was resisted by the defendant, inter alia, on the basis that the arbitration agreement was “null and void, inoperative or incapable of being performed“. The Singapore High Court entered into a fairly extensive discussion of the meaning of “null and void, inoperative or incapable of being performed” (see paragraphs [38] to [42]) before holding that the arbitration agreement was not “null and void, inoperative or incapable of being performed” (see paragraph [52]).

Because the High Court had come to a definitive view as to the validity of the arbitration agreement, it is unclear whether a stay would have been ordered if it had entertained any doubts as to the arbitration agreement’s validity or the standard that the party seeking the stay would have to meet. And while the case of Downing v Al Tameer Establishment was cited, it was for the proposition that a stay would not be granted in cases where the arbitration agreement was itself repudiated on the basis that the party seeking the stay had denied the existence of any contractual relationship between the parties.

Subsequently, Sembawang v Covec was considered and approved in the Singapore Court of Appeal case of Navigator Investment Services Ltd v Acclaim Insurance Brokers Pte Ltd, [2010] 1 SLR 25; [2009] SGCA 45, however it was for a different proposition altogether.

This case is a timely reminder that if parties want the benefit of an arbitration clause, they need to ensure that the arbitration clause is valid under the governing law of the arbitration clause and should take advice on that.