SINGAPORE COURT OF APPEAL PARTIALLY SETS ASIDE ICC AWARD OVER ITS "FLEXIBLE APPROACH" TO DAMAGES

In CEF and another v CEH, the Singapore Court of Appeal partially set aside a €62 million ICC award concerning the construction of an iron and steel plant in Malaysia.

In its award, the Tribunal had adopted a "flexible approach" to damages and awarded damages for misrepresentation against the contractors of around RM 176m (around €39m), which was about 25% of the amount actually claimed, even though the Tribunal found that the evidence of the loss was deficient.

The Court of Appeal set aside that part of the award due to a breach of natural justice, as it found that the parties would not have reasonably anticipated the Tribunal's decision.  Whilst this might at first suggest a wider opening for award debtors to challenge awards, the decision is quite specific to the facts.

Background

The respondent's parent company entered into a contract with the first appellant to provide equipment and services for the development of a steel-making plant (the Contract).  Subsequently, the respondent's parent company assigned its position under the Contract to the respondent, although the respondent continued to own the site on which the plant was built.

The appellants and the respondent then entered into a service agreement (the Service Agreement), under which the first appellant assigned to the second appellant the first appellant's obligation under the Contract to provide certain services to the respondent.

Unfortunately, construction of the plant was delayed. The plant never achieved its production targets. The respondent therefore purported to terminate the contract.

In 2016, the appellants and the respondent both commenced arbitrations, which were consolidated by consent. The appellants alleged that the respondent had unlawfully repudiated the agreement and sought damages for breach of the Contract and the Service Agreement. The respondent alleged that it had been induced to enter into the Contract by the appellants' misrepresentations.

In 2019, the Tribunal issued its award finding that the respondent was entitled to rescission of both the Contract and the Service Agreement, and made the following orders:

• the respondent was to transfer the title to the plant to the appellants (the Transfer Order);
• the appellants were to pay the respondent the contract price less various sums, including the diminution in value of the plant due to the respondent's use (the Repayment Order). The Tribunal had found that it did not have any evidence in relation to the current value of the plant. The Tribunal nevertheless held that the appellants were entitled to a deduction from the contract price being the gross revenue of the plant;
• the appellants were to pay the respondent sums of around RM 176m as damages for the appellants' misrepresentation (the Damages Order). Applying what it referred to as the "flexible approach" to damages, the Tribunal permitted the respondent to recover 25% of the damages it had claimed because there was insufficient evidence of the quantum of the loss. These deficiencies included the respondent's failure to submit relevant information and documentary evidence in its possession to support its claims.

The appellants applied to set aside the award. The High Court dismissed the appellants' application in its entirety, holding that there was no breach of the requirement for a fair hearing.

Court of Appeal's decision

On appeal, the Court of Appeal set the Damages Order aside, but allowed the rest of the award to stand.

Transfer and Repayment Orders

The appellants argued that the Transfer Order should be set aside because, among other things, it dealt with matters outside the scope of the submission to arbitration and was obtained in breach of natural justice.

The appellants also argued that the Repayment Order should be set aside for breach of the fair hearing rule and no evidence rule. The no evidence rule, which has been applied in Australia and New Zealand, allows the courts to set aside awards which contain a material finding of fact that was made by the Tribunal without any evidence.

The Court of Appeal rejected these arguments. The Court reasoned that the issues raised regarding the Transfer and Repayment Orders were part of the scope of the parties' submission to arbitration, and the appellants had a fair and reasonable opportunity to present their case and raise these issues to the Tribunal during the proceedings. The Court also found that the no evidence rule should not be adopted as part of Singapore law, as it would be an impermissible invitation to the courts to reconsider the merits of a tribunal's findings of fact.

Damages Order

The Court of Appeal did, however, find that the Damages Order was obtained in breach of the fair hearing rule and set aside the Damages Order.

To comply with the fair hearing rule, the tribunal's chain of reasoning in its award must be one which the parties had reasonable notice that the tribunal could adopt and one which has a sufficient nexus to the parties' arguments. The party seeking to set aside the award would have to establish that a reasonable person in the party's shoes could not have foreseen the possibility of the reasoning of the type in the award.

The Court found that the parties did not have reasonable notice of the Tribunal's chain of reasoning in the award, and both parties would have reasonably expected that the Tribunal would only award the respondent loss that the respondent could prove.  The Court also found that the Tribunal's chain of reasoning also did not have a sufficient nexus to the parties' arguments.

Finally, the Court refused the respondent's request to remit the award back to the Tribunal. The Court explained that a reasonable person would not be confident that the Tribunal would be able to reconsider the issue remitted in a fair and balanced manner and would not be influenced toward justifying or re-instituting its previous decision.

Implications for arbitration practitioners

The Court of Appeal's decision might raise concerns that it strays into a reconsideration of the merits of the case in a setting aside application, especially since the Court decided not to remit the award back to the Tribunal.  However, those concerns are not justified.

The decision affirms the Singapore courts' policy of minimal curial intervention in arbitration proceedings; indeed, the Court refused to recognise the no evidence rule as part of Singapore law for that reason.

It is also possible to understand the Court's decision to set aside the Damages Order within the narrow compass of breach of the fair hearing rule based on the specific circumstances of the case.  A key consideration in the Court's findings was that the Tribunal had cited an earlier Court of Appeal decision (Robertson Quay v Steen Consultants) as authority in support of the "flexible approach" to damages. However, the sole reference to Robertson Quay in the parties' submissions was in a footnote to the respondent's reply post-hearing submissions (i.e. at the very final stage of written submissions), and even then, the respondent had cited Robertson Quay for a slightly different proposition.

While the Court did doubt whether the Tribunal's "flexible approach" to damages was correct as a matter of law, it was the way the Tribunal reached its decision that troubled the Court and led it to set aside the Damages Order.

Nevertheless, the decision still raises an important practical point, as to how arbitrators should decide cases when there is uncertain or insufficient evidence in support of a claim – in particular where a party has taken an 'all or nothing' approach, leaving the Tribunal little room for flexibility.  In this case, the Tribunal may arguably have been able to reach the same result by inviting the parties to address it on the "flexible approach" to damages which it relied on in its award, thereby ensuring the parties had been heard on the issues. If that had been done, the Damages Order might perhaps not have been set aside.

For more information, please contact Daniel Waldek, Partner, and Joshua Chia, Associate, or your usual Herbert Smith Freehills contact.