SGHC sets aside arbitral award for breach of fair hearing rule and natural justice

This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC.

In BZV v BZW and another [2021] SGHC 60, the Singapore High Court (the “Court”) allowed a party’s application to set aside an arbitral award on the basis that the tribunal had failed entirely to appreciate the correct questions it had to pose to itself, let alone apply its mind to determining those questions. The Court concluded that the high bar required to establish a breach of the fair hearing rule and natural justice have been met. We review the Court’s decision and provide our takeaways.

Background facts

The plaintiff (the claimant in the arbitration) and the defendants (the respondents in the arbitration) entered into a shipbuilding contract (“Contract”) where the plaintiff was the vessel buyer and the defendants the vessel builder. At the arbitration, the plaintiff made two claims against the defendants, namely:

1. that the defendants had delayed in delivering the vessel (the “Delay claim”); and
2. that the defendants breached the contract by delivering a vessel which had generators of a lower ingress protection rating (IP23) than that specified in the Contract (IP44) (the “IP44 claim”).

At the conclusion of the arbitration, the tribunal dismissed both the plaintiff’s claims as well as the counterclaim filed by the defendants. The plaintiff applied to the High Court to set aside the award, save for the part dismissing the defendants’ counterclaim on the basis that:

1. the tribunal breached the rules of natural justice i.e. the rules of procedural fairness (section 24(b) of the International Arbitration Act (the “Act”)) and
2. the tribunal dealt with matters beyond the scope of the parties’ submission (Article 34(2)(a)(iii) of the Model Law on International Commercial Arbitration (“Model Law”)).

The High Court’s decision

The Court allowed the plaintiff’s application on the basis that the tribunal breached the rules of natural justice, specifically the fair hearing rule (section 24 of the Act). The Court found that there was no discernible link between the arguments presented by the parties and the reasoning adopted by the tribunal, and that certain critical elements arising from the parties’ arguments had not been considered. Nevertheless, the Court also found that despite the deficiencies in the award, the tribunal had not dealt with matters beyond the scope of the parties’ submission (Art 34 of the Model Law).

In reaching its conclusion, the Court addressed the issue of whether the requisite elements to set aside an award under section 24(b) of the Act have been met, specifically:-

1. Whether and which rule of natural justice was breached;
2. The manner in which the rule of natural justice had been breached;
3. Whether there was a connection between the breach and the making of the award; and
4. Whether prejudice was caused to the plaintiff’s rights by the breach.

1. Whether and which rule of natural justice was breached

The plaintiff submitted that the tribunal breached the fair hearing rule, which requires each party to be given adequate notice of the case it must meet in the arbitration and a fair opportunity to be heard on that case.

2. The manner in which the rule of natural justice had been breached

The Court accepted and analysed two of the six grounds advanced by the plaintiff as to how the tribunal breached the fair hearing rule, namely that:–

1. the tribunal adopted a chain of reasoning which had no nexus to the parties’ cases (in respect of the Delay claim and the IP44 claim); and
2. the tribunal failed to apply its mind to an essential issue arising from the parties’ arguments (in respect of the Delay claim).

Notably, the Court declined to address grounds raised by the plaintiff that attempted to seek a review of the award on the merits.

In relation to the Delay claim, the Plaintiff’s case was that none of the four findings of fact that the tribunal had relied on to dismiss the Delay claim had any nexus to the cases which the parties had advanced in the arbitration. Notably, this was uncontested even by the defendants in relation to three of the four findings – the terms of the award contained no indication that the tribunal adopted as part of its chain of reasoning on the Delay claim any aspect of six of the seven defences raised by the defendants, understandably constraining the defendants in the arguments they could make.

As a result, the Court concluded that the chain of reasoning by which the tribunal arrived at its decision to dismiss the Delay claim had no nexus to any of the defendant’s defences. While the tribunal’s fourth finding (that the plaintiff had wrongfully prevented the defendants from obtaining a class certificate for the vessel) could arguably have had a nexus to one of the defences submitted by the defendants (that this resulted in the time for the defendants to deliver the vessel being set at large), the Court found that the tribunal failed completely to identify and apply its mind to the essential issue of causation that arose from the parties’ arguments, i.e. whether the plaintiff’s acts of prevention caused the defendants’ failure to deliver the vessel on time.

In relation to the IP44 claim, the Court analysed the three defences raised by the defendants in response to the plaintiff’s IP44 claim, and concluded that the tribunal’s chain of reasoning in dismissing the claim had no nexus to the defendant’s defences.

One of the defences raised by the defendants was that they were not in breach of the Contract by delivering IP23 rated generators. The Court found that the tribunal had made findings of fact that the defendants understood that they were under an obligation to upgrade the generators from IP23 to IP44, and this could only mean that the tribunal had rejected the defendants’ first defence. However, the tribunal also used the phrase “no breach by [the defendants] in supplying generators rated IP23”. The Court rationalised this by holding that for the award to be coherent and consistent, the phrase “no breach” had to be interpreted to mean “no liability to the plaintiff” instead. The phrase could not be interpreted literally as that would render the award internally inconsistent and incoherent in view of its finding of fact.

The defendants’ second defence was that the plaintiff was precluded by estoppel from insisting that the defendants deliver the vessel with generators rated IP44 instead of IP23. The tribunal relied on an email asserting that the IP23 generators were fit for purpose to conclude that the plaintiff had led the defendants to believe that the generators rated IP23 were adequate. However, the majority erroneously identified the email as being sent by the plaintiff’s representative, when in fact it had been sent by the defendants’ representative. The plaintiff sought a correction to the award, which the tribunal allowed. It amended the award by identifying the email as originating from the defendants, and also deleting sentences that established that the tribunal was relying on said email as a clear admission by the plaintiff that the generators rated IP23 were fit for purpose. The Court found that as a result of these deletions, the award had no nexus to the defendants’ estoppel defence – there was no finding, even on a generous reading, that the Plaintiff represented to the Defendants that generators rated IP23 were fit for any purpose.

Interestingly, the Court noted that had the tribunal declined to amend the award, as egregious an error of fact that would have left, the plaintiff’s setting aside application would have failed. The Court would have to give a generous reading to the award and accept that the plaintiff had indeed made a representation to the defendants. A tribunal’s error, no matter how fundamental, egregious or patent, and whether of fact or law – is no basis on which to set aside an award.

3. Whether there was a connection between the breach and the making of the award

On the third element, the Court concluded that it is plainly evident that the tribunal’s breach of natural justice on each claim was causally connected to the making of the award.

4. Whether prejudice was caused to the plaintiff’s rights by the breach

On the fourth element, the Court found that it was easily established that the breach was prejudicial to the Plaintiff’s rights. Had the tribunal applied its mind to the parties’ cases and the essential issues arising from the parties’ arguments on those cases, the tribunal would have found in favour of the plaintiff on both the Delay and IP44 claim. As a result, the tribunal’s breach of natural justice caused real prejudice to the plaintiff.

Takeaways

The Court’s approach illustrates the balance sought to be struck between giving effect to the finality of arbitral awards and providing a recourse to parties who may have received a fundamentally flawed award.

The Singapore courts’ non-interventionist approach towards maintaining the sanctity of arbitral awards is best exemplified by the Court’s readiness to allow even “fundamental, egregious or patent” errors of the tribunal to remain untouched, as errors of law or fact do not form a proper basis for the setting aside of awards.

The grounds to set aside an arbitral award are limited, and require a high threshold to be met. An award cannot be challenged on the merits, and the Court usually gives a generous reading to the award – with benefit of doubt afforded to the tribunal having conduct of the matter. Nevertheless, if the tribunal is found to have breached the rules of natural justice, i.e. for failing to accord fundamental procedural fairness to the parties, then the award is susceptible to being set aside.