20 May, 2015
In AKN & Anor v ALC & Ors [2015] SGCA 18, the Singapore Court of Appeal considered, among other things, whether it should set aside an arbitral award which the respondents submitted was rendered in excess of jurisdiction and in breach of natural justice (specifically, the audi alteram partem rule) on a host of inter-related issues.
The case is important as it reaffirms the judicial policy of minimum curial intervention in arbitral proceedings and the Singapore Courts’ continued refusal to interfere with the merits of an award issued by a tribunal chosen by the parties. In particular, the Court of Appeal clarified the limited scope of Front Row Investment Holdings (Singapore) Pte Ltd v Daimler South East Asia Pte Ltd (2010) (“Front Row”) by highlighting the distinction between:
- a situation where the arbitral tribunal misunderstood a party’s argument and therefore failed to appreciate its merits (which is a mere error of law not amounting to a breach of natural justice); and
- a situation where the arbitral tribunal failed to even consider an important pleaded issue or argument, and therefore did not apply its mind at all to the dispute (or an important part thereof) before it (which would be a breach of the audi alteram partem rule justifying a setting-aside).
Consistent with this judicial policy, the Court of Appeal emphasised that an inference as to the latter situation (if it is to be drawn at all) must be shown to be “clear and virtually inescapable”, and where the facts are also consistent with the former situation, doubt will be resolved in favour of upholding the award.
Facts
The dispute in the arbitration related to the sale of the former assets of an insolvent corporation (“Plant Assets”). In 2004, the corporation’s liquidator (“Liquidator”), its creditors (“Secured Creditors”), and shareholders (“Shareholders”) agreed to sell the Plant Assets to the appellants (“Purchasers”), and two key agreements were entered into to give effect to the sale:
- an Asset Purchase Agreement (“APA”), which provided that the Plant Assets were to be delivered to the Purchasers “free from and clear of all Liens of any kind” on closing; and
- an Omnibus Agreement (“OMNA”) setting out the terms of two zero coupon notes which the Purchasers agreed to issue to the Secured Creditors in payment of the Plant Assets.
Pursuant to a condition precedent to Closing under the APA, the Liquidator procured a tax amnesty agreement (“TAA”) with the municipal authorities, under which the corporation was granted relief from paying interests and penalties on unpaid taxes it had hitherto incurred, and was allowed to settle the same in eight instalments starting in December 2004 and ending in December 2012. The TAA was, however, liable to be revoked if any taxes in relation to the corporation’s assets were not paid on time.
Right from the start of the first instalment payable under the TAA, problems arose and some of the corporation’s tax liabilities were not paid. In 2006, the municipal authorities considered the TAA revoked, and reinstated the interests and penalties which were previously waived.
The Purchasers commenced arbitration in 2008, arguing (among other things) that:
- the Liquidator and Secured Creditors had, in breach of their obligation under the APA to deliver the Plant Assets to the Purchasers “free from and clear of all Liens of any kind”, failed to pay the portion of the taxes for which they were responsible and that that had rendered the Plant Assets subject to statutory liens in favour of the municipal authorities. The Purchasers thus claimed damages arising as a result; and
- the Secured Creditors had failed to discharge their obligation under the APA to settle certain legal proceedings which were referred to as the “Lost Land Claims” before the arbitral tribunal and the Court of Appeal.
In 2012, the arbitral tribunal delivered an award upholding the Purchasers’ claims, and awarded the Purchasers (among other things) USD 80m in damages for the “lost of an opportunity to earn profits” in respect of the Liquidator’s / Secured Creditors’ failure to deliver clean title under the APA, as well as about USD 23.7m as an indemnity in respect of the Lost Land Claims.
Where An Arbitral Tribunal Has Misunderstood An Issue
It was argued successfully before the High Court that the arbitral tribunal failed to consider the Liquidator’s key arguments, evidence, and submissions that the obligation to deliver the Plant Assets “free from and clear of all Liens of any kind” was qualified by the TAA, and the Liquidator’s and Secured Creditors’ key arguments, evidence, and submissions that the Purchasers were the ones responsible for the revocation of the TAA as (among other things) these arguments, evidence and submissions were either not mentioned or seriously mischaracterised in the award, and that such failures amounted to breaches of the audi alteram partem rule. The Court of Appeal however reversed the High Court’s decision on these issues, holding (among other things) as follows:
- Based on the material before the Court, it was equally plausible that the arbitral tribunal had simply misunderstood the Liquidator’s arguments on the issue of whether the TAA qualified the APA. The Court of Appeal was therefore not prepared to draw the inference that there had been a breach of natural justice in that regard.
- While the arbitral tribunal appeared to have “gotten into a muddle on the facts, the law and the arguments” in respect of the issue of who was responsible for the TAA’s revocation, that was itself insufficient to justify a setting aside of the award.
In reaching this decision, the Court of Appeal noted that the High Court seemed to have engaged with the merits of the underlying dispute by way of its “detailed and exceedingly fine analysis” of the Award in ascertaining the breach of natural justice, which was held to be impermissible.
Where An Arbitral Tribunal Fails To Deal With An Issue
The Court of Appeal, however, agreed with the High Court that the audi
alteram partem rule was breached when:
- The arbitral tribunal proceeded to award the Purchasers damages for loss of an opportunity to earn profits, when parties had throughout the arbitration proceeded on the basis that the Purchasers’ claim was for actual loss of profits (which the arbitral tribunal concluded the Purchasers failed to establish). Specifically, the tribunal had raised the “loss of opportunity” issue on the final day of the arbitration hearing and went on to state that it would need help to determine the quantum of the opportunity lost. However, it never went on to ask parties to address it on that point. Notwithstanding this, it made its award on the basis of a loss of chance, holding that the Purchasers had lost a 55% chance to make a profit. The Court of Appeal held that this failure to hear parties on the issue amounted to a breach of natural justice justifying the setting aside of the relevant portions of the award.
- The arbitral tribunal mistakenly proceeded on the basis that the Secured Creditors had made a concession in respect of the Lost Land Claims (when there had been no such concession), with the effect that it overlooked and thus never considered the merits of the Secured Creditors’ case in that regard. The relevant portions of the award were, therefore, set aside accordingly.
Again, consistent with the judicial policy of minimal curial intervention, the Court of Appeal emphasised that there shall be no wholesale setting aside of the award. Instead, only portions of the award which are in fact related to / infected by the breaches of natural justice should be set aside.
Our Comments / Analysis
The Court of Appeal’s judgment provides a useful amplification of the high threshold that parties will have to meet before an award may be set aside, and confirms that successful setting aside applications will, in future, continue to be the exception rather than the norm.
Coming after two high profile cases from the Singapore courts, viz., the Court of Appeal’s refusal to enforce a substantial SIAC arbitral award issued against the respondents in the arbitration proceedings despite their failure to set aside the award within the time limited for doing so (PT First Media TBK v Astro Nusantara International BV & Ors (2014)) and the High Court’s setting aside of a positive jurisdictional ruling made by an investment treaty tribunal (Government of the Lao People’s Democratic Republic v Sanum Investments Ltd (2015)), it is also a timely confirmation that the Singapore courts’ curial role in arbitral proceedings remains generally that of minimal intervention.
The Court of Appeal did, however, raise one caveat – viz., where the arguments raised relate to the arbitral tribunal’s jurisdiction, the courts will apply a de novo standard of review. It remains to be seen whether this standard is applicable to jurisdictional appeals across all fields of international arbitration.
For further information, please contact:
Hock Keng Chan, Partner, WongPartnership
hockkeng.chan@wongpartnership.com
Wendy Lin, Partner, WongPartnership
wongpartnership.com
Alvin Yeo, WongPartnership
alvin.yeo@wongpartnership.com
