In a previous post on the taking of evidence in international arbitration, we noted that litigating parties are automatically subject to the procedural rules of the court in which the dispute is heard. However, this is not the case in international arbitration. Furthermore, national arbitration legislations leave the conduct of the arbitration and its procedure to the parties and the tribunal. These statutes do not address the finer details of how the arbitration itself is to be conducted.
One of the particularities of litigation which can be found across all jurisdictions is what Common Law lawyers refer to as “pleadings” (Civil Law lawyers would use the term to refer to his legal submissions). In Common Law parlance, pleadings refer to a statement of facts which sets out the basis of the plaintiff’s claim in terms of his or her causes of action against the defendant. It also is used to refer to the statement of facts setting out the defence against the claims and any reply thereafter.
Pleadings form a very important part of litigation. It is commonly said that a party is bound by his pleadings, whether in the form of a claim or a defence, and the court may not look beyond the pleadings and decide on a matter that is not pleaded. The reason is that pleadings allow the other side to know the case that he or she must meet and the function of pleadings is to prevent the other side of being taken by surprise. The other function of pleadings is to appraise the court of the issues that fall to be determined by it (see paragraph  and ).
In the recent decision of PT Prima International Development v Kempinski Hotels SA and other appeals,  SGCA 35, the Singapore Court of Appeal reversed the decisions of the Singapore High Court. The High Court had set aside 3 of the 5 awards arising out of an arbitration between the parties on the basis that the awards had been decided on a point which had not been properly pleaded. 2 of those awards dealt with substantive issues while the third dealt with costs. The High Court had set aside the awards on the basis the Arbitrator had decided issues that had not been formally pleaded, thereby acting beyond the scope of his authority.
This decision marks the long trend of the Singapore Court’s pro-arbitration and pro-enforcement approach and confirms the position that the Singapore Courts will not interfere with the decision of the arbitral tribunal except on the limited grounds set out in the International Arbitration Act (Cap. 143A) and in the absence of real prejudice being caused to the wronged party.
Background to Dispute
Prima, an Indonesian company, is the owner of a hotel in Indonesia which entered into an Operating and Management Contract with Kempinski (the “Contract“), a Swiss company, for 20 years commencing in June 1998. However, on 6 February 2002, Prima gave Kempinski written notice of termination of the agreement on the grounds that Kempinski had failed to perform under the Contract. Kempinski then commenced arbitration against Prima on the basis that the termination was wrongful and unjustified.
Initially, Prima’s defence was that the termination was valid. However, in the course of the arbitration, it applied for leave to amend its defence on the basis that the Contract had become illegal under Indonesian law by virtue of 3 decisions made by the Indonesian Ministry of Tourism in November 1996, June 1997 and May 2000 (the “3 Decisions“) which “[i]n substance,…made it illegal for a foreign entity to manage hotels in Indonesia unless it set up a company incorporated in Indonesia…or entered into a joint venture with Indonesian partners” (see paragraph ). Leave was granted for Prima to amend its defence, not on the basis of denying liability, but to limit the period for which Kempinski could claim damages in the event that Kempinski succeeded in its claim.
The First Award dealt with this new defence of illegality as a preliminary issue. The Arbitrator decided that the contract had become impossible to perform save in a manner that conformed with the 3 Decisions (see paragraph ).
The Second Award dealt with the parties’ follow-up query as to what lawful performance of the contract would entail in light of the Arbitrator’s decision in the First Award. The parties posed a series of questions as to what remedies (if any) remained available to Kempinski. The Second Award held that Kempinski still had a claim for damages arising out of a breach of the contract subject to any defence that was raised by Prima in its pleadings. The quantification of any loss would be the loss of profits suffered by Kempinski for the life of the contract which had to be determined in light of the circumstances (see paragraph ).
The Third Award arose as a result of Prima’s subsequent discovery that Kempinski had incorporated a company in Indonesia which was providing hotel management service in respect of another company. Prima alleged this to be a breach of the exclusivity clause in the Contract. The Third Award held that the entering of this new management contract on 28 April 2006 was inconsistent with Kempinski’s obligations under the Contract. As a result, any method of performance under the Contract was no longer possible and any damages awarded would be limited in time between the period of termination up until 28 April 2006 i.e. the date of the new management contract (the “Intervening Period“).
Following the Third Award, the Arbitrator ordered parties to tender submissions on whether any damages were to be paid by Prima to Kempinski for that intervening period. Though Prima did so, Kempinski failed to tender the submissions but sought to set aside the Third Award on 4 July 2008 in the Singapore High Court instead.
Accordingly, the Fourth Award on what damages were payable in the Intervening Period was made absent any submissions by Kempinski. The Arbitrator held that no damages were payable to Kempinski because it had performed the Contract in a manner which was contrary to the law of Indonesia as set out in the 3 Decisions. Therefore any payment of damages to Kempinski would be contrary to the public policy of Indonesia and would be unenforceable. Accordingly, the Arbitrator held that Kempinski’s claim in the arbitration had to fail. Kempinski also sought to set aside this award.
Finally, a Costs Award was issued in favour of Prima which was also the subject of a separate application by Kempinski to be set aside by the Singapore Courts.
The Singapore High Court
Kempinski had raised 4 arguments before the Singapore High Court (see paragraph ):
(a) the Arbitrator lacked the jurisdiction to issue the Third Award and the Fourth Award because the matters determined in those awards had already been determined in the First Award and the Second Award ( “the functus officio argument”);
(b) Prima was barred by issue estoppel from raising any issue relating to the new management contract in the Arbitration after the Second Award was made (“the issue estoppel argument”);
(c) in the Third Award and the Fourth Award, the Arbitrator had decided issues that had not been formally pleaded, thereby acting beyond the scope of his authority ( “the pleadings argument”); and
(d) there was apparent bias on the part of the Arbitrator in conducting his own line of inquiry into the new management contract, and Kempinski’s right to be heard had been violated by (inter alia) the Arbitrator’s refusal to allow cross-examination of the respective parties’ legal experts on the legal effect of the New Management Contract ( “the natural justice argument”).
The learned Judge at first instance set aside the Third Award on the basis that the new management contract (which was material to the decision) had not been pleaded (see Kempinski Hotels SA v PT Prima International Development,  SGHC 171). Similarly, the Fourth Award was set aside on the basis that it relied on an unpleaded matter (Kempinski Hotels SA v PT Prima International Development,  SGHC 172). Consequentially, the Costs Award was also set aside (see Kempinski Hotels SA v PT Prima International Development,  SGHC 173). However, the learned judge rejected the other 3 arguments raised by Kempinski.
In respect of the pleadings argument, she reasoned that the purpose of the arbitration agreement between the parties was to “bind [the] parties to submit the disputes arising under the [management contract] to determination by arbitration…[and] did not imply that [the] parties would be free at any time during the proceedings to raise material and unpleaded points without having first made an application to amend their pleadings” (cited in paragraph  of the Court of Appeal’s decision).
Critically, she held that,
“…Under Art 34(2)(a)(iii) of the Model Law …, one of the grounds on which an arbitration award may be set aside is where the matters decided by the Tribunal were beyond the scope of the submission to arbitration. To determine whether matters in an award were within or outside the scope of the submission to arbitration, a reference to the pleadings would usually have to be made. It is therefore incorrect for [Prima] to argue that jurisdiction in a particular reference was not limited to the pleadings or that there was no rule of pleading that requires all material facts to be stated and specifically pleaded as would be required in court litigation. An arbitrator must be guided by the pleadings when considering what it is that has been placed before him for decision by the parties. Pleadings are an essential component of a procedurally fair hearing both before a court and before a tribunal.”
The Court of Appeal
The Court of Appeal reversed the decision of the High Court while also rejecting Kempinski’s cross-appeal on the 3 failed arguments it had raised below.
In the Court of Appeal’s view the “crucial point in relation to the pleadings argument is whether the legal effect of the New Management Contract was part of, or directly related to, the dispute which the parties submitted for arbitration” (see paragraph ). As noted by the Court of Appeal, the parties might have a series of disputes between themselves, all of which are encompassed by the scope of the arbitration agreement. However, the parties could decide to submit just some (and not all) of those disputes to arbitration. But once the dispute has been submitted to arbitration, a party could not raise a new dispute without the consent of the other party (see paragraph ).
To the Court of Appeal, the role of pleadings in an arbitration was to demarcate the bounds of the arbitral tribunal’s jurisdiction.
“ The role of pleadings in arbitral proceedings is to provide a convenient way for the parties to define the jurisdiction of the arbitrator by setting out the precise nature and scope of the dispute in respect of which they seek the arbitrator’s adjudication. It is for this purpose that Art 23 of the Model Law provides for the compulsory filing of pleadings [in the form of Statement of Claim and Defence]…
 Additionally, Rule 18 of the SIAC Rules (1997 Ed) also provides for pleadings to be filed by the parties. Accordingly, in order to determine whether an arbitral tribunal has the jurisdiction to adjudicate on and make an award in respect of a particular dispute, it is necessary to refer to the pleaded case of each party to the arbitration and the issues of law or fact that are raised in the pleadings to see whether they encompass that dispute.”
Parties should note that Rule 18 exists in a modified form in Rule 17 of the 2010 edition of the SIAC Rules.
In this respect, the Court of Appeal held that the role of pleadings in arbitration and in litigation was similar to the extent that “[a]lthough there is an important difference between arbitration and litigation in the sense that arbitration is consensual in nature whereas litigation is not, the basic principles applicable to determine the jurisdiction of the arbitrator or the court to decide a dispute raised by the parties are generally the same. In arbitration the parties can determine the scope of arbitration; so can the parties in litigation…” (see paragraphs  and generally  – ).
As mentioned, parties are bound by their pleaded facts in litigation (see paragraph , citing Dyson LJ in Al-Medenni v Mars UK Limited  EWCA Civ 1041 at ).
“… It is fundamental to our adversarial system of justice that the parties should clearly identify the issues that arise in the litigation, so that each has the opportunity of responding to the points made by the other. The function of the judge is to adjudicate on those issues alone. The parties may have their own reasons for limiting the issues or presenting them in a certain way. The judge can invite, and even encourage, the parties to recast or modify the issues. But if they refuse to do so, the judge must respect that decision. One consequence of this may be that the judge is compelled to reject a claim on the basis on which it is advanced, although he or she is of the opinion that it would have succeeded if it had been advanced on a different basis. Such an outcome may be unattractive, but any other approach leads to uncertainty and potentially real unfairness.”
Critically, however, the Court of Appeal considered that the High Court had erred by taking “too narrow an approach in determining the extent or scope of the Arbitrator’s jurisdiction under the parties’ submission to jurisdiction“. Specially, the error was the finding that simply because the new management contract had not been formally pleaded, its legal effect on Kempinski’s claim in the arbitration was not within the parties’ submission to arbitration (see paragraph ). This, they held, was an error of law (see paragraph ).
Instead, the Court of Appeal held that insofar as Kempinski was seeking damages for the Intervening Period or specific performance of the management contract, then “any new fact or change in the law arising in the course of the Arbitration which would affect Kempinski’s right to these remedies must fall within the scope of the parties’ submission to arbitration. In the circumstances, it was well within the Arbitrator’s jurisdiction to decide whether, in the event that Kempinski succeeded against Prima on the issue of liability, the New Management Contract had the legal effect contended for by Prima” (see paragraph ).
The Court of Appeal also noted that in the event that the matter was remitted back to an arbitral tribunal for reconsideration, Prima could always apply to amend its pleadings, and once it had succeeded, to adduce evidence with respect to the new management contract and its legal effect on Kempinski’s claim to damages (see paragraph ).
To the extent that Prima had not formally amended its pleadings, the Court of Appeal held that Kempinski was not prejudiced, and the failure was therefore “immaterial” (see paragraph  and generally  to ). This, therefore, was not a basis to set aside the award.
As regards the Fourth Award, the Court of Appeal simply noted that “public policy is a question of law which an arbitrator must take cognisance of if he becomes aware of it in the course of hearing the evidence during arbitral proceedings” (see paragraph ). In this respect, the Court of Appeal cited Gary B Born, International Commercial Arbitration (Kluwer Law International, 2009) at vol 1, p 835 that “…Where the parties’ contract raises issues of illegality, violations of public policy or mandatory law, or performance of administrative functions, then the tribunal’s mandate must necessarily include consideration of those issues insofar as they would affect its decision or the enforceability of its award”. Accordingly, the learned judge erred in setting aside the Fourth Award on the basis that the public policy point was not based on any pleaded case (see paragraph ).
This decision of the Singapore Court of Appeal avoids a formalistic approach to pleadings in arbitration and instead considers whether the wronged party has truly been prejudiced by the acts of the other party. This practical and pragmatic approach is aligned with the underlying rationale and approach of arbitration and bodes well for the judiciary’s continued robust support for arbitration and enforcement.