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Singapore High Court: arbitration clause contained in a contract binds third party to a supplemental agreement
Practical Law UK Legal Update 0-522-9441 (Approx. 5 pages)
Singapore High Court: arbitration clause contained in a contract binds third party to a supplemental agreement
by Alastair Henderson (Partner) and Sean Izor (Associate), Herbert Smith LLP
| Published on 06 Dec 2012 • Singapore |
The Singapore High Court has considered whether an arbitration clause in a contract bound a third party who subsequently entered into supplemental agreements with the original parties. Rather than viewing the supplemental agreements (which did not expressly refer to the arbitration clause in the original contract) in isolation, the High Court found that, based on an objective interpretation of the agreements together, the parties must have intended that the arbitration clause in the original contract should apply to the supplemental agreements as well.
Background
Section 10 of Singapore's International Arbitration Act (IAA) provides that, if an arbitral tribunal rules on a preliminary question as to whether it has jurisdiction in a case, any party may, within 30 days after having received notice of that ruling, apply to the High Court to decide the matter.
Facts
Lufthansa Systems Asia Pacific (Lufthansa) entered into a cooperation agreement with Datamat to supply a component for a data protection system (Cooperation Agreement).
The Cooperation Agreement provided that any dispute which could not be settled by mediation would be finally settled by arbitration in Singapore, in accordance with the SIAC Arbitration Rules.
Subsequent to the Cooperation Agreement, Datamat entered into a sale and purchase agreement with International Research Corp PLC (IRCP), whereby IRCP would pay Lufthansa, on Datamat's behalf, for the goods and services provided by Lufthansa to Datamat under the Cooperation Agreement.
When Datamat faced financial difficulties, the three parties entered into Supplemental Agreements which effectively guaranteed that payments would continue to be made to Lufthansa as they previously had under the Cooperation Agreement, but the payments would now be made by IRPC (Supplemental Agreements). When IRCP failed to make such payments and subsequent negotiations between the parties broke down, Lufthansa commenced arbitration proceedings against Datamat and IRCP.
The Supplemental Agreements did not specifically refer to the arbitration clause in the Cooperation Agreement. IRCP objected to being joined as a party to the arbitration, on the ground that the arbitral tribunal did not have jurisdiction over it. IRCP claimed that, as it was not a party to the Cooperation Agreement, the arbitration clause in that agreement did not apply to a dispute between IRCP and Lufthansa. IRCP also argued that the conditions precedent to arbitration contained in the arbitration clause (that is, mediation) had not been met.
The arbitral tribunal dismissed these objections and found that it had jurisdiction over all of the parties in the arbitration.
IRCP subsequently commenced proceedings before the High Court pursuant to Section 10 of the IAA, requesting the arbitral tribunal's decision on its jurisdiction be set aside.
Decision
The High Court dismissed IRCP's application.
Incorporation of the arbitration clause into the Supplemental Agreements
The High Court stated that in order for an arbitration clause to be incorporated into a separate contract, the strict rule of a "two-contract case" must be satisfied. Under this rule the contract into which the arbitration agreement is to be incorporated must contain a "clear and express reference to the arbitration agreement" in the other contract.
On the facts, the High Court found that there was no clear wording in the Supplemental Agreements which expressly incorporated the arbitration clause into the Cooperation Agreement. The mere reference that all provisions in the Cooperation Agreement shall remain "effective and enforceable" in relation to the Supplemental Agreements was not sufficient.
Does the strict rule apply in all circumstances?
The High Court then determined that the strict rule would not apply in all circumstances and that there could be other grounds for the arbitration clause to be applied. In particular, the High Court found that the strict rule would not apply in circumstances where contracts are "intended by the parties to function essentially as one agreement and should be read as a whole."
The key issue then became whether the Supplemental Agreements were separate and distinct from the Cooperation Agreement or whether the Supplemental Agreements were extensions of the Cooperation Agreement. Lufthansa argued that the Cooperation Agreement and the Supplemental Agreements must be read as one composite agreement. Therefore, it followed that the arbitration clause did not need to be expressly incorporated into the Supplemental Agreements. IRCP argued that, as it had not been a party to the Cooperation Agreement, that agreement and the Supplemental Agreements could not be treated as one and the same.
In determining this issue, the High Court considered the common intentions of the parties, objectively ascertained. The High Court found that the "true issue" was whether, objectively, the parties' common intention was to be bound by the arbitration clause in the Cooperation Agreement when entering into the Supplemental Agreements.
Objective intentions of the parties
The High Court applied the principles of contextual approach to contractual interpretation by stating that the parties' intentions should be "objectively ascertained from the agreement and the background matrix of facts known to the parties which would affect the way a reasonable person would understand the language used in the agreement."
The High Court considered that the object and purpose of the Supplemental Agreements were to ensure that Lufthansa was able to enforce its rights to payment under the Cooperation Agreement. From a plain reading of the Supplemental Agreements, it was clear that IRCP's payment obligations in the Supplemental Agreements were linked and connected to Datamat's obligations to Lufthansa under the Cooperation Agreement. The Supplemental Agreements were just that: supplemental to the Cooperation Agreement; they could not be interpreted without reference to the Cooperation Agreement.
Contextual interpretation
The High Court found that, upon considering the background context and the language of the Supplemental Agreements, the parties must have intended the arbitration clause in the Cooperation Agreement to apply to all three parties to the Supplemental Agreements for the following reasons:
- The Supplemental Agreements were concluded to supplement Datamat's and IRCP's "shortcomings" in the performance of the payment obligations owed to Lufthansa.
- The obligations contained in the Supplemental Agreements were premised upon, and were extensions of, obligations contained in the Cooperation Agreement. Therefore, the parties intended that the agreements were to function as one agreement, to be read as a whole.
- IRCP was aware of the terms of the Cooperation Agreement and the arbitration clause.
- Having different dispute resolution mechanisms, the "applicability of which depends on the identity of the parties", to resolve the same dispute would be commercially impractical and may yield unreasonable results. The High Court found that it was important to have regard to the commercial purpose of an agreement when construing contractual terms, as an overly literal interpretation of contractual provisions may distort the commercial purpose of the contract.
The High Court was aware that its conclusion may undermine the strict rule that an arbitration clause may only be read into another contract if it has been expressly referred to in that contract. Nonetheless, the High Court considered it necessary to consider and give credence to the objective intentions of the parties.
Were the conditions precedent to arbitration satisfied?
IRCP raised a separate challenge on grounds that the conditions precedent to arbitration (namely, an unsuccessful attempt at mediation) had not been satisfied. The High Court found that the multi-tiered dispute resolution mechanism of the arbitration agreement was sufficiently certain and capable of enforcement. The High Court decided that the mediation requirements contained in the arbitration agreement were conditions precedent which had to be satisfied before the parties could commence arbitration.
The High Court also found that such conditions precedent had been satisfied. As the parties had engaged in discussions, thereby satisfying the requirements contained in the arbitration clause, Lufthansa was entitled to commence arbitration proceedings when these discussions broke down. It followed that the arbitral tribunal had the necessary jurisdiction to determine the dispute.
Conclusion
The High Court found that, based upon an objective interpretation of the intentions of the parties, the Cooperation Agreement and the Supplemental Agreements should be treated as one composite agreement. Therefore, the arbitration clause applied to the Supplemental Agreements. This, along with the fact that the preconditions to commence the arbitration were satisfied, meant that the arbitral tribunal had jurisdiction to decide the dispute between the parties. IRCP's application was dismissed.
Comment
While the High Court acknowledged the strict rule that an arbitration clause in one agreement must be specifically referred to in order for it to be incorporated into another agreement, it also accepted that there may be flexibility in applying this strict rule. If various agreements are deemed to be one composite agreement, instead of separate agreements, then the arbitration clause contained in one agreement may apply to all of the agreements. In determining whether various agreements will be deemed to be one composite agreement, the Singapore courts will look to the objective interpretation of the parties' intentions. This case is a reminder of the importance of clear drafting when entering into contracts.