The Uncertainty on the Law Governing the Arbitration Clause

The law governing the arbitration agreement (i.e. the arbitration clause in a contract) potentially covers matters such as the existence, legality, interpretation, termination, and the identities of the parties to the arbitration clause. It is very common to not see any express provision on the law governing the arbitration clause. Contracting parties commonly make the assumption that the governing law of the contract will be the same law governing the arbitration clause.

(1) Governing law of the contract could be a strong indication of the governing law of the arbitration clause

The English Court of Appeal decision in Sulamérica CIA Nacional de Suguros SA and others v Enesa Engenharia SA and others [2012] 1 Lloyd’s Rep 671. In essence, the English Court of Appeal set out a three-stage enquiry in determining the law governing an arbitration agreement. (1) The express choice; (2) The implied choice in the absence of such an express choice; and (3) Where the parties had not made any choice, the proper law would be the law which the arbitration agreement has its closest and most real connection with. In particular for stage (2), the English Court of Appeal held that an express choice of law governing the substantive contract is a “strong indication of the parties’ intention in relation to the agreement to arbitrate.” On the specific facts of SulAmerica, the Court of Appeal agreed that the arbitration clause should be governed by the law of the seat (English law) and not the governing law of the contract (Brazil law). Nonetheless, the SulAmerica approach creates a rebuttable presumption that an express choice of law to govern the substantive contract would also apply to the arbitration clause. There have been English decisions that have since followed the SulAmerica approach.

(2) Or should the law of the seat of the arbitration be the governing law of the arbitration clause?

FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12 departs from the SulAmerica approach in treating substantive law in the main contract being a strong indication of the parties’ intention to have that same substantive law be the law governing the arbitration clause. The case of Firstlink instead argues that, the natural inference ought to be that the law of the seat of arbitration should be the law governing the arbitration clause. This is because when commercial relationships break down and there is dispute resolution, the parties’ desire for neutrality comes to the fore. The law governing the performance of contractual obligations prior to the breakdown takes a backseat and primacy should be accorded to the neutral law selected by parties to govern the proceedings of dispute resolution.

In Malaysia, the High Court in Government of the Lao People’s Democratic Republic v Thai-Lao Lignite Co Ltd [2013] 3 MLJ 409, it was held that the law governing the arbitration clause should be the law of the seat of the arbitration (see [98] to [100]). On appeal, the Court of Appeal upheld the High Court decision but the Grounds of Judgment did not delve into the issue on the law governing the arbitration clause. This case is now pending an application for leave to appeal to the Federal Court.

The case of Thai-Lao Lignite demonstrates the significance of the law applicable to the arbitration clause. One of the contentions in the High Court for the setting aside of the award (as seen in the reported decision) was that Malaysian law should apply to the arbitration clause (as that is where the seat of arbitration is stipulated). From that, it would follow that the ‘party’ to the arbitration clause must be a signatory to the main agreement itself in order to be a party to the arbitration agreement. However, if the governing law of the main agreement (New York law) were to apply to the arbitration clause, under New York law, the concept of an “intended third party beneficiary” would be deemed to be a party to the arbitration agreement. Hence, a non-signatory to the main agreement but one which is an intended third party beneficiary, could rely on the arbitration clause and could be one of the claimants to initiate arbitral proceedings (just like in the facts of Thai-Lao Lignite. However, by applying Malaysian law to the arbitration clause, the High Court held that this was one of the grounds for setting aside the award. The Judicial Commissioner held that the arbitral tribunal had exceeded its jurisdiction by allowing a non-signatory and essentially, a non-party to claim in the arbitral proceedings.

(3) Takeaway Point: Expressly Provide for the Law Governing the Arbitration Clause

It is therefore best to expressly provide for the law governing the arbitration clause to negate any uncertainty. It will just require the simple provision such as “The law of this arbitration clause shall be [state the law e.g. the law of Malaysia]”

 

Delivering a Talk on Enforcing Arbitral Awards and Foreign Judgments

I have been invited by the Singapore Management University School of Law to deliver a lunchtime seminar on Enforcing Arbitral Awards and Foreign Judgments in Malaysia. This will be held on Tuesday 12 August 2014.

As part of my talk, I will set out some of the statistics for the successful (or unsuccessful) applications for the enforcement of arbitral awards under the Arbitration Act 2005.

 

SMU

 

Indemnity Costs for Initiating Court Proceedings in Breach of Arbitration Clause

I had earlier written about the case for indemnity costs in opposing arbitral awards. This was in the context of costs being awarded on an indemnity basis where there was an unsuccessful attempt at setting aside an award or resisting an enforcement of an award.

In my earlier article, I had pointed out that the English courts may award indemnity costs where proceedings are brought in breach of a binding arbitration agreement. In the High Court decision of A v B (No 2) [2007] EWHC 54 (Comm), court proceedings were stayed as the proceedings were brought in breach of an arbitration agreement. It was held that as the breach had caused the innocent party to incur legal costs, those costs should normally be recoverable on an indemnity basis.

The approach in A v B has now been adopted in Australia in the Supreme Court of Western Australia decision of Pipelines Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10. The Court had ordered Pipeline to pay costs on an indemnity basis to ATCO when ATCO had successfully applied for a stay of proceedings under section 8 of the Commercial Arbitration Act 2012.

In making this order, the Court confirmed the application of the principle in the English case of A v B [2007] EWHC 54 that indemnity costs will generally be awarded where a party commences legal proceedings in breach of a contractual obligation to refer a dispute to arbitration.

I am not aware of the Malaysian Courts having determined whether costs on an indemnity basis should be allowed if there is a successful stay of Court proceedings under section 10 of the Arbitration Act 2005. Hopefully this case for indemnity costs can be canvassed before the Courts.

Shareholder Oppression Action Not Arbitrable

The Singapore High Court in the Silica Investors case (Silica Investors Ltd v Tomolugen Holdings Limited and others [2014] SGHC 101) refused a stay of an oppression action initiated by a shareholder pending a reference to arbitration. The Court found that based on the facts of the case, the minority oppression claim was non-arbitrable. There were relevant parties, including other shareholders, who were not parties to the arbitration. Further, the Plaintiff in the oppression action was seeking for remedies that the arbitral tribunal could not grant, including winding up.

Briefly, there was an arbitration clause in an agreement between only two of the shareholders. The Plaintiff filed an oppression action against both the party to the arbitration agreement as well as against non-parties (being the directors and some of the other shareholders of the Company). The Plaintiff sought a share buy-out order, an alternative prayer for winding up, and for several declaratory orders.

The Judge took great lengths in looking at the developments in Australia, Canada and the UK, and the academic commentary arising from those cases. In particular, the Judge distinguished the English Court of Appeal decision in Fulham Football Club (1987) Ltd v Richards and another [2012] Ch 333 (where an unfair prejudice action was stayed pending arbitration) as the unfair prejudice relief in that case was for a specific injunction Order. There was no possibility of a share buy-out or winding up in that case.

This is a fascinating area of the law where there is still no clear answer on the right balance to be struck. On the one hand, there is the policy of interpreting an arbitration clause as wide as possible in order for contracting parties to be bound by their bargain to go to the exclusive forum of arbitration. On the other hand, parties e.g. shareholders, may still want to rely on their statutory remedies and the Court will have to consider whether a dispute is arbitrable or not.

CJ Menon’s Cautionary Notes for an Age of Opportunity

The Chief Justice of Singapore cautions on the issues arising from dramatic growth of new entrants, third-party funding and rising costs in international arbitration.

At the Chartered Institute of Arbitrators International Arbitration Conference held in Penang on 22 August 2013, which I had the pleasure of attending, The Honourable The Chief Justice Sundaresh Menon delivered his keynote address entitled “Some Cautionary Notes for an Age of Opportunity.”

Chief Justice Menon highlighted the essential role that arbitration plays in the global infrastructure and in the development of an international rule of law. However, he cautioned that how successfully this Titanic continues to sail ahead would depend on the diligence of its stewards in spotting and reacting to the approaching icebergs.

He identified three distinct issues which he believed the international arbitration community needed to take cognizance of.

1. Dramatic growth in number of new entrants

The first was the “explosive growth in the number of new entrants to the global arbitration community, many from diverse legal traditions“. The result, he feared, was that: “[i]mplied understandings or shared values no longer provide any meaningful means of shaping or influencing conduct in this context. Arbitrators can no longer consider themselves bound by peer standards, because there are no peers in the true sense, amidst all this diversity.”

Chief Justice Menon posed the question as to what yardstick should be applied in the present setting of a largely unregulated industry with little, if any, barriers to entry. Drawing an analogy from sports, “[i]f football were played without rules but with massive stakes and rewards, how would we condemn those playing the man instead of playing the ball?’

2. Third-Party Funding

The second issue was “the growing incidence of third party funding and the participation of funds in international arbitration” and the “virtual absence of any form of regulation” in contrast to third party funding for litigation.

Chief Justice Menon gave examples of a European gas company announcing that a Luxembourg fund would finance its €1 billion ICSID claim and of a Canadian mining company having made an agreement with a third-party funder to cover the costs of a multi-billion arbitration claim brought by its subsidiary against Bolivia.

In particular, he touched on how the prevalent use of third-party funding in international arbitration has seen the emergence of a market for the sale of the payment obligation that will be owed by the claimant in the event of success, as a chose in action to third-party speculators. Such practices are reminiscent of and have the potential to replicate the vulture funds that were prevalent in the 1990s.

Would funders create a portfolio of high risk claims, consisting of frivolous or unmeritorious claims, hedged by low risk claims, consisting of claims with a good chance of success, and sell them as a diversified basket of claims to third-party speculators? This would make it possible to profit from frivolous and unmeritorious claims that would not otherwise have a market with speculators if they were sold individually.

3. Rising Cost

Finally, Chief Justice Menon raised the issue of the rising costs of international commercial arbitration and warned that there was a “growing recognition amongst users that the level of costs in international arbitration is rising at an unsustainable rate“.

While he acknowledged the various reasons for such rising costs, he stated that it was “unsatisfactory that the international arbitral community has not acted with dispatch to address this issue. On the contrary, the trend might even point somewhat the other way“.

4. Possible Responses to these Challenges

Chief Justice Menon suggested two ways to combat these three issues.

The first is to develop and implement codes of ethics to set uniform standards for both arbitrator and counsel conduct. He then proceeded to distinguish the common arguments in opposing the implementation of such a uniform code.

The second is for arbitral institutions to play a larger role in developing and implementing a regulatory framework to apply and enforce such standards.

This speech completed a trilogy of views expressed by Chief Justice Menon on the topic of international arbitration. The first were the views expressed in his keynote address at the 21st International Council for Commercial Arbitration Conference on 11 June 2012 which were then expanded on at the seminar at Queen Mary, University of London on 27 September 2012.

Federal Court Ajwa decision on the Arbitration Act 2005

The Federal Court has recently released its Grounds of Judgment for its decision in the arbitration case of Ajwa for Food Industries Co (MIGOP), Egypt v Pacific Inter-link Sdn Bhd. This is the first reported Federal Court decision relating to the Arbitration Act 2005 and I had written earlier on the Court of Appeal decision.

The facts of this case involved Court applications to set aside or vary two PORAM arbitration awards. The parties had dealt with each other in an informal basis and that agreements were concluded through telephone conversations and email exchanges prior to any formal documentation. The Appellant, Ajwa, did not dispute purchasing the products from the Respondent, Pacific. Ajwa contended however that it never agreed to refer any disputes to PORAM arbitration.

Ajwa’s contention was that the Sales Contracts relied on by Pacific did not contain any specific dispute resolution clause and in most cases, were unsigned. Pacific had also relied on certain Standard Terms and Conditions (“STC”) and which Ajwa contended it had never seen nor agreed to. Therefore, Ajwa’s case for setting aside was essentially that the PORAM Tribunal had no jurisdiction to conduct the arbitral procedings as there was no agreement, written or otherwise, to refer the disputes arising from the purchases.

The Federal Court had granted leave to appeal on these two questions of law:

1st Question:

Whether for the purpose of section 9(5) of the Arbitration Act 2005, the agreement in writing where a reference is said to be made to a document containing an arbitration clause must satisfy the conditions of an agreement in writing as set out in section 9(4) of the Arbitration Act 2005.

2nd Question:

Whether an arbitration agreement in writing in respect of specific transactions, can be constituted by reference in an agreement to a document containing an arbitration clause pursuant to section 9(5) of the Arbitration Act 2005, where:

(i) The document containing an arbitration agreement is not attached to the purported agreement or otherwise published; and/or

(ii) Notice of the document containing an arbitration clause is purportedly founded on past conduct of the parties in referring to arbitration disputes arising out of unrelated transactions.

It was held at [28] that:

  1. There is no requirement under the Act that where a reference is said to be made to a document containing an arbitration clause in an agreement, that agreement must be signed. In the present case, it is clear that the contract of sale was in writing and satisfies the requirement of section 9(4) of the Act. That agreement in writing incorporates the STC which contains the arbitration clause and satisfies the requirement of section 9(5) of the Act.
  2. Section 9(5) of the Arbitration Act does not require that the STC which contains the arbitration agreement being attached or published. It is sufficient that the incorporation is by notice in the document.
Commentary

I was anticipating this Federal Court decision not so much on the specific legal issues raised but more on the chance for our apex Court to lay down a conclusive pro-arbitration policy for the judiciary under the Arbitration Act 2005. From that aspect, I was left disappointed.

Intelek Timur Sdn Bhd v Future Heritage Sdn Bhd [2004] 1 MLJ 401 (FC) but this was under the old Arbitration Act 1952. In my view, it would have been useful for our apex Court to have seized this opportunity to explain the significance of our Arbitration Act 2005 in adopting the Model Law and to reiterate the policy of judicial non-interference save in the exceptional and the specific circumstances provided for under Model Law / the Arbitration Act 2005.

This pro-arbitration approach by the judiciary can be seen time and time again in the apex Court of Singapore. We see such a pronouncements such as in the decisions of Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR 86 (CA), Tjong Very Sumitomo and others v Antig Investments Pte Ltd [2009] 4 SLR 732  (CA) and AJU v AJT [2011] 4 SLR 739 (CA). In England, we also see a similar pro-arbitration stance taken by the House of Lords in Fiona Trust & Holding Corporation & Ors v Privalov & Ors [2007] 4 All ER 951 (HL).

It is hoped that in the near future, through the guidance of submissions of Counsel, Malaysia’s Federal Court will lay down this marker that Malaysia is very much in support of the party’s right to choose arbitration and that the Court will not easily interfere in the arbitration process.

The Case for Indemnity Costs in Opposing Arbitral Awards

[Originally published in the Malaysian Institute of Arbitrators Newsletter 2013]

In upholding the contractual agreement for parties to arbitrate a dispute, a party who obtains an arbitral award in his favour should be entitled to expect that the Court will enforce the award as a matter of course. After the award has been issued however, the successful party will likely still face Court challenges by the losing party through an application filed to set aside the award or to oppose the enforcement of the award.

If such an application is unsuccessful however, there may be a case to argue that the successful party should then be allowed costs on the higher indemnity basis rather than just the standard basis.

This article will analyse how the different jurisdictions have dealt with this issue and how in Malaysia, there is a case for costs on an indemnity basis to be awarded in such unsuccessful challenges to an arbitral award.

Hong Kong’s Position in Support of Indemnity Costs

The Hong Kong Court of Appeal in Pacific China Holdings Ltd (in Liquidation) v Grand Pacific Holdings Ltd [2012] HKCA 332 has affirmed the principle that an unsuccessful party in applying to set aside an arbitral award, or in resisting the enforcement of the award, in the absence of special circumstances, will be liable to pay costs on an indemnity basis.

The Court of Appeal affirmed the principle set out by Reyes J in the Hong Kong Court of First Instance case of A v R [2009] HKCFI 342 and its own approach in Gao Haiyan & Anor v Keeneye Holdings Ltd & Anor (No 2) [2012] 1 HKC 491 in holding that, given that the parties had agreed to arbitration, applications by a party to set aside an arbitral award or to resist enforcement should be exceptional events.

The reasoning is that if the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award. The winning party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third. This is despite the winning party already having successfully gone through an arbitration and obtained an award in its favour. The losing party, in contrast, would not be bearing the full consequences of its abortive application.

Therefore, it now appears quite settled in Hong Kong that the onus is on the losing party who is unsuccessful in such a challenge to demonstrate the special circumstances why an indemnity costs order ought not be granted.

Australia and England

By contrast to the Hong Kong position however, the cases from Australia and England adopt the position that in an unsuccessful challenge to an arbitral award, costs should still only be awarded on the standard basis unless there are other circumstances to justify an indemnity costs order.

In Australia, the Court of Appeal of Victoria in IMC Aviation Solutions Pty Limited v Altain Khuder [2011] VSCA 248 considered the issue of whether indemnity costs should be awarded in an unsuccessful challenge to an arbitral award. The Judge at first instance had adopted the approach of Reyes J in A v R in awarding such indemnity costs. However, the Court of Appeal overturned this decision and held that there was nothing in the Victorian civil procedure statute or in the nature of enforcement proceedings for arbitral awards which, of itself, warranted costs being awarded against an unsuccessful party on a basis different from that on which they would have been awarded in other civil proceedings. The general position would be that costs will ordinarily be awarded against the unsuccessful party on the standard basis unless the successful party can establish special circumstances.

In England, the English courts may likely award indemnity costs where proceedings are brought in breach of a binding arbitration agreement. In the High Court decision of A v B (No 2) [2007] EWHC 54 (Comm) for example, court proceedings were stayed as the proceedings were brought in breach of an arbitration agreement. It was held that as the breach had caused the innocent party to incur legal costs, those costs should normally be recoverable on an indemnity basis.

Similar to the Australian position however, the English decisions have not appeared to adopt the Hong Kong approach in leaning towards awarding indemnity costs for unsuccessful challenges. The general position is that an order for indemnity costs will be made only where there is some conduct or some circumstances which takes the case out of the norm (see the English High Court decision of Fiona Trust & Holding Corporate and ors v Yuri Privalov and ors [2011] EWHC 664 (Comm) summarising the general principles justifying the award of indemnity costs).

The English High Court decision of Exfin Shipping (India) Ltd. Mumbai v. Tolani Shipping Co. Ltd Mumbai, [2006] EWHC 1090 (Comm) is an example where costs were awarded on an indemnity basis. The applicant was unsuccessful in applying to set aside an arbitral award and it was held that the applicant had acted in its own perceived commercial interest and without merit. That was sufficient to take the case “out of the norm” thus justifying the order for indemnity costs.

Malaysia

An award of costs on an indemnity basis is set out in Order 59 Rule 16(4) of the Rules of Court 2012 (“RC”) which essentially allows for all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred.

The issue of whether costs on an indemnity basis should be allowed in unsuccessful challenges to an arbitral award does not appear to have been considered by the courts here. Thus far, the general principle in Malaysia on indemnity costs would also require something out of the norm in order to depart from costs on the standard basis. The Federal Court in Takako Sakao (f) v Ng Pek Yuen (f) & Anor (No 2) [2010] 2 MLJ 181 set out some of the guideless for an award of indemnity costs and emphasised that the discretion to award such costs is unfettered.

Order 59 Rule 8 of the RC does provide some guidance on the special matters to be taken into account in the exercise of the Court’s discretion in the award of costs, one of which is to consider the “conduct of all parties, including before and during the proceedings.” The act of challenging an arbitral award can be seen as an exceptional event (see this general sentiment expressed in the Federal Court decision of Intelek Timur Sdn Bhd v Future Heritage [2004] 1 MLJ 401 and the Court of Appeal in AJWA For Food Industries Co (MIGOP), Egypt v Pacific Inter-Link Sdn Bhd and another appeal [2013] 2 CLJ 395). Therefore, similar to the Hong Kong position, the losing party should bear the full consequences of its unsuccessful attempt at challenging the award by being penalised with indemnity costs.

It remains to be seen which direction we will move towards and whether we will adopt the more punitive approach of awarding indemnity costs for unsuccessful challenges to an award. This may then enhance Malaysia’s position as an arbitration-friendly jurisdiction, with the courts upholding awards and discouraging frivolous challenges.