Singapore Court confirms validity of asymmetric arbitration agreements

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and Implications

The Singapore High Court in Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2016] SGHC 238 recently confirmed that a dispute resolution agreement constituted a valid arbitration agreement, even if it only granted one party the right to elect to arbitrate a dispute. However, an election to litigate the dispute would prevent any arbitration of the dispute from ever being set in motion, thereby rendering the arbitration agreement incapable of being performed. The High Court has granted leave to appeal its decision, but it remains good law as at the publication of this article.

Facts and issues

The parties had entered into a contract for certain engineering services, which contained the following dispute resolution agreement (Agreement):

"Any claim or dispute or breach of terms of the [Agreement] shall be settled amicably between the parties by mutual consultation. If no amicable settlement is reached through discussions, at the election of Dyna-Jet, the dispute may be referred to and personally settled by means of arbitration proceedings, which will be conducted under English Law, and held in Singapore."

A dispute arose between the parties, and following the failure to reach an amicable settlement through discussion, the plaintiff elected to litigate the dispute. The defendant responded by filing an application to stay the action in favour of arbitration, which raised the following issues before the High Court:

• whether there was a valid arbitration agreement between the parties; and
• whether the arbitration agreement was "null and void, inoperative or incapable of being performed" within the meaning of the proviso to section 6(2) of the International Arbitration Act (IAA).

Was there a valid arbitration agreement between the parties?

According to the High Court, a valid arbitration agreement would exist if the following elements were satisfied:

• first, the parties had to consent to being bound to arbitrate. Such consent could be conditional or subject to a contingency, but a mere reference to arbitration would not suffice;
• second, and consistent with the contractual nature of arbitration, the parties' consent had to be evidenced by an "agreement" between the parties, i.e. a "meeting of minds satisfying the legal requirements to create enforceable rights and binding duties".

On the facts and wording of the Agreement, the High Court held that the parties had manifested a mutual intent to have resort to arbitration, by agreeing that they could, in certain circumstances, come under an obligation to arbitrate a dispute. This was sufficient to characterise the Agreement as an arbitration agreement – it did not matter if the agreement to arbitrate was subject to a contingency (i.e. the plaintiff's exercise of a right to arbitrate), or that the right to elect to arbitrate was given to only one party instead of both.

It was also not the case that the Agreement would only become an arbitration agreement upon the plaintiff's reference of a dispute to arbitration, as the arbitration agreement existed from the moment the Agreement was entered into. It was true that when a dispute under the arbitration agreement was referred to arbitration, a separate arbitration agreement would come into being for that specific dispute. However, the underlying Agreement was nevertheless an arbitration agreement from the outset, and would continue to exist as a distinct and continuous agreement to arbitrate future disputes.

Was the arbitration agreement "null and void, inoperative or incapable of being performed"?

Having found that the Agreement was an arbitration agreement, the High Court went on to consider if the provisos to section 6(2) of the IAA applied, which the High Court defined as follows:

• "Null and void" was understood to mean "devoid of legal effect" – e.g. through duress, mistake, or fraud;
• "Inoperative" meant that the arbitration agreement ceased to have contractual effect – e.g. through waiver, abandonment, or repudiation; and
• "Incapable of being performed" applied if there was some insurmountable obstacle preventing the arbitration from being set in motion – e.g. being physically or legally impossible to follow, vague or internally contradictory.

The High Court dismissed the possibility that the Agreement was "null and void" or "inoperative", finding that the arbitration agreement had, and continued to have, legal and contractual effect. In fact, the reference of the dispute to litigation had occurred precisely by operation of the plaintiff's election to litigate under the Agreement.

The High Court, however, held that the Agreement was "incapable of being performed", as the plaintiff's election to litigate the dispute meant that it was no longer possible to set arbitration of the dispute in motion. The plaintiff was irrevocably bound by its decision, and the defendant did not have the power to override it. A stay of proceedings was therefore not warranted, and the defendant's application was accordingly dismissed.

Conclusion

The decision in Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2016] SGHC 238 brings welcome clarity on what constitutes a valid arbitration agreement, while shedding further light on the different instances in which an arbitration agreement might be found to be null and void, inoperative or incapable of being performed.

It is notable that while the judgment was given in the context of Singapore's IAA, the High Court observed that there was no material difference between Singapore law and English law on the points relevant to resolving the two issues before it.