AKN & Anor v ALC & Ors and other appeals [2015] SGCA 18

In AKN v ALC, the Singapore Court of Appeal set out its position on the proper relationship between arbitral tribunals and the courts in reviewing arbitral awards in the matter which concerned the enforceability of an award issued by a three-member tribunal in an arbitration administered by the Singapore International Arbitration Centre (the “SIAC”).

The Court of Appeal emphasised the policy of minimal curial intervention in arbitral proceedings, describing it as a mainstay of the Model Law and the Singapore International Arbitration Act.

Facts leading to arbitration

The dispute between the parties arose between the liquidator (the “liquidator”) of a corporation (the “corporation”), the corporation’s secured creditors (the “secured creditors”) and the purchasers. These parties had entered into an Asset Purchase Agreement (“APA”) whereby the purchasers bought the corporation’s production facility and other related machinery (the “assets”) “free from and clear of all liens of any kind”. Under the APA, the secured creditors undertook to settle all third party legal proceedings in relation to the assets. The APA contained a SIAC arbitration clause designating Singapore as the place of arbitration.

In return for delivering the assets to the purchasers “free from and clear of all liens of any kind”, the secured creditors and the purchasers entered into another agreement, known as the omnibus agreement, providing that the purchasers would issue Notes to the secured creditors and make payments to them on those Notes (“OMNA”). The OMNA did not contain an arbitration clause, providing instead for resolution of disputes in the local courts. After the parties entered into the OMNA, several investment funds (the “Funds”) purchased the Notes and the rights to receive the payments attached to those Notes.

The purchasers subsequently discovered that government taxes in respect of the assets were not paid. The purchasers claimed that this breached the secured creditors’ and the liquidator’s obligation to deliver the production facility and land “free from and clear of all liens of any kind”, constituting a breach of the APA. The purchasers initiated SIAC arbitration against the secured creditors and the liquidator under the APA. The Funds were joined in the arbitration as interested parties.

Arbitration

The main issue at arbitration was whether the obligation to deliver the assets free from encumbrances had been breached. This involved a determination of whether the taxes owed were a type of lien. The arbitral tribunal found that they were and that therefore the failure to clear the taxes constituted a breach of the APA. The tribunal also suspended the purchasers’ payment obligations under the Notes. Finally, the tribunal found that the secured creditors had also breached an obligation to settle the third party legal proceedings claiming ownership over portions of the land on which the production facility was situated, even though the time for performance of this obligation was not yet due.

High Court decision

In the Singapore High Court, the liquidator, secured creditors and the Funds sought the setting aside of the award on the basis that the arbitral tribunal had breached natural justice and had exceeded its jurisdiction. The High Court agreed with the respondents and set the entire award aside based on its finding that the tribunal failed to consider a number of the submissions. The High Court also found that the tribunal had exceeded its jurisdiction in granting a claim which had not been submitted to the arbitral tribunal.

Court of Appeal decision

The Court of Appeal reinstated parts of the arbitral award in accordance with the issues submitted before it.

The Court of Appeal found that the court below had erred in dealing with the issues concerning the obligation to deliver clean title to the assets, as its inquiry should have been restricted to whether the arbitral tribunal had committed a breach of natural justice in its resolution of these matters. Instead, the judge seemed to have engaged with the merits of the underlying dispute. The court said that this was impermissible.

Commitment to minimal curial intervention

A critical foundational principle in arbitration is that the parties choose their adjudicators. Central to this is the notion of party autonomy. Just as the parties enjoy many of the benefits of party autonomy, so too must they accept the consequences of the choices they have made. The courts do not and must not interfere in the merits of an arbitral award and, in the process, bail out parties who have made choices that they might come to regret, or offer them a second chance to canvass the merits of their respective cases. This important proscription is reflected in the policy of minimal curial intervention in arbitral proceedings, a mainstay of the Model Law and the Singapore International Arbitration Act.

The court reiterated that the grounds for curial intervention are narrowly circumscribed and generally concern 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. It follows that, from the courts’ perspective, the parties to an arbitration do not have a right to a “correct” decision from the arbitral tribunal that can be vindicated by the courts. Instead, they only have a right to a decision that is within the ambit of their consent to have their dispute arbitrated, and that is arrived at following a fair process.

Natural justice

It was contended that the arbitral tribunal had breached the rules of natural justice by, inter alia, allowing the purchasers to suddenly raise a new claim, depriving the other party of ample time and opportunity to prepare its own evidence and response to the new claim.

The Court of Appeal explained that there is an important distinction between failure even to consider an argument and “an arbitral tribunal’s decision to reject an argument (whether implicitly or otherwise, whether rightly or wrongly, and whether or not as a result of its failure to comprehend the argument and so to appreciate its merits)”. The former is a breach of natural justice and may result in the setting aside of an award; the latter is an error of law and does not, by itself, give rise to grounds for setting aside an award.

The Court of Appeal therefore rejected several of the High Court’s findings on the grounds that the tribunal had considered the arguments raised by the parties but rejected them. In contrast, the Court of Appeal upheld the High Court’s finding that the tribunal acted in breach of natural justice by basing its damages findings on “loss of opportunity” when the parties had only argued “loss of profits” damages.

Excess of jurisdiction

Turning to the High Court’s finding that the arbitral tribunal had acted in excess of jurisdiction, the Court of Appeal noted that “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.”

The court found that the arbitral tribunal exceeded its jurisdiction by suspending the purchasers’ payment obligations under the Notes as the suspension of payments issue fell under the OMNA and was therefore beyond the scope of the arbitration agreement (which is in the APA). The court further held that the tribunal’s finding that the Funds were liable to the purchasers under the APA was in excess of jurisdiction because the Funds were not parties to the APA and did not owe any contractual obligations under it.

Judgment

For the reasons above, the Court of Appeal partially reinstated the arbitral award.