Singapore Court of Appeal affirms decision to set aside award for breach of natural justice and clarifies ambit of parties’ rights to a fair hearing at arbitration

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

The Singapore Court of Appeal has upheld a decision by the High Court in setting aside an arbitration award for breach of natural justice. In its judgment, the Court also clarified the ambit of parties’ rights to a fair hearing at arbitration.

In agreeing with the High Court that the breach of the fair hearing rule was connected to the making of the Award, and had prejudiced the respondent’s rights, the Court of Appeal pointed out that the fair hearing principle requires that a tribunal pays attention to what is put before it and gives its reasoned decision on the arguments and evidence presented. Although the court in a setting aside application does not sit in appeal over the award, the court remains entitled to interfere if it considers the tribunal to have been manifestly incoherent in the making of the award. Such a decision would show that the tribunal had not understood or dealt with the case at all, which meant that parties would not have been accorded a fair hearing.

BZW and another v BZV

The respondent buyer had entered into a shipbuilding contract with the appellant shipbuilders, two associated companies, for the construction and delivery of a vessel by the appellants to the respondent. Post-delivery of the vessel, the respondent commenced arbitration proceedings against the appellants in a Singapore-seated arbitration administered by the Singapore International Arbitration Centre for: (1) a claim for liquidated damages due to the delay in delivery of the vessel (the “Delay Claim”) and (2) a claim in damages for breach of contract as a result of the installation of inadequate generators (the “Rating Claim”). The appellants, in turn, filed a counterclaim for payment for additional work.

The Delay Claim – In the Delay Claim, the respondent claimed for liquidated damages for a period of 73 days, totalling about US$3.65 million. In their defence, the appellants pleaded seven alternative defences, including relying on the “prevention principle”, i.e. as the appellants were prevented from completing its contractual obligations on time by the respondent’s own acts, and there being no contractual mechanism to extend time, the time for the appellants to deliver the vessel to the respondent was set at large. The contractual dates were therefore no longer applicable, and the appellants were subject only to a broader requirement to deliver the vessel within a “reasonable period of time”.

The Rating Claim – In the Rating Claim, the respondent claimed that contractually, the appellants were obliged to equip the vessel with generators rated IP44. Instead, in breach of contract, the appellants delivered the vessel installed with generators only rated IP23. In their defence, the appellants claimed, inter alia, that the respondent was estopped from asserting that the appellants were under an obligation to upgrade the vessel’s generators from IP23 to IP44 as the appellants had complied with the respondent’s own request.

The Award – The Award handed down by the Tribunal consisting of three arbitrators, dismissed both the respondent’s claims and the appellants’ counterclaim.

Correction of the Award: -Subsequent to receiving the Award, the respondent submitted a request to the Tribunal for correction of the Award. The Award had originally stated that the “(respondent’s Mr Tan) provided supporting documents to show that IP23 was fit for purpose”. In its request for correction, the respondent pointed out that Mr Tan was the appellants’ representative, not the respondent’s. The Tribunal subsequently reworded the Award to state: “(t)he Tribunal has noted that (the appellants’ Mr Tan) provided supporting documents to show that IP23 was fit for purpose”.

Application to Set Aside the Award – In the respondent’s application to set aside the award, the respondent alleged six breaches of natural justice in relation to the Delay Claim. The two most important breaches cited were that: (i) there was no nexus between the chain of reasoning which the Tribunal adopted and the cases which the parties had advanced; and (ii) the Tribunal failed to direct its mind to the merits. In respect of the Rating Claim, the respondent cited five breaches of natural justice, with the most important breach being the absence of any nexus between the Tribunal’s chain of reasoning in dismissing the Rating Claim and the parties’ cases on this head of claim.

Judgment of the High Court – The High Court held that the Tribunal was in breach of natural justice in the way it dealt with the Delay Claim and the Rating Claim, as when it dismissed the respondent’s claim, the Tribunal’s chain of reasoning had no nexus to any of the appellants’ defences. . (See our review of the High Court’s decision in our Annual Review of Singapore Construction Law Developments 2021 here, and earlier Law-Now update here.)

Breach of Natural Justice – Right to a Fair Hearing

The Court referred to the four elements set out in John Holland Pty Ltd (formerly known as John Holland Construction & Engineering Pty Ltd) v Toyo Engineering Corp (Japan) [2001] 1 SLR(R) 443 at [18] that needed to be established in order to set aside an award on grounds of natural justice, namely: (a) first, the specific rule of natural justice that was breached; (b) second, how it was breached; (c) third, how the breach was connected to the making of the award; and (d) fourth, how the breach prejudiced the respondent’s rights.

The Court of Appeal agreed with the High Court that the specific rule of natural justice that was breached was the fair hearing rule, and identified the two types of breaches of the fair hearing rule that were present in the award: (i) the failure by the Tribunal to apply its mind to the essential issues arising from the parties’ arguments in respect of the Delay Claim, and (ii) a defect in the Tribunal’s chain of reasoning in the Rating Claim that had no nexus with the parties’ submissions.

With respect to the Delay Claim, the High Court found that when the Tribunal dismissed the Delay Claim, there was no indication anywhere in the award, apart from the prevention principle, that the Tribunal had adopted as part of its reasoning any aspects of the appellants’ six other defences.

In their defence to the Delay Claim, the appellants had also pleaded that the liquidated damages clause was a penalty clause, and that the respondent had waived any right to claim liquidated damages. The award did not mention either of these two defences.

The four other defences to the Delay Claim contend that: (i) the appellants had delivered the vessel before the contractual date, (ii) that the appellants were entitled to an extension of time for delivery, (iii) that the starting date to pay liquidated damages had shifted and (iv) the appellants’ liability to pay liquidated damages had lapsed because a change in the Contract provided that the obligation to pay liquidated damages would end on a certain date.

The High Court found that these four defences would logically have been defeated by the dismissal of the appellants’ counterclaim. In dismissing the appellants’ counterclaim, the Tribunal held inter alia that:

  1. the appellants had delayed in delivering the vessel under the contract - this would necessarily have entailed a rejection of the appellants’ defence of no breach and that they had delivered the vessel before the contractual date;

  2. there had not been an extension of the delivery date - this would have amounted to a rejection of the two defences that there had been an alteration in the contractual dates; and

  3. the appellants were not entitled to an extension of time as they did not comply with the contractual conditions precedent – this would have necessarily meant a rejection of the defence that there had been an extension of time.

The only defence to the Delay Claim that could have had a nexus to the Tribunal’s chain of reasoning was the appellants’ defence in reliance on the prevention principle. This required a discussion as to: (i) whether an act of prevention had been committed by the respondent; (ii) whether there was a mechanism in the Contract for the appellants to claim an extension of time; and (iii) whether the act of prevention caused the delay to the vessel being ready for delivery. The Tribunal expressly stated in the Award that it did not need to deal with the issue of extension of time. The causation point was not addressed at all in the Award. The Court of Appeal agreed with the High Court that the Tribunal had simply failed to apply its mind to these essential issues.

With respect to the Rating Claim, the High Court held that the majority of the Tribunal did not rely on a chain of reasoning with a nexus to any of the appellants’ three defences, namely: (i) there was no contractual requirement for any particular rating for generators; (ii) the respondent was estopped from asserting that the appellants were under an obligation to upgrade the vessel’s generators from IP23 to IP44; and (iii) minutes of negotiations that had been signed by the parties superseded any specific technical obligations in the contract and permitted the appellants to deliver the vessel with generators rated IP23.

The majority of the Tribunal had found that the end-buyer of the vessel required the generators to be rated IP44 and that as a result of meetings with the end-buyer, the parties “understood that the [vessel’s] generators had to be upgraded from IP 23 to IP 44”. As this meant that the appellants understood that they were obliged to upgrade the generators, this necessarily meant that the Tribunal had rejected the appellants’ first defence that they were not in breach as there was no contractual requirement to deliver the vessel with IP44 generators.

In relation to the appellants’ second defence of estoppel, the Tribunal’s original chain of reasoning referred to an email by Mr Tan which stated that the IP23 generators were “fit for purpose”. However, having wrongly identified Mr Tan as being the respondent’s representative in the award, the Tribunal subsequently amended the award to (correctly) state that Mr Tan was the appellants’ representative. However, this meant that there was no longer a finding or evidential support in the amended award for the assertion that the respondent had represented to the appellants that the IP23 generators were “fit for purpose”. As held by the Court of Appeal, “…once the Tribunal amended … the Award to simply rely on the appellants’ own assessment that the IP23 generators were fit for purpose, the element of representation on the part of the promisor needed for the estoppel defence could not be established. The inescapable inference that has to be drawn from the Tribunal’s amendment of … the Award in the way that it did is that the Tribunal failed to apply its mind to the essential issue arising from the parties’ arguments, that of the existence of representation in the estoppel defence.

As for the appellants’ third defence that the minutes of negotiations had superseded specific technical contractual obligations, the Award did not refer to the minutes of negotiations at all.

These breaches of the fair hearing rule were directly connected to the making of the Award – the Delay Claim and the Rating Claim were dismissed either: (i) because the Tribunal adopted the appellants’ prevention principle and estoppel defences or (ii) for reasons other than those defences. Either way, the connection between the breaches of natural justice and the award was clear.

As discussed, the Tribunal had not applied its mind to the issue of causation as regards the prevention principle for purpose of the Delay Claim, or as to the element of representation as regards the estoppel defence for purpose of the Rating Claim. Equally, if the Tribunal had dismissed these claims for reasons other than those particular defences, then nothing in the award supported any connection whatsoever to the appellants’ defences in the arbitration and the dismissal of the respondent’s claims.

These breaches prejudiced the respondent’s rights, as had the Tribunal applied its mind to the parties’ cases and essential issues, it could have found in favour of the Respondent. The Court of Appeal held that it was not necessary for the Court to hold that the Tribunal would have found in the respondent’s favour on both claims. It was sufficient that there was prejudice arising from the failure to consider the submissions which arguably could have succeeded.

No Remission

The Court of Appeal also agreed with the High Court’s decision to refuse remission of the award back to the Tribunal pursuant to Article 34(4) of the UNCITRAL Model Law on International Commercial Arbitration, which would have given the Tribunal an opportunity to take steps to eliminate the grounds for setting aside. The Court considered that remission was inappropriate as:

  1. the breach by the Tribunal was not in respect of an isolated or stand-alone issue or point but rather a failure to appreciate the correct questions it had to pose to itself, and to apply its mind to determining those questions;

  2. judged objectively, there was a real risk that the Tribunal may sub-consciously be tempted to achieve the same result as before. Further, in particular light of the majority’s denial of the effect of their error (as to the identity of Mr Tan’s employer) on their chain of reasoning in the award when pointed out to them, and their inexplicable disregard of this point as highlighted in the dissenting arbitrator’s opinion, a reasonable person would no longer have confidence in the Tribunal’s ability to come to a fair and balanced conclusion on the issues if remitted; and

  3. given that a substantial amount had passed since the evidentiary hearing there was no benefit to parties in terms of time and cost savings as the Tribunal would have to spend considerable time, effort, and costs to review the evidence again.

Conclusion

During the appeal, the appellants argued that the fact that the High Court Judge had pored over thousands of pages of the award, pleadings and submissions in great detail in reaching its judgment to set aside the award in the first instance was wrong, as an application to set aside an award is not a pretext for the losing party to appeal on the merits. Referring to TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] 4 SLR 972, the appellants asserted that the court should only set aside an award if the breach of natural justice is “demonstrably clear on the face of the record without the need to pore over thousands of pages of facts and submissions”. The Court of Appeal disagreed and held that the allegations in the present case that the impugned portions of the award had no nexus to the case as actually presented to the Tribunal required the Judge to undertake the exercise it did. The Judge needed to understand what happened in the arbitral proceedings and analyse the award in some depth in order to decide whether there was substance to the allegations.

The appellants also argued that the enquiry as to whether a tribunal’s chain of reasoning is sufficiently connected with the essential issues is not concerned with whether a tribunal’s reasoning is cogent or correct. The Court of Appeal was clear that on the applicable standards, even if the courts consider that, in reaching its decision, a tribunal had made mistakes of facts or law or both, the courts would not interfere with an award by reason of such mistakes alone. However, the Court of Appeal held that applying that principle would still not allow for or support the right of any tribunal to be manifestly incoherent in making its decision.

Clearly, while the courts will accord fair latitude to tribunals and respect a tribunal’s autonomy in coming to its own decision, the rights of the parties to a fair hearing and to be provided with reasonable notice of the tribunal’s chain of reasoning remain paramount and sacrosanct.

References:

BZW and another v BZV [2022] SGCA 1

John Holland Pty Ltd (formerly known as John Holland Construction & Engineering Pty Ltd) v Toyo Engineering Corp (Japan) [2001] 1 SLR(R) 443

TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] 4 SLR 972