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Singapore High Court sets aside arbitral awards where arbitral tribunal determined unpleaded issue
Practical Law UK Legal Update Case Report 4-507-1410 (Approx. 4 pages)
Singapore High Court sets aside arbitral awards where arbitral tribunal determined unpleaded issue
| Published on 04 Aug 2011 • International, Singapore |
Nicholas Peacock (Partner) and Chris Ross (Senior Associate), Herbert Smith LLP
The Singapore High Court has set aside three arbitral awards on the basis that the arbitral tribunal determined an issue which was not formally pleaded by the respondent to the proceedings. Instead the issue was raised by way of a letter addressed to the arbitral tribunal. Accordingly, the arbitral tribunal had decided on an issue beyond the scope of the matters submitted to it.
Background
Section 3 of the Singapore International Arbitration Act (Chap. 143A) (the IAA) provides that the UNCITRAL Model Law (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 his claim, the points at issue and the relief or remedy sought. The respondent must then state his 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 (the applicant), a Swiss company, entered into an Operating and Management Contract (the contract) with PT Prima International Development (the respondent). The applicant was to carry out the contract. The contract obliged the applicant to market, operate and manage a hotel of the respondent. The Indonesian Ministry of Tourism subsequently issued three decisions (the three decisions), requiring the contract to be carried out by an Indonesian company. No action was taken by the applicant or respondent in response to the three decisions. On 6 February 2002, following an alleged material breach by the applicant, the respondent purported to terminate the contract. In May 2002, the applicant commenced arbitration proceedings, alleging wrongful termination.
On 18 February 2005, the arbitral tribunal published its first award (the first award) relating to the effect of the three decisions on the performance of the contract.
On 12 December 2006, the arbitral tribunal published its second award on the dispute (the second award). In the second award, the arbitral tribunal held that the applicant was not necessarily prevented from bringing a claim for damages, due to alleged supervening illegality, by reason of the three decisions, as alternative methods of performance of the contract consistent with the three decisions were available. Therefore, the possibility for damages was still available to the applicant.
Following the issue of the second award, the respondent wrote to the arbitral tribunal asking for "clarifications" on how the first and second awards would be affected by information that the applicant had subsequently entered into a new hotel management agreement with another Indonesian hotel owner, this time in full compliance with the three decisions.
On 20 May 2008, the arbitral tribunal published its third award (the third award), in which it held that the new management venture meant that the contract was no longer capable of being performed. Accordingly, the applicant was not entitled to damages after the date the new management venture was entered into.
On 11 July 2008, the arbitral tribunal published its fourth award (the fourth award) and on 15 April 2009, it published a costs award (the costs award).
On 4 July 2008, the applicant filed proceedings at the Singapore High Court in order to set aside the third award. The applicant also applied to set aside the fourth award and costs award. In support of its application, the applicant argued that:
- The awards dealt with an issue that had not been formally pleaded, namely the effect of the new management venture on the performance of the contract.
- The arbitral tribunal had become functus officio (lacking authority or power) in relation to the issues decided in the third and fourth awards following the first and second awards.
- The respondent was barred by issue estoppel from raising the new management venture following the second award.
- There had been a breach of natural justice on the part of the arbitral tribunal.
Decision
The High Court held that the third, fourth and costs awards should be set aside on the basis that the awards dealt with an issue that had not been formally pleaded. The applicant's other arguments were all rejected.
Failure to plead
The High Court rejected the respondent's argument that there was no rule in arbitration that limits a tribunal's jurisdiction to the pleadings. The High Court found that Article 23 of the Model Law binds an arbitral tribunal to decide a case in accordance with the parties' pleadings. Accordingly, an arbitral tribunal is not entitled to decide on points which go beyond those pleadings.
In making this finding, the High Court relied upon the judgment in Ng Chin Siau v How Kim Chuan [2007] 2 SLR (R) 789, which considered the same question, but in the context of the Arbitration Act (Chap. 10). In the case before the court, the respondent had raised new issues for the arbitral tribunal's determination when it asked for "clarifications" of the second award in light of the new management venture. Therefore, by deciding those issues in the third award, the arbitral tribunal had acted 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.
Functus officio
The High Court rejected the applicant's argument that the arbitral tribunal had already ruled on the issues decided in the third and fourth awards by way of the second award. The awards decided three distinct issues. The second award decided that the three decisions did not exclude the possibility of damages. The third award decided that a future claim for damages was extinguished by the new management venture, as performance had been rendered impossible by it. The fourth award decided that a claim for damages was excluded by Indonesian public policy. Therefore the arbitral tribunal was not functus officio in respect of the third and fourth awards.
Issue estoppel
Singapore law holds that a party may be estopped from raising issues that were not, but which ought to have been, raised in earlier proceedings.
The High Court held that, as the issue decided by the second award was distinct from that decided by the third award, there was no issue estoppel. There could only have been issue estoppel if the second award had decided that there was no fact which could terminate the possibility of performance of the contract.
Breach of natural justice
The High Court ruled that none of the grounds on which the applicant sought to argue a breach of natural justice had been satisfied. The rules of natural justice relied upon were set out in Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86, namely that:
- The adjudicator must be disinterested and unbiased.
- The parties must be given adequate notice and opportunity to be heard.
The applicant argued that the arbitral tribunal had "entered the fray" by initiating its own investigation into the new management venture and that it had closed its mind on certain matters of Indonesian law. The High Court found no evidence to support either allegation.
The applicant also argued that the arbitral tribunal had failed to consider defences that it had raised. The High Court noted that a distinction should be drawn between considering defences put forward and expressly responding to them in the relevant award, a distinction made in SEF Construction Pte Ltd v Skoy Connected Pte Ltd [2010] 1 SLR 733. In particular, it was not necessary for a tribunal to expressly respond to a defence in order to have adequately considered it. Accordingly, the arbitral tribunal's failure explicitly to respond to the defences raised by the applicant in its award was not a breach of natural justice.
Comment
This case demonstrates that, despite their pro-arbitration stance, the Singaporean courts will be prepared to entertain applications to set aside an award where an arbitral tribunal has acted outside its jurisdiction. It highlights the risks where an arbitral tribunal entertains lengthy correspondence from the parties raising issues not included in the pleadings. As the High Court noted, where a party wishes to raise a new issue before an arbitral tribunal, an application should first be made to amend its pleading.