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Singapore Court of Appeal espouses Standards to be met when Setting Aside an Arbitral Award; Reinforces Singapore’s Pro-Arbitration Policy

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In a judgment delivered on 31 March 2014, the Singapore Court of Appeal reinforced Singapore’s pro-arbitration stance by reinstating parts of an arbitral award that had previously been set aside, in its entirety, by the High Court. This case, AKN and another v ALC and others and other appeals [2015] SGCA 18 (“AKN v ALC”), is noteworthy for prescriptively setting out a number of important principles concerning the setting aside of arbitral awards.

Background

AKN v ALC stemmed from an arbitration administered by the Singapore International Arbitration Centre (the “SIAC”). The underlying dispute arose from an Asset Purchase Agreement (the “APA”) entered into between the liquidators of an insolvent corporation (the “Liquidators”), the corporation’s secured creditors (the “Secured Creditors”) and purchasers (the “Purchasers”) who bought, under the APA, a production facility (and its machinery) (the “Assets”) from the corporation. Under the APA, the Liquidators and the Secured Creditors had agreed to sell the Assets to the Purchasers “free from and clear of all Liens of any kind”.¹ In return, the Purchasers and the Secured Creditors entered into another omnibus agreement (the “OMNA”) under which the Purchasers would issue notes to the Secured Creditors and to make subsequent payments based on these notes.

The Purchasers subsequently discovered that government taxes in respect of the Assets were not paid. This, the Purchasers claimed, breached the APA insofar as the Liquidator and the Secured Creditors had failed to deliver the Assets to the Purchasers “free from and clear of all Liens of any kind”.² On such breach, the Purchaser invoked the arbitration clause in the APA and initiated an SIAC arbitration against the Liquidator and the Secured Creditors. An investment fund that bought the notes issued under the OMNA (the “Fund”) was subsequently joined to the arbitration as a party.¹

The Arbitration

The crux of the dispute at the arbitration was whether or not the Liquidator and Secured Creditors had indeed breached their obligation to deliver the Assets free from encumbrances. The substantive hearing took place from 14 March 2011, and an award (the “Award”) was eventually issued on 9 May 2012 (this Award was amended twice, first by a further partial award of 15 June 2015 and second by a memorandum of corrections of 5 July 2012).

In its Award, the three-member Tribunal generally agreed with the Purchasers that the Liquidator and the Secured Creditors had breached the APA by having failed to ensure that the Assets were free of encumbrances. The Tribunal took the view that the statutory liens arising over the Assets as a result of the unpaid taxes meant that the Assets were not delivered on a clean title. Accordingly, the Tribunal awarded the Purchasers US$80 million in damages for loss of opportunity to make profits.

The Tribunal also found that the Secured Creditors had further breached another term of the APA by having failed to settle a number of legal proceedings with some thirdparties who had tried to claim ownership over certain parts of the Assets. In respect of this, the Tribunal awarded the Purchasers another US$23.7 million as indemnity.

The Setting-Aside Application Before The Singapore High Court

The Liquidator, Secured Creditors and the Fund (collectively, the “Respondents” in the ensuing appeal) applied to the High Court for the Award to be set aside. Such application was made on the following two grounds:

1. The Tribunal had breached the principles of natural justice (pursuant to section 24(b) of the International Arbitration Act) read with Article 34(2)(a)(ii) of the UNCITRAL Model Law) by failing to:

a. consider a number of submissions advanced by the Respondents; and

b. give the Respondents the opportunity to address the Tribunal on issues relating to a claim in loss of profits raised by the Purchasers.

2. The Tribunal had exceeded its jurisdiction (pursuant to Article 34(2)(a)(iii) of the UNCITRAL Model Law) by having:

a. considered issues that were never submitted by the parties;

b. granting the Purchasers relief in respect of their payment obligations under the OMNA (which did not include an arbitration clause); and

c. decided that the Fund was eventually liable (alongside the Secured Creditors) to the Purchasers was made in excess of the Tribunal’s jurisdiction.

The High Court set the entire Award aside based on its finding that the Tribunal failed to consider a number of submissions put forth by the Liquidator. The High Court also found that natural justice had further been breached because the the Tribunal had failed to consider some other submissions advanced by the Secured Creditors, and had failed to give the Liquidator and the Secured Creditors an opportunity to deal with the question concerning the Purchasers’ loss of profits.

In addition, the High Court found that the Tribunal had exceeded its jurisdiction by granting the Purchasers damages for loss of profits (because such claim was not submitted to the Tribunal in the arbitration proceedings) and by granting the Purchasers relief under the OMNA.

The Appeal And Its Ensuing Principles

The Court of Appeal eventually reinstated parts of the Award. In the interests of brevity, this present article does not propose to undertake a methodical analysis of the Court of Appeal’s reasoning. Rather, the following sections will set out a number of principles concerning the setting aside of arbitral awards laid down by the Court of Appeal.

Some of these principles have been espoused in past decisions while some others are novel. However, all are noteworthy because, collectively, they embody a holistic approach proffered by our apex court in respect of applications to set aside arbitral awards. The Court of Appeal reinforced the pro-arbitration stance of the judiciary by narrowly interpreting what constitutes breaches of justice or an excess of Tribunal authority under which arbitral awards can be set aside.

The courts should not, and cannot, interfere in the merits of an arbitral award

Just as parties to an arbitration enjoy the flexibilities and freedom of choice inherent in the principle of party autonomy, they must also accept the consequences of the choices they make, including their choice of arbitrators. The courts must not interfere in the merits of an arbitral award, even if it is one that has been arrived at or reasoned badly, maybe even erroneously.³ In the words of the Court of Appeal, the courts cannot “bail out parties who have made choices that they might come to regret, or offer them a second chance to canvass the merits of their respective cases.”The Court of Appeal underscored this as the foundational principle buttressing the policy of minimal curial intervention in arbitration – a position that the Singapore judiciary has consistently adopted.

A tribunal’s failure to consider a submissions raised by a party may amount to a breach of natural justice, but such breach is narrowly defined

The courts will not set aside an award that has been “incorrectly” decided. However, they can do so if an award was not made following due process, or, in other words, when notions of natural justice have been breached. Unfortunately, what constitutes such breach has been an issue that has been hotly contested, no less because of arbitration’s procedural malleability and the broadness of what constitutes fairness in proceedings. As a result, parties have been to known to come before the courts alleging a whole host of Tribunal conduct as having breached natural justice in attempts to set aside awards unfavourable to them.

It is exactly such disingenuous challenges that the Court of Appeal in AKN v ALC warned of: counsel acting for an applicant in a setting-aside action may attempt to mask an appeal on the merits as a challenge to procedural fairness. To prevent falling for such a masquerade, the courts must “[assess] the real nature of the complaint”5 when a breach of natural justice is alleged as a ground for setting aside.

The Court of Appeal revisited Front Row Investment Holdings (Singapore) Pte Ltd v Daimler South East Asia Pte Ltd [2010] SGHC 20 (“Front Row”). Front Row stood for the principle that there would be a breach of natural justice if a tribunal:

1. disregards a party’s submissions; or

2. had regard to a party’s submissions in a superficial sense without making any attempt to understand these submissions.

In addition to these principles, the Court of Appeal held that whether or not a tribunal failed to consider a submission would usually be a matter of inference rather than that of explicit indication (short of a tribunal professing that it had not considered a particular submission). According to the Court of Appeal, such inference must be “clear and virtually inescapable6 – an extremely high standard to meet. An example would be that which happened in Front Row, where it was abundantly clear that the tribunal did not consider a submission made by a party because the tribunal was of the view that such party had abandoned the submission.

Conversely, the following conduct by a tribunal will not amount to a breach of natural justice:

1. Misunderstanding or failing to understand a submission or a case presented.

2. Not mentioning or engaging with a submission raised by a party (in the proceedings or in an award).

3. Choosing not to deal with a particular submission raised because the tribunal thinks it to be unnecessary.

4. Having been mistaken as to the law relating to a submission raised.

5. Rejecting an argument, whether implicitly or otherwise, and whether rightly or wrongly.

6. Poor reasoning in reaching a decision.

7. Muddling the facts, law and arguments in a dispute.

As can be seen, the threshold to meet when attempting to prove that a tribunal failed to consider an argument is very high: short of showing that the argument has never even crossed the tribunal’s mind, an aggrieved party is unlikely to be able to make out such an assertion.

Further, it is worth mentioning (although this is a trite and time-honoured point) that, for an award to be set aside based on a breach of natural justice, it must be shown that:

1. the breach had materially affected the conclusion reached by a tribunal in its making of the award; and

2. the breach has caused the aggrieved party to suffer real or actual prejudice.

A tribunal’s failure to give a party an opportunity to address an issue material to the case may amount to a breach of natural justice

Natural justice may be breached if, in an arbitration, a tribunal allows one party to raise a new claim at the eleventh hour, thereby depriving the other party of ample time and opportunity to prepare its own evidence and response to the new claim.

This was what happened in the arbitration that gave rise to AKN v ALC. The Tribunal allowed the Purchasers to raise a claim concerning loss of opportunity to make profits at the very last minute. After doing so, the Tribunal indicated to the Parties that, following the Purchasers’ tendering of such a claim, there was a need for the Tribunal to hear further evidence and submissions on this new claim before coming to a decision on it. Despite this, the Tribunal did not request further arguments from the Parties on this issue. As a result, the Liquidator and the Secured Creditors could not, and did not, submit arguments and expert evidence on this issue.

The Court of Appeal therefore found that natural justice had been breached on this point, and allowed the part of the Award relating to the loss-of-opportunity claim to be set aside.

An award may be set aside if a tribunal has acted in excess of its jurisdiction

The Court of Appeal confirmed, having regard to PT Prima International Development v Kempinski Hotels SA and other appeals [2012] 4 SLR 98, that a tribunal can be considered to have acted ultra vires its jurisdiction if it makes an arbitral award that neither party requested. However, in order for an award to be set aside on the basis of such ultra vires act, the court must further be satisfied that the aggrieved party has suffered actual or real prejudice (as was stated in CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] 4 SLR 305).

The Court of Appeal further drew a distinction between a tribunal erroneously exercising an available power vested in it and a tribunal exercising a power that it did not possess. The former amounts to no more than an error of law (which is not grounds for setting aside an award); an example would be when a tribunal miscalculates damages that the scope of the arbitration empowers the tribunal to award (because a party has pleaded such damages). The latter is in excess of a tribunal’s jurisdiction (and can be a ground for setting aside an award); an example is when a tribunal awards a head of damage that was never expressly pleaded by either party.

In AKN v ALC, the Respondents argued that, because the Purchasers only advanced a generic claim for damages at the arbitration, the Tribunal, by having awarded the Purchasers damages for loss of opportunity, had exceeded its jurisdiction. The High Court judge agreed with the Respondents at first instance. However, the Court of Appeal took an opposite view, holding that a generic claim of damages was broad enough to encompass a loss of opportunity claim. Had the Purchasers, during the arbitral proceedings, brought an application to amend its loss of profits claim into a loss of opportunity claim, the Tribunal would have the discretionary jurisdiction to permit such amendment.

It can thus be seen that, for a tribunal to be considered to have acted beyond its jurisdiction, it must have made an award or decision on either an issue or claim that neither party has pleaded or envisaged, or on an issue or claim that cannot be legally subsumed under any of those expressly pleaded by parties.

A further and important principle confirmed by the Court of Appeal in relation to a tribunal having acted ultra vires is that, in such situations, a court hearing the setting-aside application can conduct a de novo review, i.e. consider the merits of the case. This is an exception to the basic principle that courts should not engage with the merits of a dispute in setting-aside applications. In addition, it is also apposite to note that a de novo review in such cases do not necessitate a complete rehearing of all witness and oral evidence. The court, in conducting a de novo review, can do so only with regard to affidavit and documentary evidence alone. This was confirmed in an earlier High Court decision of AQZ v ARA [2015] SGHC 49.

An arbitral award may be set aside in whole or in part

The Court of Appeal’s decision in AKN v ALC made clear that, even if an arbitral award is found to be tainted by breach of natural justice or decision of a tribunal that is in excess of the tribunal’s jurisdiction, it does not follow that the entire award must be set aside.

According to the Court of Appeal, the High Court judge erred in having set aside the whole award based on his findings. Rather, only parts of the award (dealing with specific issues or claims) affected by the defective arbitral procedures need to be set aside; the remaining untainted parts should be upheld. It was on this basis that the Court of Appeal reinstated parts of the Award underlying AKN v ALC.

This has implications for parties looking to set aside arbitral awards: it should be borne in mind that a single, isolated allegation of procedural defect, if successful, will not work to defeat the entire award. Counsel must be clear as to what exactly the defect complained of entails, and which parts of an award such complaints strike at, as opposed to advancing vague notions of procedural breaches in a misguided attempt to topple an entire award.

Conclusion: The Court Of Appeal Has Confirmed Singapore’s Pro-Arbitration And Pro-Enforcement Policy

AKN v ALC is one of a long line of cases that reiterate the pro-arbitration approach of the Singapore courts. This decision is especially important because it was delivered by the Court of Appeal, and one that prescriptively sets out the extremely high standards of proof to be met when attempting to set aside an award based on a breach of natural justice or a claim that a tribunal has acted beyond its powers. These high thresholds mean that a party seeking to set aside an award cannot rely on vague notions of procedural injustice; its allegations must be focused, directed and evince a clear breach of procedural fairness. A party should also not expect to have an entire award set aside based on limited allegations of breach because awards can be set aside either in whole or in part.

Patrick Tan

Chief Executive Officer
DID: +65 6645 4500
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