Case Update: Separate but Related Contracts with Different Dispute Resolution Clauses

A long running dispute before the Singapore courts recently came to an abrupt and unresolved end when the Singapore Court of Appeal decided that parties had to resolve their dispute in arbitration instead.

The case of Burgundy Global Exploration Corp v Transocean Offshore International Ventures Ltd and another appeal [2014] SGCA 24 demonstrates the pitfalls of having separate but related contracts governed by different dispute resolution clauses.

The appellant, Burgundy Global Exploration Corp (“Burgundy”), brought 2 appeals before the Court of Appeal. This post will only discuss the appeal in respect of the two interrelated contracts with different dispute resolution clauses – one stipulating arbitration and the other, the Singapore courts.

Facts of the case

Background to the dispute

Burgundy is  a Philippines company engaged in the business of exploring and developing oil and gas resources in the Philippines. The Respondent, Transocean Offshore International Ventures Ltd (“Transocean”), is a company which supplies mobile offshore drilling units and provides drilling services for oil and natural gas reserves.

Under an offshore drilling contract and a novation agreement (collectively, the “Drilling Contract”), Transocean agreed to supply a semi-submersible drilling rig and provide offshore drilling services to Burgundy. Article XI of the Drilling Contract provided that Burgundy and Transocean were to enter into an escrow agreement (the “Escrow Agreement”). The Escrow Agreement required Burgundy to deposit certain amounts into an escrow account, failing which Transocean would be entitled to terminate the Drilling Contract. The Drilling Contract was governed by an arbitration agreement while the Escrow Agreement was governed by a jurisdiction clause in favour of the Singapore courts.

Burgundy failed to make the initial deposit into the escrow account. Transocean accordingly exercised its right to terminate the Drilling Contract.

Proceedings before the Singapore Courts

On 29 January 2009, Transocean commenced proceedings against Burgundy for its breach of the Escrow Agreement and, amongst other things, claimed damages for Transocean’s loss of net profits under the Drilling Contract as well as Transocean’s wasted costs and expenses in entering into the Escrow Agreement.

On 5 June 2009, Burgundy applied for a stay of the proceedings in favour of arbitration pursuant to Art 25.1 of the Drilling Contract, which provided that any dispute, controversy or claim arising out of the Drilling Contract shall be exclusively and finally settled by arbitration. Art 25.1 further provided that, unless otherwise expressly agreed in writing, indirect, consequential or exemplary damages shall not be allowed.

The stay application was granted at first instance, but the appeal against the order was allowed by Andrew Ang J (“Ang J”), see Transocean Offshore International Ventures Ltd v Burgundy Global Exploration Corp[2010] 2 SLR 821. Ang J held that Art 25.1 of the Drilling Contract did not apply to claims arising from Burgundy’s failure to pay the escrow amount into the escrow account. Rather, the Escrow Agreement was governed by the non-exclusive Singapore court jurisdiction clause. Ang J’s decision was affirmed by the Singapore Court of Appeal.

Subsequently, Transocean applied for summary judgment against Burgundy and this was granted by the learned Assistant Registrar Teo Guan Siew on 7 October 2010. That decision was upheld on appeal by the Honourable Justice Quentin Loh.

On 23 April 2012, Transocean was awarded damages amounting to US$105,536,922 plus interest, being the net profit that Transocean would have earned under the Drilling Contract plus the cost of mitigation reasonably incurred by Transocean. Burgundy appealed against that award for damages. However, its appeal was dismissed by the Singapore High Court in Transocean Offshore International Ventures Ltd v Burgundy Global Exploration Corp [2013] 3 SLR 1017.

In coming to its decision, the Singapore High Court rejected Burgundy’s argument that Transocean’s claim for damages (profits under the Drilling Contract) fell within the scope of the arbitration agreement in the Drilling Contract. The Court reached the decision on the basis that the Drilling Contract was not itself the source of the parties’ rights and obligations giving rise to Transocean’s claim. Rather, the High Court thought that the Drilling Contract was only a point of reference for ascertaining the financial consequences of Burgundy’s breach of the Escrow Agreement.

The Parties’ arguments on appeal

On appeal, Burgundy submitted that insofar as Transocean was claiming losses arising from the termination of the Drilling Contract, such a claim gave rise to a dispute under the Drilling Contract and therefore was subject to arbitration pursuant to Art 25.1 of that agreement.

Transocean argued that the question of whether it could claim its losses under the Drilling Contract in these proceedings was res judicata as Burgundy’s application for a stay of proceedings in favour of arbitration had already been finally dismissed by the Court of Appeal. Transocean further argued that the assessment of damages was a factual quantification of the losses caused by Burgundy’s breach of the Escrow Agreement and was distinct from a determination of substantive liability under the Drilling Contract.

Court of Appeal’s Decision

Threshold Question – no res judicata

Transocean submitted that an issue estoppel arose in this case because the damages issue had already been litigated and decided during the stay proceedings, and therefore Burgundy was estopped from raising the damages issue at the assessment of damage stage.

The Court of Appeal disagreed. Since the damages issue had not been decided on its merit, nor had it been necessary for it to be decided in the courts below, the matter was not res judicata.

Could Transocean recover its loss of profits under the Drilling Contract in a claim for breach of the Escrow Agreement?

As a preliminary observation, the Court of Appeal highlighted that this was a case where the parties had entered into two contracts to give effect to a single transaction. The Drilling Contract was the main contract setting out the parties’ obligations, including the services to be provided by Transocean and the rates to be paid by Burgundy for those services. The Escrow Agreement was a separate contract making provision for the question of how Burgundy should pay for Transocean’s services.

The Court of Appeal had “no real doubt” that these two contracts were closely linked (see paragraph [43]). Nonetheless, the Court of Appeal held that the parties “had deliberately carved out escrow matters from the transaction and subjected it to a separate agreement”. The Court of Appeal held that Transocean’s interest under the Escrow Agreement was to obtain security for Burgundy’s performance of its payment obligations under the Drilling Contract. This ought not to be confused with Transocean’s interest under the Drilling Contract, which was to make profits from carrying out the contracted services (paragraph [44]).

As such, the Court of Appeal concluded that the true damage caused by Burgundy’s breach of the Escrow Agreement was the loss of its security, not the loss of profits under the Drilling Contract. The proper cause of action for recovering such loss of profits had to be a claim under the Drilling Contract. The Court of Appeal held that “[h]aving deliberately chosen to carve out the security aspect and deal with it in a separate contract, Transocean could not seek to vindicate its performance interest under the Drilling Contract by bringing a claim founded on breach of the Escrow Agreement” (see paragraph [45]).

The Court of Appeal added that the fact that clause 3.2 of the Escrow Agreement entitled Transocean to terminate the Drilling Contract upon a breach of the Escrow Agreement was immaterial to the above analysis. This was because a breach of the Escrow Agreement was not necessarily a breach of the Drilling Contract. The Court of Appeal held at [46],

“…The contractual right to terminate the Drilling Contract upon a breach of the Escrow Agreement is just that – a right to terminate; it does not serve to import all the obligations under Drilling Contract into the Escrow Agreement and allow Transocean to treat them as a single composite contract. This is a matter of some significance where, as here, each contract has unique features including distinct dispute resolution mechanisms.”

Hence, the Court of Appeal held that in order for Transocean to recover its losses flowing from the termination of the Drilling Contract, the proper course for Transocean was to bring a claim in arbitration under the dispute resolution clause in the Drilling Contract and prove that the Drilling Contract had been breached by Burgundy and that Transocean was therefore entitled to damages for those losses.

Burgundy had not waived its right to arbitration

On a separate point, Transocean argued that because Burgundy had engaged Transocean in the assessment process and taking out numerous adjournment applications to allow itself to do so, Burgundy must be taken to have waived its right to arbitration. The Court rejected this argument on the basis that in order to establish a waiver by one party of certain contractual rights, there must be an unequivocal representation from that party that it is forgoing those rights. No such representation could be found in this case. In fact, Burgundy consistently insisted on its right to arbitration.

Conclusion and Takeaways

For the above reasons and despite the years of court proceedings which started in 2009, the Court of Appeal allowed the appeal.

Transocean’s claim for damages in this case was therefore limited to its alternative claim for wasted costs and expenses for US$55,001.46, insofar as these were the costs that were incurred in entering into the Escrow Agreement (see paragraph [58]).

There may be good reasons for commercial parties to have interrelated contracts governed by different dispute resolution clauses. This usually crops up in the case of construction projects which have a “chain” of contracts (Owner-Developer, Developer-Main Contractor, Main Contractor-Sub-Contractor) and parties may not want to have a single forum to resolve all their disputes.

Alternatively, in cases involving escrow arrangements, the escrow agent may not want to be party to an arbitration agreement (see e.g. Astrata (Singapore) Pte Ltd v Portcullis Escrow Pte Ltd and another and other matters, [2011] 3 SLR 386; [2011] SGCA 20).

However, Burgundy Global Exploration Corp v Transocean Offshore International Ventures Ltd and another appeal [2014] SGCA 24 should now serve to caution parties of the risks in such an approach – Claimants may potentially need to commence separate proceedings before both the courts and in arbitration to pursue their rights.

 

 

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
This entry was posted in Arbitration, Philippines, Singapore and tagged , , , , , , . Bookmark the permalink.

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