The Singapore High Court recently determined an interesting point of arbitration law in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and anor, [2013] 1 SLR 973. The issue was whether an arbitration clause contained in a contract between two parties bound a third party who subsequently entered into a supplemental agreement with those two parties. The High Court eschewed reliance on existing case law and preferred to adopt a straight contractual interpretation approach instead.

The High Court also upheld a multi-tiered dispute resolution mechanism which involved an escalation clause. The escalation clause was a precondition to arbitration and required parties to escalate any dispute to their respective management chains for negotiations. It was only when the dispute could not be resolved by Lufthansa’s MD and his counterpart, that the dispute could then be referred to arbitration.

The High Court also pointed out a possible lacuna in the Singapore International Arbitration Act (Cap. 143A) (“IAA”). A party, who is dissatisfied with a tribunal’s ruling that it has jurisdiction over the parties and the dispute, is permitted to apply to the Singapore courts under Article 16(3) of the Model Law read with section 10 of the IAA to challenge the tribunal’s decision on jurisdiction. However, a tribunal’s ruling on jurisdiction (whether positive or negative) is not a decision on the substance of the dispute such that it does not fall within the definition of an award for the purposes of the IAA. As the IAA (section 24) read with the Model Law (Article 34) only provides for the setting aside of awards, there would appear to be a lacuna where a party applies under section 10 of the IAA to challenge a tribunal’s preliminary ruling on jurisdiction. Furthermore, section 10 of the IAA is silent on what reliefs the court may order should it decide that the tribunal has no jurisdiction.

Facts

Lufthansa was the claimant and International Research Corp PLC (“IPRC“) and Datamat were the respondents in SIAC Arb. No. 061 of 2010 (the “arbitration proceedings”)..

The dispute in the arbitration proceedings related to payments due to Lufthansa under the Cooperation Agreement for Application and Services Implementation SAP R/3 IS A&D Contract No. LSY ASPAC 1ZW-B (the “Cooperation Agreement”) entered into between Lufthansa and Datamat on 11 March 2005.

In brief, under the Cooperation Agreement, Lufthansa was to render certain services and an IT system. That system was a key component of certain services which Datamat had agreed to provide to Thai Airways. Subsequent to the Cooperation Agreement, Datamat entered into a Sale and Purchase Agreement with IRCP, under which IRCP would, inter alia, provide certain financial guarantees and pay Lufthansa for the services rendered to Datamat.

Datamat subsequently ran into financial difficulties and was unable to meet its payment obligations to Lufthansa. As a result, on 8 August 2005, Lufthansa, Datamat and IRCP entered into Supplemental Agreement No. 1 and then Supplemental Agreement No. 2 on 3 May 2006. These supplemental agreements essentially involved IRCP taking over Datamat’s payment obligations to Lufthansa and providing financial assurances to Lufthansa.

Objection to Tribunal’s jurisdiction and Tribunal’s Ruling

During the arbitration proceedings, IRCP objected to the jurisdiction of the Tribunal on the basis that it was not a party to the arbitration agreement contained in the Cooperation Agreement. Furthermore, even if it were bound by the arbitration agreement, Lufthansa had failed to comply with the pre-conditions in the multi-tiered dispute resolution clause. As a result, it was not entitled to commence arbitration proceedings against IRCP (and Datamat).

On 1 June 2012, the Tribunal dismissed IRCP’s arguments and ruled that it had jurisdiction. The Tribunal found that the Cooperation Agreement and the Supplemental Agreements were to be treated as a composite agreement between all three parties. Accordingly, insofar as IRCP was a party to the Supplemental Agreements, it was bound by the arbitration agreement in the Cooperation Agreement. The Tribunal also held that the pre-conditions to arbitration (the escalation of the dispute) were too uncertain to be enforced (see paragraph [12])

Whether IRCP was bound by the arbitration agreement

The High Court held that (i) whether IRCP was bound by the arbitration agreement depended entirely on the parties’ intention; and that (ii) such intentions were to objectively ascertained (see paragraph [22]).

Parties were in agreement that if the Supplemental Agreements and the Cooperation Agreements were “distinct and separate, [then] clear and express words [were] required to incorporate [the dispute resolution mechanism] into the Supplemental Agreements“. Accordingly, the only issue to be determined was whether the Supplemental Agreements were distinct and separate from the Cooperation Agreement (i.e. a “two-contract case“) or whether the Supplemental Agreements were extensions of the Cooperation Agreement (see paragraph [23]).

In a “two-contract case“, parties must use clear and express words of incorporation in order to incorporate an arbitration agreement in one contract into another contract (see paragraphs [24] to [28]). In fact, the approach towards incorporating an arbitration clause in one contract into another is “extremely strict” (see paragraph [29], citing the case of L&M Concrete Specialists Pte Ltd v United Eng Contractors Pte Ltd [2000] 2 SLR(R) 852 at [18]). In this respect, the Singapore Court of Appeal in Star-Trans Far East Pte Ltd v Norske-Tech Ltd and others [1996] 2 SLR(R) 196 held that a general reference to “all rights” was insufficient to incorporate an arbitration agreement found in a separate contract.

The High Court considered that the language used in the agreements was insufficient to incorporate the arbitration agreement in the Cooperation Agreement into either of the Supplemental Agreements (see paragraphs [30] to [32]). The relevant provisions in the Supplemental Agreements provided that,

“All other provisions of the [Cooperation] Agreement shall remain effective and enforceable.”

and,

“All other provisions of the [Cooperation] Agreement and the Supplemental No. 1 shall remain effective and enforceable.”

Nonetheless, that was not the end of the analysis. If the three agreements were in fact a composite agreement and meant to be read together, then they were for all intents and purposes one agreement such that there would be nothing to incorporate into the Supplement Agreements (see paragraphs [33] to [35]).

The key concern of the High Court was the fact that the parties to the Cooperation Agreement and the Supplemental Agreements were different. The High Court rejected Lufthansa’s argument that the non-identity of the parties was “irrelevant“. In this respect, the High Court highlighted that in the cases cited by Lufthansa, the party (or parties) seeking to aver that they were not bound by the arbitration agreement in a separate agreement, were nonetheless parties to the original and subsequent agreement(s) (see paragraph [36]). Conversely, the High Court also rejected IRCP’s argument that a composite series of agreement also required the identity of the parties to be consistent throughout (see paragraph [39] and [40]).

After an extensive examination of the cases cited by both parties, the High Court rejected the arguments advanced by both parties and preferred instead to determine the “one true issue“, which was whether, objectively, the common intention of the parties (if any) was to be bound by the dispute resolution mechanism as stated in the Cooperation Agreement when they entered into the Supplemental Agreements. The High Court held at paragraph [48],

“…An assertion that the Dispute Resolution Mechanism [had been] incorporated into the Supplemental Agreements or the various agreements between the parties were in essence one Composite Agreement, are two ways of saying the same thing viz that the three parties, from an objective perspective, [had] intended to be bound by the Dispute Resolution Mechanism. Be it incorporation or construction, the court is always seeking to ascertain the parties’ objective intentions: Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029 (“Zurich Insurance”) at [125]”

The learned judge considered that, “[t]he use of legal constructs such as “one composite agreement” or “incorporation” may be helpful in most cases, but it [wa]s not dispositive in the present case. I will therefore start from the first principles of contractual interpretation” (see paragraph [51]).

The High Court adopted the usual contextual approach to contractual interpretation in which “the courts are concerned with the parties’ intentions as objectively ascertained from the agreement and the background matrix of facts known to the parties which would affect the way a reasonable person would understand the language used in the agreement” (see paragraph [56]).

On that basis, the High Court held that the context of the Supplemental Agreements was that IRCP would bear Datamat’s payment obligations under the Cooperation Agreement (see paragraph [61]). Accordingly (see paragraph [62]),

“…IRCP’s payment obligations to Lufthansa [were] inextricably tied to Datamat’s obligations under the Cooperation Agreement. A dispute over an invoice issued under the Cooperation Agreement would invariably affect IRCP’s payment obligations under the Supplemental Agreements. IRCP’s payment obligations [were] not free-standing and unconnected to the terms of the Cooperation Agreement. … Their titles, “Supplemental Agreements”, mean[t] precisely what they sa[id] – agreements which [were] to be supplemental to the main agreement viz the Cooperation Agreement”.

Finally, the High Court came to the conclusion that “the proper contextual interpretation, which [gave] adequate regard to the plain language of the Supplemental Agreements and its background context, yield[ed] the conclusion that the parties had intended the same Dispute Resolution Mechanism in the Cooperation Agreement to bind all three parties to the Supplemental Agreements” (see paragraph [69]). The High Court reasoned that this was because:

1. The Supplemental Agreements “were literally intended to supplement Datamat and IRCP’s respective shortcomings in the performance of their payment obligations to Lufthansa“. All three parties were aware of this background context (see paragraph [70]).
2. The obligations in the Supplemental Agreements and the Cooperation Agreement were interdependent (see paragraph [71]).
3. IRCP did not dispute that it was aware of the terms of the Cooperation Agreement when it had entered into the Supplemental Agreements. In fact, the factual matrix and the terms of the Supplemental Agreements must have meant that IRCP was fully aware of the terms of the Cooperation Agreement, including the dispute resolution mechanism (see paragraph [72]).
4. If the dispute had just been between Datamat and Lufthansa, there would have been no disagreement that such dispute would have been referred to arbitration (whether under the Cooperation Agreement or the Supplemental Agreements). Accordingly, it must have been within the contemplation of the parties that a payment dispute between any permutation of the parties must similarly be referred to arbitration. The High Court noted that “[h]aving different dispute resolution mechanisms—the applicability of which depends on the identity of the parties—to resolve the same issue in dispute is not only commercially impracticable, but may also yield unreasonable results” (see paragraph [73]).
5. The preference of the courts is for the “more commercially sensible interpretation” (see paragraph [74]).

Multi-tiered dispute resolution clause is enforceable

The Cooperation Agreement contained a multi-tiered dispute resolution mechanism which involved a so-called escalation clause. Clause 37.2 provided that,

“Any dispute between the Parties relating to or in connection with this Cooperation Agreement or a Statement of Works shall be referred:

37.2.1 first, to a committee consisting of the Parties’ Contact Persons or their appointed designates for their review and opinion; and (if the matter remains unresolved);

37.2.2 second, to a committee consisting of Datamat’s designee and Lufthansa Systems’ Director Customer Relations; and (if the matter remains unresolved);

37.2.3 third, to a committee consisting of Datamat’s designee and Lufthansa Systems’ Managing Director for resolution by them, and (if the matter remains unresolved);

37.2.4 fourth, the dispute may be referred to arbitration as specified in Clause 36.3 [sic] hereto.”

In turn, Clause 37.3 provided that in the event that any dispute could not be settled by “mediation” pursuant to Clause 37.2, such dispute should then be settled by SIAC arbitration instead. Parenthetically, we note that even though Clause 37.3 identified the process in Clause 37.2 as mediation, it ought to be more properly classified as negotiations. Mediation requires a neutral third party to help the disputing parties come to a settlement.

IRCP argued that Clause 37.2 was clear and unambiguous and that the Tribunal had erred in holding that Clause 37.2 was too uncertain to be enforceable. In turn, Lufthansa relied on the House of Lord’s decision of Walford v Miles [1992] 2 AC 128 for the proposition that “a bare agreement to negotiate or mediate [wa]s unenforceable” (see paragraph [91]).

The High Court disagreed with Lufthansa and held that “[t]here [wa]s nothing uncertain about the mediation procedure in [Clause] 37.2” (see paragraph [97]).

As the High Court noted, the case of Walford now had to be read in light of the recent Singapore Court of Appeal’s decision of HSBC Institutional Trust Services (Singapore) Ltd v Toshin Development Singapore Pte Ltd [2012] SGCA 48 (see paragraph [92]). We discussed this case in a previous post. In Toshin, the Court of Appeal upheld the enforceability of an agreement to negotiate in good faith in the context of a rent review mechanism in a concluded tenancy agreement.

The Court of Appeal in Toshin considered that in principle “there [wa]s no difference between an agreement to negotiate in good faith and an agreement to submit a dispute to mediation”, and that “[e]ven though agreement [could not] be guaranteed, it d[id] not mean that the parties concerned should not try as far as reasonably possible to reach an agreement” (see paragraph [93]).

The High Court therefore held at paragraph [93] that,

“…Given the Court of Appeal’s attitude towards mediation clauses, any doubts about an obligation to negotiate in good faith under a multi-tiered dispute resolution clause should be laid to rest. If an obligation to negotiate in good faith which [wa]s part of a broader contractual framework such as a rent review mechanism under a lease agreement is enforceable, the obligation to refer a dispute to various specifically constituted panels pursuant to [Clause] 37.2 should also be enforceable. They [were], after all, essential steps stipulated in the Dispute Resolution Mechanism and expressly made condition precedents to resolution of a dispute by arbitration.”

In this respect, “[a] court looking at the conduct of the parties can easily discern if the entire mediation procedure in [clause] 37.2 was complied with or not. Not only [wa]s there an unqualified reference to mediation through the respective committees, the process [wa]s clear and defined” (see paragraph [97]).

Escalation clause pre-condition must be complied with

The High Court further held that if Clause 37.2 (as a precondition) were not complied with, the Tribunal would then not have jurisdiction to resolve the dispute (see paragraph [106]). A party could not argue that satisfying such pre-condition(s) would be futile in resolving the dispute (see paragraph 105).

Interestingly, the High Court did not resolve the question of whether it would have ordered a stay of the arbitration proceedings if that arbitration had been commenced in breach of a pre-condition in a multi-tiered clause. Instead, the learned judge simply commented that Lufthansa had “not cited any authority which suggest[ed] that the court ha[d] the power to grant a stay or order an adjournment of the arbitration, and that such power should be exercised in the present circumstances” (see paragraph [103]).

Escalation clause pre-condition satisfied

Based on the facts of the case though, the High Court held that Clause 37.2 had been complied with (see [110]). The High Court was satisfied on the basis of the affidavit evidence adduced that “there were several rounds of high-level meetings between Lufthansa, Datamat and IRCP to resolve the Payment Dispute. The parties have had their attempts at negotiations and in that respect, the object of [Clause] 37.2 has been met” (see paragraph [110]).

Possible lacuna in the IAA read with the Model Law

The learned judge noted a possible lacuna in the IAA read with the Model Law (see paragraph [111] to [113]).

Parties are permitted to challenge a tribunal’s preliminary decision on jurisdiction pursuant to Article 16(3) of the Model Law read with section 10 of the IAA. IRCP did just that and sought in its application to set aside the tribunal’s preliminary ruling that it had jurisdiction. However, the learned judge expressed concern as to whether a setting aside order was the proper order to ask for and whether the court could make such an order because a tribunal’s ruling on jurisdiction (whether positive or negative) is not an “award” for the purposes of the IAA and therefore cannot be “set aside” under the IAA: see our previous post in which we discussed a recent decision of the Singapore High Court which reaffirmed the decision of the Singapore Court of Appeal in PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 that orders / directions of arbitral tribunal which do not go to the substance of the dispute are not liable to be set aside as if they were arbitral awards.

The learned judge noted [113] that as the IAA (section 24) read with the Model Law (Article 34) only provides for the setting aside of awards, “there would appear to be a lacuna where an application has been made under section 10 of the IAA to challenge an arbitral tribunal’s preliminary ruling on jurisdiction, such as in the present case”.

He also noted [113] that whilst the lacuna is further compounded by the fact that section 10 of the IAA is silent on what reliefs the court may order should it decide that the tribunal has no jurisdiction, as a matter of practice, “it would be very unusual for an arbitral tribunal—or indeed a party to the arbitration—to continue with a Singapore-seated arbitration where a Singapore court has decided that the same arbitral tribunal lacks jurisdiction, albeit without setting aside the arbitral tribunal’s preliminary ruling that it has jurisdiction”

The High Court ultimately did not have to express a view of these issues because it found on the facts that the Tribunal had jurisdiction.

Conclusion

This decision of the High Court is very helpful in clarifying the law as it relates to the enforceability of mulit-tiered dispute resolution mechanisms and escalation clauses. Arbitration users can have confidence that such clauses will be enforced by the Singapore courts in a pragmatic and commercial way.

The issue of the possible lacuna in the IAA read with the Model Law is also interesting. Whilst Article 16(3) of the Model Law allows a party to apply to court to overrule a jurisdictional ruling of a tribunal, there does not appear to be anything in the IAA or the Model Law which stipulates the type of relief that the court may award in the event that it finds that the tribunal does not have jurisdiction. In practice, it would be helpful for parties making such applications to have some guidance as to the appropriate type of relief to request from the court.