7 September, 2012
Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution
On 9 July 2012, the Singapore Court of Appeal delivered its judgment in PT Prima International Development -v- Kempinski Hotels SA and other appeals1, reversing the High Court's decision to set aside three arbitral awards. The case clarifies the role of pleadings in defining the jurisdiction of an arbitral tribunal in international arbitration.
The dispute
In 1994 Kempinski, a Swiss company, and Prima, an Indonesian company, entered into a 20-year hotel management contract (the Contract) under which Kempinski was given the right to manage a hotel owned by Prima in Jakarta. However, in February 2002, Prima terminated the Contract, arguing that Kempinski had failed to perform its obligations. Kempinski commenced an SIAC arbitration in Singapore in May 2002, claiming specific performance and damages for wrongful termination. In its defence, Prima initially pleaded only that the termination was valid. It later amended its defence to plead that the Contract had become illegal under Indonesian law. This was based on three decisions of the Indonesian Ministry of Tourism which effectively made it illegal for foreign entities to manage hotels in Indonesia unless they took certain steps (which Kempinski had not yet taken).
The arbitrator issued two interim awards in 2004 and 2006, finding that the Contract had not been rendered impossible as a result of the Ministry of Tourism's decisions, but could still be performed if Kempinski adopted one of the alternative methods of performance which were consistent with the Ministry's decisions. Consequently, if Kempinski could show that the Contract had been wrongfully terminated, it was entitled to damages.
After the second interim award was published, Prima discovered that Kempinski had entered into a new management contract with another hotel in 2006 (the New Contract), breaching an exclusivity clause in the Contract. However, Prima did not apply to amend its defence again at this point, but instead it asked the arbitrator for clarification of the second award. The arbitrator issued a third interim award confirming that: (1) the New Contract was in breach of the Contract; (2) the methods of alternative performance suggested in the second award were no longer possible; and (3) the possibility of damages remained for the period between the date of alleged termination by Prima and the date of the New Contract (the Intervening Period).
The arbitrator then published a fourth award holding that since the performance of the Contract by Kempinski during the Intervening Period had not been in compliance with the Ministry's decisions, any award of damages for that period would be contrary to public policy. As a result, Kempinski could not claim damages, and its claim wholly failed.
Kempinski applied to the Singapore High Court to set aside the third and fourth awards. The High Court set aside the awards on the basis that they had been made on issues (namely, the effect of the New Contract) that had not been formally pleaded in the arbitration, and were therefore outside the arbitrator's jurisdiction. Prima appealed to the Court of Appeal.
The appeal
The key question for the Court of Appeal was whether the legal effect of the New Contract was within the submission to arbitration. The Court of Appeal observed that pleadings are required under the UNCITRAL Model Law and the SIAC Rules (2007 edition), and that they provide a convenient way for parties to define the jurisdiction of the arbitrator by setting out the nature and scope of the dispute. However, significantly, the Court stated that "any new fact or change in law arising after a submission to arbitration which is ancillary to the dispute submitted for arbitration and which is known to all the parties to the arbitration is part of that dispute and need not be specifically pleaded."
In this light, the approach of the High Court in interpreting the scope of the arbitrator's jurisdiction by reference to the pleadings had been too narrow. Since Kempinski was seeking damages for the remainder of the Contract or specific performance of the Contract, any new fact or change in law affecting Kempinski's right to these remedies, such as the New Contract, must fall within the submission to arbitration. It was also relevant that the arbitrator had given Kempinski ample opportunity to respond to Prima's case on the New Contract, meaning that Kempinski had suffered no prejudice by the fact that the New Contract had not been included in Prima's pleadings.
In relation to the fourth award, the Court of Appeal held that "public policy is a question of law which an arbitrator must take cognisance of if he becomes aware of it". The arbitrator was correct in holding that he had no power to award damages contrary to the public policy of Indonesia.
Consequently the Court of Appeal reversed the decision of the High Court, and reinstated the arbitrator's awards.
Conclusion
This decision provides useful guidance on the role of pleadings in international arbitration. In finding that the High Court was too strict in its interpretation of the arbitrator's jurisdiction, the Court of Appeal took a pragmatic approach and held that new issues do not need to be specifically pleaded when they fall within the scope of the parties' existing submission to arbitration. A party must be given a full opportunity of presenting its case, and of responding to the case of the other side, but there is no strict requirement in international arbitration that this be done solely through formal pleadings.
For further information, please contact:
Ben Giaretta, Partner, Ashurst
Ronnie King, Partner, Ashurst