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    11:06 PM Hairul Hakkim and Leong Hoi Seng Victor (Justices’ Law Clerks)

    When will a stay of court proceedings be granted in favour of arbitration? – interpreting “null and void, inoperative or incapable of being performed”

        

    Introduction

    When can a party successfully avoid court proceedings in favour of arbitration? This is an issue frequently encountered by the Singapore courts in the context of international commercial arbitrations. By way of background, ss 6(1) and (2) of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“the IAA”) provide as follows:

    Enforcement of international arbitration agreement

    6.—(1)           … where any party to an arbitration agreement to which [the IAA] applies institutes any proceedings in any court against any other party to the agreement in respect of any matter which is the subject of the agreement, any party to the agreement may … apply to that court to stay the proceedings so far as the proceedings relate to that matter.

    (2) The court to which an application has been made in accordance with subsection (1) shall make an order … staying the proceedings so far as the proceedings relate to the matter, unless it is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed.

    [emphasis added]

    The Singapore courts have generally read these provisions in favour of arbitration; the party applying for a stay only needs to show, on a prima facie basis, that:

    1. there is an arbitration agreement between the parties to the court proceedings;
    2. the dispute in the court proceedings (or any part thereof) falls within the scope of the arbitration agreement; and
    3. the arbitration agreement is not null and void, inoperative, or incapable of being performed.

    These requirements were explicitly laid out by the Court of Appeal in Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2016] 1 SLR 373 (“Tomolugen”) at [63] and most recently re-affirmed in Wilson Taylor Asia Pacific Pte Ltd v Dyna-Jet Pte Ltd [2017] SGCA 32 at [11].

    But what is not entirely clear is the scope of the terms “null and void”, “inoperative” and “incapable of being performed” (“the three limbs”) in requirement (c). This is the topic that we propose to tackle in this article. We also conclude by observing the parallels that can be drawn between these three limbs and the grounds for setting aside or resisting enforcement of arbitral awards.

    Should the three limbs be considered collectively or individually?

    There appears to be minimal controversy over this preliminary issue as the Singapore courts have appeared to treat the limbs as distinct. For instance, the High Court in Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] 3 SLR 267 (“Dyna-Jet (HC)”) separately analysed each of the three limbs and discussed its disparate application in that case. The Court of Appeal in Tomolugen also noted that an arbitration agreement involving a dispute about whether the subject-matter was arbitrable “would be either ‘inoperative’ or ‘incapable of being performed’” (at [74]). The court did not need to go further than that in order to resolve the dispute as to whether it should order a stay of proceedings. These cases suggest that the limbs indeed cover different issues.

    While it is true that classifying the claim into one of the phrases over another will not result in a different outcome since the court either grants a stay or does not, this could still assist future litigants in pleading their case appropriately. This is especially so since the list of circumstances is “not closed” (Dyna-Jet (HC) at [154], in the context of the “incapable of being performed” limb). By delineating the scope of each of the three limbs, parties would be in a better position to explain to the court how the facts of their case fall within the established limits of each limb and/or to argue that the scope of a particular limb should perhaps be expanded in a principled manner.

    Apart from practical considerations, distinguishing between the three limbs is also justified in principle. As we will go on to explain, an arbitration agreement that is “null and void” or “inoperative” lacks legal validity. In contrast, one that is only “incapable of being performed” is legally valid – it is only the arbitration proceedings that cannot go ahead. In other words, distinguishing between the limbs has a knock-on effect of the validity of the arbitration agreement in future disputes.

    Null and void

    The core of what makes an arbitration agreement “null and void” is clear: where the arbitration agreement is devoid of legal effect from the beginning through vitiating factors under the proper law of the arbitration agreement (Dyna-Jet (HC) at [176], citing Albon v Naza Motor Trading Sdn Bhd (No 3) [2007] 2 Lloyd’s Rep 1 at [18]). Such vitiating factors could include fraud, unconscionability, illegality, mistake, duress, misrepresentation, or undue influence (Gary Born, International Commercial Arbitration, vol 1 (Wolters Kluwer, 2nd Ed, 2014) at p 841).

    Under the general law of contract, vitiating factors which make an arbitration agreement devoid of legal effect from the very beginning can be divided into two broad categories: (1) factors which render the contract automatically void by operation of law (eg, duress) and (2) those which only render the contract voidable and still require the innocent party to elect to rescind (eg, misrepresentation). It is important to address both categories because the “roots” of this limb “lie quite clearly in contract, as [the contract] is the legal vehicle which supplies the necessary consent for arbitration” (Dyna-Jet (HC) at [145]). Both void and voidable contracts fall quite easily into the “null and void” limb because the key requirement is that the arbitration agreement is devoid of legal effect (ie, the outcome), and not whether election is necessary (ie, the mechanism).

    What remains unresolved is whether an arbitration agreement which never came into existence because of defects in formation or consent is “null and void”, eg, mutual mistake. This is distinct from the situation where the arbitration agreement is vitiated or vulnerable to vitiation – here, the arbitration agreement was never properly concluded. While the court in Dyna-Jet (HC) did not have to address this controversy (at [177]), other local cases have taken differing views. In Sembawang Engineers and Constructors Pte Ltd v Covec (Singapore) Pte Ltd [2008] SGHC 229 (“Sembawang”), Nathaniel Khng AR noted that an arbitration agreement would be “null and void” where “the arbitration agreement was never entered [into]…” (at [39]). However, in The “Titan Unity” [2013] SGHCR 28 (“Titan Unity”), Shaun Leong AR held that the question of the validity of the arbitration agreement – which may come under the limb of “null and void” – does not arise if “no agreement was found to exist in the first place” (at [15]). In the same vein, Judith Prakash J (as she then was) held in Malini Ventura v Knight Capital Pte Ltd and others [2015] 5 SLR 707 (“Malini”) that the phrase “null and void” does not apply to a situation where “no agreement was concluded at all” (at [42]).

    It is respectfully submitted that the approach taken in Titan Unity and Malini is more justifiable. There is a distinction between the arbitration agreement never coming into existence, and the agreement existing but later being vitiated. We noted earlier that the Court of Appeal in Tomolugen set out three requirements. The former situation is better dealt with under the rubric of requirement (a) – whether there was indeed an arbitration agreement between the parties – rather than requirement (c), whether the arbitration agreement was “null and void”.

     

    This distinction is not merely semantic. In Dyna-Jet (HC), the court interpreted Tomolugen’s third requirement to mean that the burden of proof was on the party resisting the stay, and not the party applying for one, to satisfy the court that there was a prima facie case that the arbitration agreement was “null and void, inoperative, or incapable of being performed” (Dyna-Jet (HC) at [26]–[27]). In contrast, the party applying for the stay has the burden of proving requirement (a). This means that whether the situation comes under requirement (a) or (c) has a significant implication on which party bears the burden of proof.

    Inoperative

    An “inoperative” arbitration agreement (even though validly concluded) ceases to have future effect looking forward (Malini at [42]). Oft-cited examples include where the arbitration agreement is discharged by breach, or where the parties agree that the arbitration agreement is no longer effective from that point on (see Dyna-Jet (HC) at [162]–[166]; Sembawang at [41]). This is thus unlike a “null and void” arbitration agreement, which is rendered without legal effect from the beginning, either as a contract that is void ab initio or one that has been rescinded (ie, unwound from the very beginning) at the election of a party to a voidable contract.

    Defining an “inoperable” arbitration agreement as one which is invalid only from a future point but not from the very beginning is also consistent with the decision in Dyna-Jet (HC). The court found that even though one party had waived its right to elect to arbitrate, this did not mean that the arbitration agreement was inoperable (at [174]). We submit that this is sound. When a party waives the right to elect to go to arbitration, he prefers not to choose arbitration for this specific dispute. But he still retains the right to do so in future disputes. The arbitration agreement is still operable for other disputes and is thus not “inoperative”.

    Incapable of being performed

    Unlike the limbs of “null and void” and “inoperative”, an arbitration agreement can be “incapable of being performed” even if it is still valid under the general law of contract. This occurs when there is “an obstacle which cannot be overcome which prevents the arbitration from being set in motion” (Dyna-Jet (HC) at [152]). We submit that there are two ways in which an arbitration can be prevented from being set into motion:

    1. where there is a practical, albeit not legal, impediment to the arbitration agreement (see, eg, K.V.C. Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd and another suit [2017] SGHC 32 at [27]);
    2. where there is a legal impediment that does not render the entire arbitration agreement invalid, but prevents the arbitration from moving forward in respect of that particular dispute.

    A practical impediment does not invalidate the legality of the arbitration agreement but causes the parties, the court, and the tribunal to be unable to proceed. For instance, if there is a “pathological” clause which specifies an arbitration institution that does not exist, and it is clear that the parties designated that specific institution and did not mean for it to be replaced (such that the principle of effective interpretation cannot save the clause), then the arbitration cannot move forward (see also Dyna-Jet (HC) at [152]–[154]). But the arbitration agreement is still valid under the law. We submit that such problems can be referred to as arbitration agreements that are “incapable of being performed”.

    Apart from practical impediments, a temporary legal impediment also renders the arbitration agreement incapable of being performed. These impediments do not invalidate the arbitration agreement as it still can be performed for future or other disputes, but not the present dispute. A prime example is waiver. When a party waives his right to elect to arbitrate a certain contractual dispute and chooses to go to court instead, this does not mean that he cannot elect for arbitration in the future in relation to some other dispute. The right to arbitrate is preserved for future disputes, unlike an agreement being “inoperative”, where an arbitration agreement ceases to have legal effect for even future disputes. It is merely incapable of performance in the present dispute, ie, incapable of being carried out in this instance.

    A potential argument against defining the limb “incapable of being performed” in this way is that this is not the plain meaning of the term. Strictly speaking, an arbitration agreement that is incapable of performance could encapsulate any situation where an arbitration cannot happen: where the arbitration agreement is invalid from the beginning or from any future point, whether for this dispute or all future disputes, and whether for legal or practical reasons. But we submit that this phrase cannot be read in isolation but must be read together with the other two limbs. Clearly, the drafters of Model Law intended for all three limbs to co-exist; hence they must each be given a distinct meaning to avoid rendering any nugatory. We submit that this is reason enough to cut down on the plain meaning of “incapable of being performed”. In any case, the emphasis on performance in this case justifies our definition that the focus in this limb is on the arbitration, and not the arbitration agreement.

    This distinction between “inoperative” and “incapable of being performed” raises two potential issues. The first is the issue of arbitrability of the dispute. In Tomolugen, the Court of Appeal noted that the question of arbitrability would fall within either “inoperative” or “incapable of being performed”, although it declined to express a conclusive view (at [74]). Following the definition we set out above, we submit that the latter limb more appropriately covers this situation. In Tomolugen, the court considered whether a minority oppression claim could be arbitrated. The arbitration agreement between the parties was not limited to such disputes and the parties could potentially invoke the arbitration agreement again for subsequent disputes. Since the arbitration agreement still subsisted, it was not “null and void” or “inoperative”. It merely could not be performed in that case because the subject matter chosen for arbitration was unsuitable.

    Another potentially controversial area is the doctrine of frustration. On the one hand, the classic formulation of frustration is that an extraneous event causes a contract to be “incapable of being performed” (see, eg, Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729). Even though the language of the test for frustration suggests that it falls within the third limb, the consequence of successfully invoking the doctrine is more in line with that of the second limb. This is because the agreement ceases to have legal effect once the frustrated event takes place such that it cannot be operative in any future disputes. Seen in this light, a frustrated arbitration agreement is better classified within the “inoperative” limb (see also Sembawang at [41]).

    How do these grounds compare to the grounds to set aside an award or resist its enforcement?

    A less explored question is whether the three limbs can be compared to the grounds to set aside an award or to resist its enforcement, and if so, how? This comparison is useful. If parties know whether their arguments on setting aside or resisting enforcement can equally apply at the stay stage, then they can consider making these arguments at the earlier stage. This also obviates the time and expenses incurred in proceeding with the arbitration.

    We submit that the three limbs are comparable to some of the grounds for setting aside an award or resisting its enforcement. The following table compares the two:

    [Please refer to link for table]

    We can see that most of the grounds for setting aside an award or resisting its enforcement do not apply for stay applications prior to arbitration. These are grounds premised on what has happened during and after arbitration and they simply have not occurred yet as at the stay stage.

    The only two grounds that remain applicable are (a) and (e). Ground (a) – the validity of the arbitration agreement – is wide enough to capture situations of a non-existent arbitration agreement (requirement (a) of Tomolugen), an existent but invalid one from the beginning (“null and void”), or one that has ceased to be valid from a future point (“inoperative”). Ground (e), as discussed above, is more appropriately framed as falling under the “incapable of being performed” limb.

    There is, however, one common argument raised at the stay stage that does not appear to be captured by the grounds for setting aside or resisting enforcement – that the dispute referred to arbitration does not fall within the scope of the arbitration agreement. At the stay stage, this is addressed by requirement (b) of Tomolugen. While there is no direct equivalent at the setting aside or resisting enforcement stages, one potential comparison is to ground (c) – the award rendered being outside the scope of the reference to arbitration.

    The above comparison tells us two things. First, all the arguments that could be raised at the stay stage have a potential counterpart at the stage of setting aside or resisting enforcement. Second, it tells us which grounds correspond with the Tomolugen requirements and the three limbs respectively. This is especially useful since case law and other related materials from the setting aside or resisting enforcement grounds can potentially be helpful in analysing these issues at the stay stage and vice versa.

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

    ** This blog entry may be cited as Hairul Hakkim and Leong Hoi Seng Victor, “When will a stay of court proceedings be granted in favour of arbitration? – interpreting “null and void, inoperative or incapable of being performed”  (14 June 2017) (http://www.singaporelawblog.sg/blog/article/190)

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

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