Singapore High Court: Validity of a ‘floating’ choice of law & jurisdiction clause

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In the case of Shanghai Turbo Enterprises Ltd v Liu Ming [2018] SGHC 172, the Singapore High Court faced with the issue to determine the governing law of an agreement where the clause provides a floating choice of law between laws of Singapore/or People’s Republic of China. The Court also needs to decide the forum conveniens since the impugned clause provided the non-exclusive jurisdiction to “the Courts of Singapore / or People’s Republic of China”. Read the case analysis below:

Factual Matrix

A Cayman Islands company Shanghai Turbo (ST) wholly owned Best Success (BS) a Hong Kong company which in turn owns a Chinese company CZ3D. ST was listed in Singapore. Mr. Liu, a Chinese citizen, was the CEO of ST and director in BS and CZ3D. He was removed from these positions because of the declining levels of profits under his management and later, ST brought proceedings against Mr. Liu for the alleged breach of his service agreement. The dispute circles around Clause 17 of this service agreement which states the governing law of agreement.

Governing Law Clause

“This Agreement shall be governed by the laws of Singapore/or People’s Republic of China and each of the parties hereto submits to the non-exclusive jurisdiction of the Courts of Singapore / or People’s Republic of China.”

Issues

As the Governing Law Clause provided the choice of law between Singapore and China, the Singapore High Court termed it as “floating” choice of law clause. The issue before the Court was which is the proper law of the service agreement

Analysis

The Court held that to determine the proper law of a contract, it is the law of the forum which is to be applied, ie, Singapore law.

Three-Stage Test

In Pacific Recreation Pte Ltd v S Y Technology Inc and another appeal [2008] 2 SLR(R) 491 (Pacific Recreation), the Singapore Court of Appeal formulated a three-stage test to determine the implied choice of law. The first stage requires the court to examine the contract in question to determine if it expressly states what the governing law should be. If the first stage yields no result, the second stage then requires the court to ascertain whether the intention of the parties as to the proper law of the contract may be inferred from the surrounding circumstances; failing which, the third stage then directs the court to examine which system of law the contract has the closest and most real connection to, and that system of law would then be taken as the governing law.

Applying the above test, the Court held that clause 17 does not purport to select any single proper law to govern the Service Agreement. Rather, it provides for an option between Singapore and Chinese law, without stating the mechanism by which the choice between the two would be made.

The Court then cited two English cases of Armar Shipping Co Ltd v Caisse Algerienne D’Assurance Et De Reassurance [1980] 2 Lloyd’s Rep 450 and Dubai Electricity Co and ors v Islamic Republic of Iran Shipping Lines [1984] 2 Lloyd’s Rep 380 which inter alia stated that the governing law of contract cannot be a floating one and such a “floating” choice of law clause would be unenforceable. The Court also cited the Halsbury’s Laws of Singapore Vol 6(2) (LexisNexis, 2013) at para 75.356 wherein it was stated that the proper law of a contract must be ascertainable at the time the contract comes into existence, and cannot float in suspense. Such a provision “would be meaningless and will have no legal effect”

The Court observed that since there is no valid express choice of law in the Service Agreement, it is right to move to the second stage of Pacific Recreation. In Court’s view, it was rather artificial to seek to infer the intention of the parties from the other surrounding circumstances, given that clause 17 indicated that parties had applied their minds to the choice of law but had made no valid express choice as to a single governing law, and specifically no clear choice between Singapore law and Chinese law. In the circumstances, the Court found it appropriate to proceed direct to the third stage, so as to determine which system of law has the closest and most real connection with the service agreement and the circumstances surrounding its inception.

In relation to the inquiry at the third stage, it was stated in Pacific Recreation that the “closest and most real connection” test was the same as the objective test of what the reasonable man ought to have intended if he had thought about the matter at the time when he made the contract.

The Court made no conclusive remark as to the governing law of the service agreement and analysed the validity of clause 17 under both Singapore and Chinese law.

Singaporean Law on Floating Choice of Law Clauses

The Court held that to the extent that the first sub-clause of clause 17 purports to provide for a “floating” proper law, it is unenforceable under Singapore law. The next question before the Court was whether the second sub-clause (which pertains to jurisdiction) is nevertheless severable and therefore enforceable.

The Court further held that clause 17 could not be severed so as to give independent effect to the second sub-clause. This could not be achieved without the court rewriting the contract for the parties. The word “and” connects the second sub-clause to the first sub-clause. These are not structured as separate sub-clauses within the clause. This showed that the two sub-clauses are intimately linked. All the uncertainty lends weight to the point that the choice of jurisdiction is meant to be paired with the choice of law, and stands or falls with the choice of law provision and therefore, the second sub-clause falls along with the first sub-clause.

Chinese Law on Floating Choice of Law Clauses

As per the expert’s opinion, the Court was satisfied that substantially the same result obtains under Chinese law. The position under Chinese law is also that a contract “cannot be simultaneously governed by the laws of two countries”, and that clause 17 would likely be deemed too ambiguous to be enforceable.

forum conveniens

The legal basis for the requirement that Singapore be the forum conveniens appears to be premised that no leave to serve out of jurisdiction will be granted unless it is “made sufficiently to appear to the Court that the case is a proper one for service out of jurisdiction”. To establish this requirement, the two-stage test contained in Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460 (The Spiliada) is to be applied. The first stage is to determine by reference to the connecting factors, the natural forum, ie, the forum which has the most real and substantial connection with the dispute. The question is whether there is some other available and more appropriate forum, aside from Singapore, for the trial of the action. The relevant connecting factors would include locations of the parties, relevant witnesses, facts and evidence and the applicable law to the issues. Such connecting factors may also be grouped into five types, being personal connections, connections to events and transactions, governing law, other proceedings and shape of litigation. As for the second stage, assuming that that Singapore is determined not to be the natural forum, the court is to consider whether there are circumstances by reason of which justice requires that the Singapore court ought to hear the matter. The court is concerned with whether justice to the parties can be delivered in the natural forum, although the court ought not to pass judgment on the competence of the judiciary in a foreign country.

Conclusion

The Court held that under both Singapore and Chinese law, clause 17 would be invalid and unenforceable in its entirety. Applying both stages of the Spiliada test, the Court concluded that Singapore is not the forum conveniens for the proceedings

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