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    06:08 PM Kevin Elbert (Associate, OC Queen Street LLC)

    Whither Limit to the Tribunal's Case Management Powers: China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another [2018] SGHC 101

        

    It is well accepted that an arbitral tribunal has a wide discretion over the procedural aspects of arbitral proceedings. This discretion ranges from deciding the timeline of the arbitration to parties' disclosure obligations to evidential matters.

    The recent Singapore High Court decision of China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another [2018] SGHC 101 tests the limits of this discretion, specifically with respect to a tribunal's power to issue an 'attorney-eyes only' disclosure order ("AEO Order").

    Notably, this decision also explores other interesting issues such as whether there is an implied duty of good faith in the conduct of arbitration and whether a tribunal is obliged to investigate allegations of corruption.

    Factual Background

    In 2008, Jaguar Energy Guatemala LLC ("Jaguar") and China Machine New Energy Corp ("CMNC") entered into an Engineering, Procurement and Construction Contract (the "EPC Contract") under which CMNC would act as a general contractor for the construction of a coal-fired power plant in Guatemala. The EPC Contract provided that disputes are to be resolved by arbitration in Singapore under the 1998 ICC Rules by way of an expedited arbitration, which required the award to be issued within 90 days after the selection of the third arbitrator; or if the majority of the arbitrators agreed, within a further 90 days.

    After delays in the completion of the project, parties' relationship broke down. CMNC purported to exercise its step-in rights to take over Jaguar's interests under the EPC Contract. Jaguar contractually terminated the EPC Contract due to the delays.

    Jaguar then commenced arbitration proceedings pursuant to the EPC Contract.

    Following the commencement of arbitration, parties' relationship deteriorated further and tensions escalated. Jaguar built a fence surrounding the construction area and stationed armed guards at the perimeter to prevent CMNC's employees from entering. There was even a violent confrontation between Jaguar's guards and CMNC's employees, during which Jaguar's guards shot CMNC's employees with plastic pellets, doused them with pepper spray, and beat them with wooden sticks.

    CMNC also alleged that Jaguar harassed and intimidated its potential witnesses, offered some CMNC employees money to leave the construction site, and installed cameras at CMNC's employees' living quarters to monitor the movements of CMNC’s employees living there.

    The AEO Order and the AEO Regime

    In the course of the arbitration, Jaguar withheld from producing certain documents out of concern that CMNC would misuse the sensitive information (e.g. details of witnesses) to interfere with the construction project and/or the arbitration (CMNC had earlier engaged in a series of threatening actions against Jaguar). Notwithstanding this, Jaguar indicated that it was willing to disclose the documents on an AEO basis.

    After a series of communication and deliberations on the matter, the Tribunal then made an AEO Order, which established the following two-stage process (the "AEO Regime"):

    1. First,  the documents will be disclosed only to CMNC's external counsel; and

     

    1. Second, upon application by CMNC, the Tribunal will consider allowing specified employees of CMNC to have access to the documents for the purpose of obtaining instructions (subject to certain conditions, e.g. the identity of the employees must be established and such employees are to undertake enforceable confidentiality obligations in favour of Jaguar).

    The Tribunal noted that it viewed with serious concern "the possibility that disclosed documents could be used for the ulterior and quite improper purposes".

    The AEO Regime was ultimately lifted before the main merits hearing and was replaced by an order providing for limited redactions of documents.

    The Allegations of Corruption

    Three days before the merits hearing, it was reported that a Jaguar representative and one of Jaguar's witnesses in the arbitration had bribed government officials in relation to Jaguar's dispute with CMNC and the completion of the project. According to the report, Jaguar had made payments to one Ms Karen Cancinos who was linked to public officials under fictitious consultancy contracts.

    Jaguar then informed the Tribunal that in view of the allegations of corruption (the "Corruption Allegation"), it decided to withdraw its claim for public relations fees, which included fees paid to Ms Cancinos.

    Ultimately, the Tribunal rendered an award which unanimously found that Jaguar had validly terminated the EPC Contract and allowed Jaguar's claims, and ordered CMNC to pay Jaguar a sum of approximately US$130million, plus interest and costs.

    CMNC applied to set aside the award.

    Setting Aside Proceedings

    CMNC sought to set aside the award on various grounds. For the purposes of this article, only the following 3 grounds will be discussed:

    1. Under Art 34(2)(a)(ii) of the UNCITRAL Model Law on International Commercial Arbitration (the "Model Law") and s 24(b) of the International Arbitration Act (Cap. 143A) (the "IAA"): The AEO Regime deprived CMNC of a reasonable opportunity to present its case (the "Due Process Ground");

     

    1. Under Art 34(2)(a)(iv) and Art 34(2)(b)(ii) of the Model Law: Jaguar’s “guerrilla tactics” render it appropriate to set aside the award for breach of its obligation to arbitrate in good faith and public policy; and the Tribunal failed to restrain Jaguar from doing so (the "Good Faith and Guerrilla Tactics Grounds"); and

     

    1. Under Art 34(2)(b)(ii) of the Model Law and s 24(a) of the IAA: The Tribunal failed to investigate allegations of corruption and fraud and/or the Award was induced or affected by corruption (the "Corruption Ground").

    The Singapore High Court rejected all of CMNC's arguments and dismissed the setting aside application.

    The Due Process Ground

    In respect of the Due Process Ground, CMNC argued that the AEO Order effectively denied CMNC an adequate opportunity to know the evidence against CMNC, and deprived CMNC of a reasonable opportunity to respond to Jaguar's case.

    The Court rejected this argument and held that the imposition of the AEO Regime did not amount to a breach of natural justice which warrants the setting aside of the award. In summary, the Court reasoned as follows:

    1. First, what natural justice requires depends on inter alia the construction of the arbitration agreement. In the present case, the EPC Contract provided for a very swift arbitration process – and that the Tribunal was constrained by the parties’ agreement to an expedited arbitration. This is an important factor because the prejudice that CMNC claimed it suffered (due to the AEO Regime) arose because it allegedly did not have sufficient time to fully and adequately review the evidence.

     

    1. Second, the Tribunal has the power to impose an AEO Order (as part of its wide discretion to decide on procedural matters). The Court noted that Art 20(7) of the 1998 ICC Rules states that the Tribunal may take measures for protecting trade secrets and confidential information – and this includes the power to impose an AEO Order. In the alternative, the Tribunal was entitled to do so pursuant to its broad powers of case management under Art 19(2) of the Model Law.

     

    1. Third, in any event, the Court found that CMNC did not suffer prejudice that justifies setting aside the award – the essence of CMNC's complaint seemed to be that it did not have sufficient time to review the documents, but this was partly due to CMNC's own choices and failings. The Tribunal, of its own volition, devised the second stage of the AEO Regime as a safeguard to allow disclosure to CMNC's experts and external counsel, upon CMNC's application. However, CMNC never made such an application despite the Tribunal's repeated reminders, and their withholding from doing so was without good reason.

    The Court again emphasised the principle of minimum curial intervention that a supervisory court should take a "light hand" approach in reviewing case management or procedural decisions.

    Notably, the Court also held that the AEO Regime was not contrary to the principle of equal treatment under Art 18 of the Model Law because (i) the Tribunal had the power to impose the AEO Regime under Art 29(7) of the 1998 ICC Rules or in the alternative under Art 19(2) of the Model Law; and (ii) there was sufficient material for the Tribunal to make a provisional view on the imposition of the AEO Regime. Once the foregoing were established, the contention the Tribunal breached its duty of equal treatment by imposing the AEO Regime holds no ground.

    In any event, the Court observed that the AEO Regime had to operate asymmetrically because the risk that a party might misuse documents (the very risk that the AEO Regime sought to address) was asymmetric as well. CMNC did not contend that there was a similar risk of Jaguar misusing documents. It is therefore unsurprising that the AEO Regime did not apply to documents which CMNC disclosed to Jaguar.

    The Good Faith and Guerrilla Tactics Grounds

    The thrust of CMNC's arguments under this ground is that by employing 'guerrilla tactics' in the arbitration proceedings (e.g. seizing documents and harassing and interfering with CMNC's potential witnesses), Jaguar had breached its duty to arbitrate in good faith; and by failing to restrain Jaguar from doing so, the Tribunal had breached the agreed arbitral procedure.

     

    The Court did not make a determination on whether there exists a duty to arbitrate in good faith under Singapore law. The Court observed that while the nature of an arbitration agreement necessarily implies that there is a duty to cooperate in the arbitral process, it is unclear if such duty includes or falls under a general duty of good faith. If the governing law of the arbitration agreement is English or Singapore law, both English law and Singapore law do not recognise a general duty of good faith to perform contractual obligations (citing MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789, Ng Giap Hon v Westcomb Securities Pte Ltd and others [2009] 3 SLR(R) 518 and The One Suites Pte Ltd v Pacific Motor Credit (Pte) Ltd [2015] 3 SLR 695).

     

    In any event, even if there is such an implied duty to arbitrate in good faith, the Court found that Jaguar did not employ guerrilla tactics that were in breach of such a duty of good faith:

     

    1. First, guerrilla tactics must be employed with the aim of undermining an arbitration, and there is scant evidence that Jaguar performed any of these alleged acts with the aim of undermining the arbitration. For instance, the Court found that there was no evidence that the alleged acts of harassment and intimidation of CMNC's witnesses and the eviction of CMNC's employees from the construction site were performed to affect CMNC's case in the arbitration; and

     

    1. Second, these alleged guerrilla tactics all occurred before or at a relatively early stage of the arbitration (three out of four alleged guerrilla tactics predated the arbitration and occurred before the Tribunal was even constituted) – hence, the Tribunal cannot be criticised for not restraining this conduct.

     

    In light of the Court's finding that Jaguar did not employ guerrilla tactics in bad faith, CMNC's argument that the guerrilla tactics were in breach of public policy was rejected as well.

     

    The Corruption Ground

    CMNC argued that the Tribunal breached its duty to investigate the Corruption Allegation, which render the award in conflict with public policy. CMC claimed that an arbitral tribunal bears "a duty to raise and enquire, even sua sponte, into the issue of corruption". If a tribunal breaches its duty to investigate allegations of corruption and issues an award thereafter, that award is in conflict with public policy and hence liable to be set aside.

     

    The Court accepted that in appropriate cases, an arbitral tribunal may come under a duty to investigate allegations of corruption because allegations of corruption might raise issues of public policy that would affect the enforceability of an award (citing Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd [2010] 3 SLR 1).

     

    The test, however, is whether the allegations of corruption affect the issues under consideration in the arbitration.

     

    It is critical that the Tribunal held that the Corruption Allegations did not have any bearing on the issues in the arbitration because Jaguar had voluntarily withdrawn certain claims. Thus, the Tribunal was not "aware of circumstances creating a suspicion of corruption which, if proven, would affect the claims in dispute". This is a finding of fact which is not subject to appeal. Accordingly the Tribunal would not have come under a duty to investigate the Corruption Allegations.

     

    Additionally, the Court held that Corruption Allegations per se do not render the award liable to be set aside for breach of public policy. The key is that the breach of the duty to investigate must carry the risk that upholding the award that is subsequently issued may legitimise the corrupt activities – such risks would arise if there is a causal nexus between the corrupt activities and the award.

     

    Thus, the Court decided that there was no link between any breach by the Tribunal of a duty to investigate the Corruption Allegations and the award which would warrant setting aside.

     

    Comments and Observations

    As mentioned above, this decision touches upon a number of procedural issues that are live in the arbitration jurisprudence.

    Five points are apposite:

    First, the scope and limit of a tribunal's case management powers.

    This decision emphasised that the Court will exercise its supervisory jurisdiction in a "light hand" manner – i.e. a supervisory court will only intervene if there is a "material breach of procedure" and not "merely because it might have resolved the various controversies in play differently". In the present case, this "light-hand" approach is exemplified by the Court deferring to the Tribunal's issuance of the AEO Order based on its preliminary finding.

    Importantly, the Court confirmed that a tribunal has a wide-ranging case management powers in arbitral proceedings, and can issue procedural orders in international arbitrations which are not known in the jurisprudence of the seat of arbitration. In particular, an AEO Order (despite its inherently asymmetric nature) may be issued in a Singapore-seated arbitration and does not constitute a breach of natural justice. An AEO order could be a powerful tool in arbitration where parties may want to avoid disclosure of confidential information (e.g. trade secrets) to the counterparty for fear of it being misused.

    The Court adopted a very pragmatic approach and recognised that an AEO Order is inherently asymmetric in nature. The issuance of an AEO Order does not ipso facto result in the lack of equality of treatment between parties – it was simply that CMNC and Jaguar were in different positions that necessitated different treatment. Reiterating the holding in Triulzi Cesare SRL v Xinyi Group (Glass) Co Ltd [2015] 1 SLR 114, equality of treatment does not require identity of treatment – the lack of identical treatment does not indicate that the Tribunal failed to treat the parties equally. Notwithstanding, tribunals should be mindful and consider devising safeguards where there is a risk of unequal treatment between parties. Further, tribunals should ensure that the reasoning for the measures is well-documented to avoid challenges that the measure was unjustifiably imposed.

    Overall, this author notes that this decision is timely, particularly in light of the current heightened discussion regarding 'due process paranoia'.

    A survey entitled "Improvements and Innovations in International Arbitration" by Queen Mary University of London and White & Case defined "due process paranoia" as "a perceived reluctance by [arbitral] tribunals to act decisively in certain situations for fear of the award being challenged on the basis of a party not having had the chance to present its case" (Link: https://www.whitecase.com/sites/whitecase/files/files/download/publications/qmul-international-arbitration-survey-2015_0.pdf; accessed: 13 June 2018).

    Indeed, the ultimate aim of an arbitration is to render an enforceable award. Understandably, arbitral tribunals would be wary of having their award rendered set aside and/or refused enforcement for breach of due process. This paranoia results in tribunals paying excessive (and disproportionate) attention to due process considerations, in particular case management decisions. This translates to tribunals excessively erring on the side of caution when making case management decisions rather than taking a more robust approach where a party uses dilatory tactics , such as:

    1. granting repeated extension of times;

     

    1. accepting last minute amendments to party's submissions and/or introduction of fresh evidence;

     

    1. allowing unnecessary or overly generous orders of disclosure; and

     

    1. acceding to requests by a party to file submissions that are entirely superfluous.

    This inevitably results in increased costs and delay in the arbitral process.

    In light of the above sentiments, this decision would give Singapore-seated tribunals comfort in knowing that the Court generally gives the tribunals (nearly) free rein in taking a robust approach to case management.

    Second, the importance the arbitration agreement  and its relationship with due process and natural justice.

    This decision demonstrates the impact that an arbitration agreement has on the extent of due process required in the conduct of arbitration.

    Where parties have agreed on expedited proceedings or drafted in a timeline within the arbitration agreement, parties have to be aware that it would affect the extent of due process in the arbitration. The scope of the rule of natural justice, in particular parties' right to be heard, must be understood in light of the time constraints of the proceedings – a balance must be struck between giving parties the right to be heard and resolving the dispute swiftly and efficiently. Parties then cannot complain about the seemingly sparse due process arising out of such expedited proceedings because that is what the parties have agreed on.

    Moreover, the Court has held that the Tribunal did not have a "heightened duty" to police due process by virtue of the expedited proceedings. By making this decision, the Court impliedly gives the tribunal the discretion to strike the appropriate balance between expediting the proceedings and safeguarding parties' interests.

    In light of the complaints about delay in arbitration, understandably, parties may wish to agree on expedited proceedings or drafting in a timeline within the arbitration agreement to hasten the arbitration process. However, parties must be aware of the trade-off for a speedier dispute resolution process – namely, its effect on the parties' right to be heard. This is a commercial issue that parties have to agree on based on the subject matter, complexity and the quantum of the contract.

    Third, the obligation to arbitrate in good faith under Singapore law.

    It is unfortunate that the Court declined to decide on whether the Singapore law recognises a duty to arbitrate in good faith.

    This issue is even more important since Art 2A(1) of the Model Law (which was adopted only in the 2006 amendment of the Model Law) has not been adopted in Singapore.

    Following from the position that Singapore law does not recognise a general duty of good faith in the performance of contracts, this author suggests that the Singapore Court may not accept that there exists a general duty of good faith to arbitrate under Singapore law.

     

    Importing principles of good faith into arbitration obligations may potentially impose on to the parties additional terms that they have not agreed upon and cause the Court to depart from the terms agreed on by the parties. Indeed this was the concern raised by the English Court of Appeal in MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789, when it refused to find a general duty of good faith in the performance of the contract.

    Notwithstanding, it is of course open for the Singapore Court to make a contrary finding, i.e. that there is a general duty of good faith in arbitration. However, if the Court were to make such a finding, it may not be entirely based on the common law, but would instead be influenced by its interpretation of the Model Law, which ultimately is an international instrument. This may be a factor that necessitates an importation of good faith in the course of arbitration. Notably, under s 4 of the IAA, for the purposes of interpreting the Model Law, reference may be made to the documents of the UNCITRAL and its working group relating to the Model Law.

     

    Fourth, guerrilla tactics in arbitration proceedings.

    As the first decision in Singapore that discusses the phenomenon of guerrilla tactics in arbitration, it gives a valuable insight to how the Court treats and perceives guerrilla tactics, in particular guerrilla tactics as a ground to set aside an award.

    This author takes the view that the Court has correctly adopted a principled approach, whereby the Court, in assessing whether guerrilla tactics complained of warranted the setting aside of the award, analysed whether the complained acts fell within the limited grounds of setting aside under the Model Law and the IAA. If the guerrilla tactics do not meet fall within any of the grounds for setting aside, then the award should be upheld.

    The Court observed that "extreme" guerrilla tactics (which involve "severe criminal acts and blatant abuse of state authority") and "common" guerrilla tactics (which amounts to "obvious misconduct", such as bribery, intimidation and harassment or arbitrators and witnesses") may already amount to grounds of setting aside under Art 34(2)(b)(ii) of the Model Law and s 24(a) of the IAA.

     

    Indeed, allowing for award to be set aside simply because guerrilla tactics were employed by one of the parties would (unnecessarily) enlarge the grounds of setting aside under the MAL or the IAA and run counter to the philosophy and procedure established under the MAL and the IAA.

    However, this author has one concern regarding the Court's (over)emphasis on the chronology of the guerrilla tactics, which impliedly suggests chronology as the determinative factor in analysing the effect of guerrilla tactics. The Court made repeated references to the fact that the guerrilla tactics pre-dated the arbitration, seeming to suggest that guerrilla tactics pre-dating the arbitration cannot have the effect of undermining an arbitration.

    It is respectfully submitted that such a finding is misguided. Chronology may have an impact on the effect of the guerrilla tactics but it should not be a determinative factor. In fact, it should not be a factor at all. After all, what the Court should ultimately be concerned with is whether guerrilla tactics were performed with the aim or effect of undermining the arbitration.  For example, harassing a party’s employees to dissuade them from providing witness statements would undoubtedly influence the arbitration proceedings, even if the harassment pre-dated the commencement of arbitration.

    Fifth, Tribunal's obligation to investigate allegation of corruption.

    This is also the first decision in Singapore where the Court had to deal with the issue of Tribunal's obligation to investigate allegations of corruption.

    In this author's view, the Court has correctly decided that the tribunal only has the duty to investigate such allegations when there is a relevant nexus between the illegality and the claims in the dispute. Indeed, if the tribunal were to investigate the issue when it has no sufficient connection, the tribunal might have exceeded its jurisdiction.

    Interestingly, the Court treated the Tribunal's finding that there were no circumstances creating a suspicion of corruption as a finding of fact that is not subject to appeal.

    Conclusion

    This decision touches on many interesting points relating to arbitration procedure.

    Should this decision go on to appeal, it would be helpful for the Singapore Court of Appeal to decide on the issues left unanswered at the first instance, in particular whether a general duty of good faith in arbitration is applicable to a Singapore-seated arbitration. Watch this space for further developments.

    * This author would like to thank the anonymous referee for his comments and suggestions. All errors remain this author's.  

    ** This blog entry may be cited as Kevin Elbert, “Whither Limit to the Tribunal's Case Management Powers: China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another [2018] SGHC 101”  (11 July 2018) (http://www.singaporelawblog.sg/blog/article/215)​

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

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