Singapore Case Update: Setting Aside an Award on the Grounds of the Scope of the Arbitration and Breach of Natural Justice (AYH v AYI and another [2015] SGHC 300)

I.  BACKGROUND

The parties to this dispute comprised two companies and one individual. The two companies, AYI and AYJ (collectively referred to as “the Companies”), were the defendants in the proceedings. The individual, AYH (“the Director”), was the plaintiff and a former director of AYJ. He was involved in the operations of an Indonesian mining company (“PTX”), which AYJ indirectly owned.

After AYI took over AYJ, the Director vacated his posts in PTX and AYJ. Subsequently, he was asked to repay certain capital expenditure undertaken by PTX, which the new management thought should not have been undertaken. The parties entered into a settlement deed, under which the Director agreed to transfer certain assets and cash to AYJ on certain dates (“the Deed”).[1] The Director defaulted on those dates.

The Companies commenced arbitration at the Singapore International Arbitration Centre seeking specific performance of the Director’s obligations under the Deed. Notably, PTX and the Companies entered into an agreement with less than a week to go before the commencement of the arbitral hearing (“the Agreement”).[2] The essence of the Agreement was that any cash or assets transferred by the Director to AYJ would be passed onward to PTX.[3] In return, PTX would release its claims against the Director. This was in response to the Director’s assertion that, since the liabilities covered by the Deed were largely owed to PTX (which itself was not bound by the Deed), any payments made under the Deed would not release his liability to PTX.[4]

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II.  ISSUES BEFORE THE COURT

The tribunal ultimately found in favour of the Companies and issued an award. The Director challenged the award in the Singapore High Court before Judith Prakash J on two main grounds as follows:

• the tribunal had found (when it should not have) that the effect of the Agreement was to grant him release from claims by PTX and this was an issue which fell beyond the scope of the arbitration pursuant to Article 34(2)(a)(iii) of the UNCITRAL Model Law on International Commercial Arbitration 1985 (“Model Law”); and
• the tribunal did not afford him ample opportunity to be heard on the effect of the Agreement and this was a breach of the rules of natural justice under Article 34(2)(a)(ii) of the Model Law and Section 24(b) of the International Arbitration Act (Cap 143A, 2002 Rev Ed).[5]

III.  THE COURT’S DECISION

Whether the award dealt with a dispute beyond the scope of the arbitration

The Director made four submissions in support of this ground, all of which were rejected by Judith Prakash J.

First, the Director submitted that the Agreement was not included in the pleadings or the Agreed List of Issues.[6] Judith Prakash J held that, while the Agreement was indeed not referred to as such, that did not mean that the matters dealt with in the Agreement were not within the scope of the arbitration.[7] In this respect, she relied on the decision in PT Prima International Development v Kempinski Hotels SA and other appeals, where the Singapore Court of Appeal held that a new fact, which arises after submission to arbitration, need not be specifically pleaded if it is ancillary to the dispute submitted for arbitration and known to all the parties.[8] These requirements were met. The Companies had made the existence of the Agreement known to the Director almost as soon as it was concluded. The Agreement was ancillary to the dispute because the Companies had only used it as evidence that they could perform the Deed.[9]

Second, the Director submitted that the effect of the Agreement and whether it provided him with a valid release from liability owed to PTX under the Deed was not placed before the tribunal as an issue to be determined.[10] Referring to the transcripts of the hearing, Judith Prakash J found that the effect of the Agreement was in fact raised during the course of the arbitration as part of the broader issue of whether the Deed could be performed.[11]

Third, the Director submitted that the tribunal erred in finding that the Agreement validly granted him release from liability owed to PTX under the Deed. Judith Prakash J was however at pains to clarify that the tribunal did not in fact consider the Agreement to be an actual release from liability.[12] Indeed, this was not possible since the Director had not transferred the required assets and cash. The Agreement simply showed that the Companies had the power to compel PTX to release the Director from its claims when the promised assets and cash were transferred. For this reason, the tribunal had not erred in making its substantive finding regarding the nature of the release.

Fourth, the Director submitted that the tribunal’s finding prejudiced him because he did not have the opportunity to make submissions on the validity and enforceability of the Agreement. Judith Prakash J disposed of this submission briefly, holding that it depended on her agreeing that the tribunal had found that the Agreement provided an actual release from liability owed to PTX.[13] Since she did not agree with that proposition, the assertion that the Director was prejudiced also fell away.

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Whether there was a breach of natural justice

The submissions that the Director made in support of this ground were broadly similar to those made in relation to the preceding ground, namely that the tribunal had breached the rules of natural justice by finding that the Agreement provided him with a release from claims by PTX and by failing to provide him ample opportunity to submit on the effect of the Agreement.[14]

Judith Prakash J dismissed both submissions. She once again emphasised that the tribunal did not find that the Agreement itself released the Director from liability owed to PTX.[15] Furthermore, she found that, rather than being declined the opportunity to be heard on the effect of the Agreement, the Director was afforded reasonable opportunity of the same during the course of the hearing, but “simply chose not to pursue that point”.[16] In this regard, Judith Prakash J alluded to fact that the Director’s counsel had elaborated on his concerns about the effect of the Agreement during the hearing.[17] Moreover, the tribunal had itself raised queries on this point.

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IV.  COMMENTS

This decision has significance in terms of both principle and practice.

A.  Principle

First, the decision reinforces V K Rajah JA’s dictum in CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK (“CRW Joint Operation”) that there must be “real or actual prejudice to either (or both) of the parties” to warrant setting aside an award on the basis of either the scope of the arbitration or breach of natural justice.[18] Since the tribunal had not in fact made the finding envisaged by the Director, he could not have been prejudiced.

Second, had Judith Prakash J found that the tribunal erred in making a substantive finding regarding the Agreement (she did not), that, in itself, would not have sufficed to show that the dispute fell beyond the scope of the arbitration. The Director would then have needed to show that the error amounted to a substantial error of law. As V K Rajah JA observed in CRW Joint Operation, “mere errors of law or even fact are not sufficient to warrant setting aside an arbitral award under Art 34(2)(a)(iii) of the Model Law”.[19]

Third, in deciding whether there was a breach of the rules of natural justice, Judith Prakash J made consistent reference to the transcripts of the hearing adduced in evidence. Her willingness to examine all the evidence, rather than fashioning a strict legal test, is consistent with a speech made by her extra-judicially at the CIArb 2013 International Arbitration Conference:

“Admittedly, the line between permissible and impermissible decision-making is a fine one. I am sceptical that a one-size-fits-all test can be more fashioned to address the multitude of cases concerning natural justice.”[20] [emphasis in bold added]

B.  Practice

This decision also serves as a reminder to arbitration practitioners that parties should raise their objections to issues which arise before and during the proceedings as soon as they arise and as often as they arise. The Director failed to unequivocally do the same on two occasions.

First, when asked to repay the expenditure undertaken by PTX, the position he took then, and which he maintained thereafter, was that all the impugned payments had proper business purposes.[21] Nevertheless, he went on to enter into the Deed with the Companies.

Second, when informed that the Companies wished to adduce the Agreement in evidence at the hearing of the arbitration, he neither objected to this (subject to the caveat that he did not admit the Agreement’s validity or effect) nor pursued the issue during the course of the hearing.[22] As Judith Prakash J saliently observed, “[w]here a party has failed to make full use of the opportunities afforded to him, he cannot complain later.”[23]

The Director has appealed against the decision.[24]

This article may be cited as follows: Arvindh Rai, “Singapore Case Update: Setting Aside an Award on the Grounds of the Scope of the Arbitration and Breach of Natural Justice (AYH v AYI and another [2015] SGHC 300)” International Arbitration Asia (11 February 2016) <http://www.internationalarbitrationasia.com/Singapore-Setting-Aside-An-Award-On-the-Grounds-of-the-Scope-of-Arbitration-and-Breach-of-Natural-Justice>.