Background

Article 4 of the UNCITRAL Model Law (which is set out in the First Schedule of the Singapore International Arbitration Act) (Model Law) states:

“A party who knows that any provision of this Law from which the parties may derogate or any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time-limit is provided therefor, within such period of time, shall be deemed to have waived his right to object.”

Article 36(1)(a)(i) and 36(1)(a)(iv) of the Model Law state respectively:

“Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only: (a) at the request of the party against whom it is invoked, if that party furnishes to the competent court where recognition or enforcement is sought proof that:

(i) a party to the arbitration agreement referred to in Article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

(…)

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place”

Rule 6.1 of the SIAC Rules 2013 provides:

“A sole arbitrator shall be appointed unless the parties have agreed otherwise or unless it appears to the Registrar, giving due regard to any proposals by the parties, the complexity, the quantum involved, or other relevant circumstances of the dispute, that the dispute warrants the appointment of three arbitrators.”

In Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Pte) Ltd [2019] 2 SLR 131 (Rakna Arakshaka Lanka Ltd), the Singapore Court of Appeal held that a party who objected to the jurisdiction of the tribunal, but did not participate in the arbitration proceedings at all following such objection, would still be able to rely on that objection in setting aside proceedings after the issue of the final award (see Legal update, Non-participating defendant in arbitration who does not challenge the tribunal's ruling on jurisdiction may still challenge jurisdiction in set-aside proceedings (Singapore Court of Appeal)).

Facts

Singapore International Arbitration Centre (SIAC) arbitration proceedings were commenced by Sanum Investments Limited (Sanum) against four related respondents (Lao Parties). The arbitration proceedings related to five agreements governed by Lao law involving the management of a slot machine club in Laos. The first of these, a Master Agreement, contained the following operative line within its multi-tiered dispute resolution clause:

“… the Parties shall mediate and, if necessary, arbitrate such dispute using an internationally recognized mediation/arbitration company in Macau, SAR PRC.”

The rest of the relevant agreements were sub-agreements under the Master Agreement. Of these, a ‘Participation Agreement’ had a dispute resolution clause which provided, amongst other things, for arbitration to be referred to three arbitrators in Singapore in accordance with the SIAC Rules. The remaining three agreements did not contain a dispute resolution clause.

Sanum obtained an award in its favour . Sanum then applied to the Singapore courts for leave to enforce the award against the Lao Parties. The Lao Parties resisted enforcement on various grounds. One of the grounds was that the Master Agreement required the arbitration to be conducted by an internationally recognised arbitration company located in Macau. The Lao Parties alleged that these requirements had not been complied with.

The Singapore High Court found that only the Master Agreement applied to the dispute, not the rest of the agreements, and that the seat of the arbitration was, therefore, incorrect. However, the High Court found that as it was a procedural, not a jurisdictional, issue, prejudice was required to be shown in order to resist enforcement of an award. As the Lao Parties had not produced any evidence that they had been prejudiced by the irregularities in the award, leave was granted by the High Court to enforce the award against three of the four Lao Parties(for further details see Legal update, Latest developments in the Sanum saga: application to refuse enforcement rejected (Singapore High Court). The High Court refused leave to enforce the award against the fourth Lao Party (STV Enterprise) as it found that it was not a party to the Master Agreement.

Both Sanum and the three impacted Lao Parties cross-appealed to the Court of Appeal against the High Court’s decision:

• Sanum appealed against the High Court’s decision to refuse leave against STV Enterprise on the basis that it alleged that the dispute arose under both the Master Agreement and the Participation Agreement (which STV Enterprise was expressly named in), and that STV Enterprise was, in any event, a party to the Master Agreement by the wording of the Master Agreement.
• The three impacted Lao Parties appealed against the High Court’s decision granting Sanum leave to enforce the award against them on, among others, the following grounds:
  • that the award was made pursuant to an arbitration agreement to which not all the Lao Parties were party and therefore should not be enforced pursuant to Article 36(1)(a)(i) of the Model Law; and
  • that, presuming only the Master Agreement applied to the dispute, SIAC had no presence in Macau, the arbitration was wrongly seated, and the appointment of arbitrators was not in accordance with the Master Agreement’s arbitration clause. The award should, therefore, not be enforced pursuant to Article 36(1)(a)(iv) of the Model Law.

Decision

The Singapore Court of Appeal allowed the Lao Parties’ appeal and denied Sanum leave to enforce the award. The court also dismissed Sanum’s appeal in respect of STV Enterprise.

The court’s finding on the relevant agreements and the parties to them

The court agreed with the lower court’s decision that, as a matter of interpretation and a matter of Lao law, the dispute solely arose out of the Master Agreement. The obligation that Sanum contended was breached (that is, an obligation for the Lao Parties to hand over the slot club to Sanum after the expiry of other existing agreements) was solely contained in the Master Agreement, and not in the sub-agreements. The arbitration agreement in the Master Agreement (Arbitration Agreement) was, therefore, the only relevant agreement.

The court also agreed with the lower court’s decision that STV Enterprise was not a party to the Master Agreement on the wording of the Master Agreement and as a matter of Lao law. In addition, it affirmed the finding that the other Lao Parties were parties to the Master Agreement.

The interpretation of the Arbitration Agreement

The court preliminarily considered the validity of the Arbitration Agreement. Short of the Lao Parties (on whom the burden lay) adducing Lao law evidence proving otherwise, the court held that the Arbitration Agreement was valid. The court declined to apply the “presumption of similarity” and use Singapore law principles to consider the validity of the Arbitration Agreement on the basis that it would have changed the nature of the argument at too late a stage.

Having found that the Arbitration Agreement was valid, the interpretation of it was still in dispute. The three potential interpretations of the clause were:

• That the parties were to arbitrate using an internationally recognised arbitration company geographically located in Macau (Interpretation A).
• That the parties were to arbitrate using an international arbitration company recognised in Macau (Interpretation B).
• That the parties were to arbitrate using an internationally recognised arbitration company in Macau (Interpretation C).

As there is no internationally recognised mediation/arbitration company geographically located in Macau, the court rejected Interpretation A as it would contravene the principle of effective interpretation. As between Interpretations B and C, Sanum preferred Interpretation B and surmised that the Participation Agreement had then expanded on the Arbitration Agreement by providing for Singapore-seated SIAC arbitration. The court applied the principle that the interpretation that does the least violence to the language of the clause is to be preferred. Interpretation B did not provide for a seat of arbitration, which would have required significant re-wording of the relevant section of the clause, and (on Sanum’s submissions) relied on an explicit or implied reference to the Participation Agreement. In contrast, Interpretation C would be the most natural reading and only required a minor amendment of the relevant phrase. Interpretation C also aligned with positions previously taken by Sanum and its counsel in the arbitration.

As Interpretation C was the preferred interpretation, the court found that the correct seat of the arbitration was Macau.

The court further found that as, on its preferred interpretation, the Arbitration Agreement was silent on the composition of the arbitral tribunal, Rule 6.1 of the SIAC Rules 2013 applied to the constitution of the tribunal (on the basis of Sanum’s selection of the SIAC as the ‘internationally recognised arbitration company’). Under Rule 6.1, a sole arbitrator, and not a three-party tribunal, was therefore meant to have been appointed in default of another choice by the parties. Therefore, the arbitral tribunal was not composed in accordance with the agreement of the parties.

The impact of the court’s finding on the seat and constitution of tribunal

As a preliminary point, Sanum argued that even if the seat and composition of the arbitral tribunal were erroneous, the Lao Parties had waived their right to object to these issues pursuant to Article 4 of the Model Law.

The court found that Article 4 of the Model Law did not apply to this case, as the Lao Parties had not “proceeded with arbitration”, which was a requirement contained within the article. The court also cited the case of Rakna Arakshaka Lanka Ltd in support of their finding that the Lao Parties could not be prevented from raising their objections to the seat and composition of the tribunal in relation to enforcement.

As to the substantive question, it was common ground that lack of prejudice is not relevant to a jurisdictional challenge, but would be relevant to a procedural challenge.

However, the court opined that party autonomy is of central importance to the legitimacy and binding nature of an arbitral award, and that the choice of arbitral seat is one of the most important matters for parties to consider when negotiating an arbitration agreement. The choice of seat results in a number of significant legal consequences, including the external relationship with national courts, the conduct of the international arbitration, the validity and finality of the award resulting from the proceedings, and the parties’ remedies. The court found that the choice of seat was still important when comparing two Model Law jurisdictions (like Macau and Singapore) as even then, national courts approach arbitration-related applications in different ways and each jurisdiction may augment or reduce the grounds for setting aside.

Given the importance of the seat, the court must give the parties’ choice full effect and once an arbitration is wrongly seated, any award should not be enforced because it is not in accordance with the parties’ arbitration agreement. Therefore, prejudice does not need to be shown by the party resisting enforcement on the grounds of a wrongly seated award. As the choice in the applicable Master Agreement was for the arbitration to be seated in Macau, leave to enforce the award was refused by the Singapore Courts.

As to the incorrect constitution of the three-member tribunal, the court did not deal with potential prejudice to the Lao Parties arising from this, given their decision on the incorrect seat. However, the court did state, obiter, that it is arguable that a tribunal made up of three persons is totally different from a single person tribunal and might result in a different outcome, resulting in prejudice. However, the court left this point to be decided in a future case.

Comment

This rare decision by the Singapore courts to refuse enforcement of an arbitration award reflects the importance of party autonomy and, in particular, the importance of the choice of seat in international arbitration. The finding that no prejudice needs to be shown by the party resisting enforcement where the wrong choice of seat is concerned is particularly notable.

Parties should be sure to clearly select a choice of seat in their arbitration agreements to prevent such an outcome. Further, parties and their counsel should ensure that they commence arbitration by reference to the correct seat to avoid later issues with enforcement. The consequences of not doing so can be particularly costly in the case of non-participating counterparties, who may choose not to engage in the arbitration without waiving their rights to oppose enforcement or seek to set aside an award at a later stage.

Case

ST Group Co Ltd and others v Sanum Investments Limited and another appeal [2019] SGCA 65 (Coram: Sundaresh Menon CJ; Judith Prakash JA; and Quentin Loh J).