Jurisdiction - Singapore
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Singapore – Of Gross Negligence, Mitigation And Astronimical Loss Of Profit Claims.

3 November, 2012

 

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

 

INTRODUCTION

  
It has become routine for sophisticated contracting parties to limit, in advance, their liability by limitation of liability and exclusion clauses. When disputes arise, the “injured” party often seeks to undermine such clauses by raising allegation of gross negligence.  
 
Likewise, it is common for parties to make inflated claims for loss of profits. Respondents who face astronomical claims for loss of profits would do well to scrutinise the evidence supporting such a claim. 
 
These issues arose in a recent International Chamber of Commerce (“ICC”) arbitration relating to breach of contract claim between a leading Malaysian manufacturer of industrial boilers and a major Thai palm oil producer. The contract for the supply of an industrial boiler was governed by Thai law and the dispute revolved around breaches of contract, and, in particular, allegations of gross 
negligence and a lack of good faith which can unravel the limitation of liability under specific provisions of the Thai Civil and Commercial Code. 
 
The Claimant was represented by English and Thai solicitors who had instructed an English Queen’s Counsel. The Respondent was represented by Malaysian solicitors who instructed Drew & Napier LLC (Jimmy Yim, SC, Abraham Vergis, Erroll Joseph and Mahesh Rai) to defend the claim.
 
BACKGROUND
 
The contract was for the supply and installation of an industrial boiler in Thailand which would be used to power the Claimant’s palm oil production plant. Parties agreed that the contract price would be payable in tranches upon the completion of certain milestones.
 
The problems began with the delay in the delivery, installation and commissioning of the boiler coupled with delays in shipment.
 
Sometime after the failing of the first commissioning test, the Claimant stopped making payments to the Respondent.  
 
Subsequently, the boiler underwent a second commissioning, this time with efficiency tests to ensure that it met the requisite standards stipulated in the contract. The boiler passed four out of five tests; failing the particulate emissions test (a pollution test). The Respondents, having not received the payments after completion of the milestones in the contract, abandoned the Claimant’s palm oil production site. The Claimant claimed that the contractual milestones had not 
been achieved, there was inordinate delay, gross negligence and abandonment of work and hence payments were not due. 
 
The Thai Claimant commenced arbitration proceedings, claiming for loss of profits amounting to US$21million on the following grounds:
 

(a) The Respondent failed to deliver and install the boiler on time; 

(b) The boiler failed to pass its commissioning test and the particulate emissions test and hence could not be operated at its full capacity; and 

(c) The Respondent’s representatives failed to return to site to rectify the defects of the boiler and to carry out a further particulate emissions test (despite requests from the Claimants to do so). 

 
The contract stipulated that the Respondent would be liable for damages of (a) 5% of the contract price for failure of the efficiency tests and (b) 5% of the contract price for delay. The contract also provided that any compensation under the contract 
should not be more than 20% of the contract value.  
 
The Claimant argued that the limitation and exclusion of liability clauses in the contract could not be relied upon because certain aspects of the Respondent’s conduct in the course of the contract amounted to gross negligence and bad faith which, under Thai law, would prevent the Respondent from relying on such clauses. 
 
The Claimant also alleged that it suffered severe loss of profits because it had to cap the operation of the boiler to 66% of its capacity to prevent breaching the emissions standard in Thailand. The Claimant calculated that this loss of profits amounted to US$21million as a result of the corresponding fall in palm oil production (making up 99% of the amount claimed from the Respondent).  
 
The Claimant argued that it was also entitled to the costs of a secondary dust collector which would have lowered the emissions of the boiler to an acceptable level. This was despite the fact that the Claimant had chosen not to install the secondary dust collector in the 3-year period after the Respondent left the site. 
 
THE TRIBUNAL’S DECISION
 
The Tribunal found that the initial period of delay could be attributed to both the Claimant and the Respondent. The Tribunal agreed with the Respondent that the Claimant had failed to specify precisely which acts and omissions were internationally reckless and grossly negligent. The general allegations of gross negligence and bad faith made by the Claimant therefore failed. 
 
However, the Tribunal did find that the Respondent’s conduct, in refusing to return to site to rectify the boiler’s defects and to fix the boiler’s emissions problem despite being repeatedly invited by the Claimant to do so, amounted to intentional and reckless breaches of the contract and hence constituted gross negligence. The tribunal also found that this conduct was bad faith on the Respondent’s part.  
 
Nonetheless, the Tribunal rejected the Claimant’s entire claim for loss of profits because of the questionable evidence that the Claimant adduced. During the course of the arbitration, the Respondent uncovered tampered and fabricated boiler and turbine log sheets which the Claimant was relying on to substantiate its allegation that there was a cap on the production of palm oil. The Respondent also proved that the Claimant failed to supervise the data entry of the boiler log sheets, 
making these sheets unreliable.  
 
Further, by scrutinising the individual records of the boiler’s daily operation over the entirety of the periods where loss of profits were claimed, the Respondent found that there were pockets of unexplained downtime where the boiler was not put to use. The aggregate periods of downtime amounted to at least 24% of the period for which the Claimant was claiming for loss of profits.  
 
In light of the questionable log sheets, lack of adherence to protocol in supervising the recording of raw data and the unexplained downtime, the Tribunal found that it was unsafe to conclude that the Claimant had suffered any loss of profits or loss of production capacity. 
 
The Tribunal also determined that the Claimant failed to take reasonable steps to mitigate its losses by not purchasing a secondary dust collector. On the Claimant’s own case, a secondary dust collector, the most expensive of which costs US$500,000, would have solved the emissions issue and allowed the Claimant to operate the boiler at full capacity. Three months after the Respondent abandoned the site, it was apparent to the Claimant that the Respondent would not return. The Claimant should have mitigated its losses by rectifying the emissions problem itself.  
 
The Tribunal dismissed 99% of the Claimant’s claim for US$21million and instead awarded the Claimant the sum of US$330,000 (being 5% of the contract price for delay, 5% of the contract price for the failure of the emissions test, US$195,000 for a secondary dust collector, and US$19,000 for rectifying minor problems with the boiler). Each party was to bear its own costs of the arbitration and the arbitrators’ fees were to be borne equally. 
 
The conclusion was successful for the Malaysian Respondent represented by Drew & Napier LLC. 
 
COMMENT
 
The Respondent’s scrutiny of the raw data provided by the Claimant was crucial to the success in defending the exorbitant claim for loss of profits in this case. By plotting out what the palm oil production would have been if the boiler had 
been 100% operation, the Respondent demonstrated that the astronomical claim made by the Claimant was theoretically impossible to achieve. 
 
Through such detailed analysis, the Respondent also highlighted numerous periods of time where the Boiler was operating at low levels or was not operating at all to which the Claimant could not provide any satisfactory explanation. The Claimant’s raw data supporting the loss of production and profits claim was dubious and this made the Tribunal uncomfortable in awarding exorbitant damages for loss of profits. 
 
The Claimant’s failure to mitigate its losses only befuddled the Tribunal further. The Claimant could not satisfactorily explain why it did not spend US$500,000 to rectify the boiler’s emissions issue expeditiously when it was allegedly suffering huge 
losses of profits every month, collectively far in excess of US$500,000, from the time the Respondent abandoned the site. 
 
The outcome of this arbitration, however, makes it clear that the dormancy of the Respondent in not returning to the Claimant’s site when it was contractually obliged to remedy the problems with the Boiler was reprehensible. The dormancy of the 
Claimant was in not purchasing a secondary dust collector to rectify the boiler’s emissions issue when it was obliged to mitigate any losses stemming from the emissions issue (the loss of profits) was also reprehensible. Had both parties 
been more cognisant of and acted in accordance with their clear legal obligations, the dispute may have been avoided or minimised.  
 
The Claimant’s legal costs, which were disallowed by the Tribunal, far outweighed the amount the Tribunal awarded to them in damages. In reality, the Claimant lost out in bringing this arbitration claim.  
 

 

For further information, please contact:
 
Jimmy Yim, Director, Drew & Napier
 
Erroll Ian Joseph, Director, Drew & Napier
 
Mahesh Rai, Drew & Napier
 

 

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