How a Dispute Resolution Clause Works

We have started to see more and more business owners paying attention to the drafting and negotiations of their governing law and dispute resolution clauses. Most of them feel comfortable adopting the sample or model clauses promoted by any one of the major arbitral institutions. We still get asked from time to time though, “How exactly does a dispute resolution clause work and what are the key points that I should be aware of?”

Let’s use as an example the following dispute resolution clause based on the SIAC Model Clause, but with a few modifications underlined,

“Dispute Resolution and Governing Law Clause

The governing law of this Agreement shall be the law of England and Wales.

Any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (“SIAC Rules”) for the time being in force, which rules are deemed to be incorporated by reference in this clause. The governing law of the arbitration shall be Singapore law. The Tribunal shall consist of three arbitrator(s). The language of the arbitration shall be English. The Tribunal and the parties may by agreement hold hearings in any location convenient to the tribunal and the parties, including by teleconference and videoconference.

The key points to bear in mind regarding this clause are:

  1. The governing law of the underlying contract (that is, the contract within which the dispute resolution clause is found) is English law.
  2. In contrast, the governing law of the arbitration is Singapore law.
  3. The arbitration is an institutional arbitration conducted by and under the auspices of the SIAC.
  4. The seat (legal place) of the arbitration is Singapore.
  5. The venue for hearings could be any one physical location convenient to the parties or even electronically e.g. a hearing by way of teleconference and videoconference.

All of these have implications for parties and on the conduct of the arbitration itself.

Implications and Take-aways for parties

The arbitration clause is a separate agreement from the underlying contract

The arbitration agreement, though forming a clause in the underlying contract, is separable (and separate) from the underlying contract itself. Article 16 of the UNCITRAL Model Law (which is incorporated into the Singapore International Arbitration Act) provides that,

“(1) 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.”

The UK position is similar, see Fiona Trust & Holding Corporation v. Privalov [2007] UKHL 50[2007] 4 All ER 951; see also section 7 of the UK Arbitration Act 1996.

What this means is that the illegality or the unenforceability of the underlying contract does not entitle parties to disregard the arbitration clause. In the case of Beijing Jianlong Heavy Industry Group v Golden Ocean Group Ltd & Ors [2013] EWHC 1063 (Comm), the sole legal issue to be determined was “[i]f an English law guarantee is (or, as in this case, is assumed to be) unenforceable because it involves the commission in a foreign country of acts that are unlawful under local law is its provision for London arbitration also unenforceable?” The English High Court held that the arbitration provision was enforceable because of the doctrine of severability (see our analysis here).

Arbitration clause can be subject to a different governing law

In a previous post, we discussed the various laws governing an arbitration agreement. In particular, it is not necessarily the case that the law governing the arbitration agreement is the same law governing the underlying contract.

In our example, the dispute resolution clause is explicit that the arbitration shall be governed by Singapore law as opposed to English law. This is important because in the absence of a clear choice of law provision, it is entirely possible that the courts could interpret the governing law of the arbitration to be English law notwithstanding that the seat of the arbitration is Singapore.

This is not an academic point. In Arsanovia Ltd & Ors v Cruz City 1 Mauritius Holdings[2012] EWHC 3702 (Comm), parties had entered into an agreement which was governed by Indian law. That agreement had an arbitration clause which expressly stipulated that the “seat or legal place of the arbitration shall be London, England“. Nonetheless, the English High Court held that parties had made an (implied) choice of law that the arbitration was to be governed by Indian law.

The effect was that the English courts applied Indian law to determine the question of whether an arbitral award against two respondents could be enforced against one of the respondents even though the English court had determined that the tribunal had no jurisdiction over the other respondents. The answer under Indian law was no – the award could not be enforced against the other respondent (see our post here for a lengthier analysis, see also our discussion of the English Court of Appeal case of Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others, [2012] EWCA Civ 638 which raised similar issues).

 Seat determines court of supervisory jurisdiction and interim relief

The choice of the seat of the arbitration is important for two reasons.

First, the courts of the seat of arbitration have supervisory jurisdiction. The courts of the seat of arbitration have the power to set aside an award. An award which has been set aside in its seat of arbitration is a ground for any other court to refuse the recognition and enforcement of that award. Furthermore, the domestic legislation of the seat of the award may legitimately provide for additional grounds to set aside an award, above and beyond those limited grounds set out in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and/or the UNCITRAL Model Law.

In Singapore, there are two additional grounds upon which an award may be set aside. First, an award may be set aside where the making of the award was induced or affected by fraud or corruption. Second, an award may be set aside where there has been a breach of the rules of natural justice which breach had occurred in connection with the making of the award and in which the rights of any party has been prejudiced.

Second, parties should generally also approach the courts of the seat of arbitration if they require interim relief in aid of arbitration. In the English case of U&M Mining Zambia Ltd v Konkola Copper Mines Plc, [2013] EWHC 260 (Comm), the High Court considered that it would not be a breach of an arbitration agreement for a party to seek interim relief from a court other than a court in the seat of arbitration. However, this required exceptional circumstances e.g. if it were only practical and sensible to obtain relief from that other court and that such proceedings were not “a disguised attempt to outflank the arbitration agreement” (see paragraph [63]). Parenthetically, however, parties should approach the tribunal (or the emergency arbitrator if the rules so provide) first for such interim relief as a matter of course.

Seat is distinct from venue

The seat (legal place) of the arbitration is different from its venue. In other words, the arbitration may be seated in Singapore but the actual hearings can be held anywhere convenient for the parties.

In fact, there is no need for parties to congregate in a single physical locale in order to have their hearings. Where parties, counsel and tribunal members are scattered across continents, it is quite common for interlocutory or procedural hearings to be held via a conference call or even (less commonly) video conference.

The dispute resolution clause makes this distinction between seat and venue clear but even without such language, this distinction would still apply. For example, in the case of Braes of Doune Wind Farm v Alfred McAlpine [2008] EWHC 426 (TCC), an EPC contract contained an arbitration clause which was expressly stated to be subject to English law and the UK Arbitration Act 1996. However, it also provided that the seat of the arbitration was to be Glasgow, Scotland. The English High Court took the view that parties had meant for the arbitration to be seated in England (and Wales) and that the reference to Glasgow, Scotland was really a reference to having the hearings take place in the geographically convenient location of Glasgow, Scotland (see our discussion of the case here).

Conclusion

An arbitration clause is a jurisdiction clause, albeit one that is much more flexible and responsive to parties’ choice and autonomy than simply picking the court of a particular jurisdiction. Nonetheless, parties should be conscious that such arbitration clauses can be tricky and might give rise to unintended consequences parties pay insufficient attention to drafting them.

For more, see our Guidance Note on “How to Draft an Effective Arbitration Clause and Arbitration Agreement“.

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, Asean, India, Singapore, UK and tagged , , , , , , . Bookmark the permalink.

One Response to How a Dispute Resolution Clause Works

  1. Pingback: CONTRARY TO PUBLIC POLICY: Unenforceable and Void Contracts | A business law blog by MARK K THOMPSON LAW OFFICE, LLC

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