Case Update: Singapore High Court gives effect to pathological arbitration clause

We have mentioned elsewhere that managing disputes starts at the drafting stage. In particular, an arbitration clause should be drafted properly in order to avoid a jurisdiction fight before the substantive one.

The recent Singapore High Court case of HKL Group Co Ltd v Rizq International Holdings Pte Ltd, [2013] SGHCR 5 provides a good example of how a badly drafted arbitration clause increases uncertainty, time and costs for the parties involved. This was because the arbitration clause in issue was a so-called pathological arbitration clause i.e. a defective arbitration clause.

Although the Singapore High Court gave effect to the pathological arbitration clause and allowed the stay, it necessitated a jurisdictional fight before the substantive one.

In brief, the facts were that HKL entered into an agreement to sell sand from Cambodia to Rizq International Holdings Pte Ltd (“Rizq Singapore“) which would on-sell that sand to Samsung C & T Corporation (“Samsung C&T“). Parties came to an agreement that when Rizq Singapore received payment from Samsung C&T, it would remit the portion due to HKL within 24 hours. However, despite having been paid by Samsung C&T, Rizq Singapore did not pay HKL for certain invoices. HKL then commenced proceedings against Rizq Singapore in the Singapore courts (see paragraph [4] to [8]).

The defendant, Rizq Singapore, applied for a stay of court proceedings commenced by the plaintiff, HKL Group Co Ltd (“HKL“), on the basis of an arbitration clause contained in an agreement between the parties (see paragraph [1]). It read,

“Any dispute shall be settled by amicable negotiation between two Parties. In case both Parties fail to reach amicable agreement, all dispute 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 both parties. Arbitration fee and other related charge shall be borne by the losing Party unless otherwise agreed”.

However, no entity called the “Arbitration Committee” exists in Singapore (see paragraph [2]). Hence, the arbitration clause relied on was pathological / defective i.e. “after applying the general principles of contractual interpretation, or after rectification as the case may be, the court is unable to discern the meaning of that clause either in part or entirely” (see paragraph [12], referring to the Singapore Court of Appeal case of Insigma Technology Co Ltd v Alstom Technology Ltd [2009] 3 SLR(R) 936).

HKL, a Cambodian company, opposed the stay application on the basis that the defect in the arbitration clause impugned the clause and rendered it inoperative. In any event, there was “no dispute within the meaning of the arbitration clause” and therefore the arbitration clause did not apply (see paragraph [3] and [11]).

In turn, Rizq Singapore, a Singapore company, argued that the arbitration clause could be given effect as it was clear that the parties’ intention was to submit their disputes to arbitration. Rizq Singapore suggested that “parties could still agree to arbitrate the matter in Singapore, for instance, by referring the matter to the Singapore International Arbitration Centre (“SIAC”) for ad-hoc arbitration and agreeing that the International Chamber of Commerce (“ICC”) rules are to apply” (see paragraph [9]).

Rizq Singapore also maintained that there was a dispute between the parties as to the quantum to be paid to HKL. Essentially, it claimed that insofar as Samsung disputed certain amounts due to Rizq Singapore, it was entitled to withhold those amounts to HKL.

As parties were based in different countries, it was an international arbitration and therefore the Singapore International Arbitration Act (Cap. 143A) and not the Singapore Arbitration Act (Cap. 10) applied.

The learned Assistant Registrar (“AR“) eventually upheld the clause but on the condition that “parties obtain the agreement of the SIAC or any other arbitral institution in Singapore to conduct a hybrid arbitration applying the ICC rules, with liberty to apply should they fail to secure any such agreement. [The Court] will hear parties on the issue of the imposition of any other conditions” (see paragraph [37]).

Pathological Arbitration Clause

A pathological arbitration clause “may or may not be upheld depend[ing] on the nature and extent of its pathology” (see paragraph [12]). However, the Singapore courts will generally seek to “give effect to that clause, preferring an interpretation which does so over one which does not” (see paragraph [13]). As the learned AR noted, even though the Court’s determination of an arbitration clause’s pathology is necessarily fact specific, “the nature and extent of the pathology may be ascertained by assessing the pathological clause in terms of its deviation from the essential elements of an arbitration clause” (see paragraph [17]).

In this respect, the learned AR cited the work of Frédéric Eisemann, who coined the term “pathological clauses” or “clauses pathologiques”, in “La clause d’arbitrage pathologique” in Commercial Arbitration Essays in Memoriam Eugenio Minoli (Torino: Unione Tipografico-editrice Torinese, 1974). According to Eisemann, there are four essential elements of an arbitration clause.

“(1) The first, which is common to all agreements, is to produce mandatory consequences for the parties,

(2) The second, is to exclude the intervention of state courts in the settlement of the disputes, at least before the issuance of the award,

(3) The third, is to give powers to the arbitrators to resolve the disputes likely to arise between the parties,

(4) The fourth, is to permit the putting in place of a procedure leading under the best conditions of efficiency and rapidity to the rendering of an award that is susceptible of judicial enforcement”.

The problem with the arbitration clause here was its reference to a non-existent entity. This was a deviation from the fourth principle “as it leads to inefficiency and slows down the arbitral process as parties are bogged down by the dispute over the preliminary question of the mode of dispute resolution instead of moving on to resolve the substantive dispute” (see paragraph [19]).

The Singapore High Court noted that other courts, faced with a similar situation, had been able to give effect to such pathological clauses and that “an incorrect reference to the arbitral institution has not prevented the court from referring the matter to arbitration” (see paragraph [20] and [21]). The learned AR reasoned as follows:

“20 Various courts, in facing a similar problem of uncertainty of the arbitral institution, have generally been able to give effect to clauses which are a long way from certain (see Redfern and Hunter on International Arbitration (Oxford: Oxford University Press, 5th Ed, 2009) at para 2.179). For instance, a Stuttgart court read a clause referring disputes “without resource [sic] to the ordinary court to Stockholm, Sweden” to refer to a Stockholm Chamber of Commerce arbitration (see OLG Stuttgart [2006] OLG Report Stuttgart 685). An Oldenburg court read a reference to “the International Court of Arbitration (Internationales Schiedsgericht) in Austria” to refer to the international arbitration centre of the Austrian Federal Economic Chamber (see OLG Oldenburg [2006] Schieds VZ 223).

21 It seems that generally an incorrect reference to the arbitral institution has not prevented the courts from referring the matter to arbitration. The following observations in Julian D M Lew QC, Loukas A Mistelis & Stefan M Kröll, Comparative International Commercial Arbitration (Kluwer Law International, 2003) (“Comparative International Commercial Arbitration”) at para 7-75 are apposite:

A typical defect is the incorrect reference to the institution under the rules of which an arbitration should take place. There have been references to the “Official Chamber of commerce in Paris”, the “Arbitration Court at the Swiss Chamber for Foreign Trade in Geneva” or “International trade arbitration organization in Zurich.” While these clauses refer to non existing institutions they show clearly that the parties intended to submit their disputes to arbitration. For this reason courts and tribunals are reluctant to consider these clauses void for uncertainty. In general the reference to a particular city, the type of dispute or industry sector involved have allowed the courts to identify the chosen institution. Only in exceptional cases where it was not possible to ascertain which institutional rules should govern the arbitration have tribunals found such agreements invalid.

Arbitration clause was held not to be an ICC arbitration clause

The Court considered that like the Stuttgart and Oldenburg cases, it too was faced with an arbitration clause which provides for the place of arbitration but refers to a non-existent arbitral institution. The difference was that the arbitration clause at bar referred to the ICC Rules. Nevertheless, the learned AR considered that this was not sufficient to construe the arbitration clause as an ICC arbitration clause i.e. an ICC administered arbitration using the ICC Rules. This was because there was no National Committee in Singapore, by which a “reference to the ICC rules would then be strongly indicative of an ICC arbitration administered by the National Committee” (see paragraph [26]).

As authority for this proposition, the learned AR cited Comparative International Commercial Arbitration at para 7-76:

“Arbitration agreements which refer to the International Chamber of Commerce in some city are generally interpreted as referring to ICC arbitration with the place of arbitration in the specified city. Difficulties can arise where the clause uses an ambiguous title of the institution. Where there is a well known local arbitration institution at the designated place and it is unclear which institution has been selected, a court or tribunal may be able to resolve the difficulty by the name of the institution’s rules”. 

Arbitration clause was held not to be an SIAC arbitration clause

Furthermore, the learned AR also considered that the reference to the ICC Rules in the arbitration clause also precluded him from concluding that parties had intended to submit their disputes to SIAC arbitration (see paragraph [26]).

“…This also precludes me from concluding that the arbitration clause was making specific reference to the SIAC, despite the similarities in the term “Arbitration Committee” referred to in the arbitration clause and the words “Arbitration Centre” in “Singapore International Arbitration Centre” as well as the reputation of the SIAC regionally (bearing in mind that this was a regional contract made between a Cambodian company and a Singapore company), since the SIAC does not ordinarily apply the ICC rules.”

In the main, the Singapore High Court upheld the arbitration clause as it satisfied the four elements identified by Frédéric Eisemann as being essential for an arbitration clause (see paragraph [28]).

“…First, it clearly evinces the intention of the parties to resolve any dispute by arbitration. Second, it provides for mandatory consequences in that if a dispute arises, the matter has to be referred to arbitration. Third, it states the place of the arbitration, namely, Singapore. Fourth, it provides that the arbitration is to be governed by a particular set of rules, namely, the ICC rules”.

The Court’s interpretation of the arbitration clause

The solution as the Court saw it was that it “would be open to the parties to approach any arbitral institution in Singapore which would be able to administer the arbitration, applying the ICC rules, to resolve their dispute“. The Court recognised the inherent difficulties in doing so given the unique structures of the ICC in ICC arbitrations. Nevertheless, the learned AR noted that in Insigma, the Court of Appeal had taken cognizance of the fact the SIAC was able and willing, for that particular case, to conduct a hybrid arbitration, applying the ICC rules (see paragraph [28])

We pause here to note that the Insigma case had engendered a good amount of controversy and had caused the ICC to amend the ICC Rules (effective 1 January 2012) to prevent such a hybrid arbitration from taking effect again. This was achieved through inserting the underlined words into the current Article 1(2) of the ICC Rules. It now reads,

“The Court does not itself resolve disputes. It administers the resolution of disputes by arbitral tribunals, in accordance with the Rules of Arbitration of the ICC (the “Rules”). The Court is the only body authorized to administer arbitrations under the Rules, including the scrutiny and approval of awards rendered in accordance with the Rules. It draws up its own internal rules, which are set forth in Appendix II (the “Internal Rules”)”.

(emphasis added)

Possible interpretations of the arbitration clause

Looking at the arbitration clause in question, we wonder if it does in fact contemplate an ICC arbitration in Singapore. We say this because:

  1. The reference to “Arbitration Committee” could at least on one interpretation be construed as a reference to the ICC “International Court of Arbitration“. In particular, if the concern is to identify a body that administers the ICC Rules then the ICC Rules provide that an ICC arbitration is administered by the International Court of Arbitration of the ICC, which is the independent arbitration body of the ICC (see Article 1(1) of the ICC Rules). Article 1 of the Statues of the International Court of Arbitration (see Appendix I of the ICC Rules) further provides as follows.

Article 1: Function

1)
The function of the International Court of Arbitration of the International Chamber of Commerce (the “Court”) is to ensure the application of the Rules of Arbitration of the International Chamber of Commerce, and it has all the necessary powers for that purpose.

2)
As an autonomous body, it carries out these functions in complete independence from the ICC and its organs.

3)
Its members are independent from the ICC National Committees and Groups.”

  1. Alternatively, adopting another interpretation, the reference to “Arbitration Committee” could simply be read as a reference to an “Arbitration Tribunal“. Indeed, this could very well have been what the parties intended as it is not implausible that parties regarded the term “committee“, at least in layman’s terms, to be interchangeable with “tribunal“. If the phrase “Arbitration Tribunal” is used in place of “Arbitration Committee“, then the clause reads as a fairly standard arbitration clause which refers disputes between the parties to an ICC arbitration in Singapore.
  2. Furthermore, the above alternative interpretations would be consistent with the existing ICC Rules which (i) clarify that the ICC International Court of Arbitration is the only body authorised to administer arbitrations under the ICC Rules, including the scrutiny and approval of awards rendered in accordance with the same; and (ii) effectively prohibit hybrid arbitrations of the sort sanctioned in Insigma.

There was a dispute within the meaning of the arbitration clause

The learned AR quickly disposed of the argument that there was no dispute for the purposes of a stay (see paragraph [32], [34] and [37]).

“32 The approach taken to determining whether a dispute had arisen was comprehensively laid out by the Court of Appeal in Tjong Very Sumito and others v Antig Investments Pte Ltd [2009] 4 SLR(R) 732 (“Tjong Very Sumito”). For present purposes, it will suffice to note the following: (a) The court will not consider whether there is “in fact” a dispute or whether the dispute is genuine (see Tjong Very Sumito at [49]);

(b) It is sufficient for a defendant to simply assert that he disputes or denies the claim in order to obtain a stay of proceedings in favour of arbitration (Id);

(c) Exceptionally, where there is a clear and unequivocal admission, for instance where liability was admitted but there was simply an inability to pay, the court will not grant a stay (Id at [59])”.

In this respect, even though the Court did not think highly of Rizq Singapore’s defence, it acknowledged that it was not for the Court to determine in this instance (see paragraph [34]).

“34 I note that the 24 April letter does state that the back to back liability terms are “subject to contract”. Indeed, these words do take the wind out of Rizq Singapore’s sails. However, as unimpressed as I may be with the strength of Rizq Singapore’s argument, I recognise that this is not my decision to make. As the Court of Appeal in Tjong Very Sumito has said, in assessing whether to grant a stay in favour of arbitration, it is not the role of the court to consider whether there is “in fact” a dispute or a genuine dispute. That should be left to the arbitrator”.

For a more in-depth look about what constitutes a dispute for purposes of a stay of proceedings in favour of arbitration, especially in the context of a domestic arbitration, see here.

Conclusion

The High Court concluded by highlighting that its decision did not infringe on parties’ autonomy to choose a completely new arbitration procedure. The learned AR held that even though his decision “compel[led] the parties to resolve the matter by way of arbitration in the form of a hybrid arbitration applying the ICC rules, as [he was] empowered to do so under the IAA and giving effect to the arbitration clause as it stands“, that did not prevent parties from referring their dispute to a “straightforward SIAC arbitration” instead (see paragraph [28]).

We stress that managing disputes begins at the drafting stage and a properly drafted dispute resolution clause gives parties a dispute resolution procedure which is certain and appropriate to their needs. At the very least, an appropriately drafted dispute resolution clause will help parties to avoid a costly and inconvenient jurisdictional fight before the substantive hearing on the merits.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
This entry was posted in Arbitration, Cambodia, Singapore and tagged , , , , , , , . Bookmark the permalink.

6 Responses to Case Update: Singapore High Court gives effect to pathological arbitration clause

  1. Eric Fiechter says:

    With this kind of sound judicial decisons you promote effectively Singapore as a jurisdiction of choice for international arbitration proceedings. Eric Fiechter / ASBS Asian Swiss Business Services Pte Ltd

  2. The recent Singapore High Court case of HKL Group Co Ltd v Rizq International Holdings Pte Ltd, [2013] SGHCR 5 provides a good example how state courts can effectively contribute to promote Singapore as a jurisdiction of choice for international arbitration. With a well-structured reasoning and a sound result in favor of arbitration despite the defective arbitration clause, the trust in this jurisdiction can only be reinforced. But it remains much cheaper and faster to insert right from the beginning a clause that will avoid that kind of problems as can be found simply by googling the words “singapore arbitration clause”. Eric Fiechter / ASBS Asian Swiss Business Services Pte Lte

  3. Pingback: HKL v Rizq International: Pathological Arbitration Clause Case Update | Singapore International Arbitration Blog

  4. Pingback: Pathological Arbitration Clauses | Singapore International Arbitration Blog

  5. Pingback: Case Update: Seat of Arbitration and Implied Choice of Governing Law of Arbitration Agreement | Singapore International Arbitration Blog

  6. Pingback: Swedish Court of Appeal upholds pathological hybrid arbitration clause | Singapore International Arbitration Blog

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