In this issue, we focus on two recent decisions, one by the English High Court and the other by the Singapore High Court.
Xstrata Coal Queensland Pty Ltd, Sumisho Coal Australia Pty Ltd, Itochu Coal Resources Australia Pty Ltd and ICRA OC Pty Ltd v Benxi Iron & Steel (Group) International Economic & Trading Co Ltd [2016] EWHC 2022
Introduction
In this case, the English High Court granted an application under Section 79 of the Arbitration Act 1996 to extend the time period within which a party could apply under Article 27 of the London Court of International Arbitration Rules, for the arbitral tribunal to correct its award.
Facts
Contract referred to a different party
The Respondent entered into a contract to purchase quantities of coking coal from the Claimants (the “Contract”). A dispute that arose under the contract was referred to arbitration in London, at the end of which the Respondent was to pay around US$28 million to the Claimants (the “Award”). Although the Claimants sought to enforce the arbitral award in the People’s Republic of China, the Chinese court refused to do so on the basis that the fourth Claimant, ICRA OC Pty Ltd (“ICRA OC”) was not a party to the Contract, including the agreement to arbitration.
Under the Contract, the seller was described to be the first Claimant, entering as agent for “the Oaky Creek Joint Venturers”, which comprised itself, the second and third Claimants, and an ICRA NCA Pty Ltd (“ICRA NCA”). However, the Contract also referred to an “Oaky Creek Joint Venture”, to which all four Claimants were party (ICRA NCA was not a party).
In making the Award, the tribunal treated ICRA OC, and not ICRA NCA, as:
(a) A party to the Contract, including the agreement to arbitration;
(b) One of the Oaky Creek Joint Venturers;
(c) A party to the claim before the tribunal; and
(d) A beneficiary of the arbitral award.
However, the tribunal did not explain how it dealt with the Contract’s reference to ICRA NCA, and not ICRA OC.
Claimants seek to rely on Article 27 of the LCIA Rules
The Claimants, including ICRA OC, sought to rely on the London Court of International Arbitration Rules 1998 (“LCIA Rules”) to request the arbitral tribunal to:
(a) Make an additional award, under Article 27.3; or
(b) Alternatively, make corrections to the Award, under Article 27.1.
Article 27 of the LCIA Rules provides that any application for a correction of the Award or an additional award has to be made within 30 days of the publication of the Award. However, by the time the Chinese court decided to refuse enforcement of the Award, the said time limit had expired for the Claimants to make any application. The LCIA expressed that "while sympathetic to the Claimants' position, … absent agreement of the parties or an order from a competent court extending time for the application" the arbitral tribunal was "functus officio", i.e. the arbitral tribunal’s authority on the matter had come to an end.
Claimants’ application under Section 79 of the Arbitration Act
The Claimants subsequently applied to the English Commercial Court to extend the deadline for its Article 27 application to the arbitral tribunal (the “Application”), under Section 79 of the Arbitration Act 1996 (the “Act”). Section 79(1) provides that:
"[U]nless the parties otherwise agree, the court may by order extend any time limit agreed by them in relation to any matter relating to the arbitral proceedings”.
The English Court’s decision
The Court analysed Article 27 of the LCIA Rules and Section 57 of the Act and concluded that there were no material differences between the two. On this basis, the Court considered Section 57 more thoroughly.
The Court referred to Torch Offshore LLC v Cable Shipping Inc [2004] EWHC 787 (Comm) in considering the power of the arbitral tribunal under Section 57(3)(a) and (b) of the Act. In Torch, it was stated that Section 57(3)(a) “can be used to request further reasons from the arbitrator or reasons where none exist”, because:
(a) The policy which underlies the Act is one of enabling the arbitral process to correct itself where possible, without the intervention of the Court; and
(b) If there was unarguably a clear failure to deal with an issue, it could be said that there was no ambiguity in the award, but an award which contains inadequate rationale or incomplete reasons for a decision is likely to be ambiguous or need clarification.
The Court took the view that allowing a tribunal to clarify or remove ambiguity, as permitted under Section 57(3)(a) of the Act, was the same as allowing a tribunal to address “any errors of a similar nature” under Article 27.1 of the LCIA Rules.
The arbitral tribunal had earlier denied a separate request by the Respondent for clarifications of the Award, stating that the grounds for granting corrections under Article 27 are narrow in scope. Notably the Court, in considering the Application, made no definitive comments on the scope of such grounds, but stated that Article 27 allows for clarification of an award through the use of a memorandum which then becomes part of the award.
The Court then, in identifying the Application as a claim that involves an “omission which may occasionally be made”, stated that if time was indeed extended by the Court, the Claimants would be entitled to request the arbitral tribunal to make corrections to the Award that would clarify a matter that omission had left unclear or ambiguous, and that the arbitral tribunal would control the process and correct the award accordingly.
Clarification is necessary so as not to impede justice and the arbitral process
The Court finally concluded that it would exercise its power under Section 79 of the Act to extend the time limit for application under Article 27.1 of the LCIA Rules. Its reasons were as follows:
(a) The Claimants, Respondent and the Chinese Court had no explanation from the arbitral tribunal of how the tribunal dealt with the issue of ICRA NCA and ICRA OC’s identities.
(b) The absence of an explanation meant that the Award was on uncertain terms, and this impeded the arbitral process.
(c) The Claimants had, in the name of justice, the right to have the uncertainty resolved by way of an explanation by the arbitral tribunal.
(d) Enabling the arbitral tribunal to add an explanation, so as to provide clarity or remove ambiguity, was a “just and reasonable approach” that would hold parties to their agreement to arbitrate, and which would assist the arbitration process.
The Court found that the Claimants had not unduly delayed in making their Application. The Claimants were reasonable in waiting for the decision of the Chinese court first, before then approaching the arbitral tribunal and the LCIA.
Notably, the Court confirmed that there is value in giving an arbitral tribunal opportunity for correction of its award. The denial of an opportunity for correction may lead to problems in seeking recognition and enforcement of an award in other parts of the world, which would serve no worthwhile end. Moreover, it would be unjust not to allow the tribunal to consider whether uncertainty can be removed.
Comments
This case reflects the English court’s emphasis on how the exercise of law and the operation of legal mechanisms should produce sensible and practical outcomes, not only towards matters within the UK but also globally. The pro-arbitration stance of the courts is also highlighted through how the court chose not to overturn the arbitral tribunal’s award, but instead invited the tribunal to correct its award. Finally, this case serves as a good reminder as to the importance of clarifying the identities of parties in any legal transaction, lest complications ensue.
JVL Agro Industries Ltd v Agritrade International Pte Ltd [2016] SGHC 126
Introduction
In this seminal case, the High Court set aside an arbitral award on the ground that the tribunal had breached natural justice, in making an award on the basis of an issue which had not been presented by the parties.
Facts
The parties, JVL and Agritrade, entered into 29 contracts between March and August 2008 for the purchase of palm oil. The parties subsequently entered into a “price-averaging arrangement” (the “PA Arrangement”), in light of a significant fall in the market price of palm oil in the second half of 2008, so that JVL could have more time to discharge its contractual obligations to Agritrade and lower the unit price at which it had bought and was to buy palm oil from Agritrade.
Sometime in 2010, as a result of a significant rise in the market price of palm oil, the parties found themselves unable to agree with the application of the PA Arrangement to five remaining contracts (the “Disputed Contracts”). Agritrade failed to ship the required amount of palm oil under the Disputed Contracts to JVL, and JVL commenced arbitration proceedings for breach of contract.
Before the arbitral tribunal, Agritrade raised the following defences to JVL’s claim:
- The PA Arrangement rendered each Disputed Contract void for uncertainty, as the key contractual terms of price, quantity, shipment period and discharge port were to be fixed only when the palm oil was actually shipped (the “Uncertainty Defence”);
- Alternatively, even if the Disputed Contracts were not void for uncertainty, they had been mutually terminated since the shipment date under each Disputed Contract had already passed without being performed (the “Prematurity Defence”).
Since Agritrade’s defences relied on the PA Arrangement, a “further subsidiary issue” arose: whether the PA Arrangement was within the scope of the parol evidence rule. Under the parol evidence rule, unless one of a limited number of exceptions applies, 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.
The tribunal found that the PA Arrangement was not subject to the parol evidence rule, as it was a collateral contract that was capable of varying the parties’ obligations under the Disputed Contracts.
It was thus concluded that Agritrade had not breached the Disputed Contracts. Instead, JVL had repudiated the Disputed Contracts by issuing a notice of default and purchasing palm oil off the market before the PA Arrangement was applied (the “Award”).
JVL applies to the High Court to set aside the Award
JVL then applied before the High Court to set aside the Award (the “Application”), under Section 24(b) of the Act (the “Act”). Section 24(b) provides that the High Court may set aside the award of an arbitral tribunal if “a breach of the rules of natural justice occurred in connection with the making of the award by which the rights of any party have been prejudiced”.
The three principal grounds of the Application were:
(a) JVL was unable to present its case to the tribunal or there was a breach of the rules of natural justice in connection with the making of the Award;
(b) The Award concerned decisions on matters which were beyond the scope of arbitration; and
(c) The tribunal displayed apparent bias towards JVL.
At the core of the Application was that the tribunal had decided against JVL on the collateral contract point, which was a point that Agritrade did not present before the tribunal. JVL thus had no opportunity to present its case on the same. As such, the Court decided to suspend the Application to give the tribunal an opportunity to receive any further evidence and submissions on whether the PA Arrangement was a collateral contract. The tribunal concluded that there was no need to receive further evidence and submissions, and reaffirmed their findings.
Upon expiry of the Application’s suspension, the hearing on the Application resumed.
The High Court’s analysis and reasoning
The High Court decided that the Award should be set aside. Its reasons were as follows:
A. JVL did not have a reasonable opportunity to present its case on an issue
While the Court recognized that caution must be had to unmeritorious attempts by disappointed parties to set aside unimpeachable awards, the Court also highlighted the importance of “whether there is a sufficient nexus between the chain of reasoning which the tribunal adopts and the case which the parties themselves have chosen to advance”. Accordingly, a particular chain of reasoning can be identified if it:
(a) arises from express pleadings;
(b) is raised by reasonable implication by pleadings;
(c) does not feature in pleadings but is in some other way brought to the other party’s actual notice; or
(d) flows reasonably from the arguments actually advanced by either party or is related to those arguments.
An alternative consideration was whether a “reasonable party to the arbitration could objectively have foreseen the tribunal’s chain of reasoning”. The overriding concern was whether the tribunal had achieved “substantial fairness”. If the tribunal exercised “unreasonable initiative” in its chain of reasoning, it was liable to have its award set aside.
The Court found the tribunal’s chain of reasoning on the collateral contract exception was one which did not give JVL a reasonable opportunity to present its case on the same, as
(a) Agritrade never advanced the collateral contract exception as part of its case; and
(b) The tribunal also never directed JVL to address the same.
B. The arbitral tribunal did not comply with its duty to confine itself to the issues selected by the parties for determination
Agritrade had forsaken the five opportunities it had to invoke the collateral contract exception and present its submissions. By doing so, the Court found that Agritrade had implicitly rejected the collateral contract exception.
The Court also pointed out that the tribunal did not specifically direct JVL to deal with the collateral contract exception, in that the tribunal had merely mentioned the collateral contract exception in the context of a hypothesis for comment rather than a thesis for proof or disproof.
Since the issue of a collateral contract had not been raised by the parties, as a matter of the arbitration procedure, the tribunal was precluded from adopting the same as part of its chain of reasoning.
Thus it also followed that the tribunal’s unilateral decision to find that the PA Arrangement fell within the collateral contract exception was a decision which effectively relieved Agritrade of the burden of invoking an exception to the parol evidence rule, and the burden of producing evidence to establish what was ultimately a dispositive issue.
The Court found that the tribunal had, in making the Award, exercised “unreasonable initiative” and breached natural justice.
C. There was a connection between the breach of natural justice and the Award, and JVL was prejudiced
The Court stated that there was “little doubt that the collateral contract point was connected to the making of the [A]ward”. The tribunal had seemingly not considered whether the evidence before it showed that the PA Arrangement satisfied the criteria to constitute a collateral contract. Since JVL was not given a reasonable opportunity to present evidence and advance submissions on the collateral contract exception, JVL had indeed suffered prejudice.
Following a quick rejection of JVL’s other submissions (as mentioned above), the Court concluded that the Award was to be set aside.
Comments
It is well-established that there exists a high threshold in respect of which an arbitral award may be set aside. This case is therefore significant in how it illustrates that the grounds for setting aside, while few and narrow, are nonetheless in the words of the Court, “fundamental in nature”. The Court was firm in maintaining that, while arbitration has the additional inquisitorial element compared to litigation, arbitration remains adversarial at its core. However strongly or poorly a case may have been formulated, or however an arbitrator may be compelled to reformulate the case, it remains at the parties’ discretion as to the issues that are to be determined.
It is not envisaged that this case will undermine arbitral awards made in the future. Instead, this case serves as an excellent reminder as to the fairness of the legal system not just in Singapore, but in the common law world.