Procedural fairness as a ground for setting aside awards: what's fair is fair

In its recent decision in Triulzi Cesare SRL v Xinyi Group (Glass) Co Ltd [2014] SGHC 220, the Singapore High Court considered the grounds on which an arbitral award may be set aside for procedural unfairness and, in doing so, reaffirmed that the Singapore courts will be reluctant to interfere with a Tribunal's case management powers unless strictly necessary for the proper administration of justice. The Court emphasised that whilst procedural fairness and affording each party a reasonable opportunity to be heard are core principles, a balance must be struck with the needs of procedural efficiency and economy. In particular, it noted that Tribunals must not "sacrifice all efficiency in order to accommodate unreasonable procedural demands by a party". Rather, the Court should take into account the materiality of the alleged procedural breach, including evidence of prejudice or a reasonable chance of prejudice as a result of a Tribunal's conduct.

In addition, the Court confirmed that while prejudice (that may be suffered by the party who alleges a breach of natural justice) is a relevant consideration in the exercise of the Court's discretion under Article 34(2) of the Model Law, it is not a condition to that exercise. In other words, even if no prejudice may be caused to the aggrieved party, there may be instances where the Court would nonetheless set aside an award if the breach of natural justice is sufficiently serious or egregious.

The decision is a welcome one and reflects and reaffirms the positive stance of the Singapore Courts towards enforcement of arbitral awards, while recognising the importance of the parties' rights to procedural fairness. The decision also serves as a timely reminder to parties and their counsel that procedural rights have to be balanced with the necessity for the Tribunal to have discretion and to take into account competing factors, such as cost and time effectiveness, when deciding how arbitration proceedings should proceed.

Background

Triulzi and Xinyi entered into three contracts for the sale of goods, with any disputes to be resolved through arbitration in Singapore. The details of the contract and the dispute are not relevant to the context of the judgment. The Tribunal allowed Xinyi's claim and dismissed Triulzi's counterclaim. Triulzi applied to set aside the award on the basis of alleged procedural unfairness. The two key grounds of challenge were:

• Issue 1: breach of the parties' agreed arbitral procedure to exclude expert evidence, contrary to Article 34(2)(a)(iv) of the UNCITRAL Model Law (which is largely incorporated into the Singapore International Arbitration Act ("IAA")); and
• Issue 2: Triulzi was not afforded a reasonable opportunity to be heard in respect of expert evidence contrary to Article 34 (2)(a)(ii) of the Model Law and s24(b) of the IAA.

The Decision

Issue 1

The Court concluded that Triulzi's application failed as there had been no agreement between the parties to exclude expert evidence. However, the Court still considered the applicable rules for determining if and when an award can be set aside for breach of an agreed procedure. Thus, a key issue the Court considered was the extent to which a Tribunal may depart from an agreed procedure before it constitutes a breach and amounts to procedural unfairness. The starting point is that the parties are free to agree the procedure to be adopted and followed by the Tribunal, subject to any mandatory provisions in the Model Law. In the absence of an agreement, the Tribunal has wide procedural powers to determine the applicable rules at its own discretion.

The Court explained that a breach of Article 34(2)(a)(iv) will not be found where non-observance of an agreed procedure is either: (i) derived from the applicant's own doing, or (ii) the challenge is against an order or direction which falls within the exclusive domain of the Tribunal. The Court made it clear that technical and minor breaches of an agreed arbitral procedure cannot inevitably result in an award being set aside and that the court should consider the materiality and nature of the departure from the agreed procedure. While drawing on jurisprudence from other jurisdictions where legislation is also based on the Model Law, the Singapore Court concluded that prejudice is not an express requirement under Article 34(2)(a)(iv), but rather a factor to be taken into consideration. In making this conclusion, the Court endorsed the view expressed by the Hong Kong Court of Appeal in Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (no. 1) 2012] 4 HKLRD 1, which was covered in our previous post accessible here (in which Herbert Smith Freehills acted for the successful plaintiff).

Issue 2

Triulzi's complaints related to the exercise of the Tribunal's case management powers. The Court cited with approval Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR, noting that "the Tribunal is the master of his own procedure is one of the foundational elements of the international arbitral procedure". The Court acknowledged that this principle is limited as the Tribunal's exercise of its case management powers must adhere to the rules of natural justice, which includes the right to be heard. However, that right only encompasses a reasonable opportunity to present one's case and the fair hearing rule must be considered in light of other competing factors. In particular, weight must be attributed to the practical realities of conducting an arbitration e.g. timing and cost efficiencies are important factors to be taken in to account. The Court noted that it should have a light touch approach to objections to the Tribunal's exercise of its case management powers, in light of the competing factors that the Tribunal has to balance and which the Tribunal is best placed to assess.

Ultimately, the Court concluded that the Tribunal had acted fairly and that Triulzi's issues in relation to expert evidence were its own doing. On this basis, it was not for the supervising court to intervene. Notably, the Court also considered the interpretation of Article 18 of the Model Law noting that its purpose is to protect the parties from the Tribunal's conduct, not a party's own failures. Article 18 is worded with reference to "equality" and "full opportunity". The Court observed that these terms must be interpreted reasonably in regulating the procedural aspects of the arbitration: it is about applying similar standards to each party rather than identical procedures.

Additional observations

Finally, in considering a further argument by Triulzi in relation to an allegation that the Tribunal had applied the incorrect law, the Court noted that such a failure (if proved) would be an error of law and, therefore, would not amount to a breach of public policy. The Court emphasised that the standard to be met to prove a breach of public policy is high: the Tribunal's failure must "shock the conscience" or be "wholly offensive to the ordinary reasonably and fully informed member of the public". As Triulzi failed to point to any legal basis with which to support their breach of public policy argument, the Court dismissed Triulzi's arguments.

For further information, please contact Alastair Henderson, Partner, Daniel Waldek, Senior Associate, Gitta Satryani, Senior Associate or your usual Herbert Smith Freehills contact.