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    08:58 PM Fong Wei Li (Senior Associate, Fortis Law Corporation)

    Singapore Court of Appeal Espouses Standards to be Met When Setting Aside an Arbitral Award and Reinforces Singapore's Pro-Arbitration Policy

        

    In a judgment delivered on 31 March 2015, the Singapore Court of Appeal in AKN and another v ALC and others and other appeals [2015] SGCA 18 (“AKN v ALC”) distilled a number of important principles concerning the setting aside of arbitral awards. In particular, the Court of Appeal, being cognisant of the number of recent cases in which a party sought to set aside an arbitral award on the basis of a breach of natural justice under s 24(b) of the International Arbitration Act (Cap. 143A) (“IAA”), focused on the principles concerning the setting aside of arbitral awards for breach of natural justice. In this decision, the forensic approach of the Court of Appeal to the setting-aside application resulted in the reinstatement of parts of the arbitral award that had previously been wholly set aside by the High Court, thus reinforcing Singapore’s pro-arbitration stance. 

    Facts

    Introduction

    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” (AKN v ALC at [7]). 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 make subsequent payments based on these notes. 

    The Purchasers subsequently discovered that government taxes in respect of the Assets were not paid. They claimed that this 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” (AKN v ALC at [7]). On this breach, the Purchaser invoked the arbitration clause in the APA and initiated 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 and subsumed under the Secured Creditors.

    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 (and subsequently amended twice). 

    In its Award, the three-member Tribunal generally agreed with the Purchasers that the Liquidator and the Secured Creditors had breached the APA by failing 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 with 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 breached another term of the APA by failing to settle a number of legal proceedings with some third parties 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 on the following two bases. 

    • The Tribunal 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: 
      • consider a number of submissions advanced by the Respondents; and
      • give the Respondents the opportunity to address the Tribunal on issues relating to a claim in loss of profits raised by the Purchasers. 
    • The Tribunal exceeded its jurisdiction  (pursuant to Article 34(2)(a)(iii) of the UNCITRAL Model Law) by having:
      • considered issues that were never submitted by the parties;
      • granted the Purchasers relief in respect of their payment obligations under the OMNA (which did not include an arbitration clause); and
      • decided that the Fund was eventually liable (alongside the Secured Creditors) to the Purchasers. 

    The High Court set aside the entire Award 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 there was a breach of natural justice because the Tribunal had failed to consider other submissions advanced by the Secured Creditors and to give the Liquidator and Secured Creditors an opportunity to deal with 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 as well as relief under the OMNA. 

    Decision and commentary

    The Court of Appeal eventually reinstated parts of the Award. In the interests of brevity, the following sections will consider some principles concerning the setting aside of arbitral awards laid down by the Court of Appeal.

    The principles are noteworthy because they collectively embody our apex court’s holistic approach to applications to set aside arbitral awards.  The Court of Appeal reinforced the judiciary’s pro-arbitration stance 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 with the merits of an arbitral award

    Just as parties to an arbitration enjoy flexibilities and freedom of choice, they must also accept the consequences of the choices they make – including their choice of arbitrators. The courts must not interfere with the merits of an arbitral award, even one arrived at or reasoned badly, maybe even erroneously. This was confirmed in Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd [2010] 3 SLR 1, which held that no challenge can lie against an arbitral award even when such award contains a manifest or egregious error of law or fact.

    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” (AKN v ALC at [37]). This principle buttresses the policy of minimal curial intervention in arbitration – a position the Singapore judiciary has consistently adopted. 

    • A tribunal’s failure to consider a submission 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 was “incorrectly” decided. However, they can do so if an award did not follow due process; in other words, when notions of natural justice were breached.  Unfortunately, what constitutes such breach is a hotly-contested issue, not least because of arbitration’s procedural malleability and the broad definition of fairness in proceedings. As a result, parties have been known to come before the courts alleging a host of breaches of natural justice in tribunal conduct in order to set aside unfavourable awards.

    It is precisely such disingenuousness that the Court of Appeal in AKN v ALC warned against: counsel acting for an applicant in a setting-aside action may attempt to mask an appeal on the merits of the award with a challenge to procedural fairness. The courts must thus “[assess] the real nature of the complaint” (AKN v ALC at [39]) when a breach of natural justice is alleged. 

    The Court of Appeal revisited Front Row Investment Holdings (Singapore) Pte Ltd v Daimler South East Asia Pte Ltd [2010] SGHC 20 (“Front Row”), in which the High Court held that natural justice is breached if a tribunal (i) disregards a party’s submissions; or (ii) had regard to a party’s submissions in a superficial sense without making any attempt to understand these submissions.

    In addition, the Court of Appeal held that whether or not a tribunal failed to consider a submission is usually a matter of inference rather than explicit indication (short of a tribunal professing that it had not considered a particular submission). Such an inference must be “clear and virtually inescapable” (AKN v ALC at [46]) – an extremely high standard to meet. Front Row is one such example 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 the party had abandoned the submission. 

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

    • Misunderstanding or failing to understand a submission or a case presented.
    • Not mentioning or engaging with a submission raised by a party (in the proceedings or in an award).
    • Choosing not to deal with a particular submission because the tribunal thinks it to be unnecessary.
    • Being mistaken on the law relating to a submission. 
    • Rejecting an argument, whether implicitly or otherwise, and whether rightly or wrongly. 
    • Poor reasoning in reaching a decision. 
    • Muddling the facts, law and arguments in a dispute. 

    The threshold to meet in proving that a tribunal failed to consider an argument is evidently very high: short of showing that the argument did not even cross the tribunal’s mind, an aggrieved party is unlikely to be able to make out such an assertion.     

    More importantly, for an award to be set aside based on a breach of natural justice, it must be shown that:

    • the breach had materially affected the conclusion reached by a tribunal in making its award; and 
    • 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 in an arbitration if 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.

     The Tribunal in the underlying arbitration allowed the Purchasers to raise a claim concerning loss of opportunity to make profits at the very last minute. However, the Tribunal did not request further arguments on the point despite knowing that the Secured Creditors’ expert had not addressed this matter. As such, the Court of Appeal noted that the Liquidator and the Secured Creditors (i) did not have ample notice of the loss of opportunity claim; (ii) were not given the opportunity to make submissions or adduce evidence on this point.  

    Hence, the Court of Appeal held that natural justice had been breached on this point and allowed the parts 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 this basis, the court must further be satisfied that the aggrieved party has suffered actual or real prejudice (as stated in CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] 4 SLR 305). 

    The Court of Appeal further distinguished between a tribunal erroneously exercising a 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), e.g. a tribunal miscalculates the amount of damages that the scope of the arbitration agreement empowers the tribunal to award to a party that pleaded such damages. The latter is in excess of a tribunal’s jurisdiction (and can be a ground for setting aside an award), e.g. 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 had exceeded its jurisdiction by awarding the Purchasers damages for loss of opportunity. The High Court judge agreed with the Respondents at first instance. However, the Court of Appeal took the opposite view, holding that a generic claim of damages was broad enough to encompass a loss of opportunity claim. Had the Purchasers brought an application during the arbitral proceedings to amend its loss of profits claim to a loss of opportunity claim, the Tribunal would have the discretionary jurisdiction to permit such amendment.

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

    Another important principle confirmed by the Court of Appeal in relation to a tribunal acting ultra vires is that a court hearing the setting-aside application on this ground can conduct a de novo review, i.e. consider the merits of the case. This is an exception to the general principle that courts should not engage with the merits of a dispute in setting-aside applications. Here, the Court of Appeal upheld the High Court’s decision to consider the merits of two specific issues: whether the Purchasers’ payment obligations under the notes fell within s 10.3 of the APA, and whether the APA directs parties to the OMNA if a dispute under the APA overlaps with a dispute under the OMNA. 

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

    The Court of Appeal’s decision made clear that, even if an arbitral award is found to be tainted by breach of natural justice or a tribunal decision 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 setting aside the whole award. Instead, only parts of the award affected by the defective arbitral procedures need to be set aside. It was on this basis that the Court of Appeal reinstated the untainted parts of the award. 

    This decision 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 what 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

    AKN v ALC is the latest in a long line of cases that reiterate the pro-arbitration and pro-enforcement approach of the Singapore courts. This Court of Appeal decision is especially important because it 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. 

    * This blog entry may be cited as Fong Wei Li, "Singapore Court of Appeal Espouses Standards to be Met When Setting Aside an Arbitral Award and Reinforces Singapore's Pro-Arbitration Policy", Singapore Law Blog (28 May 2015) (http://www.singaporelawblog.sg/blog/article/114)

    ** A PDF version of this entry may be downloaded here

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