Arbitration: When and How to Arbitrate Business Disputes in Singapore
Arbitration is an alternative method of dispute resolution and can be chosen over commencing a suit in court in Singapore.
This article will explain:
- The differences between arbitration, litigation and mediation
- When arbitration might be suitable for your business dispute
- The arbitration procedure
- How to have your business dispute submitted to arbitration
- How to draft an arbitration clause
How is Arbitration Different from Litigation?
In ordinary litigation, your case goes before a judge in a public court who decides the outcome of your dispute. However in arbitration, you and the other party are able to choose and appoint the judge or judges (called “arbitrators”). You may choose to only appoint arbitrators who have certain qualifications, or who are of a certain nationality.
You and the other party will have to pay fees to this arbitrator(s) to decide the outcome of your dispute. This is unlike litigation, where the judge himself does not charge a fee for deciding on your dispute for you.
The number of arbitrators is typically 1 or 3 and is usually determined in advance when parties agree to resolve any future disputes by arbitration in their contract. For reasons of cost, it is preferable to have a sole arbitrator for low-value disputes (i.e. below S$500,000).
Also, arbitration is confidential. As it takes place in private, it is typically not reported in the press. Parties to the arbitration and arbitrators are obliged to maintain confidentiality of all matters relating to the arbitration proceedings as well as the arbitration award (explained below).
How is Arbitration Different from Mediation?
In mediation, you and the other party attempt to reach a settlement with the help of a neutral third- party, the mediator. He cannot give a decision and force parties to accept any particular outcome. The mediator can only facilitate the negotiation.
Hence, if either of the parties give up on the mediation process, they can walk away from the mediation and take their dispute to court or arbitration.
This is different from arbitration where the arbitrator makes a decision that is legally binding on the parties. Even if the parties don’t like the arbitral process, they will still be committed to it. They can’t simply walk away and choose to pursue their case in court instead.
When Might Arbitration be Suitable for Your Dispute?
As mentioned above, arbitration proceedings are kept confidential. Therefore, if confidentiality is important to your company, you may want to consider arbitration. For example, if you are a public listed company that is concerned about the impact of minute details of your company’s disputes on your share price, arbitration is worth considering.
You may also wish to consider arbitration if your company needs funding and you are concerned that litigation searches may make lenders less likely to extend credit to your company (after finding out that your company is being sued). In this case, arbitration may be one way to keep the large contingent liabilities that your company’s disputes represent out of the public forum.
Arbitration might also be particularly suitable for your company if the other companies you do business with are located in different countries. This is because the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. a key instrument in international arbitration) has been signed by almost 160 countries around the world, including Singapore.
This makes the process for enforcing an arbitral award (explained below) overseas relatively straightforward and predictable. This is compared to the process of attempting to enforce a court judgment in a foreign country, for which the corresponding applicable treaty has been ratified by only a handful of countries (excluding Singapore).
The above point is important because securing a judgment in your favour is just the first step in successfully suing another party. The next step is enforcing that judgment against their assets in whatever country their assets are. This can be the step where many otherwise meritorious claims can flounder, suffer from considerable delay or fail entirely, particularly if the country in which the assets are located has a very different legal system to the one where the judgment comes from.
When Might Arbitration Not be a Suitable Option for Your Dispute?
Arbitration may not be suitable for your dispute if the value of your transaction/project/deal is less than S$500,000. This is because the cost of arbitration, once you add up administrative fees, arbitrators’ fees, legal costs and disbursements, is likely to amount to several hundred thousand dollars.
If you do choose to arbitrate a dispute involving a value of less than S$500,000, it may mean that you are putting your business at risk of high cost and failure for a small reward, possibly less than and insignificant to the value of your project.
How are arbitration rules and procedure determined?
Generally, arbitrations are conducted in accordance with a set of institutional rules selected by parties in advance. There are many different set of such rules to choose from. In Singapore, the most popular are the rules of the Singapore International Arbitration Centre (SIAC), a not-for-profit organisation that provides arbitration services.
However, it is also possible (though seldom advisable) to run an arbitration without any set of rules. This is known as an ad-hoc arbitration.
In addition to any institutional rules selected, the arbitrator may issue procedural orders and/or terms of reference which will set out further procedural rules of a more granular nature to govern the procedure to be adopted for the arbitration. This is usually with the consent of both parties and subject to negotiation between them on the procedure they want.
Enforcement of arbitral award
An arbitral award is the decision of the tribunal at the end of an arbitration. Enforcement of an arbitral award (i.e. forcing the other party to comply with it) ordinarily involves simply registering the arbitral award with the relevant court in the jurisdiction in which the losing party’s assets are located, in accordance with the rules of court and other procedural requirements applicable in that jurisdiction.
Typically, assuming the court is in a jurisdiction which has ratified the New York Convention, the court will simply enforce the award without examining the underlying rationale of the arbitral tribunal or the procedure adopted in arriving at that award, with a few very limited and technical exceptions. Such exceptions tend to vary slightly from one jurisdiction to another.
How Can You Have Your Business Disputes Submitted to Arbitration?
So if that all sounds like it would work for your company, how do you get your disputes resolved by arbitration? Well while parties can agree in theory to submit their dispute to arbitration when it arises, usually when disputes arise, parties are not particularly agreeable to doing anything that the other party wants them to do.
Therefore it is much more common for parties to agree to arbitration within the main contract they sign when they first enter into a business relationship with each other. This means planning in advance.
While parties never like to think about what happens when a business relationship sours at the point in which they enter into it, like signing a pre-nuptial agreement when getting married, it’s generally advisable to deal with this issue at the outset to avoid a lot of uncertainty later. This typically requires an arbitration provision to be included in the dispute resolution clause of the contract.
This arbitration clause is sometimes referred to as an arbitration agreement (even though it is usually not a separate agreement) as it is essentially an agreement to arbitrate.
How to Draft an Arbitration Clauses/Agreements
It is generally advisable to simply copy and paste the model arbitration clause recommended by the arbitral institution of your choice into your contract. This can avoid a lot of headaches and uncertainty later. For example, the model clause for arbitrating a dispute at the SIAC can be found here.
Tweaking these standard clauses can sometimes create obstacles to securing an enforceable award. This is therefore not recommended unless being done by lawyers experienced in arbitration.
Arbitration agreements should be in writing and signed by both parties.
Considerations when drafting the arbitration clause/agreement
Where the arbitration should be conducted
You can choose the location of the arbitration (i.e. the “seat” of the arbitration) to be wherever you like. Parties typically like to select a neutral venue where neither party is domiciled.
Singapore is a popular venue due to it being a very pro-arbitration jurisdiction whose courts consistently uphold the primacy of arbitration agreements, the validity of arbitral awards and readily give effect to interim orders for various kinds of injunctive and other relief.
Ultimately, the only consideration that really matters is making sure that the country you select is a signatory of the New York Convention. You can check if a country has signed the New York Convention here.
What laws should govern the arbitration
Wherever you choose to hold your arbitration, by default the arbitral law (also known as “lex arbitri”) of that jurisdiction will apply to it.
So for example, if you hold your arbitration in Singapore, it will be governed by Singapore’s Arbitration Act (where both parties are domiciled in Singapore) or the International Arbitration Act (where at least one party is not domiciled in Singapore).
The arbitral law should not be confused with the governing law of your contract which is usually expressed as a separate clause of your agreement. The governing law of the contract is the law of the country that will determine how the terms of your contract are construed and interpreted. It will also determine what other statutes or national laws will affect the legal relations between the parties and their respective rights and obligations.
In contrast, the arbitral law only determines what country’s procedural law applies to your arbitration. This has to do with things like how arbitral awards are enforced or how legal effect is given to an arbitral tribunal’s decisions. It is not unusual for the arbitral law and governing law of the contract to be different in an arbitration.
Arbitration comes with a high degree of both procedural flexibility and certainty which makes it a popular choice for a lot of companies.
If your company engages in high-value transactions or projects with companies located in different jurisdictions, it is worth giving some serious consideration to ensuring your contracts contain an arbitration clause going forward.
Should you require any assistance in drafting an arbitration clause, or being legally represented in an arbitration, please feel free to contact one of our commercial dispute lawyers.
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