Sanctity of an arbitration award: When does a breach of natural justice tip the balance? - A case study of ASG V ASH [2016] SGHC 130

by Dentons
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Overview

The plaintiff applied to set aside three arbitral awards. The first was awarded on the merits which was challenged on the basis that the arbitrator had totally failed to consider or understand the plaintiff’s evidence and submissions and therefore, there was a breach of natural justice which prejudiced the plaintiff. The second and third arbitral awards were challenged on the basis that both had been made functus officio – the arbitrator had dealt with the issue of costs in the first arbitral award, but realised he had mistakenly done so and therefore withdrew it in the second arbitral award, and later issued a third arbitral award to deal with costs.

The Singapore High Court refused the plaintiff’s application to set aside the first arbitral award but allowed the second and third arbitral awards to be set aside because they were issued functus officio. In doing so, the Singapore High Court once again emphasised that a generous approach must be taken towards reading arbitration awards to avoid undermining the purpose of arbitration as an alternative dispute resolution mechanism.

Relevant facts

The defendant was a developer undertaking a substantial construction project. The plaintiff was the contractor engaged by the defendant to construct the foundations for the same project. Under the contract, the plaintiff was obliged to complete the works within six months, i.e. on or before 23 June 2008, failing which it would be liable to pay the defendant liquidated damages at a rate of S$135,000 per day.

On 27 December 2007, the plaintiff submitted a baseline programme to architects and engineers, and was required to wait for their approval before commencing construction. Although approval was given by email on 6 February 2008, the final stamp of approval was only given on 18 February 2008. The plaintiffs argued they were entitled to a 12-day extension based on this (the First Extension). On 22 December 2008, the architects granted the plaintiff a 75-day extension of time in total. On 1 April 2009, the plaintiff issued a formal notice of dispute to the architects, taking the position that it was entitled to a further 14-day extension based on the additional rock excavations required (the Second Extension).

The defendant later imposed liquidated damages on the plaintiff in the sum of approximately S$3.5 million in view of the late completion of works after taking into account the extension of time granted to the plaintiff. The parties subsequently resorted to arbitration, where the plaintiff sought relief, among others, that it was entitled to an extension of time of a further 26 days (comprising the First Extension and the Second Extension).

The arbitrator dismissed the plaintiff’s claim of the First and Second Extensions (the Award). In doing so, the arbitrator also made an order on costs despite both parties having agreed during the oral closing submissions to address the issue of costs separately. On objections being made to the costs order, the arbitrator withdrew his earlier order on costs by issuing a second arbitral award (the Correction Arbitral Award). The arbitrator directed the parties to file and serve written submissions on the costs of the arbitration and following this, issued a further award on costs (the Costs Award). 

Issues before the High Court

The plaintiff applied to set aside the Award on the grounds of a breach of the rules of natural justice in connection with the making of the award which prejudiced the plaintiff’s rights. The plaintiff argued that the arbitrator had failed to understand the plaintiff’s evidence and submissions on this issue, especially with regard to the Second Extension. This resulted in prejudice suffered by the plaintiff because, if the arbitrator had considered the issue, he would have awarded the plaintiff an additional 21-day extension of time.

The plaintiff’s arguments for a dismissal of the Correction Award and the Costs Award were based on the fact that the arbitrator had become functus officio upon giving his verdict on costs and therefore did not have the jurisdiction to issue further decisions in this respect.

The High Court’s decision

The High Court allowed the plaintiff’s application in respect of the Correction Award and the Costs Award but dismissed the plaintiff’s application to set aside the Award. In making its decision, the court reviewed the importance of balancing the integrity of the arbitral process and the rules of natural justice.

The Award

The High Court held that there was no breach of natural justice. In coming to its decision, the court relied on the principle in Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86 that to challenge an arbitration award as having contravened the rules of natural justice, a party must establish the following:

  1. the rule of natural justice breached;
  2. how it was breached;
  3. causal link between the breach and award; and
  4. prejudice of the party’s rights.

The High Court affirmed that courts will generally not readily accede to an application to set aside an award for breach of natural justice. Underpinning this rationale is the policy of minimal curial intervention, which is characterised by a desire to “support, and not to displace, the arbitral process” (Tjong Very Sumito and others v Antig Investments Pte Ltd [2009] 4 SLR(R) 732).

The High Court also reiterated the importance of recognising that parties have chosen arbitration as their dispute resolution process, and within that process, have chosen their own adjudicators. Just as they accept the benefits of the party autonomy bargained for, so must they accept their consequences (AKN and another v ALC and others and other appeals [2015] 3 SLR 488 (AKN)). Thus, the courts will not interfere in the merits of an award to rescue parties who have made forensic choices that they might regret, or offer them a second chance to canvass the merits of their cases.

The arbitrator’s duties to deal with arguments presented and attempt to understand the parties’ submissions were also discussed. It was emphasised that a tribunal does not have to deal with every issue raised by the party. In doing so, the High Court considered Prakash J’s observations in SEF Construction Pte Ltd v Skoy Connected Pte Ltd [2010] 1 SLR 733: Natural justice requires that the parties are heard; it does not require that they be given responses on all submissions made. The court also distinguished between an arbitral tribunal’s decision to reject an argument (regardless of the reasons) and its failure to consider that argument. Only the latter amounts to a breach of natural justice; the former is an error of law (which is not ground to set aside the decision). Therefore, the award need only show that the tribunal applied its mind to the critical issues and arguments. Even if the tribunal comes to an inexplicable decision because it comprehended the issue erroneously, it does not necessarily indicate a breach of natural justice. Thus, the court will only infer that a tribunal has failed to consider an important issue if the inference is “clear and virtually inescapable” (AKN).

The High Court disagreed that the arbitrator had failed to consider the issue of the Second Extension despite extensive submissions tendered by the plaintiff.

Essentially, the plaintiff’s case was that the arbitrator had totally misunderstood the thrust of its case on the Second Extension. The plaintiff’s argument wasthat the total extension of time granted before the commencement of arbitration was 15 days, and the plaintiff was seeking a further 14 days of extension of time, making a total of 29 days. In the Award, the arbitrator rejected the plaintiff’s claim on the basis that the plaintiff had already been granted a total of 39 days of extension of time before the arbitration started, and this was more than what he thought the plaintiff was entitled to; therefore he rejected the claim for further extension of time. As can be seen, there was a difference between the plaintiff and the arbitrator on the number of days of extension of time that had been granted before the arbitration started. The arbitrator’s position was what had been the common position between the parties until the closing submission stage when the plaintiff changed its position. The arbitrator was entitled to reject the plaintiff’s late change in position and had arrived at the decision he made. However, this was not explained  in the Award which in turn gave the impression that he had not even considered the plaintiff’s arguments on this point.

As mentioned above concerning the AKN case, the court will only infer that a tribunal has failed to consider an important issue if the inference is “clear and virtually inescapable”. Here, although the arbitrator had not set out his reasoning on the issue, the High Court found that the evidence was not incontrovertibly indicative of the arbitrator failing to consider the plaintiff’s submissions. There were several plausible reasons to explain the arbitrator’s lack of reasoning, some of which were not based on a failure to consider the issue. These included the arbitrator finding that the plaintiff’s submissions were so unconvincing that analysis of it was unnecessary. Consequently, the conclusion that there was a failure to consider the issue was not clear and virtually inescapable. The plaintiff therefore failed to persuade the court to set aside the Award on this ground.

Prejudice

Additionally, the High Court found that the plaintiff had not suffered any actual or real injustice if indeed the arbitrator had filed to consider the plaintiff’s submission on the Second Extension. The plaintiff must show that the breach of natural justice (ie the failure to consider) could reasonably have made a difference to the arbitrator’s reasoning (L W Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd and another appeal [2013] 1 SLR 125). Therefore, the crucial matter for the court was whether the material could reasonably have made a difference to the arbitrator, rather than whether it would necessarily have done so.

On the facts, the High Court found that even if the arbitrator had failed to apply his mind to the plaintiff’s case on this issue, the correspondence between the plaintiff and the architects were so overwhelmingly against the plaintiff that the arbitrator would not have decided differently had he indeed applied his mind. Therefore, the outcome would not have differed in any manner. The High Court therefore refused to set aside the Award.

The Correction Award and the Costs Award

In respect of the Correction Award and the Costs Award, the High Court held that the arbitrator was prohibited from withdrawing the costs orders in the Award, much less to issue fresh costs orders. This is because upon rendering a comprehensive decision on all matters relating to the costs of arbitration, the arbitrator became functus officio. Thus, he could not revisit the issue of costs as he no longer had the jurisdiction to do so. The plaintiff’s application to set aside the Correction Award and the Costs Award was therefore allowed.

Conclusion

The High Court’s decision clarifies the generous manner in which courts read an award so as to remedy only meaningful breaches of rules of natural justice which actually cause prejudice. It also further demonstrates the need to recognise the autonomy of the arbitral process by encouraging finality, and that parties who opt for arbitration acknowledge the risk of having a limited right of recourse to the courts. Parties must therefore be aware of the high bar they must overcome in seeking to set aside an arbitration award.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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