SINGAPORE COURT OF APPEAL PARTIALLY SETS ASIDE ARBITRAL AWARD FOR A “FLEXIBLE APPROACH” TO DAMAGES

The Singapore Court of Appeal’s recent decision in CEF and CEG v CEH [2022] SGCA 54 provides interesting guidance for arbitrators and parties alike on the dividing line between mere procedural complaints, which will not be entertained by the courts, and violations of natural justice, which will result in arbitral awards being set aside by the courts. Specifically, the decision is a reminder that arbitral tribunals should be wary of adopting positions in awards that the parties have not had an opportunity to address.

Key Takeaways:

• Singapore courts will not set aside awards based on unjustified procedural complaints, but they will scrutinize awards to ensure that they do not violate rules of natural justice.
• Arbitral awards that quantify damages without sufficient legal and/or evidential justification and fail to provide parties with the opportunity to address unexpected chains of reasoning may be at risk of being set aside by Singapore courts.
• The Singapore courts’ approach in dealing with set-aside applications remains ‘pro-arbitration’ and is in line with courts in other leading arbitral seats such as the U.K. and Hong Kong.

The Award:

The dispute that was the subject of an ICC arbitration arose from a design-and-build contract (the Contract) between an Italian manufacturer of steel-making plants and its Malaysian subsidiary (the Appellants) on the one hand, and a Malaysian hot-rolled steelcoil maker (the Respondent) on the other. Under the Contract, the Appellants were to provide engineering equipment and services to design, build and erect a steel-making plant for the Respondent.

The erection of the steel-making plant was significantly delayed and the steel-making plant never achieved its production target. As a result, the Respondent purported to terminate the Contract and disputes arose between the parties. Both parties alleged that the other was in repudiatory breach of contract. These disputes culminated in an ICC arbitration seated in Singapore in 2016, pursuant to the arbitration agreement in the Contract.

• The Tribunal issued its Award in November 2019. In its Award, the Tribunal made various orders including:
• An order that the Respondent was to transfer the title to the plant to the Appellants (the Transfer Order).
• In return, an order that the Appellants were to pay the Respondent the Contract price, minus certain amounts to account for sums due between the parties (the Repayment Order).
• An order for payment of damages by the Appellants to the Respondent for misrepresentation (the Damages Order). The Tribunal awarded the Respondent Euro 35.6 million, which was 25% of the total damages of Euros 142.4 million sought by the Respondent. The Tribunal found the Respondent’s evidence of the quantum of the loss it had suffered under each head to be deficient, scarce and incomplete. Despite these deficiencies, the Tribunal applied a “flexible approach” to proof of damage and awarded 25% of the damages claimed.

The High Court’s Decision to Uphold the Award in Full:

In February 2020, the Appellants applied to the Singapore High Court to set aside the above three Orders on four grounds under the UNCITRAL Model Law on International Commercial Arbitration (the Model Law) and the Singapore International Arbitration Act (the IAA):

• The Tribunal made the award in breach of natural justice;
• The Appellants were unable to present their case on a number of essential issues;
• The award dealt with matters beyond the scope of the submission to arbitration;
• The arbitral procedure was not in accordance with the parties’ agreement or the Model Law.

In May 2021, the High Court dismissed the set-aside application in full. In upholding the Damages Order, the High Court found, among other things, that the Appellants had chosen not to meet the Respondent’s case on the quantum of reliance loss and the Tribunal was “perfectly entitled to take a middle path between the parties’ opposing all or nothing positions” on damages.

The Appellants appealed the High Court’s decision to the Court of Appeal.

The Court of Appeal’s Decision to Set Aside Part of the Award:

On 18 July 2022, the Court of Appeal dismissed the appeal in respect of the Transfer Order and the Repayment Order but allowed it in respect of the Damages Order. The Damages Order was set aside on the basis that it breached the ‘fair hearing rule’ of natural justice under s 24(b) of the IAA.^[1] According to the Court, a breach of the fair hearing rule could arise from the chain of reasoning which the tribunal adopts in its award.^[2]

The Court held that the Tribunal’s adoption of a “flexible approach” to proof of “arbitrary” and “unproven” damages was not one which the parties had reasonable notice that the Tribunal could adopt. ^[3] The parties would have expected that the Tribunal would only award the Respondent loss that the Respondent could prove.^[4]

Therefore, if the Tribunal found that the Respondent’s evidence of loss was adequate, the parties would have expected the Tribunal to award the Respondent 100% of the loss claimed. Likewise, if the Tribunal found that the Respondent’s evidence of loss was deficient, the parties would have expected that the Tribunal would dismiss the Respondent’s claim for damages in its entirety. ^[5]

In the words of the Court^[6]:

“a reasonable litigant in the appellants’ shoes could not have foreseen the possibility of reasoning of the type revealed in the Award – ie, that the Tribunal, having noted all the deficiencies in the respondent’s evidence, would then go on to adopt a figure of 25% of the amount claimed as being the loss incurred.” [emphasis in original]

The Court also held that the Tribunal’s chain of reasoning did not have a sufficient nexus to the parties’ arguments. In adopting its “flexible approach,” the Tribunal relied on a legal authority that was only cited to by the Respondent in its post-hearing submissions, and was not cited for the proposition relied upon by the Tribunal.^[7]

The Court held that this chain of reasoning formed the basis for the Tribunal’s award of damages. Notably, the Court found that this breach of natural justice prejudiced the Appellants’ rights, as:^[8]

“Had the Tribunal informed the parties of its intention to apply the “flexible approach” in this manner, the appellants would have had the opportunity to inform the Tribunal of its objections to such an approach”

Having found that the Damages Order breached the rules of natural justice, the Court of Appeal concluded that this justified setting aside this Order rather than remitting it to the Tribunal for reconsideration.^[9] The Court explained that a reasonable person in the Appellants’ shoes would not be confident that the Tribunal would be able to reconsider the issue remitted in a fair and balanced manner and would not, even subconsciously, be influenced toward justifying or re-instituting its previous decision.^[10]

The Court of Appeal dismissed the appeal in respect of the Transfer Order and the Repayment Order. In doing so, it made a number of significant observations that provide guidance to the manner in which courts in Singapore (and potentially other Model Law jurisdictions) apply the Model Law and the ICC Rules. These include:

First, an arbitral award cannot be set aside under the Model Law on the basis that it is uncertain, ambiguous or unenforceable.^[11] Nor can an award be set aside on the basis that it is factually impossible or unworkable.^[12] An award that is not enforceable does not breach any implied term under the parties’ arbitration agreement.^[13] Further, an arbitral tribunal will be found to have discharged its duty under Art 41 of the ICC Rules to “make every effort to make sure that the award is enforceable at law” as long as it demonstrates that it has used “every effort” to ensure the enforceability of the award in the jurisdictions wherein the award can reasonably be expected to be enforced.^[14]

Second, the alleged uncertainty, ambiguity and/or unenforceability of the award was a matter that the Appellants could have raised before the arbitral tribunal. By not doing so, the Appellants waived their right to rely on this ground of complaint in set-aside proceedings.^[15]

Third, the ‘no evidence’ rule—i.e. the rule that an award which contains findings of fact made with no evidential basis at all is liable to be set aside for breach of natural justice^[16]—is not grounds for setting aside awards in Singapore. Adoption of the ‘no evidence’ rule would run contrary to the policy of minimal judicial intervention in arbitral proceedings and would invite Singapore courts to reconsider the merits of a tribunal’s findings of fact as though a setting-aside application were an appeal.^[17] It is worth noting that a recent decision of the Hong Kong Court of First Instance cited similar reasoning in rejecting a challenge to an arbitral award that was based on a tribunal’s alleged failure to consider the submissions made on behalf of one of the parties.^[18]

Fourth, an issue which surfaces in the course of an arbitration and which is known to all the parties cannot be said to be outside the scope of “the submission to arbitration” even if it is not part of any memorandum of issues or pleading.^[19] Thus, an arbitral award that deals with such an issue cannot be set aside for not “falling within the terms of the submission to arbitration” under the Model Law.

Fifth, an allegation of inadequate reasons is generally not capable of sustaining a challenge against an award.^[20] A recent decision of the Hong Kong Court of First Instance arrived at a similar conclusion, noting that the reasons that a tribunal provides for its award “do not have to be elaborate or lengthy.”^[21]

For completeness, it was notable that the Court’s judgment did not directly address the High Court’s reasoning. This may be something of a missed opportunity as the High Court had presented credible arguments for why the Damages Order should be upheld.

Comment:

The Court of Appeal’s decision in CEF and CEG v CEH makes clear that while the Singapore courts will not allow set-aside applications that are founded on unjustified procedural complaints, they will continue to carefully scrutinize awards to ensure that they do not violate the rules of natural justice. Where the tribunal adopts an unexpected position in its Award—without providing the parties with an opportunity to address that position— this may violate the rules of natural justice. This is similar to the approach adopted by courts in other leading jurisdictions, such as the U.K.^[22]

In that regard, the Court of Appeal’s decision signals that the ‘pro-arbitration’ approach of Singapore’s courts is multifaceted – it is not merely concerned with minimising judicial intervention but also focused on ensuring the legitimacy of arbitration as a fair and reliable forum for dispute resolution. This is consistent with recent thought leadership in the international arbitration community, which: (1) advocates for a more holistic understanding of what is ‘pro-arbitration’;^[23] and (2) urges courts to distinguish between ‘pure’ procedural complaints and ‘high-level’ due process violations by tribunals.^[24]

Further, the fact that the Court of Appeal declined to accept the ‘no evidence’ rule as grounds for setting aside arbitral awards highlights the commitment of Singapore courts to minimal intervention in the merits of a tribunal’s findings of fact. This policy of minimal judicial intervention is also apparent from the Court’s other findings – such as its rejection of complaints that could have been raised before the tribunal and its rejection of challenges based on the alleged ambiguity and unworkability of the award. It is also in line with the approach adopted by courts in Hong Kong (and in particular, in the recent decision of the Hong Kong Court of First Instance in LY v HW)^[25] in dealing with similar applications.

It is also of interest that the Court of Appeal criticized the Tribunal’s decision to award 25% of the damages sought despite accepting that proof of loss was deficient. There are often concerns among litigants that tribunals will ‘split the baby’ in the quantification of damages. The decision of the Court of Appeal shows that it may be risky for tribunals to do so without proper legal or evidential justification. Further, tribunals may wish to consider providing parties with an opportunity to address such an approach if it may be considered ‘unexpected’ before they make an award. It remains to be seen whether this will fuel ‘due process paranoia’ and have the unintended and undesirable effect of making arbitrations longer and more expensive.