Arbitration Clauses in Draft Commercial Contracts: Are They Enforceable?
In BCY v BCZ  SGHC 249, the Singapore High Court has considered an interesting question: if parties are negotiating a commercial contract which contains an arbitration clause, are those parties bound by the arbitration clause before the commercial contract is signed? The answer appears to be: usually, no.
The case, summarised below, provides useful guidance as to when parties will be taken to have forgone their right to litigate in the Courts in favour of arbitrating their disputes. The High Court also considered the choice of laws questions which can arise where parties have not expressly chose what law will govern their arbitration clause.
What were the facts of BCY v BCZ?
In BCY v BCZ, the plaintiff and the defendant entered into negotiations for the sale of certain company shares. The parties exchanged drafts of a sale and purchase agreement (the SPA). In the drafts, it was proposed that the SPA be governed by New York law, and contain a dispute clause providing for arbitration in Singapore under the International Chamber of Commerce (ICC) arbitration rules. This dispute clause was mutually agreed upon early in the negotiations, and never amended even as other terms in the SPA were re-drafted. However, the plaintiff ultimately withdrew from the sale, and the SPA was not finalized or executed.
A dispute subsequently arose between the plaintiff and the defendant. The defendant commenced arbitration under the ICC rules, in effect in reliance on the above dispute clause. The arbitral tribunal issued a partial award confirming there was a valid arbitration agreement and that it had jurisdiction over the dispute. The plaintiff subsequently challenged this partial award in the Singapore Courts.
Can a binding arbitration agreement be considered to have been concluded independently from the conclusion of the SPA itself?
Given that both parties had not executed the SPA, and therefore had not expressly acceded to the proposed arbitration clause contained within, the issue was whether the parties had in fact agreed to arbitrate all disputes during the course of the negotiations as per the SPA's proposed arbitration clause. This would mean that the parties had agreed to arbitrate prior to the execution of the SPA. The tribunal in the ICC arbitration accepted this argument, and found that there was a valid arbitration agreement notwithstanding the SPA not having been executed.
The plaintiff challenged the tribunal's finding in the Singapore Courts under Section 10(3) of the Singapore International Arbitration Act (Cap 50) (the IAA), which allows any party to apply to the High Court to decide the matter if the arbitral tribunal rules on a plea as a preliminary question over which it has jurisdiction, or on a plea at any stage of the arbitral proceedings where it has no jurisdiction.
Justice Steven Chong in the High Court found that there was no valid arbitration agreement, and set aside the tribunal's decision on jurisdiction. In examining the correspondence between the parties during their negotiations, Justice Chong concluded that there was nothing in that which showed the parties had agreed to be subject to the arbitration clause in the SPA if the SPA itself had not been executed. The learned judge held that agreement on the wording of the arbitration clause early in the negotiations and the lack of subsequent change did not mean that the parties "intended to be bound by the arbitration agreement as an independent contract" where the contract under which the arbitration clause was negotiated was not concluded. Further, the learned judge noted that the "arbitration agreement and SPA were 'subject to contract' and only binding upon execution".
In the absence of express stipulation, will the arbitration agreement be governed by the law of the contract itself (in this case New York law) or the law of the seat (Singapore law)?
A further issue in the case was what law governed the parties' putative arbitration agreement, and therefore determined the legal test for determining whether the parties had entered into a binding arbitration agreement. There were two options, given that there was no express choice of law. First, New York law, being the governing law of the wider SPA. Second, Singapore law, being the law of the seat of arbitration in this case.
Justice Chong found that the validity of the putative arbitration agreement should be determined by New York law.
In reaching this view, Justice Chong considered but declined to follow the earlier Singapore decision FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others  SGHCR 12, and instead relied on the English Court of Appeal's decision in Sulamerica Cia Nacional de Seguros SA and otrs v Enesa Engenharia SA and otrs  1 WLR 2012. Following the Sulamerica decision, Justice Chong held that "where the arbitration agreement is a clause forming part of a main contract", parties are reasonably assumed to intend that their entire relationship be governed by the same system of law. In the absence of an express choice of law for the arbitration agreement, there was a rebuttable presumption that the parties' implied choice of law was the governing law of the main contract (as opposed to the law of the seat). If parties intend otherwise, they should specifically provide for it in the arbitration agreement. The law of the seat will likely govern the arbitration agreement only if it is concluded after a dispute has arisen.
Ultimately, Justice Chong considered that the outcome would not have been any different under Singapore law (and so it was not strictly necessary for him to decide this choice of laws question). However, Justice Chong’s analysis of the law, and endorsement of the Sulamerica decision, provides useful guidance for future disputes where the choice of laws question may have more bearing on the enforceability of any arbitration agreement.
The Court has made clear that, even in the context where the arbitration agreement is contained within a larger substantive contract, its validity must be ascertained before it can be deemed effective. A party will thus only surrender their right to litigation and be bound to arbitrate where they have indeed acceded to a valid arbitration agreement. In the ordinary course, it is unlikely that a party will be bound to arbitrate simply because they are negotiating a contract which may contain an arbitration agreement of some type.
Further, the case confirms that parties should expressly stipulate if they desire the law of the seat to govern the arbitration agreement as opposed to the law of the contract itself. Otherwise, it is likely to be implied that the arbitration agreement will be governed by the law of the contract.