Singapore Case Update: Setting Aside on the Basis of Arbitrator Exceeding Jurisdiction (AUF v AUG [2015] SGHC 305)

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I.  BACKGROUND

The dispute between AUG (“the Owner”) and AUF (“the Contractor”) was in relation to the design, supply and installation of the external wall system for a commercial development by a nominated sub-contractor (“the Sub-Contract Works”). The final agreed sum for the Sub-Contract Works totaled $8,503,649.05 (“the Final Sub-Contract Sum”). Following the completion of the building, complaints arose as to leaks and water-seepage into the building and despite repair and rectification efforts, the leakages continued. Arbitration proceedings were commenced on the basis of an arbitration clause in the contract between the Owner and the Contractor (the “Main Contract”) providing for ad hoc arbitration seated in Singapore.

The relevant issues to be decided by the sole arbitrator were whether there was a breach of contract, and if so, the quantum of damages that the Contractor would be liable for. Detailing his reasoning in a 90-paragraph award, the arbitrator decided that the Contractor did in fact breach the contract, and awarded damages to the Owner based on 40% of the Final Sub-Contract Sum.

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II.  ISSUES BEFORE THE COURT

The Contractor challenged the award on several grounds. These grounds were based on the argument that the arbitrator’s award of damages was not the measure of damages pleaded by the Owner in the arbitration.

The first issue to be decided was whether the arbitrator had exceeded his jurisdiction by awarding damages based on the diminution of value of the building, an argument which was not raised by the Owner. Next, the court also considered issues of natural justice: whether the arbitrator had failed to give the Contractor a fair hearing by depriving it of the chance to make its case on diminution of value before making three orders in relation to the interest on the sum to be paid (“the Interest Award”), the costs of the claims (“the Costs Award”) and the fees and expenses incurred in the arbitration (“the Arbitrator’s Costs Award”).

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III.  THE COURT’S DECISION

In coming to its decision, the court stated that s 17(2) of the Arbitration Act (Cap 10, 1985 Rev Ed) (“the 1985 Act”) related to due process regardless of whether the right conclusion had been reached and that misconduct in the context of the 1985 Act referred to a mishandling of the arbitration, which “must be shown to be likely to cause an injustice that warrants correction”.^[1] Further, the court took pains to emphasise that the mere fact that a mishandling had occurred would not amount to misconduct under s 17(2). Rather, it was found that s 17(2) would only be available “where the tribunal had gone so far wrong in its conduct of the arbitration that the court would be expected to take action to correct the injustice.”^[2]

Accordingly, errors of fact or law would not qualify as misconduct under s 17(2). Additionally, while it was acknowledged that decisions reached by arbitrators should not come as a surprise to the parties^[3], this was tempered by the observation that “it will often not be necessary for an arbitral tribunal to request submissions on every point in its decision”.^[4] It was hence observed that there could not be a misconduct amounting to a breach of natural justice simply because an arbitrator had come to a conclusion not argued by either party with the caveat that the conclusion, on an objective assessment, reasonably flowed from or may be foreseen from parties’ arguments.^[5]

The court decided that for the Contractor to be successful in its challenge on the basis that the award had breached the rules of natural justice, it had to establish: (a) which rule of natural justice was breached; (b) how it was breached; (c) in what way the breach was connected to the making of the award; and (d) how the breach prejudiced its rights. Having found that diminution in value of the building had been an alternative form of relief put forward by the Owner, the court found that the real question was if the Owner had unequivocally abandoned this claim during the course of Arbitration by advancing submissions solely based on the cost of cure.^[6] It was held that the Owner had instead left the alternative form of relief open and that even if there had been an error in making use of the Final Sub-Contract Sum in the assessment of the sum to be awarded, this error “is plainly not misconduct that would go to the Arbitrator’s jurisdiction”.^[7] Accordingly, the arbitrator did not act in excess of his jurisdiction.

Finally, it was held that even if the case management decision in relation to the Interest Award had been a breach of natural justice, the Contractor would not have suffered any prejudice. ^[8] The test for prejudice was whether the arguments would have reasonably made a difference, rather than whether it would necessarily have done so,^[9] and this had not been met. Further, since it was held that errors of fact or law was held not to be indicative of misconduct of the arbitral process, there was no breach of natural justice, as it was with the Costs Award.^[10] Although it was found that there had been a procedural misstep in relation to the Arbitrator’s Costs Award, this was deemed not to warrant remission as it was held that it would not have made a difference to the award.^[11]

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IV.  COMMENTARY

Several observations can be made from this case.

First, in considering the issue of misconduct, the court affirmed that in alleging misconduct on the part of the arbitrator, the burden was on the applicant to show that “a reasonable litigant in his shoes could not have foreseen the possibility of reasoning of the type revealed in the award”,^[12] citing Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 66. Additionally, the court cited the English Court of Appeal case Carillion Construction Limited v Devonport Royal Dockyard Limited [2005] EWCA Civ 1358 with approval, agreeing that it will only be “in an exceptional case…that an adjudicator’s failure to put his provisional conclusions to the parties will constitute such a serious breach of the rules of natural justice that the Court will decline to enforce his decision”.^[13]

The threshold of prejudice relied on was that stated by the Court of Appeal in LW Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd and another appeal [2013] 1 SLR 125, which it was acknowledged concerned the provisions of the 2002 Act. Nevertheless, the court found that the approach was consistent with earlier authorities under the 1985 Act, thereby approving the aforesaid test for prejudice required under s 17(2) of the 1985 Act.^[14] 

Separately, the court pointed out that the argument made that abatement can only be used as a defence and never as a sword was “not entirely correct”. In doing so, it referred to Chong Ah Kwee and another v Viva Realty Pte Ltd [1990] 1 SLR(R) 244 and Ling Kai Seng and another v Outram Realty Pte Ltd [1991] 1 SLR(R) 885 as instances where abatement had been used as such.^[15]

In relation to the proposition that the “no evidence rule” could be a “third pillar” of natural justice, the court made reference to the Australian case of TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd [2014] FCAFC 83. In this case, it was held that, in the context of international commercial arbitration, it did not follow that lack of probative evidence should “without more” be characterized as a breach of natural justice. Additionally, it was noted that caution was raised that the “no evidence” rule could be used as a disguise to rehear facts or submissions in a case.^[16] Although the High Court noted that the status of the “no evidence” rule had been expressly left open in two other High Court decisions (TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] 4 SLR 972 and AQU v AQV [2015] SGHC 26), it found that “there is no reason to consider this issue in the present case”.^[17]

This article may be cited as follows: Eva Teh, “Singapore Case Update: Setting Aside on the Basis of Arbitrator Exceeding Jurisdiction (AUF v AUG [2015] SGHC 305) International Arbitration Asia (27 January 2016) <http://www.internationalarbitrationasia.com/Setting-Aside-on-the-Basis-of-Arbitrator-Exceeding-Jurisdiction>.