SGCA RECOGNISES ASYMMETRIC ARBITRATION CLAUSE GIVING ONLY ONE PARTY RIGHT TO ELECT TO ARBITRATE

Introduction

Is a dispute resolution clause that gives only one party the right to elect to arbitrate a dispute a valid arbitration agreement?

The Singapore Court of Appeal (the “Court”) answered this question in the affirmative recently in Wilson Taylor Asia Pacific Pte Ltd v Dyna-Jet Pte Ltd [2017] SGCA 32. We consider the Court’s decision in detail here.

Facts

The Appellant, Wilson Taylor (“Appellant”) engaged the Respondent, Dyna-Jet (“Respondent”) to install underwater anodes on the island of Diego Garcia. The parties’ contract (“Contract”) contained a dispute resolution clause (“DR Clause”) which gave only the Respondent a right to elect to arbitrate a dispute arising from the Contract.

A dispute arose under the Contract (the “Dispute”) but parties were unable to reach a settlement. The Respondent then commenced Suit No 1234 of 2015 (“Suit 1234”) against the Appellant in the High Court.

The Appellant then filed Summons No 6171 of 2015 (“SUM 6171”) to have Suit 1234 stayed pursuant to section 6 of the International Arbitration Act (Cap. 143A, 2002 Rev Ed) (“IAA”).

The Assistant Registrar (the “AR”) hearing SUM 6171 dismissed the Appellant’s stay application, holding that the DR Clause constituted a valid arbitration agreement within the meaning of s 6 of the IAA. The AR further held that given that the Respondent had elected to pursue litigation rather than arbitration, the arbitration agreement had become “inoperative or incapable of being performed” under s 6(2) of the IAA.

The Appellant appealed against the AR’s decision under Registrar’s Appeal No 43 of 2016 (“RA 43”) but the High Court judge (the “Judge”) similarly dismissed the appeal, albeit on different grounds. The Judge held that the DR Clause was a valid arbitration agreement despite its asymmetrical nature. The Judge concluded that a dispute resolution clause which confers an asymmetric right to elect whether to arbitrate a future dispute is properly regarded as an arbitration agreement under s 2A of the IAA. Ultimately, however, the DR Clause became “incapable of being performed” by virtue of the Respondent electing to litigate the Dispute.

The Court’s Decision

The Court previously held in Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2016] 1 SLR 373 (“Tomolugen”) that three requirements must be fulfilled before the Court would grant a stay of court proceedings in breach of an arbitration agreement:

  1. First, there must be a valid arbitration agreement between the parties to the court proceedings (“First Requirement”);
  2. Second, the dispute in the court proceedings must fall within the scope of the arbitration agreement (“Second Requirement”); and
  3. Third, the arbitration agreement is not null and void, inoperative, or incapable of being performed (“Third Requirement”).

A prima facie standard of review is adopted in respect of the three requirements. This is in recognition of the doctrine of kompetenz-kompetenz, which gives an arbitral tribunal the jurisdiction to rule on its own jurisdiction, including the question of whether an arbitration agreement has been validly constituted.

The First Requirement

The Court found that the DR Clause constituted a valid arbitration agreement even though:

  1. it only entitled the Respondent to compel its counterparty to arbitrate a dispute (“lack of mutuality” characteristic); and
  2. made arbitration of a future dispute entirely optional rather than an obligation (“optionality” characteristic).

On the weight of modern Commonwealth authority, the Court held that neither the “lack of mutuality” characteristic nor the “optionality” characteristic of the DR Clause prevented the Court from finding that it was a valid arbitration agreement.

The Second Requirement

As to the requirement of whether the Dispute fell within the scope of the arbitration agreement, the Court held that such a review must be conducted as at the time when the stay application was filed.

In particular, the Court found that the Dispute did not fall within the meaning of the arbitration agreement on a prima facie standard of review. This is because under the DR Clause, only the Respondent was entitled to exercise the option to arbitrate the Dispute, but not the Appellant. The Appellant therefore could not invoke a right which was vested in the Respondent alone.

By the time of the Appellant’s stay application, the Respondent had already chosen to refer the Dispute to litigation by commencing Suit 1234. As such, the Court held that the Dispute did not fall within the scope of the DR Clause as it was not a “matter which is the subject of the [arbitration] agreement” under s 6(1) of the IAA.

The Third Requirement

As the Court had found that the Dispute did not fall within the scope of the arbitration agreement, the Court did not have to consider the Third Requirement of whether the DR Clause was “null and void, inoperative or incapable of being performed”.

Accordingly, the appeal was dismissed.

Comment

This decision settles the frequently asked question of whether an arbitration agreement can only arise if it provides both parties with the mutual right to arbitrate.

The Court’s broad construction of what constitutes a valid arbitration agreement means that even if the option was only given to one party to elect to arbitrate a future dispute, this would not prevent the Court from recognising such a clause as a valid arbitration clause.

The Court also observed that the onus is on an applicant applying for a stay of court proceedings in favour of arbitration to persuade the court(s) as to:

  1. whether a dispute falls within the scope of an arbitration clause; and
  2. to advance the interpretation of the dispute resolution clause that would support the applicant’s contention that a stay should be ordered.

In other words, the courts’ adoption of a prima facie standard of review does not relieve an applicant of the burden of proving that its construction of the clause is the correct one.

The Court’s robust approach means that there can be no assumption that a court would order a stay of proceedings on account of the existence of a valid arbitration agreement. The Court is equally prepared not to send a dispute to arbitration if doing so would not accord with the parties’ underlying intentions under an arbitration agreement.

About Wei Ming Tan

International Dispute Resolution and Arbitration Lawyer
This entry was posted in Arbitration, Dispute Resolution, Singapore. Bookmark the permalink.

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