Article 34(2)(b)(ii) of the UNCITRAL Model Law (set out in the First Schedule of the Singapore International Arbitration Act) provides that an arbitral award may be set aside if the award conflicts with the public policy of the State.

The plaintiff (AJT) was a British Virgin Isles company. The defendant (AJU) was a Thai company, which had entered into a contract with P, a company associated with AJT. AJT was P's assignee and in August 2006 brought claims against AJU under the agreement.

In November 2006, AJU made a complaint of fraud, forgery and the use of a forged document to the Thai police against AJT's sole director and shareholder (Mr O) and another company related to AJT. Before the police investigation had concluded, however, the parties entered into a settlement agreement dated 4 February 2008. Amongst other provisions, the settlement agreement required the parties to take steps to withdraw and discontinue all claims, and any other form of legal action. The settlement agreement was governed by Singapore law.

After the settlement agreement was signed, AJU withdrew its complaint to the Thai police. AJT, however, refused to terminate the arbitral proceedings on the basis that AJU had failed to comply with the settlement agreement by not bringing the criminal investigation to a complete end. AJU applied to the tribunal to terminate the arbitration on the basis that a full and final settlement had been reached. AJT challenged the validity of the settlement agreement on the basis of duress, undue influence and illegality.

The tribunal concluded that the settlement agreement was not illegal. AJT applied to have the award set aside as contrary to public policy under Article 34(2)(b)(ii) of the Model Law.

The court held that the award should be set aside under Article 34(2)(b)(ii) of the Model Law. Referring to Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd [2010] SGHC 62 (see Legal update, The court's power to quash administrative decisions on grounds of unreasonableness does not apply to arbitral awards), the court re-iterated that errors of law and fact are themselves not enough: it must be shown that there was an error in the award such that enforcement would "shock the conscience", be "clearly injurious to the public good" or would "contravene fundamental notions and principles of justice."

The court also held that, while the tribunal had considered the legality of the settlement agreement and had found it to be valid, the court had the power to re-examine and decide this issue in the exercise of its supervisory jurisdiction.

The offences complained of by AJU under Thai law involved forgery and use of a forged document. As a matter of Thai law, these were non-compoundable offences (that is, offences in relation to which the parties cannot terminate the proceedings once a complaint has been made to the relevant authorities). The court found that the parties had in the settlement agreement clearly intended to compound a non-compoundable offence and that accordingly the settlement agreement was illegal under both Singapore and Thai law.

The court found that upholding the tribunal's award would breach the principles of international comity by enforcing a contract that was illegal under Thai law. Accordingly, the court found that the award ought to be set aside under Article 34(2)(b)(ii) of the Model Law.

The case usefully defines the limited circumstances in which an arbitral award will be set aside by the Singapore courts on public policy grounds related to alleged unlawful agreements. It also serves as a reminder that parties should exercise caution before involving criminal or regulatory authorities in civil disputes. In many cases, the parties will not be able to control the activities of those authorities even after the dispute has come to an end, with unintended consequences.