Singapore Court Reviews Natural Justice and Public Policy Principles

In CDI v CDJ [2020] SGHC 118, the Singapore High Court dealt with a challenge to a domestic international award under s.19 of the International Arbitration Act, following an award arising out of dispute concerning the sale (by the Defendant) of three vessels to the Plaintiff. The Court dismissed the application.

Facts

The Plaintiff commenced proceedings against various parties, including the Defendant, to recover sums owed under a loan agreement and variation agreements thereto, which sums were secured by mortgages and collateral deeds of covenants granted to the Plaintiff over the vessels and by corporate and personal guarantees. The Plaintiff paid the sum of US$335,000, representing a 10% deposit on the purchase. The remaining amount was to be financed by CF. CF originally issued commitment letters to fund the purchase of the vessels, but later advised the Plaintiff that it was no longer able to fund the purchases, spawning the dispute between the parties. The Plaintiff claimed that, as the financing facilities were no longer forthcoming, it was entitled to a return of the deposit it had paid. The Defendant’s position was that it was entitled to cancel the relevant agreement on the basis that the Plaintiff failed to take delivery of the Vessels due to a “reason…attributable to the Buyer” and to forfeit and withhold the Deposit.

The Award was in all material aspects, in the Plaintiff’s favour, with the Tribunal awarding the Plaintiff the sum of US$335,000 finding, inter alia, that:

  • even though the parties had incorporated the SCMA Rules into their agreement – which rules would have given the Arbitrator the ability to consider, if necessary, pre-contractual evidence as an aid to the interpretation of the agreement – the Arbitrator’s ability to do so was taken away by the parties by reason of the entire agreement clause in the agreement;
  • by way of contract, the parties had precluded themselves and each other from adducing evidence of their pre-contractual agreements or other pre-contractual extrinsic evidence as an aid to construing the agreement;

Grounds for Setting Aside

The Defendant applied to set aside the order enforcing the award on the following grounds:

(a) Pursuant to Article 36(1)(b)(ii) of the Model Law, recognition or enforcement of the Award would be contrary to the public policy of Singapore (the “Public Policy Objection”); and

(b) Pursuant to Article 36(1)(a)(iii) of the Model Law, the Award deals with matters not contemplated by, or not falling within, the terms of the submission to arbitration or contains decisions on matters beyond the scope of the submission to arbitration (the “Scope of Submission Objection”).

The Public Policy Objection

In respect of the Public Policy Objection, the Defendant argued that there was a breach of natural justice in the making of the Award which caused the Defendant to suffer material prejudice, and that this breach empowered the court to refuse leave to enforce the Award on the ground that allowing its enforcement would be contrary to the public policy of Singapore. The Defendant argued that the breach of natural justice arose as a result of first, the Arbitrator’s decision to exclude evidence of pre-contractual negotiations and second, the Arbitrator’s selective consideration of matters that it had submitted (namely, the Arbitrator’s alleged failure to consider the Defendant’s arguments on the interplay between various clauses of the agreement).

The Court noted that both parties argued their cases on the basis that if an award was made in breach of natural justice, enforcing it would be against the public policy of Singapore, expressing its reservation in the following terms (@26):

“..there appears to be some support … that a breach of natural justice can be encapsulated within the public policy ground as a basis on which enforcement of an arbitral award may be refused. However, it does not, in my view, stand for the wider proposition that recognising or enforcing an award made in breach of natural justice would, ipso facto, necessarily be contrary to the public policy of Singapore in every case.”

In respect of the public policy legal principles, the Court stated (@23):

“It is settled law that a party seeking to challenge an arbitral award on the basis that it is against public policy must specifically identify the public policy that, by virtue of upholding the arbitral award, would be breached (Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd [2010] 3 SLR 1 (“Sui Southern Gas”) at [44]; John Holland Pty Ltd v Toyo Engineering Corp (Japan) [2001] 1 SLR(R) 443 at [25]). The concept of public policy in the IAA has been discussed by the Court of Appeal in PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 (“PT Asuransi”) at [59]:

“Although the concept of public policy of the State is not defined in the Act or the Model Law, the general consensus of judicial and expert opinion is that public policy under the Act encompasses a narrow scope. In our view, it should only operate in instances where the upholding of an arbitral award would “shock the conscience” (see Downer Connect ([58] supra) at [136]), or is “clearly injurious to the public good or … wholly offensive to the ordinary reasonable and fully informed member of the public” (see Deutsche Schachbau v Shell International Petroleum Co Ltd [1987] 2 Lloyds’ Rep 246 at 254, per Sir John Donaldson MR), or where it violates the forum’s most basic notion of morality and justice: see Parsons & Whittemore Overseas Co Inc v Societe Generale de L’Industrie du Papier (RAKTA) 508 F 2d 969 (2nd Cir, 1974) at 974.”

“The principles enunciated above apply equally to a case where enforcement of an arbitral award is resisted on the basis that it would be contrary to public policy. As such, it may not be sufficient for a party to simply assert that if there was a breach of natural justice in the making of an arbitral award, enforcing it would, ipso facto, be contrary to the public policy of Singapore. A party should identify, with adequate specificity, the public policy alleged to have been breached and how allowing the enforcement of that arbitral award would be contrary to that particular public policy.”

As both parties were in agreement that the Court could have regard to the grounds set out in Article 36(1) of the Model Law, the Court considered, in the alternative, whether the leave to enforce order should be set aside on the basis of Article 36(1)(a)(ii) of the Model Law, namely that enforcement of the Award should be refused on the basis that the party against whom the Award was invoked (ie. the Defendant) was otherwise unable to present its case. The Court stated (@29-30):

“It must now be considered hornbook law that a party challenging an arbitral award on the ground that there has been a breach of natural justice must establish all of the following elements (Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86 (“Soh Beng Tee”) at [29], reaffirmed by the Court of Appeal in L W Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd and another appeal [2013] 1 SLR 125 (“L W Infrastructure”) at [48] and China Machine New Energy Corp v Jaguar Energy Guatemala LLC [2020] 1 SLR 695 (“China Machine”) at [86]):

– which rule of natural justice has been breached;

– how it was breached;

– in what way the breach was connected to the making of the award; and

– how the breach prejudiced the rights of the challenging party.

The approach of the courts to challenges to arbitral awards (or their enforcement) based on the breach of natural justice ground is undergirded by the overarching principles of limited curial intervention and recognition of the autonomy of the arbitral process (Soh Beng Tee at [65(c)]). As explained by the Court of Appeal in AJU ([25] supra) at [65], the “policy of the IAA is to treat IAA awards in the same way as it treats foreign arbitral awards where public policy objections to arbitral awards are concerned”, and as such, findings of fact made in an IAA award are “binding on the parties and cannot be reopened except where there is fraud, breach of natural justice or some other recognised vitiating factor” (emphasis added).

The Court summarised the “specific principles and pointers” regarding the overall approach adopted by the courts when dealing with a challenge to an award based on a complaint of breach of natural justice, as follows (@31):

  1. the burden on the party seeking to persuade the court to intervene, whether to set aside or refuse enforcement of an arbitral award, is a high one and it is only in exceptional cases that a court will find that threshold crossed (China Machine at [87]);
  2. the standard of proof for such a challenge is on the balance of probabilities (see Beijing Sinozonto Mining Investment Co Ltd v Goldenray Consortium (Singapore) Pte Ltd [2014] 1 SLR 814 at [48] on s 31(4) of the IAA in respect of whether enforcement of a foreign arbitral award would be contrary to the public policy of Singapore; see also Denmark Skibstekniske Konsulenter A/S I Likvidation v Ultrapolis 3000 Investments Ltd [2010] 3 SLR 661 at [43], Strandore Invest A/S and others v Soh Kim Wat [2010] SGHC 151 at [23] and Galsworthy Ltd of the Republic of Liberia v Glory Wealth Shipping Pte Ltd [2011] 1 SLR 727 at [11] in respect of refusing enforcement of a foreign arbitral award under s 31(2) of the IAA, which requires the challenging party to prove grounds that are largely identical to those enumerated in Article 36(1)(a) of the Model Law);
  3. an arbitral award is to be read generously and in a reasonable and commercial way, in the sense that the general approach of the courts is to strive to uphold the award; in this context, consideration may be given to the eminence of the arbitrator in his or her field and experience in the area of law concerned (TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] 4 SLR 972 (“TMM”) at [44] – [45] citing Atkins Limited v The Secretary of State for Transport [2013] EWHC 139 (TCC) and Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14);
  4. flowing from 3, an arbitral award should be read supportively, meaning it should be given a reading which is likely to uphold it rather than to destroy it (Soh Beng Tee at [59]);
  5. the corollary of 4 is that it is not the court’s function to assiduously comb an arbitral award microscopically in its attempt to determine if there was any blame or fault in the arbitral process (Soh Beng Tee at [65(f)]; in short, the court should not nit-pick at the award (TMM at [45]);
  6. the overarching inquiry (which must be contextual and based on the facts and circumstances of each case) is whether the arbitral process was conducted in a manner that was fair, and whether what was done (or not done as the case may be) by the arbitral tribunal culminating in the arbitral award fell within the range of what a reasonable and fair-minded tribunal in those circumstances might have done (China Machine at [104(c)]).

Applying the above principles, the Court found that the Defendant did present submissions on the admissibility of extrinsic evidence, albeit only at the stage of presenting its closing submissions in the Arbitration.

At 59, the Court stated:

“As held in AQU v AQV [2015] SGHC 26 at [18], the “principles of natural justice are not breached just because an arbitrator comes to a conclusion that is not argued by either party as long as that conclusion reasonably flows from the parties’ arguments”. A particular chain of reasoning would be open to an arbitrator if the links in the chain flow reasonably from the arguments actually advanced by either party or are related to those arguments (JVL Agro Industries v Agritrade International Pte Ltd [2016] 4 SLR 768 at [156]). Conversely, as noted in Soh Beng Tee ([29] supra), there may be a breach of natural justice if an arbitrator “decides the case on a point which he has invented for himself” (original emphasis) (at [41]), citing Sir Michael J Mustill & Stewart C Boyd, The Law and Practice of Commercial Arbitration in England (Butterworths, 2nd Ed, 1989) at p 312), and that an arbitrator “should not make bricks without straw” (at [65(a)]).”

The Court went on to state that even if it had been persuaded that there had been a breach of natural justice, the Defendant’s objection would still fail as it was unable to show that the Arbitrator’s decision caused its rights to be prejudiced, stating (@74):

“It is trite that there must be a causal connection or nexus between the alleged breach of natural justice and the making of the award to establish actual or real prejudice (L W Infrastructure ([29] supra) at [50], citing Soh Beng Tee ([29] supra) at [86] and [91]). As further elucidated by the Court of Appeal in L W Infrastructure at [54], the inquiry is whether as a result of the breach, the tribunal was “denied the benefit of arguments or evidence that had a real as opposed to a fanciful chance of making a difference to his deliberations” and whether “the material could reasonably have made a difference to the arbitrator rather than whether it would necessarily have made a difference” (emphasis in original).”

The Scope of Submission Objection

The Defendant asserted that the Arbitrator did not adhere to the scope of reference in the Award, as the Arbitrator’s decision to exclude evidence of pre-contractual negotiations fell outside the scope of the terms of reference.

Rejecting the argument, the Court referred to the applicable principles (@88):

“The applicable principles which guide the court in response to a claim that an arbitral award (or part thereof) was not within the scope of submission to arbitration are set out in PT Asuransi ([23] supra) at [44] and Sui Southern Gas ([23] supra) at [34]. The task of the court is to ascertain:

(a) the matters which were within the scope of submission to the arbitral tribunal; and

(b) whether the arbitral award (or the part being impugned) involved such matters, or whether it was a “new difference” which would have been “irrelevant to the issues requiring determination” by the arbitral tribunal.”

Further, the Court noted that demonstrating that an arbitrator decided a matter outside the scope of submission was insufficient; the party must demonstrate actual prejudice. The Court stated (@90):

“…it is insufficient for a party to simply demonstrate that an arbitrator decided on a matter outside the scope of submission. As with a challenge founded on a breach of natural justice, the court has to go further and determine whether there has been any real or actual prejudice caused to either or both of the parties (CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] 4 SLR 305 at [32]). For the same reasons given at [75] to [79] above, even if I were to accept that the Arbitrator’s decision to exclude evidence of pre-contractual negotiations fell outside the scope of the terms of reference, the Defendant has, in my view, suffered no real or actual prejudice. Therefore, this ground of objection also necessarily fails”

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Hong Kong Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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