Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution

The central issue in this case was whether an arbitrator had failed to determine one of the counterclaims put forth by a party in the arbitral proceedings, and the consequences if such a failure was shown. This note examines the manner in which the Court of Appeal approached this issue and poses the question of whether resort to articles 33(3) and 34(4) of the Model Law could be appropriate as a mechanism of dealing with allegations by a party that an arbitrator had failed to deal with an essential issue:
— BLC & Ors v BLB & Anor [2014] SGCA 40 (Singapore, Court of Appeal, 30 July 2014)

Facts

Following an unsuccessful joint venture in Malaysia between two groups of companies, the Appellants commenced arbitration proceedings against the Respondents. The Appellants brought claims against the Respondents on the basis that they had breached the terms of various agreements, in particular clause 4.1 of a License Agreement (the “LA”), by manufacturing defective goods which were not in accordance with the applicable quality standards. The Respondents counterclaimed for various amounts, including the sum of MYR 5,838,956, which purportedly consisted of bank balances and monies owing for goods delivered (the “Disputed Counterclaim”). At the end of the evidential phase of the hearing, the sole arbitrator directed the parties to submit an agreed framework of issues or their own list of issues if an agreement could not be reached. The parties were unable to agree a common list of issues and submitted separate lists. In the award, the arbitrator found in favour of the Appellants in respect of some of their claims, but dismissed their other claims and all of the Respondents’ counterclaims.

The Respondents applied to set aside the entire award on three alternate bases, and in particular on the basis that the arbitrator had failed to deal with the Disputed Counterclaim because he had extensively adopted the Appellants’ list of issues over the Respondents’ list, thus breaching the rules of natural justice contrary to section 24(b) of the International Arbitration Act.

High Court Decision

In the High Court, the Judge first found that it was common ground that the defective goods which were the subject of the Appellant’s claims (which she termed the Group A Goods) were different from the goods that were the subject of the Disputed Counterclaim (which she termed the Group B Goods). The Judge then concluded that the arbitrator had omitted to make a ruling on the Disputed Counterclaim as it had slipped the arbitrator’s notice that the Disputed Counterclaim was an independent and distinct claim as opposed to a relief sought by the Respondents if they succeeded on other grounds.

The Judge surmised that it was highly likely that this oversight happened because the arbitrator had extensively adopted the Appellants’ list of issues. It was held that an arbitrator had a duty to deal with all essential issues in the arbitration. Accordingly, the arbitrator’s failure to deal with a discrete head of counterclaim, which if considered and granted could have made a material difference in the award, was a breach of natural justice. Therefore, the Judge set aside the arbitrator’s findings in respect of the Disputed Counterclaim and “considered it appropriate to remit the Dispute[d] Counterclaim… and costs thereof to a new tribunal (which is to be constituted) for determination”.

The Judge parenthetically noted that this would have been the type of case that article 33(3) of the UNCITRAL Model Law (“Model Law”), which permits parties to request (within a specified time period) the arbitrator to make an additional award as to claims presented in the proceedings but omitted from the award, would have been intended to provide redress for. The Judge went on to state that “[i]t is hoped that parties in future cases of a similar nature would first attempt to avail themselves of any available opportunities to seek redress from the tribunal itself, before turning to the courts…”.

Court Of Appeal Decision

The Appellants appealed, and this appeal was allowed by the Court of Appeal. In its decision in BLC & Ors v BLB & Anor (“BLC”), the Court of Appeal held that looking at the award as a whole and having regard to the source documents, it was clear that the arbitrator did in fact address his mind to the Disputed Counterclaim and did in fact render a decision in respect of that particular claim. The Court of Appeal examined the parties’ pleadings, their list of issues as well as their written submissions, and concluded that it was the Respondents’ own case in the arbitration that if there are defective goods, the Respondents should not receive payment for the goods which were the subject of the Disputed Counterclaim (i.e., the Group B Goods). Accordingly, when the arbitrator found that the Respondents were in breach of clause 4.1 of the LA, he had also (and simultaneously) determined the Disputed Counterclaim on the Respondents’ own case. The Court of Appeal went on to hold that even taking the Respondents’ case at its highest that it had slipped the arbitrator’s notice that the Disputed Counterclaim was actually an independent and distinct claim, such an error would go merely to the substantive merits of the arbitrator’s decision as it consisted in the arbitrator conflating issues of law and/or fact which he ought not to have done.

Court of Appeal also made several observations on articles 33(3) and 34(4) of the Model Law. Although the Court of Appeal expressed doubts as to whether article 33(3) could apply in this case (as a result of its finding that the arbitrator had not entirely omitted to deal with the Disputed Counterclaim), it discussed the issue of whether a party should be required to resort to article 33(3) before article 34. The Court of Appeal considered the arguments on both sides and appeared to conclude that whilst a party is not obliged to invoke article 33(3) before article 34, he takes the risk that the court would not, in a setting aside application, exercise its discretion to set aside any part of the award or invoke the powers of remission under article 34(4). It was also cautioned that in future cases, the applicant’s reasons for failing to resort to article 33(3) (where applicable) might have an impact upon whether the courts will exercise its discretion to set aside an award under article 34. As for article 34(4), which essentially allows the court to remit the matter instead of setting aside an arbitral award, the Court of Appeal noted that the clear language of the provision does not permit remission of an arbitral award to a newly constituted tribunal but requires that the remission be to the original tribunal that had heard the matter. Accordingly, the Court of Appeal disagreed with the Judge that the court had the power to remit part of the award back to a new tribunal without more. It was further opined that if the arbitrator had indeed failed to consider and determine the Disputed Counterclaim because of pure oversight, then one course of action open to the Judge would have been to remit the matter pursuant to article 34(4).

Comment

Allegations Of Failure To Deal With An Essential Issue

In BLC, the Court of Appeal appeared to accept that a failure by an arbitrator to deal with an essential issue could constitute a breach of natural justice. However, the Court of Appeal found that on the facts, the arbitrator had considered and dealt with the issue of the Disputed Counterclaim which the Respondents had alleged he had missed out. What is important about the Court of Appeal’s decision is the manner in which the Court of Appeal approached the Respondents’ allegations that the arbitrator had failed to deal with an essential issue.

First, the Court of Appeal looked at the matter from the perspective of how the parties had run their case in the arbitration proceedings. It gleaned this from a detailed examination of the parties’ pleadings, their list of issues as well as their written submissions. Second, the Court of Appeal applied a generous approach in reviewing the award. In particular, the Court of Appeal declined to take a literal reading of several paragraphs of the award, including paragraphs which suggested that the arbitrator had concluded that the Disputed Counterclaim did not arise solely because of his findings in respect of issues unrelated to the allegations of defects in the goods. The Court of Appeal noted that the “ratio of the award ought to be distilled from a reading of the entire award and not of isolated parts”, and held that these paragraphs of the award did not detract from its finding that the arbitrator had considered and determined the Disputed Counterclaim on the Respondents’ own case. 

This aspect of BLC is consistent with the Singapore courts’ general policy of minimal curial intervention in arbitral proceedings and its recognition that the substantive merits of the underlying dispute are beyond its remit. In particular, by approaching allegations of failure to consider an essential issue from the perspective of how the parties had run their case in the arbitration proceedings, the Court of Appeal’s ruling will effectively guard against the “ingenuity of counsel who seek to launch backdoor appeals, or worse still, completely reinvent their client’s case with the benefit of hindsight in the guise of a challenge based on an alleged breach of natural justice”. This, coupled with the generous approach towards reading arbitral awards adopted by the Court of Appeal, ensures that the advantage of arbitration as an efficient alternative dispute resolution process is not undermined and that the parties’ autonomous choice to have their disputes resolved in a forum with limited recourse to the courts is respected.

It is also laudable that in considering whether the arbitrator had failed to deal with an essential issue, the Court of Appeal did not look merely to the framework of issues set out in the award or to the list of issues drawn up by the parties. Instead, the Court of Appeal undertook a detailed examination of all the relevant source documents to determine what the real issues were before the arbitrator. It is critical that the exhortation of minimal curial intervention and not delving into the substantive merits is not misinterpreted as a call to merely look at whether an arbitral award, on its face, deals with the issue that is alleged to have been missed. In this regard, BLC is a welcome confirmation that in certain instances, delving into the source documents in some detail to understand what was actually argued before the arbitrator is a necessary exercise and does not constitute an impermissible examination of the merits of the dispute.

There is however, with respect, one drawback to the approach taken by the Court of Appeal. That is it was at the end of the day trying to discern what the arbitrator had in his mind. Regardless of how meticulously and thoroughly the source documents and the award are scrutinised, there would still be room for error given the imprecision of language and the fact that documents often take on a very different light when seen in the context of what actually occurred in the arbitration proceedings (which the court is not privy to). As such, it is respectfully submitted that it may be preferable for the arbitrator himself to let the parties know whether he did or did not consider a specific issue, especially in cases such as this where certain parts of the award did appear to be incongruous with the arbitrator having considered and determined the issue alleged to have been missed out. In this regard, it is suggested that articles 33(3) and 34(4) of the Model Law would provide the precise mechanism for the arbitrator to perform such a function.

Articles 33(3) And 34(4) Of The Model Law

As mentioned above, article 33(3) of the Model Law allows a party to request the arbitrator to make an additional award as to claims presented in the proceedings but omitted from the award. If the Respondents had made a request pursuant to article 33(3) to the arbitrator, the court would not have to infer whether the arbitrator had or had not considered the Disputed Counterclaim. Had the arbitrator considered the Disputed Counterclaim, he would simply have dismissed the Respondents’ application and clarified that he had already considered and determined this issue. On the other hand, if he had omitted to consider the Disputed Counterclaim, one would assume that he would have acknowledged this and invited parties to submit on this issue before rendering an additional award.

However, a party who is dissatisfied with an arbitral award may well prefer to apply to set aside the award rather than resort to article 33(3). In this regard, the Court of Appeal did discuss the issue of whether a party should be required to resort to article 33(3) before article 34, making the following points:

• The Court of Appeal stated that it was arguable that a party ought to be penalised if he does not invoke article 33(3) before invoking article 34. If not, article 33(3) would be rendered toothless. Further, if a party is not penalised for relying on article 34 without first invoking article 33(3), this could potentially be seen as an abuse of the setting aside process under article 34, especially in situations (such as this case) where the party is alleging that the arbitrator had failed to deal with a relatively minor claim in the light of that party’s entire claim.
• However, the Court of Appeal also acknowledged that it could be argued, based on the literal language of article 33(3) (given the use of the words “may request”), that a party is not obliged to invoke article 33(3). Further, the drafters of the Model Law appeared to envisage that remission under article 34(4) provided an alternative means from article 33(3) of avoiding the setting aside of the entire award.
• It was then suggested that a possible way of reconciling these two opposed positions was by recognising that whilst a party is not obliged to invoke article 33(3), he takes the risk that the court would not, in a setting aside application, exercise its discretion to set aside any part of the award or invoke the powers of remission under article 34(4).

The Court of Appeal’s suggested approach robustly balances the considerations underpinning the opposing positions. On the one hand, it stays true to the plain language of article 33(3) and ensures that article 33(3) is not a dead letter. On the other hand, the Court of Appeal’s statement that an applicant’s reasons for failing to resort to article 33(3) might have an impact on whether the courts will exercise its discretion to set aside an award under article 34 is an extremely powerful incentive for parties to resort to article 33(3) first before article 34. It is respectfully submitted that incentivising parties to resort to article 33(3) first furthers the policy of minimal curial intervention in arbitral proceedings by allowing the arbitrator to address or correct any potential issues with the award before the court steps in.

Even if a party decides to resort to article 34 without first invoking article 33(3), the court may still have recourse under article 34(4) to have the matter remitted so that the arbitrator can determine any issues which may not have been considered. Again, such an approach benefits from absolving the court from attempting to divine the arbitrator’s thoughts. If the matter is remitted to the arbitrator, he will presumably either make a decision for the first time on the issue (if it had been missed out) or simply reiterate his decision (if he did not in fact miss the issue out).

One potential hurdle to the court utilising article 34(4) is the fact that one of the parties must request that the matter be remitted. This is borne out by the words “where appropriate and so requested by a party” in article 34(4). Such a reading is also supported by the legislative history of the article. The Working Group had discussed a proposal to delete the requirement that the remission procedure must be requested by a party. However, the general view was that “the court should have the power to suspend the setting aside proceedings only when so requested by a party” and “[t]he Commission did not adopt a proposal to delete the requirement that the remission procedure of the paragraph must be requested by a party.” Nevertheless, since the request can come from either party, this hurdle is mitigated somewhat since the party resisting a setting aside application under article 34 can also make the request for the matter to be remitted to the arbitrator.

In addition, the Court of Appeal had noted in BLC that it was arguable that if the arbitrator had indeed failed to consider and determine the Disputed Counterclaim because of pure oversight, then one course of action open to the Judge would have been to remit the award back to the arbitrator under article 34(4). Bearing in mind that the Court of Appeal’s holding earlier in BLC was that such an oversight would not constitute a breach of natural justice, it is arguable that the test for granting a remission may well be less stringent than the test that has to be met before the court will set aside an arbitral award. In fact, the issue of whether the power to remit arises only if the court makes a firm finding that one of the grounds for setting aside under article 34(2) of the Model Law has been made out has been subject to different views in other jurisdictions. In the United Kingdom, the Departmental Advisory Committee chaired by Lord Justice Mustill took the view that a firm finding that there are grounds for setting aside must be made before the power to remit under article 34(4) arises.

It is respectfully submitted that the position adopted by the New Zealand Law Commission may be preferable. In the first place, if the power to remit under article 34(4) of the Model Law was intended to be contingent on the grounds in article 34(2) having been fulfilled, it could easily have been drafted to state this expressly. Instead, the provision states that the court may exercise the power to remit “where appropriate and so requested by a party”. Further, given that the nature of the remedy is less draconian (i.e., the suspension of the setting aside proceedings as opposed to the complete setting aside of the arbitral award), it would make sense that the threshold that needs to be crossed for the power to remit to arise under article 34(4) should be lower. This would be in line with the exhortation of the Court of Appeal in Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86 that the court’s focus in a setting aside application “should be on the proportionality between the harm caused by the breach and how that can be remedied.” It is arguable that the Court of Appeal has implicitly signalled that remission should be resorted to first as a remedy where the alleged breach is the failure to consider an essential issue and that perhaps such a remedy should be more easily granted than a setting aside of an arbitral award.

Finally, some mention should be made of the Court of Appeal’s clarification that article 34(4) does not permit remission of the award without more to a newly constituted tribunal but instead requires that the remission be to the original tribunal who heard the matter 26. Although the remedy of remission has traditionally been seldom sought by parties challenging arbitral awards and even less frequently ordered by the courts, there has been a gradual but discernible recognition in Singapore that the remedy of a setting aside may in certain cases be a blunt weapon and that the employment of the more measured remedy of a remission may be appropriate in such cases. In particular, the remedy of remission was in issue in both Kempinski Hotels SA v PT Prima International Development [2011] 4 SLR 633 and the present case. However, in both cases, the remedy of remission was considered without substantive reference to or analysis of the applicable legislative provisions and this unfortunately led the courts to assume that remission could be made to a newly constituted tribunal. In this regard, the Court of Appeal’s clarification is timely. Indeed, the plain words of article 34(4) appear to be open to only one interpretation (which the Court of Appeal correctly adopted) since article 34(4) talks about suspending the setting aside proceedings “to give the arbitral tribunal an opportunity to resume the arbitral proceedings”.

For further information, please contact:

Sean Yu Chou, Partner, WongPartnership 
[email protected]

Lionel Leo, Partner, WongPartnership
[email protected]

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