An important issue for Japanese parties entering into contracts with international counterparties is the mechanism for the resolution of disputes and in particular, the familiar choice between arbitration and litigation. Where the preferred method of dispute resolution is the arbitral process, the contract must contain an arbitration clause. If, however, disputes are intended to be resolved by way of litigation, a jurisdiction clause should be included. In either case, the choice between arbitration and litigation should be made expressly and unambiguously.
The desirability of clear contractual articulation of the parties' chosen dispute resolution procedure was recently brought into focus in a case before the Singapore High Court, P. T. Tri-M.G. Intra Asia Airlines v Norse Air Charter Limited ("P. T. Tri-M.G. v Norse").1 By reason of some unfortunate drafting, the contract in dispute contained both an arbitration clause and a jurisdiction clause. These two dispute resolution provisions appeared to be inconsistent and incapable of reconciliation.
This newsletter considers the way in which the Singapore High Court approached the conundrum presented by apparently inconsistent arbitration and jurisdiction clauses in the same contract. It also examines how the same problem has been dealt with in other jurisdictions, before discussing the lessons that may be learned from the case by Japanese parties engaged in contractual negotiations with international counterparties.
P. T. Tri-M.G. v Norse
In P. T. Tri-M.G. v Norse, the parties had entered into an agreement for the lease of an aircraft. When the relationship broke down and the lessor filed a suit against the lessee, the lessee responded by filing an application to stay the proceedings in favour of arbitration. The issue before the Singapore High Court was how to construe the two apparently contradictory dispute resolution clauses.
Although the issue faced by the Court may seem surprising in that it is unusual for a contract to contain both an arbitration clause and a jurisdiction clause, it was by no means the first occasion on which it has been litigated. The Court was able to draw guidance in reaching a decision from authorities in England, Hong Kong and France.
In the English cases of Paul Smith Ltd v H & S International Holding Inc ("Paul Smith")2 and Shell International Petroleum Co Ltd v Coral Oil Ltd ("Shell"),3 the contracts in issue contained similarly distinct dispute resolution clauses. The High Court was able to reconcile the clauses in both cases and reach findings that the parties intended disputes to be referred to arbitration. In Paul Smith, the apparent contradiction was overcome by interpreting the jurisdiction clause as a reference to the law governing the arbitral proceedings. In Shell, the conflicting dispute resolution clauses were construed by the High Court as requiring all disputes to be referred to arbitration except those relating to the proper law of the contract.
An analogous Hong Kong authority, Arta Properties Limited v Li Fu Yat Tso and others ("Arta Properties")4 also provided the Singapore High Court with helpful guidance. In that case, the Court of First Instance of the High Court of Hong Kong held that an apparently conflicting reference to the jurisdiction of the Hong Kong courts was only intended to refer to the supervisory jurisdiction of the courts over the arbitration. It did not require disputes to be litigated in the Hong Kong courts. Similarly, the approach of the French Cour de cassation5 has been to ensure that where there is an apparent contradiction between an arbitration clause and a clause providing for the jurisdiction of courts, the arbitration clause should prevail.
In resolving the apparent contradiction between the dispute resolution clauses in P. T. Tri-M.G. v Norse, the Singapore High Court followed the approach taken in Paul Smith and Arta Properties. The jurisdiction clause was construed as a submission to the Singapore court's supervisory jurisdiction over the arbitration and not, as the lessor had suggested, an option for the parties to elect between arbitration and litigation. In this way, although the terms in which the contract was drafted attracted the criticism of the Court, the two dispute resolution clauses were reconciled without either being deprived of effect. The difficulties presented by the clauses were overcome by the process of judicial construction, and the application to stay the proceedings in favour of arbitration was granted.
Conclusion and Practical Considerations
In the heat of commercial negotiations, it is often easy to overlook the importance of the choice between arbitration and litigation, but the decision of the Singapore High Court in P. T. Tri-M.G. v Norse is a timely reminder that the issue should be addressed with caution. Although courts in a range of jurisdictions have where possible shown themselves willing to uphold and give effect to arbitration clauses, drafting ambiguity in relation to this important question has the potential to lead to uncertainty and unpredictability. In a worst case scenario, a party that intended disputes to be resolved by way of arbitration may find that a purported arbitration clause is ineffective. As arbitration is not possible without the prior agreement of the contracting parties, the anticipated advantages of arbitration as an alternative dispute resolution technique would therefore be lost. In such circumstances, disputes would almost invariably be resolved by way of litigation. Where the forum for the litigation is a foreign and unfamiliar jurisdiction, this may be an undesirable outcome.
Japanese parties to contracts with international counterparties should take heed of the reminder presented by P. T. Tri-M.G. v Norse, and bear in mind the following when drafting the dispute resolution clause for their agreements:
- the dispute resolution clause should be clear and unambiguous;
- in most cases, contracting parties will wish to agree upon either arbitration or litigation, and there should be clear identification of whether disputes are to be resolved through one or other process; and
- in certain circumstances, it may be appropriate for the contracting parties to select arbitration for one type of dispute and litigation for other types of dispute. If so, it is imperative that the different dispute resolution clauses are drafted carefully, so as to make sure there is no inconsistency between the clauses and that there is no doubt about what was intended by the parties.