The Shanghai First Intermediate Court (Shanghai Court), by a decision made on 11 August 2017, recently dismissed an application seeking leave to enforce an award of the Singapore International Arbitration Centre (SIAC) on the ground that the conduct of the underlying arbitration had been in disregard of the parties’ express choice of three arbitrators as set out in the contractual arbitration clause.
The relevant award was made by a sole arbitrator appointed pursuant to the Expedited Procedure of the 2013 SIAC Rules. Enforcement was refused on the basis that "[the] composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties …" as stipulated by Article 5 (1)(d) of the 1958 New York Convention on the Reciprocal Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).
The underlying dispute arose between a Singaporean company (Seller) and a Chinese company (Buyer) over a contract for the sale of iron ores.
The contract between the parties incorporated by reference an arbitration clause which provided: “Any disputes or claims arising from or in connection with the transaction or this agreement, including issues relating to the existence, validity or termination thereof, shall be arbitrated in Singapore in accordance with the SIAC Rules of Arbitration then in force. The Rules shall be deemed as incorporated into this clause. The tribunal shall be composed of three arbitrators…”.
A dispute arose between the parties and in early 2015, the Seller commenced an arbitration against the Buyer under the 2013 SIAC Rules. The Seller applied for the arbitration to be conducted under the Expedited Procedure of the 2013 SIAC Rules under which a sole arbitrator would be appointed to conduct the arbitration. After receiving the notice of arbitration, SIAC wrote to the parties regarding the estimated costs based on a three-member tribunal. Both parties were requested to each pay an advance of half of the estimated costs. SIAC invited the Buyer to respond to the Seller's request for the arbitration to be conducted under the Expedited Procedure by 6 February 2015.
On 29 January 2015, following further exchanges between SIAC and the parties, SIAC wrote to the parties to notify that it had accepted the Seller's proposal that pending SIAC's final decision on whether the Expedited Procedure would apply, the parties should each pay an advance for costs as if the Expedited Procedure would apply to the arbitration. On the same day, the Buyer wrote to notify SIAC of its objection to the Expedited Procedure.
On 17 February 2015, SIAC wrote to notify the parties of its decision that the Expedited Procedure would apply to the arbitration. SIAC requested the Buyer to pay for its half share of the advance on costs based upon a sole arbitrator tribunal. The Buyer responded by reiterating its objection and insisting that the arbitration should be conducted before a three-member tribunal, failing which the Buyer would not accept jurisdiction.
On 3 March 2015, SIAC proceeded to appoint a sole arbitrator for the arbitration. On the same day, the Seller wrote to inform the Buyer that the Seller would be prepared to accept a three-member tribunal on the condition that the Buyer confirmed that it would pay its share of the costs for a three-member tribunal. The Buyer was given until 5 March 2015 to respond. On 5 March 2015, as there had been no response from the Buyer, the Seller wrote to SIAC to request that the arbitration should proceed before the sole arbitrator appointed by SIAC.
The sole arbitrator conducted the arbitration and eventually made an award in favour of the Seller. The Seller subsequently took out an application for leave to enforce the award in China before the Shanghai Court.
After considering the points made by the parties, the Shanghai Court referred to Article 5.2 of the 2013 SIAC Rules which provided that: "When a party has applied to the Registrar under Rule 5.1, and when the President determines, after considering the views of the parties, that the arbitral proceedings shall be conducted in accordance with the Expedited Procedure, the following procedure shall apply: a. The Registrar may shorten any time limits under these Rules; b. The case shall be referred to a sole arbitrator, unless the President determines otherwise; …".
The Shanghai Court held, among other things, that:
1. Since the President of SIAC was allowed to make a determination on the matter in question, this meant that the Expedited Procedure did not necessarily require that the arbitration had to be conducted before a sole arbitrator.
2. The 2013 SIAC Rules did not stipulate that a sole arbitrator tribunal would prevail and take precedence over the contrary agreement of the parties. Taking into account party autonomy, which is the bedrock of the arbitration process, the President of SIAC, when exercising his discretion in making a determination on the composition of the tribunal under Article 5.2 of the 2013 SIAC Rules, should have taken into account the parties’ express choice and agreement to have three arbitrators.
3. SIAC's appointment of a sole arbitrator contravened the parties' agreement and resulted in the award being unenforceable under Article 5 (1)(d) of the New York Convention.
The Shanghai Court's reasoning was apparently based upon the fact that the President of SIAC had a discretion under the 2013 SIAC Rules to determine whether a sole arbitrator would be more appropriate than a three-member tribunal when applying the Expedited Procedure. It is unclear whether the Shanghai Court would have reached a different conclusion if the 2013 SIAC Rules had expressly specified that a sole arbitrator would be appointed notwithstanding the parties' contrary agreement. Nevertheless, this ruling reflects the general view and approach taken in China that the specific agreement reached between the parties should prevail over any “standard” rules (so long as these are not mandatory legal rules), regardless of whether they are expressly incorporated or not.
The Shanghai Court referred to party autonomy in explaining its decision. It is, however, not clear how the application of the 2013 SIAC Rules (which had been expressly incorporated by the parties at the time of contracting) and the implementation of those rules could be said to have infringed upon party autonomy.
The central issue in this case seems to be whether the contracting parties' “bespoke” arbitration clauses or whether incorporated institutional rules should take precedence, and further, whether the wording of such institutional rules can be allowed to override the wording in the arbitration agreed upon by the parties at the time of contracting. The Shanghai Court did not offer any specific guidance in this regard. Interestingly, the Shanghai Court also did not address the Buyer’s lack of response to the Seller's request for confirmation about the arbitration fees for a three-member tribunal, nor the question of whether the incorporated SIAC rules properly formed part of the parties' agreement.
What this means for you
In its latest 2016 SIAC Rules, SIAC has included new wording seeking to address the problematic scenario encountered in this case. Article 5.3 of the 2016 SIAC Rules provides that: “[By] agreeing to arbitration under these Rules, the parties agree that, where arbitral proceedings are conducted in accordance with the Expedited Procedure under this Rule 5, the rules and proceedings set forth in Rule 5.2 shall apply even in cases where the arbitration agreement contains contrary terms”. This approach has also been mirrored and adopted in the latest 2017 ICC Rules (see Appendix VI, Article 2(1)).
As noted above, the conventional view and approach in China means that there is a wariness towards any attempts made by arbitral institutions to adopt “standard” wording that overrides parties' bespoke wording agreed upon at the time of contracting. This is especially so in areas which are perceived as being essential to the protection of the parties' rights, including the right to nominate the members of an arbitral tribunal. It remains to be seen whether the new wording in the 2016 SIAC Rules will be accepted by the Chinese courts as providing an adequate basis for overriding parties’ express stipulation of three arbitrators in cases where the SIAC Expedited Procedure will apply.
Nevertheless, when you are drafting or negotiating arbitration clauses, it is highly advisable to pay particular attention to (and if necessary, to add specific wording to clarify) the inter-relationship between the arbitration clause in the contract and any institutional (or indeed, ad hoc) arbitration rules that are sought to be incorporated into the contract. For example, if the relevant arbitration rules are silent on this issue, it would be advisable to add a sentence to specify that provisions of the contractual clauses shall always prevail in the event of any inconsistency between the contractual clause and the relevant arbitration rules (or vice versa).