The Singapore Court of Appeal dismissed an appeal against a judgment of the High Court setting aside an arbitral award for breach of natural justice. Though this decision relates to an arbitration conducted under the rules of the Singapore Chamber of Maritime Arbitration, the findings have application in arbitrations conducted under the SIAC Rules or under the UNCITRAL Model Law on International Commercial Arbitration.
The Court of Appeal ruled that the sole arbitrator’s decision to proceed on a documents-only basis (a) was not a procedural choice open to the arbitrator in the absence of an agreement on the issue between the parties, and (b) constituted a breach of natural justice as the gating of the respondent buyer’s witnesses caused real prejudice to the buyer’s ability to present its case. The Court of Appeal further noted that the exercise of a tribunal’s discretionary powers to limit witness evidence where allowed was in any event subject to an overriding obligation to ensure that the arbitration was conducted in a just manner and that fundamental rules of natural justice were upheld.
An Indian company (the Buyer) entered into an agreement with a Singapore-based third party (the Seller) for 20,000 metric tonnes (MT) of coal (Coal) at US$74 per MT, to be delivered in January 2015. The relevant terms of the agreement:
- Required disputes to be resolved by arbitration governed by the Rules of the Singapore Chamber of Maritime Arbitration (3rd Edition, 2015) (the SCMA Rules).
- Allowed the agreement to be assigned.
- Required that any amendment had to be in writing and contained an entire agreement clause militating against oral variations.
Problems arose when the bank to whom the Seller had assigned all its receivables (the Bank) sent the Buyer a bill of exchange in January 2015 for payment of US$1,480,400 by 22 June 2015. Though the Buyer’s bank sent a SWIFT message acknowledging the amount and due date, no payment was ever made.
The Bank requested payment multiple times between July and October 2015. The Buyer responded twice and requested more time to pay in each response. The Buyer’s position changed suddenly in October 2015, when it alleged to have received only part of the agreed quantity and stated an intent to pay US$61 per MT due to falling prices for coal.
The parties’ representatives met in December 2015 to discuss the issues (the December meeting). At the December meeting, four people represented the Buyer while the Seller had two representatives present. A seventh person, from a trade credit insurer, accompanied the Seller’s representatives. What transpired at the December meeting is at the heart of the eventual arbitration and the case before the Singapore courts. According to the Buyer, the parties agreed to a reduced price of US$61 per MT while the Seller disputed that any such agreement was ever reached.
A. Commencement and procedural delays by the Buyer
The Bank commenced arbitration on 21 October 2016 to recover the outstanding sums plus interest from the Buyer. A sole arbitrator was appointed on 25 April 2017. An initial challenge to the arbitrator’s jurisdiction by the Buyer was unsuccessful and the Buyer took that decision to the Indian courts, which delayed the Buyer’s filing of its pleadings in response to the Bank’s claim submissions.
However, before the Indian proceedings were decided, the Buyer informed the arbitrator that it intended to contest the Bank’s claim on its merits, albeit under protest as to jurisdiction. The arbitrator gave the Buyer a 14 day extension to file its submissions along with its list of witnesses, if any. The arbitrator also directed the parties to “review and agree on the necessity of an oral hearing. Should the parties not be able to agree that the decision should be based on documents only then pursuant to SCMA Rule 28 we will schedule a hearing.”
The Buyer eventually submitted its pleadings (a day late) and a list of seven named witnesses. Six of the witnesses were people the Buyer claimed had attended the December meeting.
B. Necessity of an oral hearing
The Bank submitted that an oral hearing was not needed as the issues turned solely on contractual interpretation and the Buyer had failed to explain the reason it needed to call any of the witnesses. In the alternative, the Bank proposed that if a hearing was held, it should be to present oral submissions only and not to take oral evidence from witnesses. This, the Bank argued, was in accordance with Rule 28.1 of the SCMA Rules (Rule 28.1).
The arbitrator twice sought explanations from the Buyer as to the necessity of calling the witnesses. The Buyer responded each time with an explanation that the arbitrator deemed insufficiently detailed. On 1 June 2018, the arbitrator directed the parties to submit detailed written statements from each named witness in order for him to decide whether an oral hearing was necessary. He also asked each party to submit a brief on what constituted a ‘breach of natural justice’ under Singapore law. This sparked a series of emails between the arbitrator and the Buyer in the course of which:
- The Buyer asserted that the requirement for witness statements to decide whether to hold an oral hearing was a breach of natural justice and that Rule 28.1 entitled the Buyer to call witnesses which stated that:“[u]nless the parties have agreed on a documents-only arbitration or that no hearing should be held, the Tribunal shall hold a hearing for the presentation of evidence by witnesses, including expert witnesses, or for oral submissions.”
- The arbitrator maintained his request for the witness statements, arguing that he was entitled to ask for them under the SCMA Rules and stated that the Buyer’s failure to submit such statements would be deemed a waiver of “any right to submit witnesses in the event of an oral hearing”.
On 8 July 2018, the arbitrator directed that, in the absence of an agreement between the parties to proceed on the basis of a documents-only arbitration, a hearing would be held for oral submissions but not to take any witness evidence, oral or written. The reason given for the exclusion of witness evidence was the Buyer’s failure to submit the requested witness statements or evidence as to the substantive value the witnesses would add.
C. Hearing and award
The day before the hearing, the Buyer asserted that denying witness examination was “a violation of [the] principles of natural justice and also against the principles of [a] full and fair hearing”. The Buyer also informed the arbitrator that it would not, given the arbitrator’s decision on witnesses, participate in the hearing.
Regardless of the Buyer’s protestations, the hearing was conducted on 21 August 2018. The Buyer did not join and no witness testimony was presented. The Bank made oral submissions and presented no new or additional documents, evidence or submissions. The arbitrator issued an award on 16 November 2018 finding in favour of the Bank on the grounds that:
- The Coal had been delivered by the Seller and there was no documentary evidence of any shortfall.
- There was no written evidence of either party’s intent to amend the contractual price at any time and the Buyer’s bank had acknowledged the debt owed by the Buyer on the basis of the contractual price.
- In any event, there was no evidence that the formalities regarding amendments had been complied with.
The High Court sets aside the final award
Following the award by the arbitrator, the Buyer applied to the Singapore High Court to set aside the award on the grounds that there had been a breach of the rules of natural justice. The judge ruled in the Buyer’s favour, finding that there had indeed been a breach of the rule that parties must have “full opportunity” to present their case.
The judge also noted that the arbitrator’s decision was contrary to Rule 28.1. To this, the Bank argued, unsuccessfully, that Rule 28.1 was to be read disjunctively; i.e., the arbitrator could decide whether to hold a hearing for the presentation of evidence or only for oral submissions as he had done.
The judge decided the case in the Buyer’s favour and set aside the award, holding that:
- Rule 28.1 did not empower the arbitrator to proceed on a documents-only basis where the parties had not agreed to do so. Rule 28.1 also did not allow the arbitrator to reject any witness evidence and/or allow oral submissions to stand in for the presentation of witness evidence.
- The arbitrator’s decision and resulting breach of natural justice rules had caused real prejudice to the Buyer’s interests as its case hinged on an alleged oral agreement and excluding witness evidence was unfair in this context.
- Though Rule 25.1 of the SCMA Rules gave the arbitrator broad case management powers, the exercise of those powers was subject to the rules of natural justice and the obligation to conduct proceedings in a just manner could not be subordinated to the need for efficiency.1
- Finally, neither amendments to, nor the full provisions of, the agreement foreclosed the Buyer’s defence as the parties could have agreed to dispense with those formalities at the December meeting.
The Court of Appeal upholds the order to set aside the award
The Bank appealed to the Court of Appeal (the Court), where the primary issue was whether there had been a breach of natural justice in the making of the award. The Court held that the test to satisfy in this regard was the four-part test in Soh Beng Tee.2 Under that test, applicants seeking to have an arbitral award set aside for breach of a rule of natural justice must establish:
- which rule of natural justice was breached;
- how that rule of natural justice was breached;
- the connection between the breach of that rule and the making of the award; and
- the manner in which the breach of that rule prejudiced the applicant’s rights and, specifically, whether the material not presented could reasonably have made a difference to the arbitrator.3
The Court held that the test was satisfied. In summary, the Court held as follows:
A. The rule of natural justice was the right to have “full opportunity” to present one’s case
The relevant rule of natural justice was the right to have “full opportunity” to present one’s case.4 In deciding whether a party was given full opportunity to present its case, the Court had to consider what was reasonable, fair and efficient.5 That required asking whether the arbitrator’s decision was “within the range of what a reasonable and fair-minded [arbitrator] in those circumstances might have done”.6 The assessment itself was guided by two principles set out in Triulzi,7 namely:
- the arbitrator needed to have known of the alleged breach of natural justice at the material time; and
- the arbitrator had to be accorded a margin of deference in procedural matters.
B. The rule of natural justice was breached by the manner in which the arbitrator decided to proceed as regards the oral hearing and the gating of the Buyer’s witnesses
The Court held that the arbitrator’s actions fell outside the range of what a reasonable and fair-minded arbitrator might have done in the circumstances because:
- Rule 28.1 did not entitle the arbitrator to choose the type of hearing in the absence of an agreement between the parties or impose a condition that the Buyer had to prove the “substantive value” of the witness evidence.
- The Buyer’s explanations as to the necessity of witness evidence had sufficiently explained the purpose and importance of the witnesses; i.e., their evidence would prove what transpired in the December meeting. Moreover, the Buyer’s refusal to furnish the witness statements on request from the arbitrator was reasonable, as the arbitrator had no right to request the statements as a pre-condition to deciding as to the need for an oral hearing.8
- The arbitrator’s discretionary power under Rule 25.1 of the SCMA Rules to limit oral examination of witnesses had to be exercised to ensure the “just, expeditious, economical and final” disposal of the matter. In this regard, the arbitrator had alternative procedural options, such as limiting the time for individual witnesses.
- The arbitrator erred in suggesting that the decision to hold a hearing for witness testimony would be determined based on the Buyer’s witness statements, which had to be submitted beforehand.
Though courts would accord a margin of deference to a tribunal’s procedural decisions, doing so in in light of a serious breach of the rules of natural justice would “reduce the content of those rules to a vanishing point”.
C. The breach of natural justice did affect the award
The Court found there was a causal link between the arbitrator’s actions and the making of the award. The Court held that the arbitrator had misapprehended the scope of his powers under the SCMA Rules.
Though the Buyer’s conduct was not ideal, it had not violated any SCMA Rule and was not the cause of the breach. The arbitrator’s direction was to gate all seven of the Buyer’s witnesses, six of whom the Buyer alleged were at the December meeting. In disallowing the witness evidence, the arbitrator breached the fair opportunity rule and found the Buyer liable for the entire sum claimed by the Bank.
Therefore, this breach of the fair hearing rule directly affected the award.
D. The breach gave rise to real prejudice
Establishing prejudice requires that the denial of evidence had “a real as opposed to a fanciful chance of making a difference to the arbitrator’s deliberations”.9
As the Buyer’s defence rested on what transpired at the December meeting, evidence of witnesses alleged to have been at the December meeting was core to that defence. The Court held that including that evidence was such that it could have materially changed the arbitrator’s deliberations and conclusion.
The Court noted that the provisions requiring amendments to be made in writing were no real hurdle as the parties could have agreed to dispense with those formalities at the December meeting.
E. The Court’s conclusion
With all four limbs thus satisfied, the Court held that there had been a breach of natural justice and the order of the judge setting aside the award was appropriate. The Bank’s appeal was dismissed.
Why is this judgment important to you?
- The decision usefully sets out the correct interpretation of Rule 28.1 of the SCMA Rules and clarifies that an arbitration under the SCMA Rules cannot proceed on a documents-only basis unless that is agreed by both parties.
- We note that Rule 28.1 of the SCMA Rules is similar in substance to Rule 24.1 of the SIAC Rules10 and Article 24 of the Model Law.11 As such, this decision has import in arbitrations governed by those rules. In contrast, we note that Rule 14(b) of LMAA Terms 2017 allows tribunals to decide the extent of oral hearings in the absence of an agreement between the parties to the arbitration.
- Applications to dispose of witness testimony and, therefore, to witness gate should be taken with care given the possibility that this may form a ground to set aside any award rendered.
- Whether provided for explicitly or not, an arbitral tribunal’s power to conduct arbitrations in the manner it deems to be most efficient is one that courts do not normally interfere with. This case is a rare and useful illustration of the circumstances in which the courts may intervene with a tribunal’s procedural decisions for a breach of natural justice.
- The case highlights, in particular, the boundaries within which tribunals must exercise their discretionary powers of case management when faced with a party whose conduct is dilatory. The Court was clear that even in those circumstances the tribunal must always ensure its decision is within the rules governing the arbitration and uphold the fundamental rules of natural justice.