Author: Lawyer Zhang Jingxinyue, PRC-qualified Lawyer | Singapore Registered Foreign Lawyer
Editor's note: In the specific terms of an arbitration agreement, the parties may expressly agree on the key elements of arbitration, such as the seat of arbitration, the arbitral institution, the applicable arbitration rules, and the law governing the arbitration agreement itself. These arrangements are often based on each party's consideration of its own interests; therefore, the final text of an arbitration agreement is often the product of compromise among the parties' respective positions, which is common in practice.
However, this does not mean that once the parties have expressed an intention to arbitrate, that intention must be enforced in all circumstances. The validity of an arbitration agreement must be judged by whether the content of the agreement complies with legal requirements and by its enforceability, rather than solely by the parties' expression of an intention to arbitrate. Whether the parties' intention to arbitrate should be carried out depends on whether the terms of the arbitration agreement are clear, lawful, and capable of being validly interpreted under the legal framework of the seat, the applicable law, and the place of enforcement. It is particularly important to note that even if the parties have entered into an arbitration agreement, the agreement may still be found invalid for various reasons. Therefore, ensuring that an arbitration agreement is enforceable worldwide is a legal risk that Chinese enterprises “going global” must be highly vigilant about.
This article, drawing on BNA v BNB and Another [2019] SGCA 84, focuses on a seemingly clear arbitration clause: SIAC arbitration, seat Shanghai. Why did it ultimately face the risk that the arbitration agreement could be found invalid due to the determination of the applicable law, and why did it require a further ruling by the Chinese courts? This article will deconstruct this typical misconception and remind Chinese enterprises in cross-border contracts to focus on guarding against risks in the design of arbitration clauses, particularly with respect to governing law and choice of seat.
01 What Are the Main Circumstances in Which an Arbitration Agreement May Be Found Invalid?
1. The arbitration agreement does not satisfy the written form requirement
The written form requirement is a matter of formal validity of the arbitration agreement and is usually determined by the law of the seat of arbitration (i.e., the lex arbitri) and the law of the place of enforcement (such as the New York Convention or relevant domestic law). For example, Section 2A(4) of the Singapore International Arbitration Act provides that an arbitration agreement is deemed to satisfy the written form requirement if its content is recorded in any form, regardless of whether the agreement or contract was concluded orally, by conduct, or by other means. Section 2A(6) further provides for the principle of estoppel; for example, where one party asserts in a pleading that an arbitration agreement exists and the other party does not deny it, the existence of the agreement may be inferred. Article II(2) of the New York Convention further provides that an arbitration agreement may be in the form of an arbitration clause in a contract or a separate arbitration agreement, and must be signed by the parties or contained in an exchange of letters or telegrams between the parties. In addition, the United Nations Commission on International Trade Law (UNCITRAL) has also pointed out that the list of written form requirements in the New York Convention is not exhaustive.
2. The contract to which the arbitration agreement is attached never existed
Under Article 16(1) of the Model Law, the arbitral tribunal has the power to rule on its own jurisdiction. The principle of separability derived from this provision indicates that an arbitration clause should be regarded as existing independently, and even if the arbitrator finds that the main contract is void from the outset, the arbitration clause may survive independently. However, when it comes to whether the contract containing the arbitration clause itself ever existed, a clear distinction must be drawn between “the contract is void” and “the contract never existed.” Some views hold that if the contract never existed, the arbitration clause would lose its foundation, which would substantially weaken the tribunal's jurisdiction.
3. The subject matter of the arbitration agreement is not arbitrable
If the subject matter of the dispute is found to be non-arbitrable under the law applicable to the arbitration agreement, the relevant arbitral award may be set aside or refused enforcement under Article 34(2)(a)(i) of the Model Law and Section 31(2)(b) of the Singapore International Arbitration Act, because that circumstance would directly cause the arbitration agreement to lose effect.
02 How to Determine the Law Applicable to an Arbitration Agreement
When the parties have not expressly agreed on the law applicable to the arbitration agreement, how to determine that law becomes a key and complex issue. Singapore addressed this issue relatively clearly in BCY v BCZ [2016] SGHC 249, establishing a “three-step test” to determine the governing law of an arbitration clause:
(1) If the parties have expressly chosen the law applicable to the arbitration clause, that law shall be directly applied;
(2) If there is no express choice, the law of an implied choice shall be determined based on the parties' inferable common intention at the time the contract was formed;
(3) If there is neither an express choice nor an inferable implied choice, the legal system most closely and substantively connected to the arbitration clause shall apply.
Specifically, if the arbitration agreement is a standalone agreement, it is generally difficult to find an implied choice. In that situation, the third step (i.e., the “closest connection principle”) would usually be applied, and the law of the seat of arbitration would be treated as the law governing the arbitration clause. Where the arbitration clause is embedded in a contract and the contract has expressly provided for the law governing the main contract, the arbitration clause will generally be presumed to be governed by the same law as the main contract. This is because in commercial practice, the arbitration clause is often a “midnight clause” added at the final stage, and is usually negotiated together with the main contract rather than separately.
However, it should be noted that if extending the law governing the main contract to the arbitration clause would render the arbitration clause invalid or unenforceable, the court will not treat the law governing the main contract as the law governing the arbitration clause, even though the parties actually intended to resolve disputes by arbitration. In that situation, the court will usually turn to the “closest connection principle,” and the law of the seat of arbitration will often become the most appropriate choice. The principle underlying this is that the parties should not be presumed to have chosen a legal system that would frustrate their intention to arbitrate.
03 Case Analysis -- BNA v BNB and Another [2019] SGCA 84
1. Case Background
The appellant (“BNA”) is a company incorporated and existing under the laws of the People's Republic of China, with its principal place of business in mainland China. The first respondent (“BNB”) is a company incorporated and existing under the laws of the Republic of Korea, with its principal place of business in South Korea. The second respondent (“BNC”) is also a company incorporated and existing under Chinese law, with its principal place of business in China.
In 2012, BNA and BNB entered into a contract. In 2013, all of BNB's rights and obligations under the contract were assigned to BNC by a supplementary agreement. The contract contained the following arbitration clause:
14.1 This Agreement shall be governed by the laws of the People's Republic of China.
14.2 Any dispute arising out of or in connection with this Agreement shall first be settled by the parties through friendly negotiation in good faith; if such negotiation fails, the parties agree to finally submit the dispute to arbitration at the Singapore International Arbitration Centre (SIAC) in Shanghai, in accordance with its arbitration rules. The arbitral award shall be final and binding on both parties.
2. Issues in Dispute and Procedural History
The core dispute in this case concerned how to correctly interpret the arbitration clause and how to determine the applicable law. In its majority opinion, the tribunal considered that the arbitration clause should be governed by Singapore law, a view that was subsequently upheld by the Singapore High Court. However, the Singapore Court of Appeal, after hearing the case on 15 October 2019, held that Chinese law, rather than Singapore law, should apply. Based on that finding, the question whether the arbitration agreement should be held invalid under Chinese law was no longer appropriate for the Singapore courts to decide. The Court of Appeal noted that the issue should be determined by the Chinese courts under Chinese law.
3. Legal Analysis
In this case, the Singapore Court of Appeal followed the three-stage analytical framework established in BCY v BCZ to determine the governing law of the arbitration agreement.
First stage: whether the parties had made an express choice of the law governing the arbitration agreement:
The Court of Appeal first noted that the parties had not made an express choice of the law governing the arbitration agreement. Although the contract expressly provided for the governing law of the main contract, this did not automatically mean that the arbitration agreement was also governed by the same law. The court emphasized that parties are entirely free to make a separate choice of law for the arbitration agreement. If no such choice is made, the governing law of the main contract can only be regarded as a “strong indicator” of the law governing the arbitration agreement, rather than a necessary conclusion, unless there is contrary evidence.
Second stage: whether the parties had made an implied choice of the law governing the arbitration agreement:
The Court of Appeal held that, ordinarily, where an arbitration agreement is embedded in a main contract and the parties have not made a separate choice, the governing law of the main contract may be presumed to be the governing law of the arbitration agreement, but that presumption is rebuttable. The core question was therefore whether there were circumstances sufficient to rebut that implied choice. Only where there is a substantive conflict between the law of the seat and the governing law of the arbitration agreement would the issue of rebuttal have practical significance.
In this case, the phrase “arbitration in Shanghai” played a key role in determining the seat of arbitration. The Court of Appeal held that the natural meaning of “arbitration in Shanghai” is that Shanghai should be identified as the seat of arbitration. Given the significant difference in legal effect between the seat of arbitration and the venue of the arbitration, where the parties have specified only a geographical location in the agreement and have expressly stated that arbitration is “in [that place],” that should ordinarily be understood as a choice of the seat of arbitration.
As to the two rebuttal arguments raised by the respondents, the court analyzed them as follows:
First, the respondents sought to rely on communications during contract negotiations to prove that the parties intended to choose a neutral location, and therefore Shanghai could not be the seat and only Singapore could be the seat. However, under the Evidence Act and the parol evidence rule, where the written clause itself is clear and complete, additional oral or written communications should not be admitted as supplementary evidence unless they are used to explain an ambiguity. In this case, there was no ambiguity requiring extrinsic evidence to interpret, and therefore the relevant negotiation communications were not admitted.
Second, the respondents argued that applying Chinese law might render the arbitration agreement invalid, so the parties were unlikely to have chosen Shanghai as the seat. To sustain that inference, however, it should at least be shown that the parties were clearly aware at the time of contracting of the possible conflict between choosing Chinese law as the governing law and selecting SIAC as the arbitral institution, and that this could result in the invalidity of the arbitration agreement. The available evidence did not show that the parties had any awareness or consideration of this issue; on the contrary, the evidence showed that they did not regard it as a relevant factor at all. Accordingly, this argument was also insufficient to rebut the implied choice of Chinese law as the governing law.
Third stage: whether the law most closely and substantively connected with the arbitration agreement should apply as its governing law:
The third stage, the “closest and most substantial connection” principle, applies only where an express or implied choice cannot be found. Since the Court of Appeal had already found that the parties had made an implied choice of Chinese law for the arbitration agreement, the third stage did not need to be applied.
4. Controversies in the Case
Notably, in BNA, the Court of Appeal held that the consequences of choosing a governing law that may render the arbitration agreement invalid should not be considered unless the parties had at least been aware that the choice of the law governing the arbitration agreement might affect the validity of the arbitration agreement. This position, however, raises two issues:
First, it conflicts with the approach in BCY. In BCY, whether the parties were aware that the chosen law might invalidate the arbitration agreement was not the focus.
Second, accurately determining the parties' true intention is inherently challenging because their subjective intention is difficult to measure. If pre-contractual negotiations are not considered, and such content is often excluded by the parol evidence rule, any assessment on this point may well be little more than the court's subjective interpretation of the contractual terms, rather than an objective examination of the parties' true intention.
Therefore, if the BCY approach were followed, the Court of Appeal at the second stage should have directly considered the factor that Chinese law might render the arbitration agreement invalid, without adding the subjective condition of “whether the parties were aware.” In that scenario, if the implied choice were excluded, it would be necessary to proceed to the third stage and apply the law “most closely connected” with the arbitration agreement—usually the law of the seat—as its governing law. In BNA, however, because the seat was China, even if the third stage had been reached and the law of the seat had been identified as the governing law of the arbitration agreement under the closest connection principle, the result would still have been the application of Chinese law, and therefore there would have been no substantial impact on the final outcome.
04 Implications and Recommendations for Chinese Enterprises
- An arbitration agreement is not “valid once signed”; fully understand the legal risks that may render it invalid
Although an arbitration agreement is the result of negotiation between the parties, it does not automatically take effect and become enforceable under all circumstances. If it fails the written form requirement, if the contract containing it never existed, or if the subject matter of arbitration is found to be non-arbitrable under the applicable law, the arbitration agreement may be set aside or refused enforcement. This reminds Chinese enterprises, when entering into cross-border contracts, to ensure that the form, execution, and content of the arbitration clause satisfy the validity requirements of the New York Convention and the laws of the seat and place of enforcement, so as to avoid falling into the dilemma of “having an arbitration clause on paper but being unable to enforce it” because of formal defects or lack of arbitrability.
- Arbitration agreements should expressly choose the governing law as far as possible to avoid uncertainty and subsequent disputes
Both BCY v BCZ and BNA v BNB demonstrate that if an arbitration agreement does not expressly specify its governing law, courts will often need to infer it afterwards through the “three-stage test.” This creates significant uncertainty and room for dispute, and may even give rise to the legal risk that the arbitration agreement is invalid due to a conflict between the applicable law and the seat of arbitration. Therefore, when Chinese enterprises enter into contracts with foreign parties, it is advisable to clearly specify in the arbitration clause the law governing the arbitration agreement itself, and to ensure as far as possible that such law is consistent with the law of the seat of arbitration, so as to avoid loopholes in enforcement or jurisdiction.
- Choose the combination of the seat of arbitration and the arbitral institution carefully to avoid a “mismatch”
As can be seen from BNA, if the seat of arbitration specified in the arbitration agreement conflicts with the selected arbitral institution in terms of applicable law or enforceability, the arbitration agreement may be found invalid. In particular, when Chinese enterprises go global and cooperate with overseas institutions, the sensitive combination of “overseas institution + seat in China” is common. If the compatibility of the seat, the arbitral institution, and the governing law is not fully evaluated, the enterprise may fall into an invalidity trap. Therefore, when choosing the seat of arbitration, enterprises should consider the arbitral institution, the applicable law, and the place of enforcement together, and should seek professional legal advice where necessary to ensure that the overall design of the arbitration clause can be smoothly enforced in all relevant jurisdictions.
Conclusion
Although an arbitration agreement is a “safety valve” for cross-border transactions, it is by no means “valid once signed.” The lesson of BNA is that imprecise clause drafting and a mismatch between the applicable law and the seat of arbitration may expose an enterprise to the legal risk of unenforceability. Faced with the complex compliance environment under the Belt and Road Initiative, Chinese enterprises must plan arbitration clauses in advance and clearly specify the applicable law and the seat of arbitration, so as to truly turn “paper agreements” into enforceable risk defenses.
In practice, when signing cross-border contracts, Chinese enterprises must do three things: (1) clearly specify the governing law and the seat of arbitration in the arbitration clause to avoid conflicts of laws; (2) avoid combinations of “non-local arbitral institution + local seat of arbitration” as much as possible; and (3) when dealing with English-language template contracts, be sure to have professionals familiar with international arbitration assist in reviewing the clauses.
If you are currently involved in international engineering projects, or have signed contracts containing arbitration clauses, please contact and consult professional advisors at China-Singapore Legal News to help you prevent risks before they arise and achieve steady, long-term development.
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This article is for informational reference only and does not constitute formal legal advice.
This article is general information and not legal advice. Specific matters require assessment by appropriately qualified professionals.