WHAT HAPPENS WHEN THE ARBITRAL INSTITUTE IN THE ARBITRATION AGREEMENT CEASES TO EXIST?
In DFL v DFM [2024] SGHC 71, a rather unusual situation came before the High Court. What happens if the parties agree to arbitration under a specific set of arbitral rules, and the institute administering the rules was abolished? Would an arbitration brought before a “replacement” institute be in accordance with the arbitration agreement?
Facts. We set out the salient facts below.
On 17 August 2018, the applicant and respondent entered into an agreement (the “Settlement Agreement”) ([3]), of which Clause 17 provides for disputes to be referred to and finally resolved by arbitration under the Dubai International Financial Centre-London Court of International Arbitration Rules (the “DIFC-LCIA Rules”), and for the seat to be in London, United Kingdom ([4]).
The DIFC-LCIA Rules were administered by the DIFC-LCIA Arbitration Centre, operated by the Dubai International Financial Centre Arbitration Institute (the “Institute”) ([5]).
On 14 September 2021, the Institute was abolished by the Dubai government via Decree No 34 of 2021 (the “Decree”) with its assets transferred to the Dubai International Arbitration Centre (“DIAC”) ([5]).
On 29 March 2022, the DIAC and LCIA issued a joint press release to “… all arbitrations referring to the respective rules of the DIFC-LCIA, commenced on or after 21 March 2022 “shall be registered by [the] DIAC and administered directly by its administrative body in accordance with the respective rules of procedure of [the] DIAC …”” ([9(a)]).
On 2 April 2022, the applicant commenced arbitration under the DIAC Rules against the respondent and another company, [E] Limited ([10]).
On 18 May 2022, the respondent and [E] Limited filed their respective answers to the request for arbitration, in which the respondent reserved his rights in relation to the Decree and its impact on the arbitration ([11]).
It suffices to say that thereafter, on 16 November 2022, the arbitral tribunal (the “Tribunal”) issued a Provisional Award for the applicant’s application for interim relief ([16]), and the applicant sought to enforce the Provisional Award in Singapore against the respondent on 27 December 2022 ([17]).
An Enforcement Order was granted on 28 December 2022, which was served on 18 July 2023, and the respondent filed an application to set aside the Enforcement Order on 29 August 2023 (having been granted an extension of time) ([17]).
Ground for setting aside. The respondent’s key argument for setting aside is set out in [19]: i.e., that “the arbitration conducted under the DIAC Rules was not in accordance with the agreement of the parties, which was for arbitration under the DIFC-LCIA Rules.”
Frustration. Both parties accepted before the High Court that the agreement for arbitration under the DIFC-LCIA Rules was frustrated by the Decree ([21]), which the High Court note was correct.
“21 Before me, the applicant accepted that the agreement for arbitration under the DIFC-LCIA Rules was frustrated by the Decree. In my view, the applicant was correct to do so. Parties’ submission to arbitration is purely contractual. They cannot be compelled to submit to arbitration under a set of rules that they did not agree to. The Decree could not force an arbitration under the DIAC Rules on the respondent without his agreement (see, also, Baker Hughes Saudi Arabia Co. Ltd. V Dynamic Industries, Inc. and others Civil Action No. 2:23-cv-1396 (E.D. La. Nov.6, 2023)).”
This is important. It was undisputed that the Decree frustrated the agreement to arbitrate under the DIFC-LCIA Rules. Hence, the respondent “cannot be compelled to submit to arbitration under a set of rules that [he] did not agree to.”
Severance? But the applicant argued that as the Settlement Agreement contained a Clause 16(i) which, in gist, provided that “provisions that were or became illegal, invalid or unenforceable could be severed and, if possible, replaced with a lawful provision that gave effect to the intention of the parties”, this meant that the provision for arbitration under the DIFC-LCIA Rules could be severed and be replaced with a provision for arbitration under the DIAC Rules ([22]).
This is an interesting argument, as most well-drafted agreements would likely contain such a boilerplate.
No severance. But this argument was rejected by the High Court, which held that the arbitration procedure under the DIAC Rules was not in accordance with the parties’ intention for the arbitration to be held under the DIFC-LCIA Rules ([28]).
Citing Gary Born, International Commercial Arbitration (Kluwer Law International, 3rd Ed, 2021) at 3909, the High Court held that “it was a stretch to say that the parties intended, at the time they signed the Settlement Agreement, to accept arbitration administered by any institute in Dubai (whether then existing or not) regardless of the rules under which the arbitration would be conducted” (at [27]).
The High Court at [27] also agreed with the respondent’s submissions that there were significant differences between the DIFC-LCIA Rules and the DIAC Rules which rendered an arbitration administered under the DIAC Rules being “fundamentally at odds” with the parties’ intention (at [27]).
Three differences were identified, which we set out below from [27]:
“(a) The DIAC Rules provided for timelines which were unnecessarily compressed in circumstances where the issues in dispute were complex and the value of the claim was high.
(b) The DIAC rules permitted an emergency arbitrator to hear applications on an ex parte basis; in contrast, under the DIFC-LCIA Rules, any emergency application had to be delivered and notified forthwith to the other parties.
(c) The arbitration costs in the DIAC were calculated on an ad valorem basis, whereas costs in a DIFC-LCIA arbitration were calculated on the basis of hourly rates and time spent.”
At this juncture, we pose two questions for thought:
Would it have mattered if the arbitral rules were effectively the same?
Would the result have been different if the DIAC was prepared, and did, administer the arbitration as though the DIFC-LCIA rules apply?
Submission to arbitration. Nonetheless, the High Court held that the respondent’s challenge failed as the respondent had submitted to the Tribunal’s jurisdiction in relation to the applicant’s application for interim relief to the Tribunal.
Given the respondent had contested the applicant’s application for interim relief on its substantive merits, this would (in and of itself) ordinarily amount to a submission to the Tribunal’s jurisdiction ([35]). The High Court also found that there was insufficient qualification of his conduct by the respondent ([35]) as the respondent did not specifically raise any jurisdictional objections ([37]), which the High Court found demonstrated “an unequivocal, clear and consistent intention to submit to the tribunal’s jurisdiction” ([38]; [42] – [44]).
But in relation to the main arbitral proceedings, the High Court declined to make a finding as to whether the respondent had submitted to the Tribunal’s jurisdiction, holding that it was “more appropriate to leave it to the Tribunal to deal with this issue” (at [49]).
Conclusion. When an arbitration clause is “pathological” because it has been badly worded, the arbitration clause is not necessarily unenforceable: it all depends on the nature or substance of the defect and whether the defect is curable.
For instance, when the parties identified a non-existent arbitral institute to administer the arbitration, this does not necessarily mean that the arbitral agreement is so defective as to be inoperable. See, e.g., Re Shanghai Xinan Screenwall Building & Decoration Co, Ltd [2022] 5 SLR 393, where the High Court found that the reference to “China International Arbitration Centre” (on the facts of the case) meant that the parties had, in fact, agreed to CIETAC arbitration.
But the result would be different if the parties agreed to submit to arbitration only under Institute A (or the rules of Institute A) and Institute A ceases to exist.
Hence, it is probably prudent for parties to ensure that the arbitral institute identified in the arbitration agreement is a well-established one (with low likelihood of ceasing to operate) to avoid encountering the facts of this case.
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