‘Bare’ arbitration clauses under the UNCITRAL Model Law on International Commercial Arbitration

By Prof Jonathan Hill, Professor of Law (University of Bristol Law School).

As every student of international commercial arbitration ought to know, an arbitration agreement should not only impose on the parties a binding obligation to refer a certain dispute (or certain types of dispute) to arbitration but also, as a minimum, indicate the place (or seat) of arbitration and provide a mechanism for the appointment of the arbitral tribunal. Unfortunately, the drafting of arbitration clauses in commercial contracts often leaves much to be desired; in a case involving a badly-drafted arbitration clause, disputing parties who are unable to resolve their disputes by negotiation may find themselves getting bogged down in one or more of the procedural problems to which pathological arbitration clauses frequently give rise.

Particular difficulties may be posed by so-called ‘bare’ clauses – that is, clauses which merely provide for submission of disputes to arbitration without specifying the place of the arbitration, the number of arbitrators or the method for establishing the arbitral tribunal. If, once a dispute has arisen, the parties are unable to agree on the appointment of an arbitral tribunal, the claimant may encounter practical difficulties in activating the arbitration machinery and getting the arbitral tribunal established.

In the context of the UNCITRAL Model Law on International Commercial Arbitration (‘ML’), the problem posed by a ‘bare’ arbitration clause arises in the following way. If the parties fail to appoint an arbitrator, the claimant may, in principle, apply for the assistance of a national court (or other designated appointing authority); article 11.3 ML provides that any party may request the court or other authority specified in article 6 ML to take the necessary steps to ensure the appointment of an arbitrator; however, the effect of article 1.2 ML is that the court (or other authority) of a Model Law state can exercise the power of appointment conferred by article 11.3 only if the place of arbitration is in the territory of that state; if the parties’ arbitration agreement is ‘bare’, the place of arbitration is undesignated and, at first blush, no court (or other authority) can step into the breach and make an appointment. In this scenario, the claimant is left with little choice but to pursue its claim through the courts and seek to resist any application by the defendant for the dispute to be referred to arbitration (under article 8 ML) on the basis that the arbitration agreement is ‘null and void, inoperative or incapable of being performed’ (art 8.1 ML).

The problems posed by ‘bare’ arbitration clauses recently came before the Singapore High Court in KVC Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd [2017] SGHC 32. The case involved two (almost) identical contracts for the sale of rice between Thai buyers (P1 and P2) and a Singaporean seller (D). The arbitration agreement in the contract of sale between P1 and D provided:

The Seller and the Buyer agree that all disputes arising out of or in connection with this agreement that cannot be settled by discussion and mutual agreement shall be referred to and finally resolved by arbitration as per Indian Contract Rules.

In the contract between P2 and D, the word ‘Indian’ was replaced with ‘Singapore’.

When disputes arose between the parties, P1 and P2 tried to have them arbitrated, but D did not co-operate in the appointment of an arbitrator. Then, when P1 and P2 sued D in the Singapore courts, D applied for stay on the basis of the contractual arbitration clauses. P1 and P2 argued that D’s application should be dismissed on the ground that the arbitration clauses were ‘incapable of being performed’. The main question facing the court was whether, under Singapore law, an arbitrator can be appointed (by the court or another authority) if the place of arbitration is unclear or not yet determined. If an arbitrator could be appointed – as a result of which the arbitration clause would be capable of being performed – the court was bound to stay the litigation.

The problem facing the Singapore court is not a new one. When the Model Law was being finalised, it was apparent that the combination of articles 1.2 and 11.3 could give rise to difficulties if the parties failed to designate the place of arbitration in their agreement (or subsequently). The travaux préparatoires indicate that, in the sort of situation that arose in the KVC Rice Intertrade case, it was desirable that the courts of one country or another should be able to get the arbitration off the ground by appointing the tribunal. Although the prevailing view in UNCITRAL was that the Model Law should provide for the application of article 11 in cases where the place of arbitration had not yet been determined, nothing was included in the final text because, in the time available, no agreement could be reached on which country’s courts should be given jurisdiction: should it be the claimant’s country or the respondent’s country or some other country? If no seat was designated, which alternative connecting factor was appropriate? Nevertheless, it seems to have been envisaged that a party might be able to obtain court assistance under laws other than the Model Law.

Indeed, a number of legal systems, in the context of their own arbitration statutes, have sought to plug the gap which the drafters of the Model Law had left unfilled. Dutch law, for example, follows the Model Law by providing, as a general rule, for the application of the Dutch legislation only if the place of arbitration is located in the Netherlands; but, if the parties have not determined the place of arbitration, the Dutch court nevertheless has the power to appoint an arbitrator if at least one of the parties is domiciled or has its actual residence in the Netherlands (see art 1073, Code of Civil Procedure). Similar legislative solutions are also to be found in, inter alia, England, Germany, Italy, the Czech Republic and Japan.

When the Model Law was implemented in Singapore, the implementing legislation did not address the problem posed by ‘bare’ arbitration clauses. However, in the KVC Rice Intertrade case, Pang Khang Chau JC held that, in an appropriate case, Singapore law does allow for an arbitral tribunal to be appointed even though the place of arbitration is not determined or designated. First, the judge considered that, in the circumstances, there were ample materials on the basis of which the President of the Singapore International Arbitration Centre (SIAC), which is the appointing authority for the purposes of the Model Law in Singapore, could conclude that there was a prima facie case for the applicability of article 11.3 ML. Secondly, even if the SIAC President were to take the view that he had no power to act, the courts should have the residual jurisdiction to assist with the appointment of arbitrators as a last resort, to ensure that the parties’ intention to have their dispute settled by arbitration is not defeated. In Hong Kong, albeit in a different context, there are dicta suggesting that, in the last resort, the court has a residuary jurisdiction to make an appointment to implement the intention of the parties that their disputes should be resolved by arbitration: see Findlay J in Comtec Components Ltd v Interquip Ltd [1998] HKCFI 803 at [10]. In KVC Rice Intertrade, Pang Khang Chau JC considered (at [73]) that, in a case where there is truly no other way to prevent injustice to a would-be claimant, a Singapore court should be prepared to step in to appoint an arbitrator, provided the dispute has some connection with Singapore.

In policy terms, the decision in the KVC Rice Intertrade case is desirable. A ‘bare’ arbitration clause is valid and binding on the parties. If the parties are prepared to co-operate (by agreeing to the appointment of an arbitrator), the fact that the clause is ‘bare’ is no impediment to the proper functioning of the arbitration: once appointed, the arbitrator can designate the place of arbitration (art 20.1 ML), thereby providing a framework for court assistance and, if necessary, court supervision of the arbitration. If, however, the respondent will not work with the claimant to enable the arbitration to get off the ground, it would be unfortunate if such intransigence were allowed to undermine the parties’ contractual commitment to arbitrate.

However, the judge’s reasoning in the KVC Rice Intertrade case is not without its problems. First, the SIAC President’s jurisdiction to appoint an arbitrator depends either on the parties agreeing that the SIAC President should be the appointing authority (which was clearly not the case in KVC Rice Intertrade) or Singapore being the place of arbitration. There seems little basis for Pang Khang Chau JC’s statement that there were ‘ample materials for the SIAC President to conclude that a prima facie case for the applicability of Art 11(3) of the Model Law has been made out’ (at [55]). There was nothing about the facts of the case to suggest that Singapore was the place of arbitration. Article 20.1 ML indicates that parties are free to agree on the place of arbitration, failing which the tribunal determines the place. An agreement by the parties might be express or implied (on the basis of the choice of the arbitration’s procedural law, of the courts with supervisory jurisdiction or of the arbitration’s physical location). But, the nature of the ‘bare’ arbitration clause in KVC Rice Intertrade was such that there had been no choice of the place of arbitration – either express or implied. Secondly, Pang Khang Chau JC’s view that the court has a residual jurisdiction to appoint an arbitrator to avoid injustice is hard to support. Article 5 ML clearly states: ‘In matters governed by this Law, no court shall intervene except where so provided in this Law.’ As article 11 ML makes express provision for the appointment of arbitrators by the court (or other appointing authority), the most obvious interpretation of article 5 ML is that it precludes the court’s intervention in circumstances not envisaged by the Model Law itself.

This does not mean, however, that the decision in the KVC Rice Intertrade case cannot be supported. In the final part of his judgment, Pang Khang Chau JC rejected P1’s and P2’s argument that the arbitration clause was incapable of being performed and referred the parties to arbitration under article 8 ML. But, the judge added a condition to the stay of proceedings – part of which was that D would raise no objections to the SIAC President’s jurisdiction to appoint an arbitrator in the event that the parties could not reach agreement on an appointment. While, for reasons considered above, the SIAC President could not reasonably have had jurisdiction by virtue of Singapore being the place of arbitration, there is no reason why such jurisdiction could not be based on the parties’ agreement.

The effect of granting a stay of proceedings subject to the condition imposed by the court goes most of the way to ensuring that, in policy terms, the right result could be reached. Following the judgment, there were three possible ways forward: (i) the parties could agree to appoint an arbitrator; (ii) they could agree to the appointment of an arbitrator by the SIAC President; (iii) failing an appointment under (i) or (ii), the arbitration clause would become incapable of being performed and, as a consequence, the stay would be lifted and the litigation between P1/P2 and D in Singapore would be allowed to continue. Admittedly, the third of these possibilities is not what the parties, by including an arbitration clause in their contract, had bargained for. But, given that, in the Singapore proceedings, D had sought to rely on the arbitration clauses and had argued that the arbitration clauses were workable because, in the absence of the parties’ mutual agreement, the SIAC President was able to make an appointment, it seems highly likely that the effect of the judge’s condition would be that, one way or another, an arbitrator would be appointed.

Of course, it would be better if the Model Law (or the national law implementing the Model Law in Singapore) had included a rule (similar to article 1073 of the Dutch Code of Civil Procedure) providing an easy solution to the issue that arose in KVC Rice Intertrade. But, it is encouraging that, even without express legislative authority, the court was able to find a way to make a ‘bare’ arbitration clause effective.

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