By Christine Ong and Tan Yi Lei - Virtus Law LLP, with assistance from Michelle Lam
Nature of Matter
Applications to set aside arbitral award on the basis that there had been a breach of natural justice and that the tribunal had exceeded its jurisdiction.
Case Summary
The second claimant carried on work on a hydroelectric power plant (“Project”) between 2007 and 2010 in Lemuria. By the end of 2011, it ran out of funds. The respondents, its controlling shareholders at the time, could not inject more funds into the second claimant. The first claimant thus became the external investor to fund the Project. There are two relevant contracts to the dispute - the Securities Purchase Agreement (“SPA”) dated 2012 and the Bulk Power Transmission Agreement (“BPTA”) dated 2009.
Under the SPA, the first claimant agreed to buy the entire share capital of the second claimant from the respondents. The payments to be made were based on the express assumption that the Project would be certified by the first claimant’s engineer as being fully operational and therefore able to supply electricity to generate revenue (“Wet Commissioning”) by 31 March 2013. Further, the first claimant agreed to pay $5.1m of the purchase consideration directly to the second claimant, to be recorded in the second claimant’s books as a loan due from the second claimant to the respondent (“SSL”). If the wet commissioning date was after 31 March 2013, the first claimant was entitled to require the respondent to cede control of the Project to the first claimant. If the first claimant did exercise this right, it was obliged to undertake the completion of the Project in the most prudent and cost effective manner.
Under the BPTA dated 2009, the second claimant executed the BPTA with the company which runs the power grid in Lemuria (“Grid Company”). The second claimant agreed to pay transmission charges to the Grid Company in exchange for access to its power grid for 25 years. Access to the Grid Company was necessary for the second claimant to transmit electricity generated by the Project to consumers and earn revenue. Accordingly, the SPA obliged the respondent to indemnify the second claimant for any transmission charges which the second claimant became obliged to pay the Grid Company on or before the Wet Commissioning.
The Project failed to achieve Wet Commissioning by 13 March 2013. From November 2013, the first claimant began to oversee the Project more closely. In March 2014, the first claimant issued a takeover notice to the respondent pursuant to the SPA and took full control of the Project. The first claimant began addressing defects of the Project. Part of the Project was eventually wet commissioned on 31 October 2015 (“Wet Commissioning Date”). The Project as a whole, however, never achieved Wet Commissioning and was abandoned when the penstock ruptured.
The claimants commenced arbitration and sought to recover the following: (a) the entire Cost Overrun up to the Wet Commissioning Date for $70.8m (“Cost Overrun”); and (b) the transmission charges which the second claimant paid to the Grid Company under the BPTA up to the Wet Commissioning Date for $13.7m (“BPTA Charges”).<
The tribunal found the respondent liable to the claimants for the Cost Overrun and the BPTA charges. However, the tribunal did not award the claimants the full sums claimed as the respondent’s liability on both claims terminated on 30 June 2014, before the Wet Commissioning Date. The respondent was liable to pay $17.3m for the Cost Overrun and $5.5m for the transmission charges, and the respondent’s counterclaim for the SSL was rejected.
The claimants applied on 30 April 2018 to set aside the following findings of the award: the tribunal’s finding that the respondent is not liable to indemnify the claimants for the Cost Overrun and the BPTA Charges from 1 July 2014 to 31 October 2015, and the tribunal’s rejection as the consequence of these findings.
The respondent applied on 22 June 2018 to set aside the findings of the award under Articles 34(2)(a)(ii) and 34(2)(a)(iii) of the Model Law and s 24(b) of the International Arbitration Act that the respondent be liable to pay for the Cost Overrun and the BPTA Charges and the rejection of the respondent’s counterclaim of the SSL.
Both applications were dismissed and both parties have appealed against the dismissal of the applications.
Ruling
RESPONDENT’S APPLICATION TO SET ASIDE THE AWARD
The Singapore High Court dismissed the respondent’s application to set aside the award.
The Claimants’ Preliminary Argument
The claimants’ preliminary argument against the respondent’s application was that the application was made after the three month time limit under Article 34(3) of the Model Law. The Court concluded that the respondent’s setting aside application had been brought within time on the facts.
Whether a request under Article 33 of the Model Law must be genuine
Article 34(3) requires an aggrieved party to apply to set aside an award within a three month period. This three month period commences on either the date which parties receive the award or the date which the tribunal disposes of a request for correction under Article 33.
The respondent submitted that the second limb of Article 34(3) of the Model Law applies to its application and the three month time limit therefore commenced on 23 March 2018, i.e. its application was filed within the three month time limit.
The claimants stated that State of Arunachal Pradesh v Damani Construction Co (2007) 10 SCC 742 (“Damani”) is authority for the proposition that only a genuine request under Article 33 would trigger a postponement of the time limit of Article 34(3) of the Model Law.
The Court held that Damani could not be followed in Singapore. The court agreed with the reasoning in Todd Petroleum Mining Co Ltd v Shell (Petroleum Mining) Co Ltd [2015] 2 NZLR 180, which held that Article 34(3) of the Model Law does not require a request under Article 33 to satisfy a qualitative test for it to trigger a postponement, as it is inconsistent with the language of Article 34(3) which speaks only of a request being “disposed of”, and further, adding a qualitative requirement would bring about uncertainties, as an applicant party would not know whether it has made a request in terms of that article until the tribunal determines its application. The Court also found that the uncertainty of such a qualitative test would lead to potential wasted time and costs. Further, the drafters of Article 34(3) were aware of the risk of abuse of the qualitative test, but considered it a constrained risk and accepted that risk in the current drafting of Article 34(3).
Accordingly, the Court rejected the claimants’ argument that only a genuine request under Article 33 triggers postponement under Article 34. Whether a request is made under Article 33 is purely a matter of form and does not depend on evaluating the substance of the request by applying any qualitative test.
Whether a request under Article 33 of the Model Law must be material
The claimants relied on Daewoo Shipbuilding & Marine Company Ltd v Songa Offshore Equinox Ltd and anor [2018] EWHC 538 (Comm) (“Daewoo Shipbuilding”) to argue that the second limb of Article 34(3) applied only where the request under Article 33 of the Model Law is material to the setting aside application.
The Court found that Daewoo Shipbuilding was distinguishable and did not assist the claimants. Daewoo Shipbuilding interpreted the provisions of the English Arbitration Act, which differed from the Model Law. Under the English Arbitration Act, the commencement of the time limit is not generally postponed by an application to correct the award. However, under the Model Law, the commencement of the time limit for challenging an award is postponed by every application to correct an award. Whilst corrections under the English Arbitration Act requires any correction sought to be material before postponement, the Model Law postpones the commencement of the time limit for any and every type of request under Article 33.
Accordingly, the Court also rejected the claimants’ argument that the request must be material to the setting aside application.
Applicable principles in relation to breach of natural justice
To set aside an arbitral award for breach of natural justice, the four requirements in Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86 (“Soh Beng Tee”) must be established: (a) the act of natural justice which was breached; (b) how it was breached; (c) in what way the breach was connected to making the award; and (d) how the breach prejudiced the party’s rights.
Applicable principles in relation to a tribunal acting in excess of its jurisdiction
To set aside an arbitral award under Article 34(2)(a)(iii) of the Model Law, the Court must determine first, what matters were within the scope of submission to the arbitral tribunal and second, whether the arbitral award involved such matters or whether it involved “a new difference… outside the scope of the submission to arbitration and accordingly… irrelevant to the issues requiring determination”.
The respondent’s application
The court distilled the following issues to be determined on the respondent’s application:
- On the Cost Overrun Claim:
- Did the tribunal act in breach of natural justice by failing to address the respondent’s argument that certain correspondence was inadmissible (“First Issue”);
- Did the tribunal act in breach of natural justice or in excess of jurisdiction by finding the respondent liable for the Cost Overrun even though it was not in breach of the SPA (“Second Issue”);
- Did the tribunal act in breach of natural justice by failing to consider the respondent’s arguments and evidence on the transmission line works? In the alternative, was the respondent deprived of an opportunity to present its case on whether other components of the Cost Overrun claim were time-dependent (“Third Issue”); and
- Did the tribunal act in breach of natural justice or in excess of jurisdiction in finding that the SSL the respondent’s liability for Cost Overrun (“Fourth Issue”)
- On the BPTA Charges claim: did the tribunal act in breach of natural justice by failing to consider the respondent’s argument that the claim was unsupported by evidence (“Fifth Issue”)
- Did the tribunal act in breach of natural justice by awarding pre-award interest from 4 July 2014 when the claimants themselves sought pre-award interest only from a later date (“Sixth Issue”)
The First Issue
The respondent submitted that the correspondence between the respondent and first claimant between May 2013 and March 2014 was covered by without prejudice privilege and was therefore inadmissible. The tribunal had thus breached the rules of natural justice by relying on this correspondence without addressing the respondent’s objection to admissibility.
The Court held that it was not a clear or virtually inescapable inference that the tribunal failed to apply its mind to the respondent’s argument that the correspondence was inadmissible. The issue of admissibility was not presented as an important point to consider in the arbitration. Whilst the respondent did object to the admission nine times, such objection was provided without elaboration. Accordingly, the court found that both parties did not regard the admissibility to be of great importance, and inferred that the tribunal made a decision to admit the correspondence without seeing a need to articulate its reasons.
Accordingly, the Court rejected the respondent’s submission that the tribunal, by reason of its silence on the point in the award, failed entirely to apply its mind to the issue of admissibility. The Court found that even if the tribunal did fail to consider the respondent’s objections, no prejudice was found as the respondent failed to show that the tribunal would not have found the respondent liable for the cost overrun. The tribunal only referred to the correspondence in determining the extent of the respondent’s liability of the Cost Overrun. As such, liability of the respondent was established purely on the interpretation of the SPA and the correspondence was immaterial in the tribunal’s findings for liability.
The Second Issue
The respondent submitted that the claimant, on the last day of oral submissions, changed their case by stating that the respondent’s obligation to bear the Cost Overrun was absolute and unconditional, which the tribunal accepted as an issue to be determined. The respondent alleged that as a result, it was denied the opportunity to respond to this new case.
The court found that the respondent was not denied a reasonable opportunity to respond. The pleadings showed that the claimants, from the early stages of arbitration, took the position that the respondent’s liability for the Cost Overrun arose directly from its express obligation to indemnify the claimants. The claimants thus pleaded the breaches of the SPA only to explain the incurrence of the Cost Overrun, and not as precedent for the respondent’s liability for the Cost Overrun. The respondents were found to have understood the true nature of the claimant’s case, thus explaining why the respondent’s defence provided that it could not be liable for the Cost Overrun unless it was in breach of the SPA.
Further, the respondents were found to have four months between the conclusion of oral submissions and the close of written submissions to develop and present a response on the Cost Overrun liability, and thus, the parties could have easily dealt with the issue in written submissions or sought directions from the tribunal to hear on the substance of the issue. In addition, the court found that the tribunal did not exceed its jurisdiction – the tribunal was found to have correctly apprehended the true basis of the claimant’s case on why it was entitled to recover Cost Overrun from the respondent.
Accordingly, the court held that the respondent was not deprived of a reasonable opportunity to respond to the case made out by the claimants.
The Third Issue
The tribunal limited the respondent’s liability up to 30 June 2014 which was the date the Project would have achieved Wet Commissioning if the claimants completed the Project in the most prudent and cost effective manner. The tribunal quantified the recoverable Cost Overrun by breaking it down into four components, and made adjustments to the first two to reflect the costs incurred up to 30 June 2014. The tribunal allowed the fourth component in full, even though parts of the costs of the fourth component were incurred after 30 June 2014.
The respondent argued that in not making any adjustments to the fourth component, the tribunal failed to give the respondent a reasonable opportunity to address whether any aspect of it was time dependent.
The Court found that there was no breach of natural justice as the tribunal is not required to invite submissions on every point necessary in its decision. Further, the tribunal is entitled to come to his own conclusions from the primary facts placed before him, and is not expected to consult parties on his thinking process before finalising his award. The Court further held that even without arguments on whether each component was time dependent, the full extent of the evidence on the components were presented before the tribunal.
As regards the tribunal’s failure to consider a specific element of the fourth component, the respondent submitted that it made extensive submissions to the tribunal on why it could not be held liable for the said costs but the tribunal failed to apply its mind to any of the respondent’s submissions on the issue.
The Court found that the respondent ran an all or nothing defence to the claim and did not advance any alternative challenge to the costs. Further, the tribunal had used the same components of the Cost Overrun to calculate the Project Cost, in turn showing that the tribunal had implicitly rejected the respondent’s defence on the said costs. The tribunal is also not required to acknowledge expressly all of the arguments which a party has made.
The Fourth Issue
The tribunal found that the respondent was not entitled to recover the SSL. The respondent contended that such a finding was in breach of natural justice or in excess of jurisdiction because it reached that conclusion on a line of reasoning argued by neither party.
The Court found that the finding was within the tribunal’s jurisdiction, as the finding, whilst not put forward by either party, was reached on the evidence submitted to the tribunal. Further, the tribunal had already made the primary finding that the respondent’s right to recover the SSL was extinguished under the SPA as it failed to comply with the Cost Overrun notice issued in October 2013. There was thus no prejudice to the respondent either.
The Fifth Issue
The respondent submitted that had the tribunal applied its mind to its arguments on the inadequate evidence provided by the claimants, it would have found that the table provided by the claimants lacked proper supporting invoices and there was no evidence to support the claimants’ claim from $3.3m in BPTA Charges before February 2014.
The Court rejected the respondent’s grounds on the basis that the tribunal did expressly analyse the evidence supporting the BPTA Charges claim. The tribunal’s chain of reasoning further made clear that it did consider the sufficiency of the claimant’s evidence. As such, the respondent’s argument for the lack of considerations on the sufficiency of the claimant’s evidence was rejected.
The Sixth Issue
The respondent argued that the tribunal acted in breach of natural justice by awarding the claimants pre-award interest on the Cost Overrun claim, on the basis that the tribunal’s choice of 4 July 2014 as the date on which pre-award interest commenced was not argued by either party.
The Court rejected this argument on the basis that pre-award interest is in the discretion of the tribunal under s. 20(1) of the International Arbitration Act. Further, the Court found that the date 4 July 2014 had legal significance as it was the date on which the claimants sent legal notice of the Cost Overrun and the BPTA Charges claims to the respondent. Accordingly, it had a rational connection to the dispute before the tribunal.
Conclusion on the respondent’s application
All of the respondent’s challenges to the tribunal’s decision were rejected by the Court, and as such, the respondent’s setting aside application was dismissed.
CLAIMANTS’ APPLICATION TO SET ASIDE THE AWARD
The Court considered the following issues in the claimants’ application:
- The tribunal failed to consider the claimants’ evidence and arguments that their methods for repairing the penstock were entirely appropriate based on the following aspects:
- A risk assessment by the claiman’s’ senior management and an expert report which concluded that re-lining was the most prudent and cost effective method of rectifying the defects and completing the Project (“Rectifying Penstock Defects”)
- The respondent’s original design for the penstock was inadequate (“Unfeasibility of the Original Penstock Design”)
- The time taken to complete other critical components of the project meant that it could not have been Wet Commission by 30 June 2014 (“Other Components of the Project”)
- In the tribunal’s finding that the project would have been wet commissioned by 30 June 2014, the tribunal adopted a chain of reasoning that the claimants could not have foreseen and had no opportunity to redress (“Opportunity to be heard on the Project Completion Date”)
Rectifying Penstock Defects
The Court held that the tribunal saw no need to engage with the claimants’ evidence on what the tribunal saw to be an irrelevant point. Further, the court found that the tribunal did consider the evidence contended – for instance, the tribunal cited the expert report in its award.
There was also no prejudice suffered by the claimants.
Unfeasibility of the Original Penstock Design
The Court held that there was no clear and virtually inescapable inference that the tribunal had overlooked this evidence. There was an implicit rejection of the claimant’s argument that relining the penstock was a necessary expense to achieve wet commissioning and that therefore the respondent should be liable for it.
Other Components of the Project
The claimants pointed to evidence showing that there were also other defects being rectified concurrently with the penstock, which would have delayed the Wet Commissioning Date beyond 30 June 2014, which the tribunal failed to make reference to.
The Court held that the tribunal’s failure to engage with the evidence on the time needed to rectify the other components had to be understood in the entire context of the Project. Some of the other components, such as the transmission line works, were the obligation of the first respondent, and not the second respondent. The Court found that even if there was an error on this, it is a mere error of fact or law, which would not amount to a breach of natural justice.
Opportunity to be heard on the Project Completion Date
The claimants argued that the tribunal’s finding on the Project being completed by 30 June 2014 was one which it could not have expected and had no opportunity to address.
The Court dismissed this ground on the basis that this deprivation of chance would go against the claimant’s argument above of the lack of consideration of the evidence provided. Further, the tribunal’s calculation of three to four months was based on the claimants’ own evidence.
Thus, if the relevant evidence was already before the tribunal, there could be no argument that a party is deprived of the chance to present new material that could have made a difference to the tribunal’s award.
Conclusion on claimants’ setting aside application
The court rejected all of the claimants’ allegations of a breach of natural justice in the tribunal’s decision to limit the claimants’ recovery on the basis that the Wet Commissioning Date should have been achieved by 30 June 2014, and dismissed the claimants’ application in its entirety