Setting aside an international arbitration award based on deficient pleadings

Transcription

1 Setting aside an international arbitration award based on deficient pleadings DARIUS CHAN * Kempinski Hotels SA v PT Prima International Development [2011] SGHC 171 If it isn t pleaded, you can t consider it. That in a nutshell appears to be the holding established recently by the Singapore High Court in Kempinski Hotels SA v PT Prima International Development [2011] SGHC 171 ( Kempinski ). That case saw the setting aside of three related international arbitration awards on the basis that the tribunal had gone beyond the scope of matters submitted to it by making a decision based on an issue not formally pleaded. Kempinski was released six days after the Singapore Court of Appeal s decision in CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33 ( CRW ). CRW is the first reported setting aside of an international arbitration award by the Court of Appeal between 2001 to date. Both cases took place amidst a recent flurry of judicial activity in the Singapore arbitral sphere, in tandem with the rise of arbitration as the preferred mode of dispute resolution among commercial parties doing business internationally. This note poses two questions in the aftermath of Kempinski and examines the role of pleadings in international arbitration. Facts and decision It is necessary to examine the chronology of events in some detail to assess the adequacy of the pleadings at hand. The applicant (Kempinski Hotels) was a Swiss company which contracted to manage a hotel of the respondent (an Indonesian company called PT Prima) in Jakarta. The Indonesian Ministry of Tourism subsequently issued three decisions requiring the contract to be performed by an Indonesian company. Although certain proposed amendments to the contract were then raised between the parties, no amendments were effected nor did Kempinski Hotels change the entity operating the hotel to an Indonesian company. After some time, following an alleged material breach by Kempinski Hotels, PT Prima purported to terminate the contract and Kempinski Hotels commenced SIAC arbitration proceedings in 2002 alleging wrongful termination. The contract was governed by * Associate, Wilmer Cutler Pickering Hale and Dorr LLP, London. LL.B. (First), NUS, LL.M. (International Business Regulation, Litigation and Arbitration), NYU. Advocate & Solicitor, Supreme Court of Singapore, Attorney & Counselor at Law, State of New York. 1

2 Indonesian law. PT Prima lodged its defence, defending the legality of its termination and also mounted counterclaims for alleged breaches of contract by Kempinski Hotels. PT Prima was subsequently given permission to amend its defence to include a plea of supervening illegality, viz, the contract had become illegal as a result of the Ministry s decisions. The issue of illegality was heard first as a preliminary issue. The tribunal, consisting of a sole arbitrator, released its first award relating to the effect of the Ministry s decisions, by holding, inter alia, that the contract remained valid but had become incapable of performance in the manner stipulated. Subsequently, the tribunal identified several outstanding issues. Following cross-examination of each party s experts and written submissions, the tribunal released a second award. The second award held that there were alternative methods of performance consistent with the Ministry s decisions. Consequently, any supervening illegality did not necessarily bar Kempinski Hotels from bringing a claim for damages if Kempinski Hotels could show that the contract was wrongfully terminated. According to PT Prima, after the release of the second award, it learned that Kempinski Hotels had, prior to the release of the second award, entered into a new management venture, in full compliance with the Ministry s decisions, to provide hotel management services in respect of another hotel located within a one mile vicinity of PT Prima s hotel. PT Prima wrote to the tribunal to seek clarification on the first and second awards in light of this information. In that letter, PT Prima explained what it had found out and sought clarification on whether Kempinski Hotels actions were in breach of good faith. The tribunal held a conference to decide how the arbitration should proceed. After the conference, the tribunal directed Kempinski Hotels to provide specific disclosure on four questions concerning the new management venture. Kempinski Hotels issued its response to those queries. PT Prima, who was not satisfied with that response, sought specific discovery of the documents relating to the new venture. The tribunal made another order directing Kempinski Hotels to disclose certain information relating to the new management venture. Kempinski Hotels subsequently put in its response to the order for disclosure. It stated that the new venture was irrelevant to the issue of liability in respect of PT Prima s termination of the contract and sought directions for the further conduct of the arbitration. Thereafter, the tribunal observed in a letter, inter alia, that some of the four questions posed were unanswered and directed written submissions on the disposition of the dispute to be tendered. After submissions were tendered, the tribunal requested for further submissions on the issue of the effect of the new management venture on the second award s holding that there was a possibility of the performance of the contract by alternative means. Parties tendered further submissions. The tribunal subsequently wrote to invite expert opinions from the respective legal experts on whether the conduct of the parties after the date of the alleged termination of the contract was relevant to the arbitration. After the experts tendered their opinions, the tribunal wrote, inter alia, that the tribunal will make an order on the issues that have been raised as to the effect of the new management venture. The tribunal subsequently published its third award. It held that (a) the new management venture was inconsistent with the contract; (b) the methods of performance that remained open after the Ministry s decisions were no longer possible; and (c) the possibility of damages remained for the period between the date of alleged termination of the contract and the date the methods of performance ceased being possible. The tribunal requested submissions on damages. 2

3 PT Prima duly filed the relevant submissions. Kempinski Hotels took out proceedings before the Singapore High Court to set aside the third award instead. Thereafter, PT Prima requested the tribunal to make its determination on the issues of damages payable. Kempinski Hotels submissions however did not contain any argument on damages. The tribunal issued a fourth award holding that, because no steps were taken to make performance of the contract lawful, an award of damages to Kempinski Hotels was not possible. The arbitrator also made a costs awards after requesting for submissions on costs. Kempinski Hotels took out similar proceedings to set aside the fourth and costs awards as well. Before the Singapore High Court, Kempinski Hotels sought to set aside the awards on five grounds: (a) Whether the tribunal was functus officio in issuing the third and fourth awards after determining the matters in the first and second awards; (b) Whether, even if the tribunal was functus, Kempinski Hotels had waived its right to object; (c) Whether PT Prima should have been barred by issue estoppel from raising the new management venture after the second award was made; (d) Whether the third, fourth and costs awards should be set aside on the basis that they dealt with an issue that had not been formally pleaded; and (e) Whether the tribunal breached rules of natural justice, through bias and a failure to give parties adequate notice and an opportunity to be heard. Kempinski Hotels failed on all but the pleading point which forms the focus of this note. The learned Judge s reasoning can be summarised as follows. Article 34(2)(a)(iii) of the Model Law (set out in the First Schedule of Singapore s International Arbitration Act) provides that an arbitration award can be set aside when the matters decided by the tribunal were beyond the scope of the submission to arbitration. To determine whether matters in an award were within or outside the scope of submission to arbitration, a reference to pleadings would usually have to be made. An arbitrator is bound to decide the case in accordance with the parties pleadings, and the arbitrator is not entitled to go beyond the pleadings and decide on points which the parties have not given evidence or submissions. The learned Judge was of the view that, in the circumstances, PT Prima should have applied to amend its pleading to include the issue of the new management venture. This would have identified properly to Kempinski Hotels the case that it had to meet and reply to, and which would have enabled Kempinski Hotels to put in the necessary response and evidence. The tribunal would then have been able to take evidence on the new management venture and the impact it had on the contract, to establish the facts necessary to decide whether the new management venture made it impossible for Kempinski Hotels to perform the contract and/or claim damages. Comment A question of prejudice Two questions can be posed. We start with the more intuitive question: what was the prejudice to Kempinski Hotels here? 3

4 If one accepts as alluded to by the learned Judge that pleadings exist to permit no surprises on the relevant issues so as to allow a party proper opportunity to meet the case against it, intuitively it is difficult to see where the surprise or prejudice to Kempinski Hotels was in this case. After the issue of the new management venture was raised by PT Prima and the Tribunal had made directions for specific disclosure on that issue, the parties tendered not one but two rounds of submissions and one round of further expert opinions before the Tribunal published its third award. 1 That must have given Kempinski Hotels ample opportunity to ventilate its position concerning the new management venture, even if the matter had only surfaced after the first award was published. Indeed if PT Prima s raising of the new management venture had caught Kempinski Hotels by surprise, the learned Judge would have simultaneously found a breach of natural justice by the tribunal for failing to give Kempinski Hotels a proper opportunity to meet the case against it. Yet far from contending so, one of Kempinski Hotels complaints concerning natural justice was that the tribunal had failed to consider Kempinski Hotels defences relating to the new management venture. Implicit in this submission is an admission that the opportunity to raise arguments concerning the new management venture was given and was taken. Consequently, the Judge s holding seems to be premised not upon what one would typically expect to be the substance of a pleading point, viz, that Kempinski Hotels had been prejudiced by surprise. Rather it appears to be premised upon form, viz, that the new management venture cannot be considered by the tribunal only because it had not been formally or properly raised as a matter within the scope of submission to arbitration. Preferring form when there is little merit to the substance of an objection is again not an intuitively attractive proposition. The aim of having pleadings needs little introduction: pleadings define the issues to give the other party fair notice of the case which it has to meet and also enable the relevancy and admissibility of evidence to be determined. 2 The importance of proper pleadings is undeniable. But in so far as fair notice had already been given and taken by the tendering of multiple rounds of submissions, having the result of a case turn on the precise state of pleadings may be, as other authorities have vividly noted, 3 putting the cart before the horse. That must be so, whether in litigation or arbitration. If this dispute had been litigated, it may not be farfetched to hypothesise the following response to Kempinski Hotels objection midway through the hearing that the new management venture had not been pleaded. Once the court is satisfied that the new management venture is relevant to the issues at hand, the court is likely, subject to any prejudice that cannot be compensated by costs, to allow Kempinski Hotels the necessary time to respond to that allegation accordingly (through the taking of evidence and/or submissions), and thereby allow all the relevant facts to be before the court in order to reach a just result. The same principle and practice applies in arbitration. Should a court, having all the relevant evidence and submissions before it, then decide against Kempinski Hotels because of the new management venture, it would perhaps be difficult to imagine an overruling by the appeal court on the basis that the new management venture had not been 1 Kempinski at [17] [23]. 2 See Bullen & Leake & Jacob s Precedents of Pleadings (16th ed, 2008), at The day has well passed when decisions are based on the state of the pleadings, irrespective of the facts or justice, per Millhouse J in State Government Insurance Commission v Sharpe (1996) 126 FLR 341 at 344. But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other on issues fairly fought out, it is impossible for them to hark back to the pleadings and treat them as governing the area of contest, per Issacs and Rich JJ in Gould v Mount Oxide Mines Ltd (1916) 22 CLR 490 at

5 properly pleaded. A fortiori in the case of an international arbitration award, where a curial court typically does not engage in substantive review. In this connection, the sole authority cited in Kempinski may speak against the position it was purportedly cited for. The decision, Ng Chin Siau v How Kim Chuan [2007] 2 SLR(R) 789, was adopted by Singapore Arbitration Legislation Annotated by Merkin and Hjalmarsson in the following terms reproduced in the judgment: 4 Where an arbitration is conducted on the basis of Model Law, art. 23, the arbitrator is bound to decide the case in accordance with the parties pleadings, and he is not entitled to go beyond the pleadings and decide on points on which the parties have not given evidence and have not made submissions. [emphasis added] This principle is incontrovertible but the part emphasised appears to have been neglected. Specific disclosure concerning the new management venture was ordered and rounds of submissions were made. Kempinski Hotels itself admitted the existence of the new management venture. Kempinski Hotels contested the relevancy of the new management venture, 5 but that was presumably rejected by the tribunal. In these circumstances, it is not surprising that it is difficult to locate from the judgment what prejudice Kempinski Hotels actually suffered from the state of the pleadings. Indeed it does not appear that Kempinski Hotels raised any. If no prejudice had been suffered, the court has the discretion not to set aside an award even if any of the grounds for setting aside are established. 6 We turn now from legal intuition to legal principle and practice. A question of principle and practice The second question that can be posed is: can it be said that the new management venture falls within the scope of matters submitted to arbitration? We focus on the third and fourth awards since the costs award was but a consequence of the former two. Let us start with the relevant statutory provision in Art 34(2)(a)(iii) of the Model Law. The Court of Appeal in CRW cited its earlier decision in PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 ( Asuransi ) for the two-stage assessment the court has to embark upon when considering Art 34(2)(a)(iii). Specifically, the court has to determine: 7 (a) first, what matters were within the scope of submission to the arbitral tribunal; and (b) second, whether the arbitral award involved such matters, or whether it involved a new difference outside the scope of the submission to arbitration and accordingly irrelevant to the issues requiring determination. Article 34(2)(a)(iii) with the specific expression submission to arbitration used therein traces its lineage back to Art V(1)(c) of the New York Convention and Art 2(c) of the 1927 Geneva Convention. 8 The report of the Drafting Committee of the New York Convention explained that: 4 Kempinski at [56]. 5 Kempinski at [19]. 6 CRW at [100]. 7 The test was also applied in Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd [2010] 3 SLR 1 per Prakash J. 8 Howard M. Holtzmann & Joseph E. Neuhaus, A Guide To The UNCITRAL Model Law on International Commercial Arbitration: Legislative History And Commentary, at

6 the expression submission to arbitration was used in a broad sense, and was intended to include not only an arbitration clause in a contract, but also a specific compromis. 9 [emphasis added] This could be read to mean that a matter is properly within the scope of arbitration as long as it falls within an arbitration clause in a contract or a compromis (which can be defined for present purposes as a submission agreement to arbitrate after a dispute arises). A literal reading of the equally authentic French text of the New York Convention supports this reading. When literally translated, the French text catches a difference not contemplated by the submission agreement or not falling within the terms of the arbitral clause. If one applies a literal reading of the French text of the New York Convention to the present case, there appears to be nothing to suggest that the arbitration agreement in this case precluded the tribunal from considering the new management venture. Nonetheless, it has been suggested that if such a reading of Art V(1)(c) was intended, the Drafting Committee would have simply used the expression arbitration agreement which it used in Art V(1)(a) of the New York Convention, instead of the expression submission to arbitration. 10 Most authors agree that this means that if tribunals deal with matters not falling within the questions submitted to the tribunal (also known as the tribunal s mandate), that would be caught by Art V(1)(c) as well. It is suggested here that this view is consistent with the consensual nature of arbitration. Parties can confer a mandate on the tribunal that delimits the issues submitted to arbitration in spite of the presence of an existing arbitration agreement, and there is no reason why the law should deny binding effect to that mandate any less than an arbitration agreement. Accordingly, as a matter of principle Art 34(2)(a)(iii) ought to, and has been, interpreted to prohibit a tribunal from deciding on matters that go beyond the questions raised by the parties. This was the approach taken by the Court of Appeal sub silentio in Asuransi where it looked at the issues raised to examine what formed the scope of submission to arbitration. In arbitral practice, the matters submitted for arbitration can be gleaned from various documents, such as the equivalent of a Notice of Arbitration, 11 the equivalent of a Response to the Notice of Arbitration, 12 a Terms of Reference, 13 and of course, the pleadings. The ICC Terms of Reference for instance requires a list of issues to be set out unless the arbitral tribunal considers it inappropriate. It is commonplace for a ICC tribunal and parties to set out a list of issues but to include a statement that the list of issues will be subject to review and modification in accordance with the parties submissions. 14 In like vein, the ICC Practical Guide for the drafting of Terms of Reference suggests adding the following reservation: 15 The issues to be determined shall be those resulting from the parties submissions and which are relevant to adjudication of the parties respective claims and defenses. In particular, the Arbitral Tribunal may have to consider the following issues (but not necessarily all of these, and only these, and not in the following order ). [emphasis added] 9 United Nations Economic and Social Council, Report of the Committee on the Enforcement of International Arbitral Awards, UN Doc E/27C4, E/AC.42/4/Rev.1, 28 March 1955, at para Albert Jan van den Berg, The New York Arbitration Convention of 1958, at See Rule 3, SIAC Rules (4th ed, 1 July 2010). 12 See Rule 3, SIAC Rules (4th ed, 1 July 2010). 13 Article 23, Rules of Arbitration of the ICC (in force as from 1 January 2012). 14 See Bühler and Webster, Handbook of ICC Arbitration: Commentary, Precedents, Materials, at See Craig, Park and Paulsson, International Chamber of Commerce Arbitration (3rd ed, 2000), at

7 This approach of having regard to the parties submissions as they develop through the course of the arbitral proceedings, rather than the strict state of the pleadings, may not sit well with the holding at hand. The holding could permit a party to effectively re-open a case based on allegedly deficient pleadings even if the particular matter that was not pleaded had already been substantively (and many times, exhaustively) argued before the tribunal. When one parses the judgment carefully, the award was set aside not on the basis that, even if PT Prima had made a successful application to amend the pleadings, the new management venture was really a new claim that ought not to be have been introduced to the arbitral proceedings. That is typically the province of specific arbitral rules such as Rule 17.5 of the SIAC Rules 2010 and Art 23(4) of the ICC Rules That could possibly have been a stronger argument for Kempinski Hotels, but the new management venture does not lend itself to this argument for the following reason. Applying the Asuransi test, it could be said that the new management venture was not an independent matter over and above the scope of matters submitted to arbitration. It was a new material fact that was relevant to the resolution of the underlying causes of action and defences already submitted to arbitration. The High Court of Australia in Dare v Pulham (1982) 148 CLR 658 at 664 held that: Where there is no departure during the trial from the pleaded cause of action, a disconformity between the evidence and particulars earlier furnished will not disentitle a party to a verdict based upon the evidence. Kempinski Hotels cause of action was wrongful termination of contract by PT Prima. PT Prima s counterclaim was breaches of contract by Kempinski Hotels. In other words, it could be said that the tribunal was tasked to decide two main issues: (a) Did PT Prima wrongfully terminate the contract, and if so, what are the consequences? (b) Did Kempinski Hotels breach the contract, and if so, what are the consequences? Following Dare v Pulham, it could be argued that the omission of the existence of the new management venture from the pleadings was an omission from the particulars of the issues above. The underlying cause of action that Kempinski Hotels had breached the contract, and the defence that PT Prima s termination was not wrongful, were indisputably part of the matters submitted to arbitration. Since the evidence led showed that the new management venture was indeed entered into, in the words of Dare v Pulham, a disconformity between the evidence and particulars earlier furnished will not disentitle a party to a verdict based upon the evidence. Further, in the words of Asuransi, it would appear that the new management venture was relevant to the preliminary issue, the underlying causes of action and their corresponding defences requiring determination. The existence of such a venture could mean that, regardless of whether there were methods of performance that remained open after the Ministry s decisions, no damages would be payable by PT Prima after the new management venture was entered into. Asuransi suggests that the question of relevancy is key. 16 Although the question of relevancy was not engaged directly in Kempinski, the learned Judge opined that the amended pleading would enable the tribunal to: Asuransi at [31]. 17 Kempinski at [61]. 7

8 come to a decision as to whether or not the existence of the new management venture made it impossible for the applicant to perform the Contract and/or claim damages. The due performance of the contract and the issue of contractual remedies were the very issues submitted to arbitration. The amended pleading itself suggests that the new management venture was relevant to the issues at hand. Fourth award The comments on the fourth award will be as succinct as its treatment in Kempinski. The fourth award decided that, no steps were taken to make performance of the contract lawful, and consequently any claim to damages during the period between the date of termination of the contract and the date on which Kempinski Hotels entered into the new management venture was excluded due to the operation of Indonesian public policy. The learned Judge was of the view that the fourth award should be set aside because this was not based on any pleaded case nor had evidence been admitted in relation to this issue. It appears that the tribunal had sought submissions from the parties legal experts on whether the conduct of the parties after the date of termination of the contract was relevant to the issues raised in the arbitration, 18 and it also appears that the tribunal had sought submissions on damages. 19 It is thus not entirely clear from the judgment why the evidence in relation to the exclusion of damages had not been admitted. If the opportunity to tender such submissions was provided such that there could be no prejudice to Kempinski Hotels, the foregoing discussion would similarly apply to the fourth award mutatis mutandis. Conclusion Interestingly, the High Court in Asuransi had earlier appeared to opined that a matter that was not formally raised was not within the scope of arbitration. 20 The Court of Appeal did not appear to accept that, albeit that was unclear from the judgment. 21 Perhaps an occasion will arise where this issue can be formally raised. 18 Kempinski at [22]. 19 Kempinski at [24]. 20 Asuransi at [27]. 21 Asuransi at [36]. 8