Error of Law / Erroneous Application of choice of law clause not grounds to set aside award – Quarella v Scelta Marble

The Singapore High Court has once again dismissed an attempt to set aside an arbitration award, this time on the purported basis that the arbitrator had wrongly interpreted the choice of law clause which parties had chosen to govern their distributorship agreement.

In the recent case of Quarella SpA v Scelta Marble Australia Pty Ltd, [2012] SGHC 166, Quarella (the Respondent in the arbitration) sought to set aside the substantive and costs awards that had been obtained against them by Scelta.

The dispute arose out of a distributorship agreement. The governing law clause provided that the distributorship agreement would be governed by the Uniform Law for International Sales under the United Nations Convention of April 11, 1980 (Vienna) or more commonly known as the CISG (see paragraph [8]). Where the CISG was not applicable, Italian law would apply.

The Tribunal held that on a proper construction of the choice of law provision, parties had intended for the CISG to apply only insofar as the convention was applicable to the distributorship agreement. Where the CISG did not apply, the agreement or the application provisions would be governed by Italian law. As the CISG did not apply to the distributorship agreement, Italian law did and the arbitrator rendered an award in favour of Scelta against Quarella on that basis.

The Singapore High Court dismissed Quarella’s application on the basis that the arbitrator had not wrongly applied or failed to apply the choice of law provision stipulated by the parties under the distributorship agreement. Furthermore, the High Court held that even if the tribunal had erred and applied the wrong substantive law, that would be an error of law which would not be a ground for setting aside an award.

Significantly, Quarella accepted that an error of law was not a ground for setting aside but submitted that the arbitrator’s application of the wrong law was a “distinct situation” that warranted the awards being set aside (see paragraph [27]). The High Court disagreed.

Proceedings in the arbitration: decision on the choice of law

While not dispositive of the matter, the High Court noted that at the initial stages the issue of the governing law was “not in doubt” with Quarella seeming to agree that Italian law as opposed to the CISG applied on the basis that “the [CISG] has a limited application, as it does not govern expressly distributorship agreements, which is a framework agreement, but the sales to which it refers to. In this arbitration therefore we shall mostly refer to (and rely on) Italian law” (see paragraph [13]). In this respect, it was only 3 weeks prior to the substantive hearing on the merits that Quarella suddenly took the position that the CISG applied to the distributorship agreement proper (see paragraph [15]).

The arbitrator permitted Quarella to raise this argument on the applicable law over Scelta’s objection, but permitted Scelta to reply (see paragraph [18]). The arbitrator also found that there was no agreement between the parties to exclude the purview of the CISG (see paragraph [19]. Finally, the arbitrator considered that the correct interpretation of the governing law clause was that “the parties intended the CISG to apply to the extent that the CISG was applicable according to its own rules on applicability, and if it did not apply in part or in whole, then Italian law applied” (see paragraph [20]).

In this regard, the arbitrator decided that based on the CISG’s internal rules on applicability, the CISG did not apply to the distributorship agreement as the agreement did not constitute a contract of sale but was a framework agreement (see paragraph [21]).

Argument before the High Court

Quarella argued that the arbitrator had failed to apply the law chosen by the parties and that this constituted grounds to set aside the award(s) pursuant to Article 34(2)(a)(iii) and (iv) of the UNCITRAL Model Law as applied by section 3 of the Singapore International Arbitration Act (Cap. 143A). Article 34 states that,

“Article 34. — Application for setting aside as exclusive recourse against arbitral award

(1) Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this Article.

(2) An arbitral award may be set aside by the court specified in Article 6 only if:

(a) the party making the application furnishes proof that:

(iii) the award deals with a dispute 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, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside;

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law;”

Quarella made three arguments in support of its position that the arbitrator had erred in its decision on the governing law of the agreement and failed to apply the law chosen by the parties:

  1. Article 17 of the ICC Rules which governed the ICC arbitration between parties permitted them to agree on “the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute. In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate“.Quarella’s argument was that Article 17 permitted parties to chose otherwise non-binding principles or even non-applicable conventions like the CISG even where its internal rules on applicability would not lead to the convention applying (see paragraphs [22] and [23]).
  2. The tribunal should have adopted a contractual interpretation that would give effect to the contract and so that the performance of the contract would be lawful and effective. However, the arbitrator’s determination that the CISG was not at all applicable deprived the governing law clause of any effect (see paragraph [24]).
  3. Italian law was only meant to “supplement the CISG when there was a lacuna, and was not intended to replace the CISG” (see paragraph [25]).

Accordingly, in respect of Article 34(2)(a)(iv), Querella argued that “by failing to apply the CISG and by applying Italian law, the Tribunal had failed to comply with article 17 of the ICC Rules and therefore the arbitral procedure was not in accordance with the agreement of the parties” (see paragraph [32]).

The High Court held that a situation which concerns Article 17 of the ICC Rules might only arise in situations where the tribunal “fails to apply”, or where there is an “express refusal [to apply]” or to “respect [the choice of the applicable law”. This caveat is by virtue of the fact that the Singapore International Arbitration Act does not share similar provisions with Egypt’s 1994 Law on Arbitration which had been the basis for setting aside an award for failing to comply with Article 17 of the ICC Rules i.e. In the Matter of the Arbitration of Certain Controversies between Chromalloy Aeroservices and the Arab Republic of Egypt, 939 F. Supp. 907 (D.D.C 1996). In particular Article 53(1) of the Egyptian arbitration law contained grounds unique to Egyptian law on setting aside of arbitral awards. These are:

“(d) if the arbitral award fails to apply the law agreed by the parties to the subject matter of the dispute;

(g) if nullity occurs in the arbitral award, or if the arbitral proceedings are tainted by nullity affecting the award.”

In any event, the High Court noted that the arbitrator had in fact “respected the choice of law clause chosen by the parties, interpreted the law so chosen and came to the conclusion that the CISG did not apply and Italian law applied” and “took pains to explain the process by which he derived the applicable law” (see paragraph [37] and [38] and the replication of paragraphs [42] to [53], [61] to [72] and [74] of the substantive award).

Accordingly, the High Court held that the arbitrator did in fact “respect the choice of law clause set out in the contract. Parties did agree on the rules of law to be applied to the dispute, and the Tribunal did apply the chosen rules of law to the dispute” (see paragraph [40]). A disagreement with the result reached by the arbitrator could not activate Article 34(2)(a)(iv) of the Model Law.

The High Court dismissed the arguments on Article 34(2)(a)(iii) on the basis that Quarella’s attempt to set aside the Award “was based entirely on a disagreement with the interpretation the Tribunal took regarding the choice of law clause. The dispute was not one that engaged Article 34(2)(a)(iii) of the Model Law” (see paragraph [55]).

In arriving at its decision, the High Court had noted that this was “not a particularly novel argument”.

In brief, it would appear that the Singapore courts adopt 3 principles when applying Article 34(2)(a)(iii) of the Model Law (see the Singapore Court of Appeal case of CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK, [2011] 4 SLR 305 at [30] to [33] following its earlier decision in PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA, [2007] 1 SLR(R) 59):

  1. Article 34(2)(a)(iii) of the Model Law is not concerned with the situation where an arbitral tribunal does not have jurisdiction to deal with the dispute which it is supposed to determine. Rather, it applies where the arbitral tribunal improperly decides matters that have not been submitted to it or fails to decide matters that have been submitted to it.In other words, Article 34(2)(a)(iii) addresses the situation where the arbitral tribunal exceeds (or fails to exercise) the authority that the parties have granted to it. This ground for setting aside an arbitral award covers only an arbitral tribunal’s substantive jurisdiction and does not extend to procedural matters.
  2. A failure by an arbitral tribunal to deal with every issue referred to it will not ordinarily render its arbitral award liable to be set aside. The crucial question in every case is whether there has been real or actual prejudice to either (or both) of the parties to the dispute.
  3. 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. The article only applies where an arbitral tribunal exceeds its authority by deciding matters beyond its ambit of reference or fails to exercise the authority conferred on it by failing to decide the matters submitted to it, which in turn prejudices either or both of the parties to the dispute.

In considering the first principle, the High Court held that “this was not a case where the arbitral tribunal improperly decided matters that had not been submitted to it or failed to decide matters that had been submitted to it. The issue of the applicable law was submitted to the Tribunal; the Award addressed this explicitly. The Tribunal did decide the matters that were submitted to it” (see paragraph [53]).

As for the third principle, the High Court simply remarked that “besides examining the guidance of the Court of Appeal [in CRW and PT Asuransi], Quarella would not have had to venture too far to find literature that would have indicated that the prospects of it succeeding in the setting aside application on this ground were dim” (see paragraph [54]).

Conclusion

This case, drawing on a large and ever growing body of Singapore case law, continues to demonstrate the robust pro-arbitration and pro-enforcement judicial attitude of the Singapore courts when dealing with challenges to arbitral awards.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for Domain Name Dispute Resolution at the KLRCA.
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4 Responses to Error of Law / Erroneous Application of choice of law clause not grounds to set aside award – Quarella v Scelta Marble

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