Articles

By Debbie Lee and Sharon Wong Qiao Ling - ECYT Law LLC

Introduction 

This case involves the Court setting aside an arbitral award on various grounds:

1. Tribunal exceeding its jurisdiction;
2. Breach of agreed procedure;
3. Breach of natural justice.

The Court affirmed the following principles in the following cases: 

1. Setting aside an arbitral award due to the tribunal exceeding its jurisdiction under Article 34(2)(a)(iii) of the UNCITRAL Model Law (the “Model Law”), CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] 4 SLR 305 and PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597;
2. Setting aside an arbitral award due to a breach of agreed procedure under Article 34(2)(a)(iv) of the Model Law and AMZ v AXX [2016] 1 SLR 549; and
3. Setting aside an arbitral award due to a breach of natural justice under Article 34(2)(a)(ii) of the Model Law or Section 24(b) of the International Arbitration Act (Cap. 143A) (the “IAA”) and Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86.  

Brief Background

The Plaintiff is GD Midea Air Conditioning Equipment Co Ltd (the “Plaintiff”), a company that manufactures air conditioners and other electrical products. The Defendant is Tornado Consumer Goods Ltd (“Defendant”), a company that sells air conditioners in Israel.

The Plaintiff and Defendant (the “Parties”) entered into an exclusive agreement, which governed the supply of Midea-branded air conditioners and other electrical products to the Defendant (the “MBA”).  

The MBA was valid from 1 January 2012 to 31 December 2014, pursuant to which:

1. The Defendant was required to purchase from the Plaintiff electrical products and achieve preset annual sales targets;
2. The Defendant was required to make payment in accordance with the payment terms set out in purchase orders sent by the Plaintiff, by telegraphic transfer (“TT”) or letter of credit (“LC”);
3. The Defendant was required to make payments in full within 90 days of the marine bill of lading date (“Clause 4.2 of the MBA”);
4. The Plaintiff was required to terminate the MBA by giving 60 days’ prior written notice “at its own discretion and option” if: 
   1. The Defendant failed to achieve the annual sales target in any year; 
   2. The Defendant failed to achieve half the annual sales target by 30 June in any year; or
   3. It seemed obviously impossible for the Defendant to meet the annual sales target before the end of the year.

At the start of the Parties’ relationship, the payment terms required the Defendant to make payment in full by LC within 90 days of the bill of lading. However, this was changed by the Plaintiff in August 2013 through an invoice that indicated “30% TT + 70% LC at sight” (“PI-1325”).

Disputes between the Parties

Disputes arose between the Parties when:

1. The Defendant fell short of the sales targets in 2012 and 2013;  
2. Between 26 and 28 November 2012, annotations were made to lower annual sales targets and postpone the commencement of the reduced sales targets from 2012 to 2013;
3. Payment terms were varied over the course of the Parties’ relationship. Due to the said variations, the Parties were not always in agreement on the prices of the electrical products. Hence, on 14 January 2014, when the Defendant requested for products to be sent to them, the Plaintiff declined to do so; and
4. The Defendant continued to submit orders and the Plaintiff rejected the same.

 In January 2014, the Plaintiff gave the Defendant 60 days’ written notice in accordance with the MBA, claiming that the Defendant failed to achieve its annual sales target for 2013 and refused to do so (the “Termination Notice”).

Arbitration

The Defendant commenced arbitration against the Plaintiff in SIAC Arbitration No. 65 of 2014 (the “Arbitration”), claiming that the Termination Notice was invalid because:

1. The Plaintiff had breached the agreed payment terms as a result of the issuance of PI-1325, the subject of which was disputed by the Parties;
2. No good faith discussions were made by the Plaintiff prior to issuing the Termination Notice;
3. The Plaintiff failed to provide 60 days’ notice to remedy the alleged breach of terms by the Defendant.

In its defence, the Plaintiff alleged and counter-claimed for breach of contract, as the Defendant had failed to meet its sales targets, which also made it impossible to realise the aim of the MBA thereby entitling the Plaintiff to dissolve the contract.

The tribunal found that the Plaintiff breached Clause 4.2 of the MBA by the payment terms in PI-1325. The tribunal thus concluded that due to the Plaintiff’s breach, the Defendant would not need to meet the annual sales targets and the MBA was terminated wrongfully. The tribunal therefore made the award in favor of the Defendant (the “Award”) and dismissed the Plaintiff’s counterclaim. The Defendant then obtained an order to enforce the Award.

The Setting Aside Application

The Plaintiff challenged the tribunal’s finding – that the Plaintiff had breached Clause 4.2 of the MBA by imposing payment terms – on the following bases:

1. The tribunal dealt with matters beyond the scope of the issues submitted for arbitration by the Parties; 
2. The agreed procedure was breached by the tribunal; and
3. The Plaintiff’s right to present its case was breached and/or the rules of natural justice was breached.

The Plaintiff also applied for the enforcement order to be set aside, following the setting aside of the Award.

Decision

Exceeding Jurisdiction – Article 34(2)(a)(iii) of Model Law

The Court decided that the Award arising from the tribunal's finding the Plaintiff had breached Clause 4.2 of the MBA, should be set aside, as the tribunal exceeded its jurisdiction through its finding that the Plaintiff breached Clause 4.2 of the MBA. The Parties had defined the scope of the arbitration and Clause 4.2 of the MBA was not part of the scope.

The Notice of Arbitration, pleadings, submissions, and the agreed list of issues (the “ALOI”) in the Arbitration did not allege breach of Clause 4.2 of the MBA. In fact, the Parties were in agreement that the effect of Clause 4.2 of the MBA was to require the Defendant to “make full payment within 90 days of the date of the bill of lading in any event”.

It was also pointed out by the Court that the Defendant had not agreed with the varied payment terms in PI-1325 and another variation stated in another invoice, but throughout the course of disagreement the Defendant never claimed that Clause 4.2 of the MBA applied as the default payment term.

The Court also decided that once it has been determined that the tribunal exceeded its jurisdiction, there was no further requirement for the Plaintiff to show that it had suffered real or actual prejudice, but in any case, the Court was of the view that there was real prejudice suffered by the Plaintiff.

Breach of Agreed Procedure – Article 34(2)(a)(iv) of Model Law

To set aside the Award under Article 34(2)(a)(iv) of the Model Law, it must be shown that:

1. There was an agreement between the Parties on a particular arbitral procedure;
2. The tribunal failed to adhere to the agreed procedure;
3. The failure to do so has a causal relation to the tribunal’s decision, because if the tribunal had adhered to procedure, the tribunal’s decision would have been different; and
4. The Party mounting the challenge is not barred from relying on this ground due to its failure to raise an objection during the proceedings before the tribunal.

The Court reaffirmed the general principle that no party shall be permitted to advance any new factual allegations or any new legal arguments at the oral hearing, unless expressly permitted by the tribunal.

The Court agreed with the Plaintiff’s position that the tribunal breached the agreed procedure when departing from the ALOI submitted by the Parties by making its finding on Clause 4.2, as Clause 4.2 was not part of the ALOI. The ALOI was considered part of the Parties’ agreed arbitral procedure.

Also, the Court held that the Plaintiff had no opportunity to object to this departure from the agreed procedure as this did not arise at all during the arbitral proceedings.

Breach of the rules of natural justice

To set aside the Award for breach of natural justice, it must be shown:

1. Which rule of natural justice was breached;
2. How that rule was breached;
3. In what way the breach was connected to the making of the award; and
4. How the breach prejudiced the party’s rights - the test is whether the arbitral tribunal could reasonably have arrived at a different result if not for the tribunal’s breach.

The Court found that the Plaintiff was denied a full opportunity to present its case. The issue of the breach of Clause 4.2 of the MBA did not arise in the arbitration and the tribunal made its finding on Clause 4.2 of the MBA without giving notice to the Parties. The fair hearing rule was thus breached.

Conclusion

The Court set aside parts of the Award arising from the tribunal's funding that the Plaintiff had breached Clause 4.2 of the MBA, which included the initial award of US$9 million in favour of the Defendant.

As a general principle, there is minimal curial intervention when it comes to such applications. However, this has to be balanced against the Parties’ right to define the jurisdiction of an arbitral tribunal.

In this case, it is shown that through the process of defining the jurisdiction of the arbitral tribunal and the arbitration process, the Court would intervene where the Parties’ rights had been violated.