Singapore Court of Appeal restores awards on ground that matters were within scope of submission to arbitration even though it decided matters not formally pleaded

Practical Law UK Legal Update Case Report 4-521-2467 (Approx. 5 pages)

Singapore Court of Appeal restores awards on ground that matters were within scope of submission to arbitration even though it decided matters not formally pleaded

by Practical Law

Background

Section 3 of the International Arbitration Act (Chap. 143A) (IAA) provides that the UNCITRAL Model Law shall have the force of law in Singapore.

Article 34(2)(a)(iii) of the Model Law provides that arbitral awards may be set aside where the matters decided by an arbitral tribunal are beyond the scope of the submission to arbitration.

Article 23 of the Model Law requires a claimant to state the facts supporting its claim, the points at issue and the relief or remedy sought. The respondent must then state its defence in respect of those particulars.

Section 19B(1) of the IAA provides that arbitral awards shall be final and binding on the parties.

Section 19B(2) of the IAA provides that, subject to Articles 33 and 34(4) of the Model Law, an arbitral tribunal may not vary, amend, correct, review, add to or revoke an award.

Facts

On 15 April 1994, Kempinski Hotels SA (Kempinski), a Swiss company, entered into an Operating and Management Contract (Contract) with PT Prima International Development (Prima). The Contract obliged Kempinski to market, operate and manage a hotel of Prima. The Indonesian Ministry of Tourism subsequently issued three decisions (Three Decisions), requiring the Contract to be carried out by an Indonesian company. No action was taken by Kempinski or Prima in response to the Three Decisions. Following an alleged material breach by Kempinski, Prima purported to terminate the Contract on 6 February 2002. Kempinski commenced arbitration proceedings in May 2002, alleging wrongful termination.

The arbitral tribunal issued five awards:

The First Award was made on 18 February 2005. The tribunal held that, as a matter of law, the Three Decisions did not render the Contract illegal, but merely made its performance impossible except in a manner that was in conformity with the Three Decisions.
The Second Award was made on 12 December 2006. The tribunal held that there were three methods by which the Contract could be performed in a manner which conformed with the Three Decisions. If Kempinski could show that it had performed the Contract in one of these three methods, a remedy of damages was still available to it. Following the issue of the Second Award, Prima wrote to the arbitral tribunal asking for "clarifications" on how the First and Second Awards would be affected by the information that Kempinski had subsequently entered into a new hotel management agreement with another Indonesian hotel owner on 28 April 2006. This new agreement was entered into in full compliance with the Three Decisions but was contrary to an exclusivity clause in the Contract.
The Third Award was made on 20 May 2008. The tribunal held that the new hotel management agreement meant that the Contract was no longer capable of being performed. Accordingly, Kempinski was not entitled to damages after the date the new hotel management agreement was entered into.
The Fourth Award was made on 11 July 2008. The tribunal held that Kempinski could not claim damages for the intervening period between the purported termination (6 February 2002) and the date of entering into the new hotel management agreement (28 April 2006), as Kempinski had been performing the Contract in a way which did not conform with the Three Decisions.
The Costs Award was published on 15 April 2009.

The first instance decision

Kempinski filed proceedings at the High Court on 4 July 2008 in order to set aside the Third Award. Kempinski argued, among other things, that the arbitrator had acted beyond the scope of his authority because he had decided issues that had not been formally pleaded (pleadings argument).

The pleadings argument was accepted by the High Court, which found that when Prima had asked for "clarifications" on the First and Second Awards in the light of the new hotel management agreement, it had raised new issues. By deciding the issues in the Third Award, the tribunal was therefore acting on matters beyond the scope of the matters submitted to it. As the Fourth Award and the Costs Award were made on the basis of the Third Award, they were also set aside.

Prima appealed against this decision, on the ground that the court had been wrong to accept the pleadings argument.

Decision

The Court of Appeal allowed the appeal. In respect of the pleadings argument, the court considered there to be two crucial questions:

Was the legal effect of the new management contract part of or directly related to the dispute which the parties submitted for arbitration?
Was Kempinski prejudiced by Prima's omission to amend its pleadings to plead the new hotel management agreement and its legal effect?

In answer to the first question, the Court of Appeal decided that the scope of the parties' submission to arbitration was determined by the disputes which the parties choose to submit to arbitration, in this case as set down in the Notice of Arbitration filed by Kempinski on 20 May 2002.

In its Notice of Arbitration, Kempinski sought two alternative remedies for wrongful termination:

Damages from 6 February 2002 onwards for the remainder of the term of the Contract (that is, until 15 February 2014).
Specific performance of the Contract.

In the course of its judgment, the Court of Appeal set down the following rule in relation to pleadings: any new fact or change in the law arising after a submission to arbitration, which is "ancillary" to the dispute submitted for arbitration and which is known to all the parties to the arbitration, is part of that dispute and need not be specifically pleaded.

Applying this rule, the Court of Appeal held that any new fact arising in the course of the arbitration which would affect Kempinski's right to the remedies of damages or specific performance must fall within the scope of the parties' submissions to arbitration. The issue determined in the Third Award (the legal effect of the new hotel management agreement on the continuing viability of the two claims after 28 April 2006) was therefore clearly within the scope of the parties' submissions to arbitration.

In answer to the second question, the Court of Appeal decided that Kempinski had suffered no prejudice, as it was given ample opportunity to address the issue. There was extensive correspondence, written submissions and expert opinions that were exchanged in relation to the legal effect of the new hotel management agreement. In addition, Kempinski itself had failed to disclose the existence of the new hotel management agreement when the tribunal was considering the Second Award.

Comment

This reversal of the first instance decision demonstrates that the Singapore courts will not lightly set aside a tribunal's decision under Article 34(2)(a) of the Model Law.

The Court of Appeal clarified how to determine the "scope of the submission to arbitration" for the purposes of Article 34(2)(a)(iii) of the Model Law. One of the arguments submitted to the Court of Appeal by Prima was that the scope of the submission to arbitration was determined by the scope of the arbitration agreement. By deciding that the scope is determined by the disputes which the parties choose to submit to arbitration, a scenario could be envisaged in which a narrowly drafted claim comes out of a widely drafted arbitration agreement. In such circumstances, the courts would look to the narrower claim as providing the scope of the submission rather than the wider agreement.

It will need to be clarified what constitutes a fact or change in law which is "ancillary" to the dispute, such that it comes within the rule set down by the Court of Appeal. In this case, it was clear that a fact affecting one party's right to a remedy was not too remote.

Case

PT Prima International Development v Kempinski Hotels SA and other appeals [2012] SGCA 35.

Singapore Court of Appeal restores awards on ground that matters were within scope of submission to arbitration even though it decided matters not formally pleaded | Practical Law