High Court of Singapore: Admissibility of pre-contractual negotiations as evidence, whether the admissibility of evidence is an evidentiary rule or whether it is a substantive rule in international arbitration? Bifurcation of arbitration into jurisdiction and merits phases

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Background

In BQP v BQQ [2018] SGHC 55, the plaintiff, challenged the Arbitral Award under Section 10 of the Singapore International Arbitration Act (Cap 143A, 2002 Rev Ed) (‘the Act’) against the jurisdictional ruling of the arbitral tribunal (‘the Tribunal’) which was dismissed by High Court. The plaintiff then applied for leave to appeal under Section 10(4) for the act praying there was a question of general principle to be decided for the first time. This question was ‘whether pre-contractual negotiations were admissible in evidence to construe written agreements’. The application for leave to appeal was also dismissed by the High Court.

Fact

The Company from British Virgin Islands (Plaintiff) and an Indonesian Company (Defendant) along with its affiliates had a long history of commercial dealings in the course of which various disputes arose. The parties then decided to settle all their disputes and there were extensive negotiations over a short period of time resulting in a suite of agreements being executed. The issue was regarding two dispute resolution clauses of two different contracts entered into by two different affiliates of the companies providing jurisdiction to two different arbitration institutions i.e. Singapore International Arbitration Centre (SIAC) and BANI arbitration in Indonesia. The Defendant commenced SIAC arbitration proceedings against the Plaintiff in Singapore. The Plaintiff objected to the Tribunal’s jurisdiction on the grounds that the clause relied on by the defendant (‘the Arbitration Clause in First Agreement’) had been superseded by another subsequent agreement, which contains a BANI clause (‘the Arbitration Clause in Second Agreement’), and disputes should be resolved by BANI arbitration in Indonesia, or in the alternative, the majority of the Identified Claims properly fall only under the subsequent agreement and hence under the BANI arbitration clause.

On the Plaintiff’s application, the SIAC Tribunal bifurcated the arbitration into jurisdiction and merits phases. The Tribunal framed the question for resolution in the jurisdictional phase as: “Does the Tribunal have jurisdiction, based on the Arbitration Clause in First Agreement to adjudicate the Identified Claims? The parties agreed to break this question into two jurisdictional issues:

  • Jurisdictional Issue 1: Has the Arbitration Clause in First Agreement superseded the Arbitration Clause in Second Agreement or are the Arbitration Clause in First Agreement and the Arbitration Clause in Second Agreement both valid and separately enforceable?
  • Jurisdictional Issue 2: Even assuming that the Arbitration Clause in First Agreement has not superseded the Arbitration Clause in Second Agreement, are the Identified Claims properly brought on the basis of the Arbitration Clause in First Agreement within the scope of the SIAC arbitration agreement or are they in fact premised on the Arbitration Clause in Second Agreement?

Award by Tribunal

As to the first jurisdictional issue, the Tribunal determined that the Arbitration Clause in Second Agreement had not superseded the Arbitration Clause in First Agreement, which remained valid and separately enforceable.

As to the second jurisdictional issue, the Tribunal took the view that this could only be definitively determined at the merits phase and decided to carry these claims into the merits phase without prejudice to the Plaintiff’s jurisdictional defence that some of these fall properly under the Arbitration Clause in Second Agreement.

Question before the High Court of Singapore

  1. Whether the Arbitration Clause in First Agreement has been superseded by the the Arbitration Clause in Second Agreement.
  2. If it has, it follows that the SIAC Tribunal lacks jurisdiction over the claims submitted to it pursuant to an arbitration clause in the Arbitration Clause in First Agreement as the Arbitration Clause in Second Agreement provides for arbitration in Indonesia under BANI. If the Arbitration Clause in First Agreement has not been superseded by the Arbitration Clause in Second Agreement, then the SIAC Tribunal has, subject to the second jurisdictional issue, jurisdiction to hear the disputes Arbitration Clause in First Agreement which provides for SIAC arbitration in Singapore.

The impugned clause which is linking the two contracts is as follows:

In the event no definite legal agreement is entered into, the parties agree that this MOA shall continue in force and be valid and binding on the parties hereto.

Contentions of Plaintiff

The Plaintiff interprets this clause to mean that once the Second Agreement, being the “definite legal agreement”, was signed, the first Agreement ceased to be in force and was no longer valid and binding on the parties. The effect of this clause is that the First Agreement will cease to be in force upon the signing of a “definite legal agreement”. The “definite legal agreement” in this clause refers to an onshore legal agreement. The Second Agreement, being an onshore agreement, therefore superseded the First Agreement by virtue of this clause.

Contentions of Defendant

The Defendant disagrees and interprets the phrase “definite legal agreement” in this clause as referring only to a subsequent offshore legal agreement entered into between the parties. Since the Second Agreement is an onshore legal agreement, and no subsequent offshore legal agreement was entered into, the First Agreement remained in force and continued to be valid and binding on the parties. As such, the Identified Claims were validly brought under the SIAC arbitration agreement under the First Agreement.

High Court Decision on Plaintiff’s Challenge to SIAC’s Jurisdiction

  • The meaning of the phrase “definite legal agreement” in this clause is not plain or obvious on a perusal of that clause and that phrase alone. In particular, it does not indicate whether the “definite legal agreement” was to be an “onshore” or an “offshore” legal agreement and therefore, one has to look to the context to derive some assistance. In considering the text alone, although the phrase “definite legal agreement” by itself does not indicate whether it refers to an offshore or onshore agreement, it is followed by another phrase: “this MOA shall continue in force”
  • If “this MOA” was to continue in force under the impugned clause absent entry into another agreement, it would tend to follow that the contemplated new “definite legal agreement” must also be another offshore agreement. That new offshore definite legal agreement would then logically supersede the existing offshore First Agreement.
  • It is accepted that the First Agreement is an offshore agreement, being entered into by an Indonesian affiliate of Defendant and an entity of Plaintiff and the parties did not enter into any other offshore agreement after the First Agreement was concluded. Considering the context in which the First Agreement was entered into, it confirms the construction that the phrase “definite legal agreement” must have been, on a balance of probabilities, an offshore agreement.
  • The Court cited another clause from the Second Agreement which was as follows:

“The Round Logs Supply MOA (the Second Agreement) will be implemented by way of an onshore wood supply agreement to be finalized between the parties. The parties agree to enter into a binding legal agreement to be governed by the respective laws, substantially on the terms set out in the Round Logs Supply MOA”

The words chosen by lawyers in drafting the Second Agreement were clear – “will be implemented by”, ie, the First Agreement would be performed by or carried into effect or given effect to by an onshore agreement. They did not use the word “supersede” as they did elsewhere, as in the first draft of Clause which referred to “the date of execution of definitive legal agreements superseding this MOU”. These parties were aware in drafting these agreements of the concepts of “supersession” and “implementation”

  • The Court analyzed the evidence of pre-contract negotiations i.e. pre-contract emails and drafts and based on that the Court concluded the SIAC Tribunal had jurisdiction over the dispute.

The Singaporean law on applicant seeking leave to appeal

It is not disputed that an applicant seeking leave to appeal must demonstrate that there exist questions falling within at least one of the following three limbs (Lee Kuan Yew v Tang Liang Hong [1997] 2 SLR(R) 862 at [16]):

  • prima facie case of error (“the Error Limb”);
  • question of general principle decided for the first time (“the First Time Limb”); or
  • question of importance upon which further argument and a decision of a higher tribunal would be to the public advantage (“the Public Importance Limb”).

Evidence of pre-contractual negotiations in Arbitration

  • Since, the Plaintiff had never objected to the admissibility of evidence of the negotiating history of the agreements, and (ii) the Plaintiff had itself relied on such evidence to advance its case. Therefore, the admissibility of the pre-contractual negotiations was accepted by both parties.
  • In its submissions for Leave to Appeal, the Plaintiff explained that this question could be described in terms of three sub-issues, all of which fall within the First Time and Public Importance Limbs:
    • The existence (and desirability) of a blanket rule against pre-contractual negotiations.

It is accepted by the High Court that the question of whether an absolute exclusionary bar against the admissibility of pre-contractual negotiations exists is one of great public importance which has not yet been decided by the Court of Appeal of Singapore.

  • The mandatory applicability of such a rule, either as a rule of the substantive law of the contract, or as a rule of the law of the arbitration agreement, or as a matter of the exercise of discretion.

The High Court cited a number of articles which debate whether the admissibility of evidence is an evidentiary rule or whether it is a substantive rule in international arbitration. Some of them are as follows:

  • “Contract Interpretation in International Arbitration” (2013) 30(1) Journal of International Arbitration

In this article it was stated by author:

“despite the title of the parol evidence rule and the reference to evidence not being ‘admissible’ or ‘allowed’ as a result of it or any related exclusionary rules, it is generally accepted that these kind of rules are not procedural but rather substantive rules. They are rules of contract interpretation which exclude certain evidence from being considered and insofar as any question of admissibility arises, it arises because evidence that is irrelevant will not be considered. Although modern arbitration laws and rules grant the arbitrators broad discretion to ‘determine the admissibility, relevance, materiality, and weight of any evidence’, the circumstances that the arbitrator is allowed to consider in interpreting the contract are controlled by the applicable law. To let the procedural rules determine which facts should be allowed to throw light on the intention of the parties will not result in a faithful application of the substantive law; it could in fact be tantamount to distorting it.”

  • Jeffrey Waincymer, Procedure and Evidence in International Arbitration (Wolters Kluwer 2012, at para 10.16,

In the authors view, the admissibility of evidence is an evidentiary, not substantive rule

  • Patrick Ostendorf, in “The exclusionary rule of English law and its proper characterisation in the conflict of laws” (2015) 11(1) Journal of Private International Law 163

“the prevailing opinion that the admissibility of extrinsic evidence is directly concerned with the decision on the merits and hence functionally belongs within the realm of contract interpretation, is flawed. He opines that “only issues concerned with the decision on the merits rather than merely affecting it should be governed by the lex causae instead of the lex fori” [emphasis in original] since almost any procedural rule “may in some way or other affect the material outcome of a given case”

“characterisation of the exclusionary rule as a matter of substantive law can only be justified if its function is more closely intertwined with principles of contractual interpretation, such as the objectivity principle, the contra proferentem rule, the holistic approach or the contextual dimension, rather than with matters of evidence and procedure”

The High Court held that the law on this issue, ie, the characterisation of admissibility of evidence as a rule of evidence or procedural law as compared to substantive law, has been made clear, and in that sense settled, by the Court of Appeal of Singapore in Sembcorp Marine. The following principles are clearly stated in the judgment of the court delivered by Sundaresh Menon CJ:

“The law governing the admissibility of extrinsic evidence in Singapore is primarily statutory in the form of the EA [Evidence Act].” Since jurisdictions such as the United Kingdom, Hong Kong and New Zealand do not have equivalent provisions of the EA their cases on construction of contracts must be treated with a degree of caution.

However, there are fundamental differences when in the applicability of these principles to international arbitration cases with Singapore as the seat and where Singapore law is the governing law of the contract. First and foremost, Section 2(1) of the Evidence Act of Singapore provides:

Parts I, II and III shall apply to all judicial proceedings in or before any court, but not to proceedings before an arbitrator.

  • Whether arbitral tribunals are technically bound by the judicial characterisation of such rules, and if not, whether a court is entitled to review the tribunal’s decision de novo and apply the judicial characterisation.

The Court held that under Rule 16.2 of the SIAC Rules 2013, admissibility clearly lies within the sole province of the tribunal, as do relevance and materiality. The second sentence in Rule 16.2 makes this even clearer by allowing an arbitral tribunal to decide whether to admit evidence that is not admissible in law. The Rules is as follows:

“The Tribunal shall determine the relevance, materiality, and admissibility of all evidence. Evidence need not be admissible in law.”

To underscore the different underlying premises in international arbitration as compared to national court procedures on the admissibility and treatment of evidence, Rule 16.2 of the SIAC Rules 2013 does not stand alone. Many other arbitral institutions have a similar rule, eg

(a) London Court of International Arbitration Rules 2014, Art 22.1: “The Arbitral Tribunal shall have the power, upon the application of any party … or its own initiative … (vi) to decide whether or not to apply any strict rules of evidence (or any other rules) as to the admissibility, relevance or weight of any material tendered by a party on any issue of fact or expert opinion …”

(b) UNCITRAL Arbitration Rules 2010, Art 27.4: “The arbitral tribunal shall determine the admissibility, relevance, materiality and weight of the evidence offered.”

(c) Hong Kong International Arbitration Centre Administered Arbitration Rules 2013, Art 22.2: “The arbitral tribunal shall determine the admissibility, relevance, materiality and weight of the evidence, including whether to apply strict rules of evidence.”

(d) American Arbitration Association International Dispute Resolution Procedures 2014, Art 20.6: “The tribunal shall determine the admissibility, relevance, materiality and weight of the evidence.”

(e) Korean Arbitration Act (revised on 31 December 1999 and again on 30 November 2016 to incorporate the UNCITRAL Model Law on International Commercial Arbitration), Art 20 confers on the arbitral tribunal the “power to determine the admissibility, relevance and weight of any evidence” (see also Doo-Sik Kim et al, “Commercial Arbitration 2017: Korea” Global Arbitration Review <https://globalarbitrationreview.com/jurisdiction/1000194/korea&gt; (22 May 2017)).

(f) Although the International Chamber of Commerce Rules do not contain a specific provision like those above, it is generally accepted that it is inherent in its powers under Art 25, “Establishing the Facts of the Case” (formerly Art 20): “The arbitral tribunal shall proceed within as short a time as possible to establish the facts of the case by all appropriate means”. This discretion enjoyed by the tribunal has been described as being “extremely broad”, and subject only to (i) Art 19, “Rules Governing the Proceedings” (formerly Art 15): “The proceedings before the arbitral tribunal shall be governed by the Rules and, where the Rules are silent, by any rules which the parties or, failing them, the arbitral tribunal may settle on, whether or not reference is thereby made to the rules of procedure of a national law to be applied to the arbitration” and (ii) Art 21, “Applicable Rules of Law” (formerly Art 20): “The parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate…” (see Nathan D. O’Malley, Rules of Evidence in International Arbitration (Informa, 2013) ch 7 at para 7.06; Yves Derains & Eric A. Schwartz, Guide to the ICC Rules of Arbitration (Kluwer Law International, 2nd Ed, 2005) at pp 270–272).

2 Comments Add yours

  1. Chitra Iyer says:

    Interesting and informative article. .

    Liked by 1 person

    1. Ananya Pratap Singh says:

      Thank you Ms. Iyer.

      Like

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