In the recent decision of JVL Agro Industries Ltd v Agritrade International Pte Ltd [2016] SGHC 126, the Singapore High Court set aside an arbitration award in favour of the defendant, Agritrade International Pte Ltd (“Agritrade”), on the basis that there had been a breach of the rules of natural justice.

In brief, the Court found (amongst other grounds) that:

• The arbitral tribunal had reached its determination on the basis of an issue which Agritrade had not advanced in the proceedings; and

• In doing so, the tribunal had failed to grant the plaintiff, JVL Agro Industries Ltd (“JVL“), a fair hearing.

This is a significant decision in Singapore, an arbitration-friendly jurisdiction where the local courts rarely intervene in the decisions of arbitrators.

The background

• JVL entered into a series of 29 contracts to buy palm oil from Agritrade between July and November 2008.
• In the second half of 2008, the market price of palm oil fell significantly below the parties’ contractually agreed prices.
• JVL approached Agritrade to have a price-averaging arrangement (“PAA”) to allow JVL more time to discharge its contractual obligations and to average down the unit price of the palm oil. Meanwhile, JVL continued entering into new contracts with Agritrade to buy palm oil at the prevailing market price.
• Eventually, JVL discharged almost all its purchase obligations, save for five (5) undischarged market price contracts (the “disputed contracts“).
• By June 2010, the market price of palm oil had risen significantly. The parties were unable to agree on the prices to be reflected in the disputed contracts. As a result, JVL served a notice of default on Agritrade that it would purchase the remaining palm oil from the market and claim the difference against Agritrade.

The arbitration proceedings

• In April 2011, JVL commenced arbitration against Agritrade at the Singapore International Arbitration Centre (“SIAC“).
• JVL’s pleaded position was that Agritrade had failed to perform any of the disputed contracts despite promises to do so.
• Agritrade’s main defences were that:
  • the PAA resulted in the disputed contracts being void for uncertainty (“Uncertainty Defence“); or
  • Even if the disputed contracts were not void, they had been mutually terminated (“Mutual Termination Defence”).
• Agritrade abandoned its Mutual Termination Defence on the first day of the arbitration proceedings, resulting in its sole defence at the arbitration being the Uncertainty Defence.
• Agritrade did not address the parol evidence rule at all in its defence. It was the tribunal that directed parties to address this issue.
  • The parol evidence rule provides that a party to a contract which has been reduced to writing cannot (unless one of a limited number of exceptions applies) rely on extrinsic evidence to vary, contradict, add or subtract from the contract.
• The tribunal issued its award in October 2013, dismissing JVL’s claim with all three arbitrators agreeing that their decision turned on the issue of whether the PAA amounted to a collateral contract:
  • The majority found that the PAA amounted to a collateral contract that was capable of varying the parties’ obligations under the disputed contracts.
  • In a nutshell, the tribunal’s determination of Agritrade’s liability depended primarily on its determination of whether the PAA was a collateral contract falling within the exception of the parol evidence rule.

JVL’s application to set aside the award

Dissatisfied with the outcome, in January 2014, JVL applied to the Singapore High Court to set aside the arbitral award. JVL’s primary grounds were:

• There was a breach of the rules of natural justice in the tribunal’s making of the award;
• The arbitral tribunal’s decision on certain issues went beyond the scope of the arbitration; and
• There was apparent bias on the part of the tribunal towards JVL.

Having heard the parties, the High Court suspended JVL’s application to set aside the award (i.e. exercising the Court’s power under Art 34(4) of the UNCITRAL Model Law), remitting the award back to the tribunal for it to consider whether it was necessary or desirable to receive further evidence or submissions on (amongst other things) whether the PAA amounted to a collateral contract. The tribunal declined to receive further submissions or evidence and rendered an addendum reaffirming its decision. JVL’s application to set aside the award resumed before the High Court after six (6) months.

The High Court’s decision

• The Honourable Justice Vinodh Coomaraswamy observed that:
  • JVL and Agritrade failed to raise or address the parol evidence rule in their respective cases.
  • Although the parol evidence rule was addressed in the parties’ first exchange of written submissions (at the direction of the tribunal):
    • Agritrade chose not rely on the collateral contract defence as an exception to the parol evidence rule (“collateral contract exception”) despite having at least five (5) opportunities to do so; and
    • Neither party was directed to specifically address the collateral contract exception.

• The Court allowed JVL’s application, holding that:
  • there was an insufficient nexus between the tribunal’s chain of reasoning and the cases advanced by the parties.
  • Significantly, the Court found that Agritrade’s defence was not merely silent on the collateral contract exception, but had implicitly rejected it.
  • As such, the majority of the tribunal had breached the rules of natural justice by depriving JVL of a fair hearing.
  • In particular, the Court found that the majority had exercised “unreasonable initiative” by impermissibly relieving Agritrade of the burden of establishing its defence.

Key takeaways

This decision is unlikely to open the floodgates. It affirms the trite legal principles that:

• there should be a sufficient nexus between the reasoning which the tribunal adopts and the cases advanced by the parties. [In this case, neither party had advanced the collateral contract issue.]
• each party should be given a fair and reasonable opportunity to present its case. [The court found that JVL had been deprived of a reasonable opportunity to present its case, particularly on an issue that turned out to be the determinative issue in the tribunal’s ultimate award, i.e. the collateral contract issue.]
• an arbitral tribunal has the power to undertake inquisitorial processes under s. 12(3) of the International Arbitration Act (Cap. 143A). Once issues have been raised by the tribunal, the tribunal can incorporate those issues into its reasoning provided that the parties have been given the opportunity to address such issues. [In this case, the tribunal had raised the collateral contract exception on its own accord (possibly to avoid an “unattractive” outcome) and adopted a chain of reasoning that had no connection with the cases advanced by either party.]

Ultimately, this decision validates Singapore as a neutral, fair seat where the Courts – while known for their pro-arbitration stance – will adopt a robust approach when there has been a clear breach of the rules of natural justice. The courts at the seat of the arbitration proceedings have supervisory jurisdiction over the arbitration process and the parties should be secure and confident that such powers will be exercised when required.

With thanks to Lakshanthi Fernando.