Pathological Arbitration Clauses: How Singapore Courts Treat a Defective Clause

What makes an arbitration clause pathological

A pathological clause is simply a defective one, and the label carries no legal consequence of its own. The Court of Appeal said as much in Insigma Technology Co Ltd v Alstom Technology Ltd: there is no magic in the term, and whether the clause can be upheld depends on the nature and extent of its pathology rather than on the description.

The term was coined by Frederic Eisemann in a 1974 essay on la clause d'arbitrage pathologique. It covers the ordinary run of drafting accidents: a clause naming an institution that does not exist, one nominating two sets of rules at once, one that fixes a seat but no procedure, and one that leaves it unclear whether some earlier step had to be taken before arbitration could begin.

What these have in common is that the parties plainly meant to arbitrate and the document does not quite say how. That gap is where a counterparty who has changed its mind goes to work, because a defective clause offers the argument that there is no binding arbitration agreement at all and the dispute belongs in court.

The controlling principle is effective interpretation

Where the intention to arbitrate is clear, a Singapore court gives effect to it and treats the drafting defects as problems to be solved. The governing statement is from the Court of Appeal in Insigma, and it repays close reading, because every later case turns on its qualifications rather than on its opening words.

Two limits sit in the second half of that sentence. The arbitration must be capable of being carried out without prejudice to the rights of either party, and the result must be within the contemplation of both. The principle is not a licence to rewrite. A court will repair a clause; it will not build one the parties never agreed to, and it will not save a clause by imposing a procedure that disadvantages one side.

The Court of Appeal noted that this approach is similar to what international arbitration law calls the principle of effective interpretation, under which an arbitration agreement is construed so as to give it effect rather than to defeat it.

Eisemann's four elements, and the one that usually fails

The severity of a defect is measured by which of the four functions of an arbitration clause it disables. In HKL Group Co Ltd v Rizq International Holdings Pte Ltd the court assessed the clause against Eisemann's four essential elements, which require an arbitration clause to produce mandatory consequences for the parties, to exclude the intervention of the courts before an award is made, to give the arbitrators power to resolve the dispute, and to permit a procedure that is efficient and leads to an enforceable award.

Most real defects sit in the fourth element, and that is the least damaging place for them to sit. A clause that unmistakably binds the parties to arbitrate but leaves the machinery uncertain is a clause a court can make workable.

The clause that named an institution which did not exist

A clause referring disputes to a body that does not exist can still be operative. The clause in HKL sent disputes to an "Arbitration Committee at Singapore" under ICC rules. There is no such committee, and the ICC maintains no national committee in Singapore. The clause had been drafted without legal help, in a contract for the sale of sand shipped from Cambodia to Singapore, and when the seller was not paid in full it sued and the buyer asked for a stay in favour of arbitration.

The court held the clause workable. Four features carried it: the parties had clearly intended to arbitrate, the clause produced mandatory consequences, it fixed Singapore as the seat, and it nominated the ICC rules as the procedural framework. The only thing missing was an institution able to administer them, which is a deviation from Eisemann's fourth element and nothing more.

Hybrid arbitration: one institution, another's rules

Singapore recognises an arbitration administered by one institution under the rules of a different one. That was the arrangement upheld in Insigma, where the Singapore International Arbitration Centre was able and willing to administer an arbitration applying the ICC rules, and it is the remedy the court reached for in HKL. Proceedings were stayed on the condition that the parties obtain the agreement of an arbitral institution in Singapore to conduct a hybrid arbitration applying the ICC rules.

The mechanism honours what the parties actually chose. They selected a body of procedural rules, and those rules can be applied by a competent administering institution other than the one that wrote them. The court described the hybrid as inelegant and a last resort rather than a preferred form, and in HKL itself the parties never used it: they agreed instead on a straightforward arbitration before the Singapore International Arbitration Centre.

That outcome is the point. The value of the hybrid remedy lies less in its use than in its existence. It keeps the arbitration agreement alive while the parties negotiate something workable, which removes much of the incentive to litigate the defect.

Whether the ICC can stop a hybrid arbitration

An institution cannot use its own rules to prevent another institution applying them. Article 1(2) of the ICC Rules claims for the ICC's International Court of Arbitration the sole authority to administer ICC arbitrations. In the second HKL decision that provision was said to bar the hybrid the court had contemplated. The argument failed, on a point about where the force of institutional rules comes from.

The reasoning is that the power of institutional rules to bind comes from the consent of the parties, not from the institution's assertion of authority. Once that is accepted, a rule by which an institution reserves administration to itself binds the parties as between themselves and that institution. It does not enlarge the institution's control over what a court may do with a defective clause.

Where the court's willingness runs out

The question is always whether the clause can be made to work, not whether it was well drafted. In HKL the court framed the issue as whether the arbitration clause was, in the words of the International Arbitration Act which it quoted, "null and void, inoperative or incapable of being performed", and held that it was not, provided the parties could secure an institution willing to act.

Read against the qualifications in Insigma, three things will defeat a clause. A clause that does not bind the parties to arbitrate at all is not a defective arbitration agreement but an absent one. A construction that would prejudice one party's rights is unavailable however clear the intention. And an outcome outside what both parties contemplated cannot be imposed, which is why the court asks what the clause's language admits rather than what would be commercially sensible.

The practical exposure is therefore rarely the loss of the arbitration. It is the satellite dispute: an application, evidence, argument and an appeal risk, all before the substantive claim has moved at all.

Conditions precedent need clear words

A step the parties must take before arbitrating binds only if the clause says so clearly. Multi-tier dispute resolution clauses are common, particularly in construction contracts on FIDIC forms, and they routinely require an attempt at amicable settlement first. Whether that attempt is a true precondition decides whether an arbitration commenced without it is premature.

The Singapore International Commercial Court added a reason worth keeping in mind when drafting, because it explains why the burden falls on the party asserting the precondition.

Why 'unless settled amicably' was not enough

Three features of the drafting in CZQ defeated the argument that settlement was a precondition. The contract had replaced the standard FIDIC adjudication board with a two-stage negotiation: representatives were to meet within seven days, and failing agreement, senior officers within fourteen.

First, the arbitration sub-clause opened with the words "Unless settled amicably" but contained no cross-reference to the settlement sub-clause or its procedure. Second, "settled amicably" was not a defined term, so it bore its ordinary meaning, and any dispute not resolved by agreement could go to arbitration whatever method had been attempted. Third, the settlement provision said that either party "shall notify", which the court read as meaning either party may start the process and neither is obliged to.

The court contrasted clauses from other cases where a precondition had been upheld, and in those the arbitration clause expressly referred to the settlement procedure and said arbitration could be commenced only after it had been exhausted. The decision turned on a construction of the dispute resolution clause as a whole rather than on any single sub-clause read alone.

What this means for your contracts

The law rewards two disciplines at the drafting stage and punishes their absence at the dispute stage. Neither costs anything to apply while the contract is being negotiated.

1. Adopt the institution's own model clause and do not modify it. The recommended clauses published by the major institutions have been tested in litigation. Variation is where pathologies enter, and the variation usually does no work the model clause was not already doing.
2. Verify that the institution you name exists and will act under the rules you have specified. This is a short check that removes the most common defect in the reported cases.
3. Make every mandatory step expressly mandatory. If a settlement step must precede arbitration, the arbitration clause itself must cross-refer to it and say that arbitration may be commenced only once it is exhausted. Permissive words will not do it.

The firm's work on arbitration agreements sits alongside our notes on enforcing an arbitration agreement in Singapore and on protecting an award from challenge, which take up what happens after a clause has done, or failed to do, its work.

This article is provided for general information purposes only and does not constitute legal advice. Specialised legal counsel should be sought for specific fact patterns.