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    12:37 AM Nicholas Poon (Assistant Registrar, Supreme Court of Singapore)

    Clash of Jurisdictions: The Applicable Standard of Review for Stay Applications Under the International Arbitration Act: Malini Ventura v Knight Capital Pte Ltd and others [2015] SGHC 225

        

    Introduction

    When a defendant who is sued under a contract claims that it never agreed or entered into the relevant contract, it should follow, logically, that the terms of the contract ought not to bind the defendant until the merits of the parties’ respective positions are finally determined. To impose the terms of the contract on the defendant at any prior stage, such as in interlocutory proceedings, may lead to oppressive consequences, which is why this drastic course is only reserved for the clearest of cases where special circumstances exist (see NCC International AB v Alliance Concrete Singapore Pte Ltd [2008] 2 SLR(R) 565 at [75]).

    Do the same or similar considerations apply, with equal force, in an application before a court to stay its proceedings in the face of an arbitration agreement which is alleged to have never been formed? That was the tantalising question before the High Court in Malini Ventura v Knight Capital Pte Ltd and others, a case that will in time prove to be a significant contributor to the global arbitration jurisprudence on this troubling issue.

    Background

    The loan agreement and Guarantee Deed

    The Plaintiff’s husband (“the Husband”) was the sole shareholder and director of a company (“the Borrower”) which was loaned monies by the Defendants. As part of the transaction, the Husband agreed to guarantee the loan and executed a deed (“the Guarantee”) to that effect on the same day as the other loan and security documents. The Plaintiff was supposed to execute the Guarantee on that day but did not do so. It was only a couple of months later, after the funds had been disbursed, that the Borrower’s solicitors sent the Defendants’ solicitors a letter enclosing a copy of the Guarantee bearing a signature next to the Plaintiff’s name.

    The Borrower defaults

    Shortly thereafter, the Borrower defaulted on the scheduled repayment. The Defendants then gave notice to the Borrower, the Husband and the Plaintiff. They initially demanded payment from the Borrower and the Husband. However, when the loan remained unpaid, the Defendants turned their attention over to the Plaintiff who likewise did not take steps to repay the loan.

    The SIAC arbitration

    The Guarantee provided that any dispute, including its existence and validity, was to be submitted to the Singapore International Arbitration Centre (SIAC) for resolution before a single arbitrator. The Defendants hence commenced arbitration proceedings in the SIAC and served the relevant notice on the Plaintiff. At some point, the Plaintiff informed the Tribunal that the arbitration had been improperly commenced because the Plaintiff had not entered into any Guarantee or other such agreement with the Defendants. In particular, the Plaintiff contended that the signature on the Guarantee was forged and not hers. 

    The Tribunal indicated that it wished to proceed with the arbitration, over the objections of the Plaintiff and her request for a stay. The Tribunal referred to s 25.2 of the SIAC Rules which stated that the Tribunal has the power to rule on its own jurisdiction. The Tribunal also ruled that it would decide jurisdictional objection in a final award together with the merits of the dispute.

    Three days after the Tribunal’s decision, the Plaintiff commenced the present court proceedings seeking (a) declarations that she had not entered into any arbitration agreement with the Defendants and that the SIAC arbitration was a nullity and of no effect, and (b) an injunction restraining the Defendants from continuing with the arbitration until the disposal of the court action. The Defendants applied to stay the court proceedings pursuant to s 6 of the International Arbitration Act (“IAA”). 

    The court’s decision  

    To the court, the central issue involved the application of s 6 of the IAA and Art 16 of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). More precisely, the court had to balance between, on the one hand, the kompetenz-kompetenz principle enshrined in Art 16 of the Model Law which gives arbitral tribunals the jurisdiction to rule on objections to its jurisdiction, and on the other, the power of the court under s 6(2) of the IAA to a refuse to stay its proceedings if it is satisfied that the arbitration agreement is “null and void, inoperative or incapable of being performed”.

    The court began its analysis (at [22]) with a statement of principle, namely, that it is the court which has the jurisdiction, as a matter of general law, to determine the existence or otherwise of a putative contract which includes an arbitration agreement. Where a party is requesting for the court to surrender that jurisdiction to an arbitral tribunal, that party bears the burden of proving that there is an arbitration agreement.

    The court then proceeded to review the history of the provisions in the Model Law relating to the concurrent jurisdiction of the courts and arbitral tribunals in the context of challenges to the arbitral tribunal’s jurisdiction, after which it concluded (at [28]) that “generally, the court’s consideration of whether an arbitration tribunal has jurisdiction or not must come after the tribunal’s own examination of the issue”. Although the court noted that there were a handful of English decisions which suggested the contrary, it declined to follow the English approach because of the philosophical differences between the IAA and the English 1996 Arbitration Act.

    In the court’s view (at [36]), granting a stay of court proceedings would satisfy the rights of both parties if the party applying for the stay was able to show on a prima facie basis that the arbitration agreement existed. The arbitral tribunal would then determine the existence of the arbitration agreement on a civil standard, and any dissatisfied party could still return to the court which has a final say in setting aside or enforcement proceedings (or under Art 16(3) of the Model Law though that did not apply here because the Tribunal had indicated that it would determine the jurisdictional objection together with the merits).

    Applying prima facie as a standard of proof, it was held that the Defendants had shown that the Guarantee Deed was signed by the Plaintiff. The Plaintiff’s anti-arbitration injunction application was consequently dismissed while the Defendants’ stay application was allowed.

    Comments

    At least six points emerge from this seminal decision.

    The first is that this case is the first reported instance in Singapore of an anti-arbitration injunction application against a claimant in an arbitration. The only other reported instance of an injunction to restrain arbitration proceedings is Mitsui Engineering & Shipbuilding Co Ltd v Easton Graham Rush and another [2004] 2 SLR(R) 14 where the arbitrator was sought to be restrained on the ground that there was a pending application to remove him as arbitrator. Although clearly not a principal conclusion that may be drawn from this judgment, it is nonetheless noteworthy that the court did not reject the application on the basis that the remedy of an anti-arbitration injunction is wholly foreign to Singapore law. It follows, therefore, that an anti-arbitration injunction can and will be granted in an appropriate case, possibly where the plaintiff (the putative respondent in the arbitration) satisfies the court that there is no existing or binding arbitration agreement.

    The second point concerns the enforcement of promises. It is axiomatic that private law expects parties to keep their promises, and holds them to it. Equally, the law does not subject parties to performing promises that the law regards them as having not made. This decision affirms that these fundamental principles apply to the enforcement of an arbitration agreement which at its core is a promise to resolve a dispute by arbitration. The arbitration agreement was in this case enforced because the court found on the facts that the Plaintiff had signed the Guarantee. Had the facts pointed in the opposite direction, the court would have refrained from staying the court proceedings on the ground that there was no arbitration agreement to speak of or that the arbitration agreement was null and void, inoperative or incapable of being performed.

    The third point relates to the interpretation of Art 8 of the Model Law which is the analogue to s 6 of the IAA. While this is not a suitable place to engage in a comprehensive review of the Model Law preparatory materials, it suffices to state that the Model Law does not provide conclusive guidance on this issue. Indeed, the court’s reference to the Model Law was to a general philosophy colouring the intersection where the courts and arbitral tribunals’ jurisdiction collide, and not to a specific principle or instruction directing that arbitral tribunals shall have the right of first refusal regarding all questions pertaining to its jurisdiction. The literature on this point is equivocal, with notable commentators such as Julian Lew, Loukas Mistelis and Stefan Kröll contending that the Model Law in fact permits court to engage a full review where the existence of the arbitration agreement is in doubt (see Comparative International Commercial Arbitration (Kluwer, 2003) at p 349), and other luminaries including Emmanuel Gaillard and Frédéric Bachand contending for a more restrained approach (see Emmanuel Gaillard and Y Banifatemi, “Negative Effect of Competence-Competence” in Enforcement of Arbitral Agreements and International Arbitral Awards (Gaillard and Di Pietro eds) (Cameron May, 2008) at p 259; and Frédéric  Bachand, “Does Article 8 of the Model Law Call for Full or Prima Facie Review of the Arbitral Tribunal’s Jurisdiction? (2006) 22 Arb Int 463).

    For completeness, it must be pointed out that the court was absolutely correct in its observation that this question of concurrent jurisdiction has divided both common and civil law legal systems, Model Law and non-Model Law jurisdictions. For instance, full review is generally permitted in Sweden and Germany but not France and Canada (see Christopher Seppälä, “Comment on Section 2 of the Swedish Arbitration Act of 1999” in The Swedish Arbitration Act of 1999 (Lars Heuman and Sigvard Jarvin eds) (JurisNet, 2004) at pp 45–59; and Dell Computer Corporation v Union des consommateurs and another [2007] 2 SCR 801 (“Dell”), though it should be noted that the dissenting minority favoured a full review and the majority conceded that the court should in certain cases undertake a full review).

    The fourth point is on the scope of the kompetenz-kompetenz principle At first blush, this decision may be lauded as giving full effect to the principle, but that would be missing the woods for the trees. If anything, this decision highlights the limits of the principle, because the court has all but confirmed that it has and will exercise the right to assess such jurisdictional objections for itself, the only question being what type or level of review (see the sixth point below) will be applied to the assessment.

    Confusion over the scope of the principle of kompetenz-kompetenz arises because the name lends itself to misunderstanding. The principle reflects the trite rule of law that an arbitral tribunal is competent to determine its own jurisdiction or competence (hence, competence-competence), much in the same way that a court is when its own jurisdiction is challenged in cases involving jurisdiction agreements, for example. The essence of the principle thus is one of prorogation of jurisdiction, the application of which extricates adjudicatory bodies from the infinite logical loop that invariably arises when their jurisdiction to decide a dispute is questioned. The other extreme of the principle, that the arbitral tribunal is and must always be the initial arbiter of its jurisdiction, does not represent the law in Singapore (see Tjong Very Sumito v Antig Investments Pte Ltd [2009] 4 SLR(R) 732 at [22]–[24]) or indeed in most major arbitral jurisdictions. As was implicitly noted by the court, s 6(2) of the IAA (and Art 8 of the Model Law) readily disproves that misconception. By virtue of the fact that the court may refuse to stay its proceedings if there was never any or presently enforceable arbitration agreement to speak of, s 6(2) of the IAA explicitly and unambiguously countenances the possibility of the court exercising the initial right of determination, over any right of the tribunal to determine its competence.

    The fifth point is one of burden of proof. Having regard to the two-step regime governing setting aside and enforcement of arbitral awards proceedings, there is a strong case to be made that under s 6(1) of the IAA, the initial burden of proving the existence of an arbitration agreement rests with the party relying on the arbitration agreement. This, however, is likely or ought to be a largely mechanistic process that involves a formalistic review of the documents (see Aloe Vera of America, Inc v Asianic Food (S) Pte Ltd and another [2006] 3 SLR(R) 174). Thus, producing the Guarantee with the forged signature is likely to be sufficient to satisfy this stage. Once this threshold is crossed, the burden under s 6(2) of the IAA then shifts to the party resisting the arbitration agreement to prove that the agreement is null and void, inoperative or incapable of being performed.

    Amongst the persuasive authority, albeit in the context of enforcement proceedings, that the substantive question of whether an allegedly non-existent arbitration agreement should be considered in the second stage of this two-step approach include the decisions of the English courts in Yukos Oil Company v Dardana Limited [2002] EWCA Civ 543 and of course, Dallah Estate and Tourism Holding v Government of Pakistan [2011] 1 AC 763, both of which were cited with approval by the Singapore Court of Appeal in PT First Media v Astro Nusantara [2014] 1 SLR 372. Additionally, locating the analysis in the second stage coheres with the concept of “null and void” in s 6(2) of the IAA, as the definition for that concept which is derived from Art II(3) of the New York Convention includes allegations of fraud, duress, illegality, mistake and lack of capacity going towards the formation of the arbitration agreement (see Gary Born, International Commercial Arbitration: Commentary and Materials (Kluwer, 2nd Ed, 2001) at p 160). 

    Finally, the sixth and most difficult point: the appropriate scope of review. There are two sub-points. The first is on the understanding of “prima facie review”. There are two possible ways of conceiving prima facie: (a) as a standard of proof, for instance, prima facie in contradistinction to balance of probabilities; and (b) as a mode of assessment, for instance, purely on affidavit evidence in contradistinction to affidavit evidence supplemented by oral testimony (see for eg, Dell at [168]). Ostensibly, it is conceptually and practically possible to take affidavit and oral evidence and apply a prima facie standard of proof, and vice versa, to apply a balance of probabilities standard of proof to affidavit evidence only. Even though there is a palpable difference between each understanding, the distinction has not been fleshed out clearly in the commentaries and cases.

    The second sub-point is on calibrating the scope of review. Leaving aside the Model Law, commentaries and cases for the moment because as suggested above these are arguable in both directions, and relying instead on first principles, the argument could be made that on balance, stronger review beyond prima facie (on any characterisation) is justified for cases where the challenge against the arbitration agreement is to its formation.

    Generally, as far as the arbitration agreement is concerned, the jurisdiction of the arbitral tribunal may be impugned in one of three ways:

    (i)           the arbitration agreement was never formed;

    (ii)         the arbitration agreement was formed but has since been invalidated by a vitiating factor; or

    (iii)       the arbitration agreement does not cover the dispute.

    The prima facie approach has much to commend where the objection is in relation to the second and third category. In these two categories, there was once an arbitration agreement which is no longer valid or does not otherwise apply. The crucial point is that the parties are in agreement that there was at the outset a binding arbitration agreement. A low threshold, partial towards arrogating the right of initial determination to the arbitral tribunal, is hence understandable both from the perspective of principle and policy.

    But an assertion that there was never any binding arbitration agreement entered into by the parties is fundamentally different because there is no common ground whatsoever. The premise that justifies the low threshold therefore falls away, and another is needed in its place. It is easy to forget that what is at stake is foundational: the basic right of a party not to be subjected to a promise that it has not made.

    Promoting arbitration as a policy could be a substitute premise but that suffers from some conceptual and practical difficulties. First, it is difficult to reason with conviction that giving the arbitral tribunal the first right of determination whenever there is some doubt is somehow pro-arbitration. As Toby Landau and others have expertly pointed out, being pro-arbitration does not mean being pro-arbitral tribunal or pro-court; pro-arbitration should mean whatever approach that conforms to the established arbitration architecture which, as has been explained above, is visibly unstable in relation to this particular issue.

    Second, on a practical front, the jury is split on whether it is more time and cost efficient for arbitral tribunals to make that initial determination. Take the present case as an example. The court observed that it was not the end of the road for the Plaintiff because ultimately, there is still a final recourse in the court. The Plaintiff will have her day in court. The fly in the ointment, however, is that even if the court eventually finds in favour of the Plaintiff, it may prove to be scant consolation. Not only is the Plaintiff’s right not to be subjected to arbitration irreversibly lost, and which value is beyond quantification, so also is the amount of time and legal cost and expenses that would have been expended as a result of the arbitral process. It is no secret that cost orders cover only a fraction of the actual legal costs, not to mention business and other opportunity costs. The cumulative financial prejudice is particularly significant (even egregious, as parties with shallow pockets may say) in cases where the arbitral tribunal reserves the right to determine the jurisdictional objection together with the merits, as was the decision of the Tribunal in the case at hand, because there would be no opportunity for financial mitigation via intermediate curial intervention as permitted under Art 16(3) of the Model Law.      

    Therefore, a pro-arbitration policy cannot perfectly account for the gap in principle that clearly exists between the pure formation cases, and the rest of the cases involving allegations of other types of invalidity and scope. If it is accepted that these objections are fundamentally different, and that the former objection strikes at the heart of the consensual nature of arbitration more fatally than the latter two, then it ought to follow that there must be a discernible different in treatment, with, logically, a more stringent assessment for the formation cases.

    In conclusion, this decision succinctly captures and amplifies the complexities inherent in this vexed area of arbitration law and practice. It is not clear as of now whether this matter will reach the Court of Appeal. If it does, the Court of Appeal will have an opportunity to revisit or substantiate and affirm its observations in its ex tempore judgment in Sim Chay Koon v NTUC Income [2015] SGCA 46 which on their surface accord with those of the court in the present case. One way or the other, the certainty that follows a decision of the apex court will be welcomed by parties and practitioners alike. 

    * This blog entry may be cited as Nicholas Poon, "Clash of Jurisdictions: The Applicable Standard of Review for Stay Applications Under the International Arbitration Act", Singapore Law Blog (3 September 2015) (http://www.singaporelawblog.sg/blog/article/132)

    ** The opinions contained in the commentary reflect the author’s own views and are not to be understood as reflecting the views of the author’s employer.

    *** A PDF version of this entry may be downloaded here

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