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Singapore Court agrees: make up your mind when choosing law and jurisdiction

02.10.2018 Maritime

Nicholas Lum

Nicholas Lum Partner

Peter Huang

Peter Huang Associate

Shanghai Turbo Enterprises v. Liu Ming [2018] SGHC 172

Parties should not contract on a “floating” governing law clause – i.e. a clause that provides for two or more governing laws and leaves the exercise of the choice until a later stage. The English courts have traditionally found that such clauses are unenforceable. In this recent decision, the Singapore High Court accepted that Singapore law adopts a similar position to English law. Having struck down the governing law clause, the Court ruled further that an inextricably linked “floating” jurisdiction clause was also unenforceable. Parties to international contracts should carefully consider and expressly set out their choice of law and forum at the outset. Losing an enforceable law and jurisdiction clause can result in ceding serious tactical advantages in litigation.

What is floating choice of law and jurisdiction?

This case concerned a company director’s terms of service entered into between a PRC Chinese resident and a Singapore listed company, which included the following law and jurisdiction 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.”

The clause can be broken down into two limbs. The first limb before the word “and” (emphasis above) provides for a choice between PRC and Singapore law as the governing law.  The latter part of the clause then provides for a choice between the PRC and Singapore courts to assume jurisdiction.

The Singapore High Court held that this clause was unenforceable in its entirety.

First limb - Floating choice of law clauses are generally unenforceable

As far as the first limb (the floating law clause) was concerned, the Singapore High Court accepted a longstanding English law rule – that floating choice of law clauses are unenforceable. The reasoning behind this rule is a compelling one. Any contractual clause derives its meaning and effect from the governing law. The corollary is that there must be certainty in the governing law clause; failing which, parties to a contract will not know from which perspective to interpret a clause or perform their obligations.

It should also be kept in mind that a floating governing law clause does not become enforceable just because it provides for a mechanism for making the choice. In past cases, the English courts have struck down clauses allowing one party to choose a governing law out of a named few.

As clear from the above, whether under Singapore law or English law, a choice of law clause would only be enforceable if a definite and singular choice is made from the outset.

Second limb - Floating choice of jurisdiction clauses are unenforceable too if inextricably linked to a floating choice of law clause

Moving onto the second limb, the English courts generally adopt a more permissive attitude towards floating jurisdiction clauses as compared to floating choice of law clauses.  Reference is more often made to “non-exclusive jurisdiction clauses”, rather than to “floating jurisdiction clauses”. Such clauses are frequently adopted and are not generally struck down by the courts, even where the parties name more than one jurisdiction on a non-exclusive basis. The point to note is that, in all such cases, the choice of law needs to be a definite one. 

This more “relaxed” attitude is underpinned by a set of rules that quite readily determines the proper forum to hear a case. The law also assumes that the courts can generally administer or determine questions arising under foreign law. Accordingly, the scope of the parties’ rights and obligations can still be ascertained, in the first instance, with certainty by reference to a definite governing law.

However, the position differs if the floating jurisdiction clause is tied to a floating law clause.  In this case, the Singapore Court held that, where the floating jurisdiction clause is too inextricably linked with the floating law clause, the former could not survive alone without the latter. The Court interpreted the entire clause as meaning that the parties will go before a Chinese court if they so choose Chinese law, and vice versa for Singapore law and jurisdiction. The Court reasoned further that, without the first limb, the contract provided no mechanism to choose between the two jurisdictions. To read the second limb as meaning that the parties submitted to the jurisdiction of both China and Singapore was inconsistent with the plain wording adopted in the clause (“the Courts of Singapore/or People’s Republic of China”).

Practical significance

The strategic advantage of litigating in a jurisdiction of choice is clear to those familiar with cross-border dispute resolution. In this case, having declined to assume jurisdiction over the matter, the Singapore Court consequently set aside a range of powerful interim orders that the Plaintiff had initially obtained, including Mareva injunctions on assets, and prohibitory injunctions on the exercise of rights attached to shares.

Comment

In the shipping context, it is not uncommon to encounter back-to-back claims in a charterparty or sale contract chain. Enforceable and definitive choice of law and jurisdiction clauses are key to the smooth passing of claims through the chain. Care must also be taken to examine the bills of lading, which often incorporate governing law and jurisdiction clauses by reference to the charterparty which may or may not be readily available.

A floating choice of law clause and an associated floating jurisdiction clause are more likely than not to be unenforceable before the English courts and Singapore courts alike. To ensure certainty and prevent unnecessarily time-consuming and costly litigation, parties should avoid incorporating “floating” governing law and jurisdiction clauses in their contracts.

Article authors:

Nicholas Lum Peter Huang