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Impact of Seat of Arbitration on the Applicable Law of Arbitration Agreements: A Case Study of BNA v. BNB and Another

Release time：2023-12-29 14:07:14

Introduction

In international commercial activities, arbitration has emerged as the preferred method for resolving disputes due to its efficiency, professionalism, confidentiality, and enforceable awards. The Seat of Arbitration is a critical element in the arbitration process. However, in the practice of international commercial arbitration, parties often overlook the significance of the Seat of Arbitration in the arbitration procedure. Issues may arise when the arbitration institution or the competent court interprets the arbitration agreement's governing law differently due to unclear provisions regarding the Seat of Arbitration, thereby affecting the outcome and enforcement of arbitration awards. This article, using the case of BNA v. BNB and another, explores in detail how the Seat of Arbitration influences the application of the governing law of arbitration agreements.

I. Case Overview

(A.) Information of the Parties

The case of BNA v. BNB and Another was brought before the Singapore International Arbitration Centre (SIAC)1. BNA, a company established and operating under PRC law with its main business located in China, was the buyer involved in the "Reversal Agreement." BNB, a company established and operating under South Korean law with its main business located in South Korea, was the original seller under the "Reversal Agreement." BNC, a company established and operating under PRC law with its main business located in China, succeeded to the rights and obligations of BNB under the "Reversal Agreement" through a supplemental agreement. The products covered by the "Reversal Agreement" were manufactured by BNB in China, and related facilities were located in China.

(B.) Agreement on the Contract Involved the Case

Contractual Agreements Clause 14.1 of the "Reversal Agreement" stipulated "This Agreement shall be governed by the laws of the People’s Republic of China." (“PRC law”)

Clause 14.2 further specified, "With respect to any and all disputes arising out of or relating to this Agreement, the Parties shall initially attempt in good faith to resolve all disputes amicably between themselves. If such negotiations fail, it is agreed by both parties that such disputes shall be finally submitted to the Singapore International Arbitration Centre (“SIAC”) for arbitration in Shanghai, which will be conducted in accordance with SIAC Arbitration Rules. The arbitration shall be final and binding on both Parties."

Subsequently, due to BNA's failure to make the required payments as per the "Reversal Agreement," BNB and BNC submitted the case to SIAC for arbitration. BNA raised objections to the jurisdiction of the arbitral tribunal.

(C.) Focus of Controversy

The main issue was whether SIAC had jurisdiction in this case. To answer this question, it was crucial to determine whether the governing law of the arbitration agreement was PRC law or Singapore law. Another key issue was the interpretation of the term "arbitration in Shanghai" as specified in the agreement.

II. Case Analysis

A. Three-Stage Test to Determine the Governing Law

1. BNA's Perspective

BNA argued that if the governing law of the arbitration agreement was PRC law, the agreement would be invalid. This was based on the contention that, first, Shanghai was the Seat of Arbitration, and PRC law does not allow foreign arbitration institutions like SIAC to administer arbitration with China as the Seat of Arbitration. Second, the dispute was purely domestic, and PRC law does not permit foreign arbitration institutions like SIAC to adjudicate such disputes. Therefore, if PRC law governed the arbitration agreement, the arbitral tribunal would lack jurisdiction.2

2. SIAC Arbitral Tribunal's View

During the case proceedings, the majority of the SIAC arbitrators believed that presuming the application of PRC law could render the arbitration agreement invalid, while presuming the application of Singapore law would validate the agreement. Hence, they concluded that Singapore law should be recognized as the applicable law of the arbitration agreement, ensuring the validity of the agreement and SIAC’s jurisdiction.3

3. Decision of the Singapore High Court

When discussing the dispute in this case, the Singapore High Court applied the basic principle of "Three-Stage Test" established in BCY case, which is divided into three steps: (1) In the first stage, it is judged whether the parties have clearly agreed on the applicable law of arbitration agreement; (2) In the second stage, it is judged whether the parties have made an implied agreement on the applicable law of the arbitration agreement; (3) In the third stage, the law that has the closest and truest connection with the arbitration agreement agreed by the parties is recognized.

The High Court held that the first stage: although the applicable law was selected in Article 14.1 of the involved contract, the dispute settlement clause was in Article 14.2. Therefore, the parties have not clearly chosen the law for the arbitration agreement, that is, the applicable law clause of Article 14.1 can only determine the applicable law of the main contract. The second stage: according to the principles determined in the cases of Sulamérica and BCY, the applicable law of the main contract will be a very convincing guide. However, the court held that "arbitration in Shanghai" does not mean that Shanghai is the Seat of Arbitration.4 The parties expressly agree that the arbitration shall be governed by the SICA Arbitration Rules of 2013, and Article 18.1 of the Rules stipulates that the place of arbitration shall be Singapore in the absence of explicit agreement by the parties. Shanghai is a "city", not a "jurisdiction", and Singapore is a jurisdiction, so "arbitration in Shanghai" should be understood as the place where the court session is held in Shanghai. As the law of the place of arbitration, Singapore law can replace China law as the applicable law of arbitration agreement chosen by the parties by default. If the applicable law of the arbitration agreement is China law, the arbitration agreement will be deemed invalid.

However, under Singapore law, the arbitration agreement will be considered valid. The third stage: the court held that the law that is most closely related to the arbitration agreement between the parties is the law of the place of arbitration. Therefore, Singapore should be regarded as the arbitration place of this case according to the intention of both parties, and Singapore law is the applicable law of this case.

4. Perspective of the Singapore Court of Appeal

BNA appealed to the Singapore Court of Appeal, which overturned the High Court's reasoning in the second stage. The Court of Appeal held that when the law of the Seat of Arbitration and the governing law of the arbitration agreement substantially differ, determining the Seat of Arbitration is crucial for assessing whether there is evidence to suggest an alternative implied choice of PRC law.

The Court of Appeal analyzed that the natural interpretation of "arbitration in Shanghai" resulted in Shanghai being the Seat of Arbitration, not Singapore. However, the Court of Appeal did not provide a conclusive opinion on the issue of whether the arbitral tribunal had jurisdiction.

III. Impact of Seat of Arbitration on Governing Law

A. Definition of Seat of Arbitration

To comprehend this case, it is essential to correctly understand the Seat of Arbitration, distinguishing between the geographical and legal dimensions of the Seat of Arbitration. The hearing and deliberation locations are often confused with the Seat of Arbitration. The former two are geographical concepts, i.e. the "site of arbitration." Typically, the hearing and deliberation locations align with the location of the arbitration institution, but parties may agree to any convenient location, which is flexible and holds no legal significance.

From a legal perspective, the Seat of Arbitration links arbitration to a specific legal system and acts as the "legal center" that gives life and efficacy to the arbitration agreement.5 Article V(1)(a) of the New York Convention specifies that for the recognition and enforcement of an arbitral award, it must be determined whether the law applicable to the arbitration agreement, which the award relies on, is legal and valid, or whether the law of the Seat of Arbitration validates the arbitration clause.

B. Significance of the Seat of Arbitration on the Governing Law of Arbitration Agreements

Arbitration clauses, often referred to as "midnight clauses," are frequently overlooked by parties, who may neglect to specify the governing law of the arbitration clause in the agreement or confuse the hearing location with the Seat of Arbitration. However, in international commercial arbitration, the Seat of Arbitration has a significant impact on both the arbitration agreement and the outcome and enforcement of arbitration awards. On the one hand, in the absence of an explicit agreement between the parties, the Seat of Arbitration can determine the governing law of the arbitration agreement. On the other hand, the Seat of Arbitration decides the court with supervisory jurisdiction over the arbitration procedure.

In this case, the "three-stage test" framework established in the BCY case was applied to determine the governing law of the arbitration agreement. In the second stage, although the applicable law could be presumed to be the law governing the main contract, the law of the Seat of Arbitration and the governing law of the arbitration agreement would lead to different results, creating a dispute over the Seat of Arbitration. If the Seat of Arbitration is improperly chosen, it can result in a different governing law for the arbitration agreement, fundamentally affecting the effectiveness of the arbitration agreement.

Conclusion

In arbitration practice, common arbitration clause formats state, "Any dispute arising out of or in connection with this agreement shall be referred to the _______ Arbitration Committee (or its branch) for arbitration in accordance with its prevailing rules at the time of applying for arbitration. The arbitration award is final and binding on both parties." This clause is generally unproblematic in domestic arbitration practice. However, in international commercial arbitration, issues may arise when the clause does not mention the Seat of Arbitration, leading to uncertainties or disputes regarding the choice or clarity of the Seat of Arbitration and the applicable governing law of the arbitration agreement and procedure.

In China, current laws and judicial interpretations establish the hierarchy for the application of the governing law of the arbitration agreement: (1) the law chosen by the parties in the arbitration agreement; (2) in the absence of a choice by the parties, the law of the place where the arbitration institution is located or the law of the Seat of Arbitration; (3) in the absence of a choice of the arbitration institution or the Seat of Arbitration by the parties, the law of the court's location.6 The above rules do not explicitly consider the Seat of Arbitration as a connecting point for the application of the governing law of the arbitration agreement. It is noteworthy that the "Draft Amendment to the Arbitration Law of the People's Republic of China (Solicitation of Comments)" addresses the issue of the Seat of Arbitration and designates it as the basis for determining the jurisdiction of the arbitration and the connecting point for the applicable governing law of foreign-related arbitration agreements. As China's arbitration legislation is currently undergoing organized revisions, to avoid disputes over jurisdiction and the validity of arbitration agreements arising from different interpretations of the arbitration clause by parties, arbitration tribunals, and courts, international commercial entities ought to strive to clearly specify the governing law and Seat of Arbitration in agreements.


Footnote:

1. BNA v. BNB and another [2019] SGCA 84, 65.

2. Interpretation (I) of the Supreme People's Court on Several Issues Concerning the Application of the Law of the People's Republic of China to Foreign-Related Civil Relations (2012), Article 1: Civil relations have one of the following circumstances, and the people's court may deem them as foreign-related civil relations: (1) one or both parties are foreign citizens, foreign legal persons, or other organizations, or stateless persons; (2) one or both parties' habitual residences are outside the territory of the People's Republic of China; (3) the subject matter is located outside the territory of the People's Republic of China; (4) the facts establishing, changing, or extinguishing civil relations occur outside the territory of the People's Republic of China; (5) other circumstances that may be deemed as foreign-related civil relations. Even though BNB is a South Korean company, falling under the first category of foreign factors stipulated in Article 1, the debate over whether the arbitration clause is automatically invalid if PRC law applies remains. Moreover, the appellant also argued that, according to current PRC law, the arbitration agreement would not be invalid. However, the Court of Appeal did not elaborate on whether the arbitration agreement would be valid under PRC law, stating, "If the Appellant wishes to advance this argument, it must show that the parties recognized that the choice of the governing law of the arbitration agreement could have an impact on the validity of the arbitration agreement. However, there is no evidence that the parties were aware of the interaction between choosing PRC law as the governing law of the arbitration agreement and choosing the Singapore International Arbitration Centre as the arbitration institution, let alone that they were aware that this combination of special choices might render the arbitration agreement invalid."

3. BNA v. BNB and another [2019] SGCA 84, 18-19.

4. BNA v. BNB and another [2019] SGCA 84, 65.

5. FirstLink v. GT Payment [2014] SGHCR 12.

Article 18 of the Foreign-related Civil Relations Law of the People's Republic of China; Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Arbitration Law of the People's Republic of China, Article 16.

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