Swedish Court of Appeal upholds pathological hybrid arbitration clause

We previously addressed the problematic issue of pathological arbitrations clauses and discussed the cases of HKL Group Co Ltd v Rizq International Holdings Pte Ltd[2013] SGHCR 5 (see Case Update: Singapore High Court gives effect to pathological arbitration clause) as well as HKL Group Co Ltd v Rizq International Holdings Pte Ltd[2013] SGHCR 8 (“HKL v Rizq International (No. 2)“) (see HKL v Rizq International: Pathological Arbitration Clause Case Update).

One of the issues that arose for determination in HKL v Rizq International (No. 2) was whether an arbitration using the ICC Rules could be administered by an institution other than the ICC International Court of Arbitration. Famously, in  Insigma Technology Co Ltd v Alstom Technology Ltd [2009] 3 SLR(R) 936, the Singapore Court of Appeal upheld a pathological hybrid arbitration clause which had provided that,

“Any and all such disputes shall be finally resolved by arbitration before the Singapore International Arbitration Centre in accordance with the Rules of Arbitration of the International Chamber of Commerce then in effect and the proceedings shall take place in Singapore and the official language shall be English …”

The Court of Appeal in that case had taken cognizance of the fact that the SIAC was able and willing, for that particular case, to conduct a hybrid arbitration, applying the ICC rules.

However, following the Insigma case, the ICC amended the ICC Rules (effective 1 January 2012) in an attempt to prevent a re-occurrence of any such hybrid arbitration. This was achieved through inserting the underlined words into Article 1(2) of the ICC Rules which, with effect from 1 January 2012, provides as follows:

“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”)”.

Recently, the Swedish Court of Appeal upheld a clause providing for arbitration administered by the Chamber of Commerce and Industry, Stockholm, Sweden  (“SCC“) but using the ICC Rules. The Swedish court thus dismissed the Russian Federation’s challenge to the award which had been issued by the tribunal constituted by the SCC.

In a split decision handed down on 23 January 2015, the Svea Court of Appeal in Case No. T 2454-14 (official Swedish version of the judgment here) upheld the arbitration administered by the SCC using the ICC Rules. This was the case even though:

  1. The SCC did not have the organisational structure or experience to administer the arbitration using the ICC Rules;
  2. The SCC had to adapt the ICC Rules in order to administer the arbitration; and
  3. The SCC had accepted administration of the hybrid arbitration provided that the parties agreed to authorise the SCC to adapt the ICC Rules to the SCC’s organisation structure.  However, the government of the Russian Federation never provided any such authorisation.

The split in the court was due to a dissenting decision that the Russian Federation was not covered by the relevant agreement and was therefore not bound by the arbitration clause. Nonetheless, the Svea Court of Appeal unanimously upheld the enforceability of the hybrid arbitration clause.

The majority held that the approach to interpreting a pathological/hybrid clause was as follows,

“If an arbitration agreement in some respect provides a self-contradicting or otherwise ambiguous procedure, which is not practicably doable, the general principle is that the agreement should, to the extent possible, be interpreted in line with the parties’ basic intentions with the arbitration agreement, i.e. that disputes between the parties should be settled by arbitration. This could entail that the court will disregard a contradicting provision if it is clear that the remainder of the arbitration agreement otherwise represents the parties’ actual intentions. In some particular instances the natural order could, however, be to disregard the arbitration agreement in its entirety (Redfern and Hunter, On International Arbitration, 5th ed., p. 146, Lindskog, op. cit., p. 145 and Heuman, Skiljemannarätt, p. 138).”

Upon a review of the factual matrix, the majority held that the arbitration clause must be properly interpreted as follows,

“…the agreement between the parties must be understood so that the main purpose was that possible disputes between the parties would be resolved by arbitration and that the purpose was that the arbitration should take place in Stockholm before the SCC“.

Insofar as “[i]t  is undisputed that the SCC agreed to and also did administer the arbitration“, the arbitration clause was enforceable and the arbitration clause was not invalid. In the circumstances, the arbitral tribunal could not “be deemed to have disregarded a joint instructions from the parties by adapting ICC’s rules of arbitration to the organization of the SCC“.

The minority held that “an arbitration agreement is not invalid merely because it provides that arbitration shall take place by application of the arbitration rules of one arbitration institute, but be administered by another arbitration institute“. However, the Judge of Appeal went on to hold that “[a]nother conclusion might be reached in the event that one arbitration institute has refused to apply the rules devised by another arbitration institute“.

In this particular instance, the SCC did administer the arbitration. Furthermore, the fact that the SCC never received authorisation from the Russian Federation to administer the arbitration in accordance with the ICC Rules was immaterial. The minority held that such an authorisation was implied from the arbitration clause.

“Even if – which the Government [of the Russian Federation] has maintained – the SCC never received such authorization, such an authorization must be deemed included in the arbitration agreement, since it in practice provides that the SCC should apply ICC’s rules, which obviously requires an adaption of those rules, not least to the effect that the SCC will take those measures the rules provide that the ICC should take.”

Conclusion

Many arbitration institutions provide for model arbitration clauses, see for example, the SIAC, ICC, HKIAC, LCIA, KLRCA, KCAB and ICDR (AAA). Parties who have chosen a particular institution to administer their arbitration would be well advised to adopt those model clauses to mitigate the risks of a jurisdictional fight.

Nonetheless, model clauses are not perfect for each and every situation and should be considered and tailored in certain situations. For example, where parties are in different jurisdictions, where the likely remedies required are not for monetary compensation and where the counterparty is a state-owned enterprise or a state. For more details, we have a guidance note on “How to Draft an Effective Arbitration Clause and Arbitration Agreement”.

Finally, 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 Domain Name Dispute Resolution at the KLRCA.
This entry was posted in Arbitration, Asean, Singapore and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s