In AKN and another v ALC and others and other appeals [2015] SGCA 18, the Singapore Court of Appeal helpfully restated the proper relationship between arbitral tribunals and the courts, reminding parties of the limits of judicial review of arbitral awards. The Court emphasised party autonomy and choice of adjudicators as a critical principle in arbitration. On that basis, the grounds of court intervention are narrowly circumscribed, generally concerning process failures that are unfair and prejudice the parties, or instances where the arbitral tribunal has made a decision that is beyond the scope of the arbitration agreement. What the courts cannot do is “correct” a decision – mistakes of law or muddling of facts will not provide a basis for challenge.
This case is interesting for another reason: to preserve confidentiality, the names of parties, the subject matter and geographic locations were replaced by mythical names from The Lord of the Rings.
Background
This case arose from the liquidation of a company which was heavily indebted to a number of secured creditors. The appellants (“Purchasers“) agreed to buy some of the company’s assets, including land on which unpaid taxes were due. In return, the Purchasers agreed to issue two notes for the benefit of the secured creditors (“Notes“). Two key agreements were entered into: an asset purchase agreement (“APA“) between the liquidator, the secured creditors, the company’s shareholders and the Purchasers; and an omnibus agreement (“OMNA“) between the Purchasers and the secured creditors. A tax amnesty agreement (“TAA“) was also procured from the municipal authorities, granting deferred payment of taxes on the land.
The APA contained an arbitration agreement, while the OMNA did not. Soon after closing, the TAA was revoked and the parties’ relationship began to sour. The Purchasers stopped making payments, and commenced arbitration in Singapore under the APA. Investment funds which had purchased the right to receive payments under the Notes on the secondary market (“Funds“) also joined the arbitration alongside the original secured creditors as Respondents. The crux of the dispute was whether the liquidator and secured creditors had fulfilled their obligation under the APA to deliver the company’s assets to the Purchasers “free from and clear of all Liens of any kind”. The arbitral tribunal (“Tribunal“) decided in favour of the Purchasers, awarding them damages for the lost opportunity to earn profits and granting them relief in respect of their payment obligations under the Notes as long as clean title to the assets was not delivered to them (“the Award“).
Issues before the High Court
The liquidator, 11 of the secured creditors and the Funds successfully applied to the High Court to set aside the Award on the grounds of a breach of natural justice and excess of jurisdiction.
The High Court considered whether the Tribunal had committed a breach of natural justice by failing to consider the liquidator’s and/or secured creditor’s arguments, evidence and submissions on three issues, being whether: the APA was qualified by the TAA (Issue 1); the Purchasers were responsible for the revocation of the TAA (Issue 2); and the secured creditors had failed to discharge their obligation to settle third party legal proceedings over the land (Issue 5). The Judge also examined whether the Tribunal failed to give the parties an opportunity to address the Tribunal on whether the Purchasers suffered a loss of opportunity to earn profits (Issue 4). The Judge found that the Award should be set aside on all four issues.
The High Court then analysed whether the Tribunal had acted in excess of its jurisdiction in awarding damages to the Purchasers for their loss of opportunity to earn profits (Issue 3); in granting the Purchasers relief in respect of their payment obligations under the Notes (Issue 6); and in holding the Funds liable, alongside the secured creditors, for breaches of the APA (Issue 7). The Judge decided affirmatively for Issues 3 and 6, but not Issue 7.
Decision and Observations
The broad question before the Court of Appeal was whether the High Court erred in setting aside the Award in its entirety. The Court of Appeal analysed the Judge’s decision according to the seven issues laid out by him and found that the Judge had erred in his findings on four of the seven issues identified. This resulted in only parts of the Award being set aside.
Whether the Tribunal Committed a Breach of Natural Justice
The Court of Appeal, in a judgment delivered by the Chief Justice, reiterated that an essential feature of the rule of natural justice is consideration of pleaded issues. However, the inference that an arbitrator wholly missed important pleaded issues should not be drawn where the arbitrator has simply misunderstood the aggrieved party’s case, has been mistaken as to the law or has chosen not to deal with a point pleaded because he or she thought it was unnecessary or wrong. The inference that an arbitrator failed to consider an important pleaded issue must, firstly, be clear and virtually inescapable. Secondly, there must be a causal nexus between the breach of natural justice and the arbitral award, and lastly, the breach must have prejudiced the aggrieved party’s rights.
The Court of Appeal went on to decide that the High Court Judge erred in engaging with the merits of the underlying dispute for Issues 1 and 2, instead of restricting his inquiry to whether the Tribunal had committed a breach of natural justice. This was impermissible. In its own inquiry on Issue 1, the Court of Appeal held that there was no basis for drawing the inference here that the Tribunal had failed to consider material contentions. The Court of Appeal also pointed out that even if there had been a breach of natural justice, this should have resulted in only part of the Award being set aside.
In relation to Issue 2, the Court of Appeal conceded that it appeared that the Tribunal had attributed an argument made by one party to another party, and then discredited it on the basis that it had been put forward by the wrong party. However, such a muddle on the law, facts and arguments was not sufficient ground to set aside the Award. Further, even if there had been a breach of natural justice, this was unlikely to have affected the Tribunal’s conclusions, and thus the Award should not have been set aside on this basis.
However, the Court of Appeal found that the Tribunal did act in breach of natural justice in relation to Issues 4 and 5. With respect to the former, this was because the Tribunal raised the potential of the Purchaser’s claim resting on the loss of opportunity to earn profits only on the final day of the proceedings. The parties were not given an opportunity to provide further arguments or expert evidence on this point, particularly on the quantum. In respect of Issue 5, the Tribunal never considered the merits of the relevant contention because it mistakenly thought that a concession had been made regarding the proceedings which had, in fact, not been made. This therefore was a failure of natural justice. However, only those portions of the Award dealing with those specific issues were ordered to be set aside.
Whether the Tribunal Exceeded its Jurisdiction
Although the courts should not, in general, engage with the merits of the dispute when dealing with applications to set aside arbitral awards, an exception arises when the courts are confronted with arguments relating to the jurisdiction of the arbitral tribunal. In such a case, the court undertakes a de novo hearing, and considers the issue of jurisdiction on its merits.
On Issue 3, the Court of Appeal found that the judge erred in deciding that a generic claim for damages was not broad enough to encompass a claim that might be characterised as one for loss of chance. This was, however, a moot point due to the Court’s finding on Issue 4.
On the other hand, the Tribunal had exceeded its powers in relation to Issue 6 by granting relief to the Purchasers in respect of obligations under the Notes. The Court of Appeal found that the obligations under the Notes were not covered by the arbitration agreement in the APA. In relation to Issue 7, the Court of Appeal held that the Funds only joined the arbitration because they had an interest in receiving payments under the Notes, and the pleadings were never amended to include a cause of action against them. The Funds were only assignees and there was no novation of the obligations under the Notes to them. They merely agreed to be bound by the findings of the Tribunal. In the Award, however, the Funds were held liable as if they were an original party (a secured creditor). The Court of Appeal held that the mere fact of the Funds joining the arbitration did not vest the Tribunal with jurisdiction to find that the Funds had taken on the substantive obligations of the secured creditors. Therefore, this part of the appeal was allowed.
Comments
Whilst not advancing any new law, this judgment serves as a useful reminder of the limited right of challenge to an arbitral award, with the Court of Appeal encouraging the courts to resist engaging with an appeal on the law dressed up as a breach of natural justice or other process failure. Further, even where there is a breach of natural justice, it will also be necessary to demonstrate a causal nexus between the breach and the award, and that the breach prejudiced the aggrieved party’s rights. Therefore, if the breach of natural justice makes no difference to the award, there will be no right of challenge.
It is important for parties agreeing to arbitrate in Singapore to be aware that they will not, apart from in the most exceptional cases, have a right to challenge an award that goes against them, even if the arbitrators have made a mistake of law or fact. The courts do not bail out parties who have made arbitral choices they might have come to regret, or offer them a second chance to canvass the merits of their respective cases, but the courts will step in to remedy an error in process or a decision that exceeds the jurisdiction provided to the tribunal through the parties’ consent.
By Leng Sun Chan SC, Andy Leck, Nandakumar Ponniya, Celeste Ang, and Carinne Kamdar.
