Staying above the fray: Singapore High Court sets aside arbitral award on basis of breach of natural justice

In JVL Agro Industries Ltd v Agritrade International Pte Ltd, the Singapore High Court set aside an arbitral award on the grounds that the tribunal, in deciding the case on the basis of an issue which the defendant had not advanced, had failed to grant the claimant a fair hearing.

The decision is significant insofar as it demonstrates that whilst the grounds on which a court may set aside an award in Singapore are narrow in scope, it will not hesitate to act when the circumstances justify doing so.

Background

The parties entered into 29 contracts between March and August 2008 for the purchase of palm oil, to be supplied by the claimant, JVL to Agritrade. To counter the effect of a significant fall in the global price of palm oil in the second half of 2008, the parties entered into a "price-averaging arrangement" (the Arrangement) to give JVL additional time to discharge its obligations under the original contracts and to lower the average unit price of the palm oil. After the price of palm oil rose in 2010, the parties failed to agree how this arrangement would work for five remaining contracts. Agritrade failed to deliver the palm oil under the Disputed Contracts and JVL brought the dispute to arbitration. Agritrade counterclaimed that JVL were in repudiatory breach.

Tribunal's decision

The primary issue before the tribunal was whether Agritrade had breached one or more of the Disputed Contracts. Agritrade raised two defences to this claim:

1. the price-averaging arrangement rendered each disputed contract void for uncertainty; and
2. in the alternative, the Disputed Contracts had been mutually terminated as they were purely to facilitate the price-averaging arrangement which was no longer required.

Each of the defences relied on the Arrangement and gave rise to what the court considered a "further subsidiary issue", which the effect of the parol evidence rule. In summary, this provides that a party to a contract which has been reduced into documentary form cannot rely on evidence which is extrinsic to the document to vary, contradict, add to or subtract from the contract, unless one of a limited number of exceptions applies.

The tribunal decided that the price averaging arrangement was a collateral contract, which constituted a recognised exception to the parol evidence rule. It therefore dismissed JVL's claim for breach of contract on the basis that the price-averaging arrangement was capable of varying the parties' performance obligations under the Disputed Contracts.

However, the parol evidence rule and the relevance and applicability of collateral contracts as an exception to the rule was (i) only raised briefly in the oral submissions, at the tribunal's request; (ii) not fully pleaded by Agritrade; and (iii) never responded to by JVL.

The Singapore High Court's decision

JVL applied to set the award aside on the grounds that the tribunal failed to allow the claimant to present its case on the collateral contract exception, in breach of the rules of natural justice. The court initially set aside the proceedings for six months to give the tribunal an opportunity to reconsider its award and to receive further submissions if necessary. The tribunal declined to do so.

The court decided that the award itself should be set aside as the Tribunal had "deprived JVL of its right to present evidence and address submissions" by exercising "unreasonable initiative" on the collateral contract question. Despite being directed to the parol evidence rule and the collateral contract exception, the court found that Agritrade failed to even informally advance the exception as part of its case, having had five opportunities to do so in its written and oral submissions. The Court therefore found that Agritrade "implicitly rejected the collateral contract exception" and therefore the exception could not even arise by reasonable implication. The Court emphasised that the tribunal erred by reversing the burden of proof and expecting JVL to disprove the relevance and applicability of the collateral contract exception, especially as Agritrade's failure to raise the exception and rule as a defence meant that JVL had no reason to respond to that argument.

The Court allowed JVL's appeal and set aside the award. We understand that Agritrade is now appealing that decision.

Need for Nexus

The decision of the court is clear and well-reasoned: whilst a tribunal can in certain circumstances consider points that parties had failed to plead, where the point has "sufficient nexus" and both parties have been put on notice in some other way that they are expected to address that point, the tribunal cannot do so where the a party had chosen not to advance the argument, such that the other party did not have an opportunity to respond. In arriving at its decision, the court distinguished previous cases in which a tribunal was allowed to consider points which parties had failed to plead. In particular:

1. In PT Prima International Development v Kempinski Hotels SA and other appeals [2012] 4 SLR 98, whilst the claimant had not amended its pleadings to rely on a new issue, it had advanced the argument in correspondence with the tribunal, which had thereafter specifically directed both parties to address the issue.
2. in TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] 4 SLR 972 , the court had held that the argument in question, though not specifically argued reasonably flowed from the arguments advanced by the parties.

In contrast, whilst the tribunal in JVL v Agritrade raised the collateral contract exception, it was "couched in the language of hypothesis for comment rather than that of thesis for proof".  Whilst the difference between this and an express direction for parties to address an issue (as tribunals are empowered to do pursuant to section 12(3) of the International Arbitration Act) may be subtle, the potential implication, insofar as parties ultimately choose not to address the point, goes to the root of natural justice. 

The decision therefore serves as a timely reminder to tribunals to stay above the fray, even when the case presented before it is "a most unattractive" one (as the court in JVL noted). The tribunal must confine itself to the issues selected by the parties for determination, recognising that parties' ability to mutually determine the scope of the arbitration is considered one of the touchstones of arbitration.

For further information, please contact Alastair Henderson, Partner, Emmanuel Chua, Senior Associate or your usual Herbert Smith Freehills LLP contact.