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Nature of Matter

Setting Aside of Arbitral Award – Whether there is breach of natural justice

Setting Aside of Arbitral Award – Whether the award deals with matters beyond the scope of the submission to arbitration

Setting Aside of Arbitral Award – Whether the arbitral procedure was not in accordance with the parties' agreement or Model Law.

Case Summary

The facts of this matter can be found in the reported High Court decision in CEF and another v CEH [2021] SGHC 114.

Briefly, the defendant's sole shareholder ("the Parent") entered into a contract with the first plaintiff in June 2011. Under the contract, the first plaintiff was to construct a steel making plant ("the Plant") on a site (which was and is owned by the Parent), with the intention that the Plant would be capable of producing 600,000 tonnes of hot rolled coils per year. By way of novation and assignment in September 2011, the defendant replaced the Parent as the counterparty under the contract. The parties entered into a services agreement in May 2014 for the 2nd plaintiff to provide supervision and training to the defendant. In July and November 2015, the plaintiffs extended two loans to the defendant amounting to €15m.

There was a delay in the erection of the Plant and the Plant never achieved the production target. Both parties blamed the other for the delays and shortfall in production capacity. In February 2016, the plaintiffs claimed that the Plant was completed and that they were entitled to receive the final acceptance certificate. The defendant rejected this claim. Each party took the position that the other was in repudiatory breach of contract. In the meantime, the Plant was shut down.

The agreements provided for disputes to be resolved in Singapore under the Rules of Arbitration of the International Chamber of Commerce, and both parties commenced arbitrations against the other in August 2016. The arbitrations were consolidated, with the plaintiffs as the claimants and the defendant as the respondent.

In November 2019, the tribunal issued its award, which may be summarised as follows:

1. The Repayment Order ordered the defendant to repay to the plaintiffs the Contract price of €92.7m, less €15m (the loans) and €54.5m (accounted for both the defendant’s use of the Plant and the diminution in value of the Plant).
2. The Transfer Order ordered the defendant to transfer title to the Plant to the plaintiffs in return for payment under the Repayment Order.
3. The Damages Order ordered the plaintiffs to pay the defendant €35.6m as damages under the Misrepresentation Act.

The High Court dismissed the plaintiffs’ challenge to all three orders.

Transfer Order

The plaintiffs argued that the the Transfer Order should be set aside because (1) the term “title to the Plant” was impermissibly uncertain; (2) a transfer of title to the Plant by the defendant to the plaintiffs is not legally or factually possible.

The plaintiffs argued that under Ruritanian law, the Plant had become a fixture of the land on which it sits, and the Parent would have title over the Plant. Further, the Transfer Order cannot be construed as requiring the plaintiffs to, at their expense, physically disassemble the Plant and therefore retake possession of the components thereafter, which would also render the Transfer Order unworkable. This would also render the Plant practically worthless.

The plaintiffs therefore submitted that the Transfer Order should be set aside on three grounds under the Model Law:

1. because the tribunal made the Transfer Order in breach of the parties’ arbitration agreement (Art 34(2)(a)(iv));
2. because the Transfer Order is a decision on a matter beyond the scope of the submission to arbitration (Art 34(2)(a)(iii)); and
3. because the tribunal either made the Transfer Order in breach of natural justice, contrary to s 24(b) of the Act, or the plaintiffs were unable to present their case on the Transfer Order (Art 34(2)(a)(ii)).

(a) First ground: Breach of arbitration agreement or Model Law

The plaintiffs argue that Art 34(2)(a)(iv) requires an award to be enforceable or, at the very least, not to be "uncertain and/or unworkable and/or contrary to law and/or factually impossible and/or meaningless."

The Court dismissed the first ground on 2 preliminary points:

1. Art 34(2)(a)(iv) cannot apply to the substance of an award. This would amount to an open invitation to the Court to look into the merits of the tribunal's analysis underlying the decision and order;
2. Art 34(2)(a)(iv) cannot apply if the plaintiffs failed to raise the ground in the arbitration itself, which they did not in this case.

In any event, the Court went on to consider the merits of the plaintiffs' application, and found that the challenge would fail on the merits as well.

First, the plaintiffs argued that there is an implied term in law in every arbitration agreement that an award which results from it must be in a form which is enforceable. The Court decided that, while desirable, it cannot be accepted that a tribunal has a contractual or statutory duty to produce an enforceable award, let alone that a breach of the alleged duty would render an award liable to be set aside under Article 34(2)(a)(iv) In any case, the Court found that the Transfer Order was workable and therefore enforceable.

Next, the plaintiffs argued that an award that is unworkable is liable to be set aside under Art 34(2)(a)(iv), relying on [3.75] of the Singapore Law of Arbitral Awards that "If a party is to do something, there must be clear language on what it is supposed to do, leaving no doubt as to the scope of its obligation and the time within which it is to perform." In this regard:

1. The tribunal did not accept that an award that is the product of the arbitral procedure must be workable. While desirable, it does not follow that an award which does not fulfil these criteria is liable to be set aside under Art 34(2)(a)(iv).
2. In any event, the Transfer Order was not unworkable. The Parent made no claim to the Plant, and was prepared to transfer title to the components resulting from the Plant's disassembly to the plaintiffs and to allow the plaintiffs to take possession of those components.
3. Further, the plaintiffs' point that disassembling the Plant will render the Plant practically worthless was rejected as an afterthought and contrivance. Both before and after the award, the plaintiffs contemplated that the Plant could be disassembled and that the plaintiffs could retake possession of the resulting components without ever suggesting that it was unworkable to do so, or that doing so would render the Plant "practically worthless". For instance, when the defendant offered the plaintiffs access to the site to disassemble the Plant, the plaintiffs' response was to object to the defendant's assertion that this should be done at the plaintiffs' costs, and never raised that it was unworkable, or that doing so would render the Plant "practically worthless".

(b) Second ground: beyond the scope of the submission to arbitration

The plaintiffs argued that in the Terms of Reference, the list of issues, the pleadings, the memorials and the post hearing submissions in the arbitration, a transfer of title to the Plant never formed part of the parties' submission to arbitration; specifically there was no explicit reference to the transfer of title in those documents. The tribunal therefore decided a matter beyond the scope of the submission to arbitration, by ordering restitution and counter-restitution in specie, and the Transfer Order should be set aside under Art 34(2)(a)(iii).

The Court rejected this argument. In the Court’s view, only the parties' arbitration agreement and the notice of arbitration which initiates a specific reference to arbitration delimits the scope of the parties' submission within the meaning of Art34(2)(a)(iii) of the Model Law. It is only if the Transfer Order is outside the scope of the parties' arbitration agreement and outside the scope of each of their notices of arbitration in the consolidated arbitrations that the Transfer Order is outside the scope of their submission to arbitration. In this case, the Transfer Order was not outside the scope of the arbitration agreement or notices of arbitration.

In any event, the Terms of Reference contained language wide enough to bring counter-restitution in specie within the scope of the submission to arbitration given that there was reference to the defendant's counterclaim for recission. On the facts, both restitution and counter-restitution of benefits are the natural legal consequence of rescission.

Further, the plaintiffs were clearly aware throughout the arbitration that counter-restitution of the Plant in specie was a live issue in the arbitration. In the Court’s view, if the plaintiffs thought such a relief was outside the scope of submission to arbitration within the meaning of Art 34(2)(a)(iii) of the Model law, they should have raised the complaint to the tribunal. They failed to do so – this amounted to waiver - and they cannot now rely on art 34(2)(a)(iii) to challenge the Transfer Order.

(c) Third ground: breach of natural justice

The plaintiffs also argued that they were denied natural justice within the meaning of s 24(b) of the Act or were unable to present their case on the Transfer Order within the meaning of Art 34(2)(a)(ii) of the Model Law. The plaintiffs submitted that they were unable to present their case on the issue of whether the tribunal could and should order counter-restitution of the Plant in specie as a consequence of rescission because counter-restitution was never a live issue in the arbitration.

This was dismissed as the Court held that counter-restitution was always a live issue.

On the facts, the defendant expressly sought rescission in its request for arbitration and in its answer to the plaintiffs’ request for arbitration and further pleaded that counter-restitution in specie is the natural legal consequence of recission. Further, the defendant positively raised counter-restitution in specie as a consequence of recission in its opening submissions, and the plaintiffs made a point in their post-hearing submission that the plaintiffs' obligation to make restitution of the Contract price to the defendant must be reduced to account for the diminution in value of the Plant since it was shut down in 2016.

This shows that both parties clearly appreciated and knew that if the tribunal rescinded the Contract, a transfer of title to the Plant in specie was not just a possible consequence of recission but the natural legal consequence of rescission.

Repayment Order

The plaintiffs argued that the tribunal had no basis for deciding that the defendant should be allowed to deduct €54.5m from the Repayment Order and sought to set aside the Repayment Order under s 24(b) of the International Arbitration Act or Art 34(2)(a)(ii) of the Model Law on two grounds:

1. The tribunal breached natural justice in making the Repayment Order in that the plaintiffs were unable to present their case on the current value of the Plant or the diminution in value of the Plant; and
2. The tribunal made the Repayment Order without any evidence of the current value of the Plant or the diminution in value of the Plant. On the first ground, the Court found that there was no breach as the diminution in the value of the Plant was a live issue in the arbitration from the very outset, whereby the tribunal had held that the plaintiffs bore the burden of proving the quantum of the diminution in value of the Plant. The plaintiffs did not do so, and chose to present an all or nothing case on rescission which did not address the consequences of rescission.

On the second ground, the plaintiffs submitted a novel argument to the effect that an award which contains material findings of fact made by the tribunal with no evidential basis at all is liable to be set aside for breach of natural justice (“no evidence rule”). The plaintiffs argued that the Repayment Order and Damages Order (see below) should be set aside because the tribunal made those orders without any evidence of the asset being diminished in value.

The Court rejected this submission. There was strong policy imperative of minimal curial intervention and accepting the no evidence rule would add nothing to the existing grounds for setting aside an award save for an impermissible invitation to Court to reconsider the merits of a tribunal's findings of fact.

In any event, it was clear that the burden of proof was on the plaintiffs to adduce evidence relating to the issue, and the plaintiffs had every opportunity to do so. The plaintiffs cannot now argue that they were unable to present their case on diminution in value or that their own failure left the tribunal with no evidence on the diminution in value of the Plant.

Damages Order

The plaintiffs sought to set aside the Damages Order under either:

1. s 24(b) of the International Arbitration Act on the ground that the tribunal breached the rules of natural justice in quantifying the defendant’s reliance loss at €35.6m; or
2. Art 34(2)(a)(ii) of the Model Law on the grounds that the plaintiffs were unable to present their case on the quantum of the defendant’s reliance loss.

On the first ground, the plaintiffs submit the tribunal could have required the defendant to produce the source documents evidencing each head of its claim for reliance loss. The Court disagreed and decided that it remained the plaintiffs’ responsibility, and the plaintiffs’ alone, to decide how it wished to meet the defendant’s claim for reliance loss. The plaintiffs had every opportunity in the arbitration to require the defendant to produce source documents which were relevant to the quantum of reliance loss, but they did not do so. The plaintiffs were taking a forensic risk by resting their defence on quantum by arguing that the defendant failed to discharge its burden of proof.

On the second ground, the plaintiffs relied on the aforementioned "no evidence rule", which the Court rejected. In any event, the tribunal was perfectly entitled to take a middle path between the parties' opposing all or nothing positions, and the plaintiffs can hardly complain if the tribunal gave them a 75% discount.

Finally, the plaintiffs’ final ground for seeking to set aside the award is that its contents, taken as a whole, do not inform the parties of the several bases on which the tribunal reached its decision on material or essential issues. The Court dismissed this argument, stating that inadequacy of reasons is not a ground, in itself, for setting aside an award, even if the duty to give adequate reasons is characterised as an aspect of the rules of natural justice. Even if an award gives no reasons at all, that is not in itself a ground for setting it aside.