Singapore Case Update: (1) Natural Justice applies to Arbitration Ancillary Proceedings and (2) Court has no Supervisory Powers outside of the IAA

The Singapore Court of Appeal has recently delivered its judgment in L W Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd, [2013] 1 SLR 125; [2012] SGCA 57. This case involved an Arbitrator who had rendered an additional award against Lim Ching San Contractors Pte Ltd (the defendant in the arbitration) (“LCSC“) for pre-award interest in favour of L W Infrastructure Pte Ltd (the claimant in the arbitration) (“LWI“) (the “Additional Award“) despite not having heard LCSC at all on this issue.

In Lim Chin San Contractors Pte Ltd v L W Infrastructure Pte Ltd, [2012] 2 SLR 1040; [2012] SGHC 75, the High Court had set aside the Additional Award on the basis that there had been a breach of natural justice by the Arbitrator. However, the High Court refused to make a declaration that the Additional Award was a nullity.

As a result, LWI appealed against the setting aside of the Additional Award while LCSC appealed against the refusal of the High Court to grant a declaration that the Additional Award was a nullity. The Singapore Court of Appeal upheld the decision of the High Court on both issues.

Facts

LCSC had been LWI’s subcontractor for a building project. However, it failed to complete certain works by the completion date. As a result, a dispute arose between the parties and LWI commenced arbitration against LCSC on 22 June 2004. A final award was eventually rendered by the Arbitrator in favour of LWI on 29 June 2010. Pursuant to the Singapore Arbitration Act (Cap. 10), both parties appealed that final award to the High Court on questions of law arising out of the award. LCSC’s appeal was dismissed but LWI’s appeal was substantially allowed. The final award was remitted to the Arbitrator for reconsideration (see paragraphs [3] to [5]).

The Arbitrator subsequently rendered his Supplementary Award No 2 (Remitted Issues) on 21 September 2011 (the “Second Supplementary Award”) which increased the quantum of damages awarded to LWI due to liquidated damages from $341,391.10 to $603,608.90. As was the case with the remitted final award, the Second Supplementary Award only dealt with post-award interest. The two awards were silent on pre-award interest.

Accordingly, on 17 October 2011, LWI’s solicitors wrote to the Arbitrator and requested that he render an additional award for pre-award interest. LWI cited section 43(4) of the Arbitration Act which provided that,

“Unless otherwise agreed by parties, a party may, within 30 days of receipt of the award and upon notice to the other party, request the arbitral tribunal to make an additional award as to claims presented during the arbitration proceedings but omitted from the award”.

The Arbitrator responded 3 days later on 20 October 2011 with the Additional Award which awarded pre-award interest amounting to S$274,114.61. The relevant start date that had been chosen was the date that liquidated damages were determined to have started to accrue (see paragraph [10]).

As the Court of Appeal noted (at paragraph [10]), at the time the Additional Award had been issued,

“…the Arbitrator had not heard submissions on issues such as (a) the principal amount that should carry interest, (b) the rate of interest, (c) the time from which interest should [have] be[en] awarded, or (d) why the situation in favour of the Defendant should [have] differ[ed] from that which applied when he [had] made his Final Award in favour of the [LWI] and [had] confined interest to post-award interest”.

LCSC’s solicitors protested against the Additional Award on the same day it was rendered and argued that LCSC had been deprived of an opportunity to make submissions. In any event, LCSC had also argued that the Arbitrator was functus officio and therefore had no power to make the Additional Award.

There then followed an exchange of letters between LCSC’s solicitors and the Arbitrator in which the Arbitrator took the position that he was justified in rendering the Additional Award because: (i) he had assumed that LCSC did not object to LWI’s application as LCSC had not responded to LWI’s letter in the 3 days prior to the rendering of the Additional Award; (ii) the failure to award pre-award interest had been merely an oversight on the Arbitrator’s part; and (iii) if this failure to award pre-award interest had not been an oversight on his part, he would have rejected LWI’s application (see paragraphs [11] to [13]).

LCSC’s Appeal – Whether the High Court erred in refusing to declare the Additional Award a Nullity

LCSC argued that the High Court had erred because the Additional Award did not fall within section 43(4) of the Arbitration Act and was thus not a proper arbitral award. In such circumstances, there was no award for the court to set aside and the proper course was for the courts to declare that the Additional Award was a nullity (see paragraph [30]).

(a) The courts have no power except those expressly provided for in the Arbitration Act

LCSC also sought to argue that the Arbitration Act did not exclude the power of the Singapore courts to grant a declaratory judgment in an arbitration. This was on the basis that the court retained supervisory jurisdiction over the arbitral tribunal through the grant of a declaratory order (see paragraph [31]).

Having reviewed the legislative history of the Arbitration Act, the Court of Appeal rejected LCSC’s argument. The Court of Appeal held that a concurrent supervisory jurisdiction would be contrary to the underlying doctrine of minimal curial intervention in arbitration. The certainty of when court intervention would be permitted would be “significantly undermined” if the court could exercise the grant of declaratory orders, where such a power was not expressly provided for in the Arbitration Act (see paragraph [38]).

The Arbitration Act was enacted in 2000 in order to repeal the old arbitration act and to enact a new one which would align and harmonise the Arbitration Act with the International Arbitration Act. The Court of Appeal noted that “a significant concern was the desire to ensure that while the framework governing domestic arbitration would retain the provision for a greater degree of judicial involvement than would be case with international arbitration, in general the two should be broadly consistent” (see paragraph [33]).

The Court of Appeal held (at paragraph [34]) that,

“Given the clear legislative intent to “align our domestic laws with the Model Law”, unless a clear departure [wa]s provided for in the Act, the Court [was] entitled and indeed even required to have regard to the scheme of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“IAA”) or the UNCITRAL Model Law on International Commercial Arbitration (“the Model Law”) for guidance in the interpretation of the [Arbitration] Act. This [wa]s undoubtedly so where similar provisions [are to be] found in the [Arbitration] Act and in the IAA or the Model Law”.

Accordingly, the Court of Appeal cited the doctrine of minimal curial intervention as found in Article 5 of the Model Law (which was enacted through section 3 of the IAA) and held that its effect was “to confine the power of the Court to intervene in an arbitration to those instances which [were] provided for in the Model Law and to “exclude any general or residual powers” arising from sources other than the Model Law” (see paragraph [36]).

The Court of Appeal further held that section 47 of the Arbitration Act was comparable to Article 5 of the Model Law and “should be construed in a manner that [wa]s consistent with the intent underlying [A]rticle 5 of the Model Law” (see paragraph [37] and [38]). Section 47 provided that,

No judicial review of award

47. The Court shall not have jurisdiction to confirm, vary, set aside or remit an award on an arbitration agreement except where so provided in this Act”. 

Accordingly, “[i]n short, the courts should only intervene where so provided in the [Arbitration] Act” (see paragraph [39]).

(b) LCSC’s remedy was to be found in setting aside and not through a declaratory order

The Court of Appeal considered that the remedy to LCSC’s complaint was to be found in section 48(1)(a)(v) of the Arbitration Act and not through a declaratory order (see paragraph [40]). Section 48 provided that,

“Court may set aside award

48. —(1) An award may be set aside by the Court —

(a) if the party who applies to the Court to set aside the award proves to the satisfaction of the Court that —

(v) the composition of the arbitral tribunal or the arbitral procedure is not in accordance with the agreement of the parties, unless such agreement is contrary to any provisions of this Act from which the parties cannot derogate, or, in the absence of such agreement, is contrary to the provisions of this Act;

…”

The Court of Appeal reasoned in the same paragraph that,

“…If the Arbitrator was wrong to render the Additional Award because s[ection] 43(4) of the Act [had] not in fact empower[ed] him to do so, the “arbitral procedure” leading to the issuance of the Additional Award would [have] be[en] contrary both to “the agreement of the parties” and also “the provisions of this Act”…”.

The Court of Appeal also held that this was the position in case law, see Denmark Skibstekniske Konsulenter A/S I Likvidation (formerly known as Knud E Hansen A/S) v Ultrapolis 3000 Investments Ltd (formerly known as Ultrapolis 3000 Theme Park Investments Ltd) [2010] 3 SLR 661. The Court of Appeal noted that even though the High Court in that case had upheld the challenged “corrected award” on the basis that the tribunal was not in fact functus officio when it made the award, nevertheless “it [did] not seem to have been doubted that had the defendant made out its assertion that the tribunal was functus officio, s 31(2)(e) of the IAA (and by analogy, s 48(1)(a)(v) of the [Arbitration] Act) would indeed have afforded the defendant an appropriate avenue for seeking recourse” (see paragraph [41]).

Furthermore, the Court of Appeal noted that there had been an explicit provision formerly in the Rules of Court which granted powers to the court to declare that an award was not binding. This had been legislatively removed (see paragraph [42]). The Court of Appeal was fortified in its view by the report of the Law Reform and Revision Division of the Attorney-General’s Chambers entitled Review of rules of court relating to arbitration (23 January 2002) at para 1.2 as well as Halsbury’s Laws of Singapore, vol 1(2), (LexisNexis, 2011 Reissue) at footnote 6 of [20.120].

Finally, the Court of Appeal held that PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 did not assist LCSC’s argument. We had previously discussed the case in a post on the substance-procedure distinction in distinguishing between arbitral award and orders/directions of the tribunal. The Court of Appeal held that since the “real complaint” of LCSC was that the Additional Award was an invalid award, the case provided no assistance. This was because the case stood for the proposition that the jurisdiction of the courts to set aside an award could only “be invoked against something that purport[ed] to be an award in fact and in substance, even if it ultimately turn[ed] out to be an invalid award“.

LWI’s Appeal – whether the Additional Award ought to be set aside for a breach of natural justice

(a) Natural justice and setting aside of Awards

Section 48(1)(a)(vii) governs the setting aside of an award for a breach of natural justice.

48. —(1) An award may be set aside by the Court —

(a) if the party who applies to the Court to set aside the award proves to the satisfaction of the Court that —

(vii) a breach of the rules of natural justice occurred in connection with the making of the award by which the rights of any party have been prejudiced;

…”

The locus classicus in Singapore on this issue is Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86. A party challenging an arbitration award as having contravened the rules of natural justice must establish the following (see paragraph [48]):

(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 had prejudiced the party’s rights.

In relation to the issue of prejudice, the Court of Appeal explained that not every breach of natural justice will amount to the required prejudice (see paragraph [50]). The applicant is not required to “demonstrate affirmatively that a different outcome would have ensued but for the breach of natural justice” or that his application was not “bound to fail if there [wa]s a possibility that the same result might have been arrived at even if the breach of natural justice had not occurred” (see paragraph [51]). The test is whether “there ha[d] been some actual or real prejudice caused by the alleged breach” (see paragraph [51]). This is a lower threshold than the UK’s threshold of “substantial injustice” as adopted in section 68(2) of the UK Arbitration Act 1996 (see paragraph [52]).

In summary, the Court of Appeal held (at paragraph [54]) that,

“…the real inquiry [wa]s whether the breach of natural justice was merely technical and inconsequential or whether as a result of the breach, the arbitrator [had been] denied the benefit of arguments or evidence that had a real as opposed to a fanciful chance of making a difference to his deliberations. Put another way, the issue [wa]s whether the material could reasonably have made a difference to the arbitrator; rather than whether it would necessarily have done so. Where it [wa]s evident that there [wa]s no prospect whatsoever that the material if presented would have made any difference because it wholly lacked any legal or factual weight, then it could not seriously be said that the complainant ha[d] suffered actual or real prejudice in not having had the opportunity to present this to the arbitrator (cf Soh Beng Tee at [86])”.

(b) The applicability of the rules of natural justice to ancillary matters

The Court of Appeal agreed with the High Court that “‘natural justice should apply to the entire arbitration proceedings’ because these [were] immutable principles which ought to apply to any tribunal acting in a judicial capacity“. Further, such a principle was “fundamental” and had statutory support (see paragraph [56]).

LWI argued, however, that there was no specific requirement for the Arbitrator to provide the Plaintiff with an opportunity to be heard on the basis that such a requirement was not expressly stated in section 43(4) of the Arbitration Act. Furthermore, parties would already have had an opportunity to fully present their cases earlier (see paragraph [57]).

(I) The jurisdiction question and the substantive question

The Court of Appeal considered that there were actually two different issues to which LCSC was entitled to be heard on in respect of the Additional Award (see paragraph [58] referring to Darius Chan, “Role of natural justice in the making of an additional award” in Singapore Law Watch Commentary Issue 2 / April 2012 at p. 6) namely,

(a) firstly, whether the requirements of s 43(4) of the Act were met – ie, whether pre-award interest was a presented claim that had been omitted from the Second Supplementary Award (“the jurisdictional question”); and

(b) secondly, if the requirements of s 43(4) of the Act were met, whether pre-award interest should be awarded, and if so, to what extent (“the substantive question”).

The Court of Appeal considered that the High Court had only directed its mind to the jurisdictional question and as a result, the arguments on appeal were mostly directed to that issue (see paragraph [59]).

(II) Lack of express provision does not remove right to be heard

LWI argued that the lack of an express provision for a party’s right to be heard in section 43(4) should be contrasted to the analogous provision of section 57(3) of the UK Arbitration Act 1996 as well as to section 39(5) of the Arbitration Act which expressly provided that parties would have “a reasonable opportunity to be heard” on amendments to costs (see paragraphs [60] and [61]).

The Court of Appeal disagreed and held that the Arbitrator should have given LCSC the right to be heard on the applicability of section 43(4) prior to his decision. This is so, notwithstanding the absence of the express words “giving the parties a reasonable opportunity to be heard” in the section (see paragraph [74]).

In this respect, the Court of Appeal considered that regard should properly be had to Article 33(3) of the Model Law, which section 43(3) had been modelled on (paragraph [62]). In its review of the materials in aid of the interpretation of Article 33(3), the Court of Appeal held that the notice requirement to the other party (in section 43(3) and Article 33(3)) actually stood for a wider proposition than simply not having ex-parte communications with the tribunal.

The Court of Appeal held that the notice requirement “was included on the premise that embedded within it was the requirement that “the other party” be afforded the opportunity to respond to the requesting party’s request for an additional award” (see paragraph [67] and [68]).

The Court of Appeal cited the drafting history of the Model Law (see paragraph [67]), and in particular HM Holtzmann & JE Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (Kluwer Law and Taxation Publishers, 1989) at pages 889 to 890 where the learned authors wrote,

“One other point of significance to the Article as a whole that was discussed in the legislative history was the necessity of providing parties to the proceedings with an opportunity to respond to a request by a party for … an additional award. On this there appear[ed] to have been broad agreement. The Working Group considered but did not adopt a proposal to lay down a time schedule for this purpose, but it noted in its Report that “it was understood that the arbitral tribunal should allow sufficient time for a reply”. During the later discussion of the matter by the Commission, this view was repeated and it was said that the requirement of an opportunity to respond flowed from the general standards of fairness imposed by Article 18 [in pari materia to s 22 of the Act] and was also encapsulated in the phrase “with notice to the other party”, which is contained in both the Model Law and the UNCTIRAL Arbitration Rules”.

Similarly, the Court of Appeal considered that LWI’s argument was based on “an incomplete appreciation of the drafting history of [Article] 33(3) of the Model Law” (see paragraph [69]). LWI had cited the Analytical Commentary on Draft Texts of a Model Law on International Commercial Arbitration, Report of the Secretary-General, UN Doc A/CN.9/264 (March 25, 1985) produced by the United Nations Commission on International Trade Law (“Analytical Commentary”), which commented on Article 33(3) as follows (at p 69):

“The third possible measure [wa]s to make an additional award as to any claim presented in the arbitral proceedings but omitted from the award (e.g. claimed interest was erroneously not awarded). If the arbitral tribunal consider[ed] the request, not necessarily the omitted claim, to be justified, it shall make an additional award, irrespective of whether any further hearing or taking of evidence is required for that purpose“.

(emphasis added)

However, as the Court of Appeal explained at paragraph [69], a variant of the phrase “whether any further hearing or taking of evidence is required” i.e. “can be rectified without any further hearings or evidence” had been included in the early drafts of Article 33(3), but was subsequently deleted. The learned authors of Holtzmann & Neuhaus explained the reason for the deletion at page 891,

“This [had been] done in response to a question raised by the Secretariat of what would happen where claims [had been] omitted as to which further hearings or evidence would [have] be[en] needed. The Secretariat [had] suggested that “[f]rom a practical point of view” the arbitral tribunal should be permitted to resolve such claims because the alternative might be that the award as a whole would be set aside. The Working Group [had] agreed, and the restriction [ie, that the omission by the arbitrator is rectifiable without any further hearings or evidence] was omitted”.

Finally, the Court of Appeal explained that the sentence in the Analytical Commentary i.e. “shall make an additional award whether any further hearing or taking of evidence is required for that purpose” had been misunderstood and actually referred to the substantive question and not the jurisdictional question (see paragraphs [72] and [73]).

“…they simply mean[t] that once the tribunal [had] decide[d] that a claim ha[d] been omitted, it must make an additional award to deal with that omitted claim and it must proceed to do so whether additional evidence is required or not. Nothing in the Analytical Commentary exclude[d] the opportunity for evidence to be led or hearings to be held if the tribunal deem[ed] that this [wa]s necessary”.

(c) Natural Justice – Breach

The Court of Appeal held that the Arbitrator had breached the rules of natural justice by rendering the Additional Award just three days after LWI’s application and even before LCSC had been given a chance to respond on whether section 43(4) was applicable. The Court of Appeal held that the short timeframe was unreasonable unless the Arbitrator had taken the initiative to inquire if LCSC had intended to object to LWI’s application (see paragraph [75]).

(d) Natural Justice – Prejudice

The Court of Appeal reiterated that the mere breach of natural justice did not in itself cause prejudice (see paragraphs [77] and [78]).

In this respect, the Court of Appeal held that no “actual or real prejudice” could have been suffered by LCSC in being denied a right to argue that the claim for pre-award interest had not been presented to the Arbitrator (see paragraph [81]). The Court of Appeal reasoned that it was “uncontroversial” that the generic claim for “interest” in LWI’s “Points of Claim” was sufficiently wide to cover pre-award interest (see paragraph [79]). Since LWI would automatically have been entitled to post-award interest by virtue of the Arbitration Act, the Court of Appeal held that LWI’s prayer for interest must have had referred to a claim for pre-award interest and that the claim for pre-award interest had therefore been presented to the Abitrator (see paragraph [80]).

However, the Court of Appeal considered that LCSC had been deprived of a right to argue that the claim for pre-award interest had in fact “not [been] omitted” and therefore the Second Supplementary Award had in fact been final and the Arbitrator had no right reconsider and vary such a final award (see paragraphs [83] to [87]). This was the prejudice that LCSC had suffered as “it could reasonably have made a difference to the outcome of the case had [the argument] been presented“. This was regardless of the court’s view as to whether there had been an omission of the claim (see paragraph [88]). This prejudice sufficed for the Additional Award to be set aside (see paragraph [89]).

(e) Breach of natural justice – the substantive question

The Arbitrator was criticised for failing to give either party the opportunity to be heard on the substantive question. As the Court of Appeal noted (see paragraph [90],

…the Arbitrator [did] not appear to have heard either party before he [had] fixed the rate of interest, [had] selected the date from which interest should accrue, [had] determined the amount on which interest would be levied and [had] considered whether in the circumstances there [had been] a reasonable basis for him to adopt a different approach in the Additional Award than he had done in the Final Award that had been in favour of the Plaintiff“.

The “actual or real prejudice” suffered by LCSC was therefore “in being deprived of its right to be heard on each of these issues in relation to the substantive question“. In this respect, the Court of Appeal considered that there had been at the very least an issue of fact which the Arbitrator should have heard parties on i.e. whether the pre-award interest should have had been reduced as LWI had taken nearly three and a half years to confirm the Arbitrator’s appointment after it had served its notice of arbitration on LCSC (see paragraph [92]).

Conclusion

The Court of Appeal had invited parties to make submissions on the appropriate consequential orders, if any, that it should have made in the event it had chosen to uphold the decision of the High Court below (as it eventually did). However, these points were not fully argued and the only issue before the Court of Appeal had been whether the decision to set aside the award should have been upheld. Accordingly, the Court of Appeal chose not to make any special consequential orders (see paragraph [93]). Pertinently, the arguments for both parties did in fact show that there was a real question as to whether the issue of pre-award interest could still be raised by LWI and be determined by the Arbitrator.

While this decision involved a domestic arbitration governed by the Arbitration Act, nevertheless, given the alignment of the Arbitration Act and the International Arbitration Act, this decision is of wider applicability to international arbitrations and arbitral awards.

This decision provides a helpful gloss on the development of Singapore law on the breach of natural justice in respect of arbitral awards and its application across the entire arbitration proceedings including ancillary hearings.

The key take-away points are as follows:

  1. There is value in having an arbitral institution scrutinise the award to see if any key claims have been omitted. This scrutiny is helpful whether it is formal (see e.g. the ICC Rules) or informal (SIAC).
  2. The Singapore courts continue to uphold their commitment to minimal curial intervention. Their powers to review challenged awards are circumscribed by the relevant arbitration act.
  3. The Singapore courts also take breaches of natural justice very seriously and will not hesitate to set aside an award in the appropriate circumstances. However, the approach of the courts is tempered by their commitment to minimal curial intervention. Accordingly, it is not every breach of natural justice that will render an award liable to be set aside.

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 Singapore Case Update: (1) Natural Justice applies to Arbitration Ancillary Proceedings and (2) Court has no Supervisory Powers outside of the IAA

  1. Pingback: Singapore Case Update: (1) Natural Justice applies to Arbitration Ancillary Proceedings and (2) Court has no Supervisory Powers outside of the IAA | Blogging International Arbitration | Scoop.it

  2. Pingback: Astro v Lippo: Hearing Dates updates | Singapore International Arbitration Blog

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  4. Pingback: Challenge to Arbitrator for Apparent Bias – What happens if the final award is rendered before the court determines challenge? | Singapore International Arbitration Blog

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