By Wynne Tay, MPillay
In this issue, we discuss the following three decisions:
- BNX v BOE and another matter [2017] SGHC 289;
- BNP and another v BNR [2017] SGHC 269; and
- Prometheus Marine v Pte Ltd v King, Ann Rita and another appeal [2017] SGCA 61.
BNX v BOE and another matter [2017] SGHC 289
This High Court decision concerns an application by the plaintiff under s 48 of the Arbitration Act (Cap 10, 2002 Rev Ed) (the "AA") to set aside an arbitral award and an application by the defendant to strike out the plaintiff's separate action in the High Court under O 18 r 19 of the Rules of Court. The Court dismissed the plaintiff's setting-aside application and allowed the defendant's striking-out application. An appeal by the plaintiff against the High Court's decision on both applications is currently outstanding.
While the judgment applied and reaffirmed many well-settled principles on the setting-aside of arbitral awards, it also made several interesting observations which are worth noting. This case further involved the interesting situation where the plaintiff brought a separate action which the defendant sought to strike out.
Background facts
The plaintiff acquired a business from the defendant in Singapore pursuant to a sale and purchase agreement (the "SPA") which was expressly governed by Singapore law and contained an arbitration agreement.
The terms of the SPA also provided for the plaintiff's acquisition of a leasehold interest in the premises from which the business was operated. Therefore, pursuant to the SPA, the parties entered into a lease for the premises which was comprised in a separate document.
After completion under the SPA, the plaintiff for the first time became aware that the Urban Redevelopment Authority (the "URA") had restricted the use of the facilities on the premises to customers and staff of the business.
The plaintiff brought a claim in arbitration against the defendant for wrongfully failing to disclose the restriction of use during the negotiations for the SPA. More specifically, the plaintiff alleged that the defendant had fraudulently misrepresented that members of the public were permitted to patronize the facilities and that the facilities could therefore generate an independent revenue stream for the business. In the alternative, the plaintiff argued that the defendant was in breach of warranty under the SPA because members of the public were not permitted to use the facilities.
The tribunal dismissed the plaintiff's claim in its entirety.
The court proceedings
Dissatisfied with the tribunal's decision, the plaintiff sought to set aside the award under s 48 of the AA on the following grounds:
- That the tribunal exceeded its jurisdiction by deciding issues that the parties did not submit to it for decision: discussed at [50] to [72] of the judgment.
- That the tribunal breached the rules of natural justice: discussed at [73] to [92] of the judgment.
- That the award is contrary to public policy: discussed at [93] to [110] of the judgment.
Only the second and third grounds will be discussed in this commentary
Breach of rules of natural justice
One of the reasons put forth by the plaintiff in alleging that the tribunal breached the rules of natural justice was that the tribunal erred in admitting and giving weight to hearsay evidence: see [75(b)].
The Court readily dismissed the plaintiff's contention and held that the hearsay rule does not apply in arbitration. Even if the rule did apply, the impugned evidence was found not to be hearsay as it went towards the finding of the defendant's state of mind: see [79].
In coming to its conclusion that the hearsay rule is inapplicable to arbitration, the Court observed that the hearsay rule is enshrined in s 62 of the Evidence Act which is found in Part II of the Act. Under s 2(1) of the Evidence Act, it is provided that Part II of the Act shall not apply to proceedings before an arbitrator. Therefore, if there is a hearsay rule in Singapore arbitration, it must be found outside of the Evidence Act: see [81].
The Court was reluctantly prepared to assume in favour of the plaintiff, without deciding, that the rule against hearsay is part of the common law of evidence in Singapore and that it applies to arbitration. Indeed, the Court noted that there was an "almost insurmountable argument" to be made that in arbitrations conducted in Singapore as the seat, the tribunal is empowered to receive all relevant evidence, with the concerns which underlie the exclusionary rules at common law going only to weight and not to admissibility: see [83].
Contrary to public policy
The Court noted at the outset that the cases on Art 34(2)(b)(ii) of the Model Law are of persuasive value in considering the scope of s 48(1)(b)(ii) of the AA although the provisions are not identical: see [93].
The Court then went on to reiterate and reaffirm the principles propounded in past cases in relation to the setting-aside of arbitral awards for being contrary to public policy: see [94] to [96].
Interestingly, the plaintiff made the argument that "public policy" in s 48(1)(b)(ii) of the AA sets a lower threshold for setting-aside in a domestic arbitration than that set by Art 34(2)(b)(ii) of the Model Law. This is because, the plaintiff argued, the AA enables the court to set aside a domestic arbitration award on the domestic standard of public policy which is wider than the narrow international standard of public policy which the Model Law applies to an international arbitration: see [97]
Regrettably, the Court held that it was not necessary for it to determine this issue as it found that the plaintiff's submission that the award contravenes public policy was "thoroughly misconceived, whatever the applicable threshold": see [97].
Defendant's striking out application
The plaintiff, while the setting-aside application was pending, brought an action in the High Court against the defendant focusing on the lease for the business which the defendant had granted to the plaintiff pursuant to the SPA.
The plaintiff argued that the lease and the SPA were distinct agreements. The arbitration and the award were concerned only with the parties' rights under the SPA so it submitted that nothing that occurred in the arbitration barred it from pursuing an action against the defendant for breach of the lease: see [144].
The defendant contended that this action was nothing but an impermissible collateral attack on the award. The action should therefore be struck out on the basis of res judicata: see [122].
In this regard, the Court elucidated the principles relevant to the doctrine of res judicata: see [123] to [129].
On the facts, the Court found that the lease arose directly from the express terms of the SPA. The lease was simply the mechanism under the SPA by which the defendant transferred to the plaintiff an interest in the property from which the business was operated. Accordingly, the SPA and lease were not independent agreements: [132]
Seeing that the two were not independent agreements, the Court held that the plaintiff's action was a collateral attack on the award or an abuse of process, and should accordingly be struck out. In any event, its claims were also unsustainable: see [137].
BNP and another v BNR [2017] SGHC 269
The High Court in this case was concerned with an application under s 10(3) of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (the "IAA") by the plaintiffs to determine whether the tribunal in the arbitration lacked jurisdiction as it was not properly composed. More specifically, the plaintiffs contended that the third member of the tribunal was appointed as the president of the tribunal and not an umpire, which was contrary to the arbitration agreement. The Court dismissed the application.
In this determination, the Court had to consider seemingly-contradictory provisions on the appointment of arbitrators under the Rules of Arbitration of the International Chamber of Commerce (the "ICC Rules") which were expressly incorporated into the arbitration clause on the one hand, and the express terms of the arbitration clause on the other.
Background facts
The relevant arbitration clause was provided in the shareholders' agreement between the plaintiffs and the defendant under Clause 24 which read as follows:
24.2 Such Dispute shall be referred to and finally resolved by arbitration under the [ICC Rules] which Rules are deemed to be incorporated by reference into this Clause 24. …
24.3 The number of arbitrators shall be one (1) provided that, if the parties to the dispute are not able to agree upon the sole arbitrator within 30 (Thirty) days of the date on which a Party initiates arbitration proceedings, the number of arbitrators shall be 3 (Three). In such event, one arbitrator shall be nominated by [the defendant] on the one hand and one arbitrator, by [the plaintiff] on the other hand as the case may be. The third arbitrator, who shall act as an umpire, shall be nominated by the 2 (two) arbitrators appointed (‘Umpire’), provided that if these two arbitrators are unable to agree on the nomination of the Umpire within 20 (Twenty) days of their appointment, the Umpire shall be appointed in accordance with the Rules.
Article 12(5) of the ICC Rules states that where the parties agree that there are to be three arbitrators, the third arbitrator shall be appointed by the court and "will act as president of the arbitral tribunal".
The tribunal was constituted by the 2 party-appointed arbitrators jointly nominating the third member of the panel to act as the third arbitrator and president of the tribunal, which was subsequently confirmed by the ICC Court.
The judgment
The Court at [4] set out some general principles relevant to the application:
- The principle of party autonomy enables the parties to decide on how the arbitral tribunal is to be constituted and how the arbitration is tobe conducted.
- Where clauses are incorporated by reference into a written agreement, and the incorporated clauses conflict with terms in the written agreement, the latter will ordinarily prevail. However, the court will endeavour to construe the sub-clauses harmoniously to give effect to the whole of cl 24
- The indisputable fact is that the parties have agreed to incorporate the ICC Rules into their arbitration agreement and effect should be given to the ICC Rules in a manner that is consistent with the incorporation. If necessary, where there is express incorporation of the ICC Rules into cl 24, case law allows for some degree of verbal modification or adjustment to fit the incorporated ICC Rules into the wording of cl 24.3.
- A clause that is completely inconsistent with the parties’ objectively-ascertained intention will not be enforced.
On this basis, the Court went on to consider the parties' arguments.
The plaintiffs argued that Article 12(5) of the ICC Rules was not applicable as the parties had provided under cl 24.3 of the shareholders’ agreement for the third arbitrator to act as an umpire, as opposed to the president of the tribunal: see [7].
The plaintiffs took the position that the word "umpire" is a settled and well-defined term. An umpire will decide the arbitration where the two party-appointed arbitrators disagree on a joint award: see [9].
In this regard, the Court noted that "umpire" was not defined in the shareholders’ agreement. The Court also noted that the description adopted by the plaintiffs was based on the English Arbitration Act 1996 which was not applicable in the present case. The IAA, although applicable, has no provision covering the role and function of an umpire: see [10].
The Court found that cl 24.3 as objectively ascertained, was intended to provide for a three-member arbitral tribunal which was to be constituted in accordance with Articles 12 and 13 of the ICC Rules: see [12].
There remained the issue of an inconsistency where cl 24.3 provided for the third arbitrator to "act as an umpire" whereas under Art 12(5) of the ICC Rules, the third arbitrator will act as president of the tribunal: see [13].
The Court found favour in the defendant's argument that the plaintiffs' position necessarily advocated for a two-member arbitral tribunal which was inconsistent with the ICC Rules because the umpire steps in only in the event of a deadlock.
The following reasons were given by the Court (at [15] to [17]):
- The ICC Rules do not support a two-tier decision-making process;
- The ICC Rules, IAA and the UNCITRAL Model on International Commercial Arbitration (the "Model Law") envisage decision-making by majority which implies that all three arbitrators participate in the decision-making process in a three-member panel;
- Article 31 of the Model Law requires that an arbitral award be signed by all members of the arbitral tribunal or a majority of all members provided that the reason for any omitted signature is stated, which is inconsistent with a two-member arbitral panel rendering an award.
Interestingly, the Court went on to observe in obiter that it would have been permitted in the present case to go further to engage in some degree of verbal modification or adjustment where the ICC Rules were expressly incorporated so as to resolve the gap in the agreement. This was because the court will give effect to the meaning of the parties' agreement reasonably discerned from the written agreement itself and the background even though it involves departing from or qualifying particular words used, especially if the words in the written agreement would lead to inconsistency with the rest of the instrument: see [19].
Prometheus Marine v Pte Ltd v King, Ann Rita and another appeal [2017] SGCA 61
The Singapore Court of Appeal in this case agreed with the High Court's decision and dismissed 2 appeals brought in relation to an application to set aside an award (the "Award") issued in an arbitration administered by the Singapore International Arbitration Centre ("SIAC"). The High Court decision was discussed in our March newsletter.
While the Court considered many issues in its judgment, the following raised interesting observations from the Court of Appeal:
- the alleged failure to determine the lex arbitri; and
- the allegation of excess of jurisdiction and beach of natural justice.
These issues will be discussed in more detail below.
Background facts
The appellant was a company incorporated in Singapore which sold a yacht (the "Yacht") to the respondent who was a British national under a purchase agreement (the "Contract"). The Contract was governed by Singapore law and contained a dispute resolution clause referring disputes to arbitration at the SIAC in accordance with its Domestic Arbitration Rules.
When the Yacht was due to be delivered, it was dropped while being loaded onto a barge at the shipyard for shipment to Singapore. Extensive damage to the Yacht was caused. The appellant agreed to have the Yacht repaired but the respondent was dissatisfied with the repairs done by the appellant. She had the Yacht further inspected and repaired at her own cost.
The respondent then commenced proceedings against the appellant seeking a full refund of the purchase price of the Yacht as well as damages and/or the cost of repairs. The sole arbitrator appointed by consent (the "Arbitrator") issued an award in the respondent's favour (the "Award").
The court proceedings
The appellant sought to set aside the Award by filing 2 originating summonses in the High Court, one under s 48(1) of the Arbitration Act (the "AA") and the other under s 24 of the International Arbitration Act (the "IAA"). The appellant made the two applications because it took the position that the Arbitrator had failed to determine the applicable statute. The High Court dismissed the appellant's applications.
The High Court decision has been discussed in our March newsletter so this commentary will focus on the arguments brought on appeal. On appeal to the Court of Appeal, the appellant raised the following arguments:
(a) The High Court judge (the "Judge") was apparently biased against the appellant;
(b) The Judge erred in finding that the Arbitrator’s failure to determine the lex arbitri was not contrary to public policy;
(c) The Judge erred in finding that there was no evidence that the making of the Award was induced by fraud on the Respondent’s part or non-pecuniary corruption on the Arbitrator’s part;
(d) The Judge erred in finding that the Arbitrator had neither acted in excess of jurisdiction nor in breach of natural justice when he held that the Appellant was liable for breaches of the Contract; and
(e) The Judge erred in finding that the Appellant was the seller under the Contract (and was hence a party to the arbitration agreement contained there), instead of Clipper (the manufacturer of the Yacht), and therefore also erred in finding that the Arbitrator had the requisite jurisdiction to hear the dispute.
As foreshadowed in the introduction to this case, this commentary will focus on the Court of Appeal's discussion in relation to grounds (b) and (d) above.
The CA Summonses
As a side note, in addition to the 2 appeals brought against the Judge's decision, the appellant also brought 2 Court of Appeal summonses to set aside the Judge's decision on the ground of apparent bias against the Appellant (the "CA Summonses").
The CA Summonses were easily dismissed as an abuse of process as the appellant's counsel was in essence asking the Court of Appeal to reverse the Judge's decision without going through the appellate process. Indeed, the Court of Appeal is not conferred any original jurisdiction under the Supreme Court of Judicature Act to hear the matter: see [35].
Lex arbitri and public policy
The appellant contended that because the Arbitrator did not determine which of the IAA or the AA governed the arbitration, he had "delocalised" the Arbitration and so an award rendered pursuant to a delocalised arbitration should not be enforced in Singapore for being contrary to public policy: see [44].
This paved the way for the Court to consider the notion of delocalised arbitration and what it meant in Singapore's context. The Court took the opportunity to clarify that Singapore law "does not support the notion that arbitral proceedings or arbitral awards can stand free from control of the national legal system of the seat of the arbitration". Consequently, an award that has been set aside at the seat of arbitration would generally lead to the conclusion that there is no award to enforce anywhere else: see [46].
That being the case, the Court found that the issue in the present case did not concern whether the Arbitration was delocalised because the appellant accepted that the Arbitration was seated in Singapore. The issue only related to whether the AA or the IAA governed the Arbitration, which the Court determined to be the IAA: see [47] to [48].
The Court eventually concluded that in any case, the failure to determine the lex arbitri was not a valid ground for setting aside an award under the IAA or the AA: see [49].
Excess of jurisdiction and breach of natural justice
The appellant also sought to argue that the Arbitrator:
- acted in excess of jurisdiction in reformulating the respondent's case and finding the appellant was in breach of terms which were not specifically pleaded in the respondent's statement of claim in the arbitration proceedings; and
- breached the rules of natural justice for failing to give parties the opportunity to make submissions on the discount made to the damages payable by the appellant as repair costs on the basis that this represented ordinary maintenance costs.
In this regard, the Court noted that the jurisdiction of arbitral tribunals is not limited by pleadings because a practical view has to be taken regarding the substance of the dispute being referred to arbitration: see [58].
On the facts, the Court found that the substance of the breach was the same regardless of how the terms were labelled. Further, the respondent had pleaded the necessary facts to sustain the Arbitrator's finding regarding the breach so the appellant had not been taken by surprise by the respondent's failure to plead the term breached: see [60] to [61].
On the argument that there had been a breach of the rules of natural justice, the Court found that the appellant had indeed submitted on the issue of damages and that maintenance costs ought to be excluded. Further, its evidence in the form of its expert's testimony and reports had also addressed the damages payable for repair costs, which the Arbitrator took into consideration: see [65].