SIArb Newsletters

By Owain Stone - KordaMentha

One of the key benefits that is often cited for arbitration, compared to litigation, is flexibility. Flexibility in the choice of arbitrator(s), in process and in approach. However, a recent Singapore Court of Appeal decision has highlighted that there are limits to this flexibility, particularly as it relates to the assessment of damages.

Various findings were made leading to the Court of Appeal’s decision in CEF and CEG v CEH1 [2022] SGCA 54 decision setting aside the arbitral award. Whilst there are several aspects which will be of interest to arbitration practitioners, particularly on the issue of natural justice, this article considers the comments in the decision on the quantum of damages. The Court of Appeal decision stated that:

“In the Award, the Tribunal noted that there were deficiencies in the respondent’s evidence as regards proof of its reliance loss, but nonetheless proceeded to award the respondent 25% of each claimed head of reliance loss. We reproduce the relevant excerpts of the Award as follows:

Ancillary capital expenditure

...

443. The Tribunal notes that the Respondent could have produced various source documents to show its expenditures (e.g., purchase orders and invoices for purchase of equipment). Such production would have been reasonable in light of the [appellants’] objection to the figures stated by the Respondent and would have assisted the Tribunal in ascertaining whether the numerous figures stated in the audited reports are directly relevant to the claim. However, the Respondent failed to submit the relevant source documents.

444. Nevertheless, the Tribunal believes that the Respondent had suffered loss by spending significant ancillary capital in relation to the Plant. Accordingly, bearing in mind the deficiencies in the Respondent’s evidence, the Tribunal decides to award the Respondent 25% of the ancillary capital expenditure claimed amounting to [R$57,825,000]."2 (emphasis added)

The decision included several similar extracts from the Award for the other heads of reliance loss claimed, each referring to the ‘deficiencies with the Respondent’s evidence’ and each reaching the decision to award the Respondent 25% of the respect head of loss.

Relevantly it was decided that the Tribunal had:

“inexplicably proceeded to adopt a “flexible approach” and to award the respondent 25% of each head of reliance loss, without first telling the parties it would be doing so or giving them the opportunity to address the Tribunal on the same. Had the Tribunal indicated beforehand that it would apply this flexible approach, the appellants would have had the opportunity to decide whether to ask the respondent to produce the source documents, or to take a forensic risk by resting their defence only on the burden of proof.^”3

“The Tribunal explained that it was applying a “flexible approach” to proof of damage as “it is impossible to lay down any definitive rule as to what constitutes sufficient proof of damage.^"4

Whilst it may not be possible to lay down definitive rules on what is sufficient proof of damages, as the Court of Appeal judgment stated, “…both parties would have expected that the Tribunal would only award the respondent loss that the respondent could prove.”

Not looking for perfection – “… a court will make the best estimate it can”

The most common form of relief being sought in arbitrations is damages. However, our experience is that the proof of these damages is sometimes not given the same degree of rigour or forethought afforded to the liability issues. Furthermore, the focus often doesn’t turn to damages until relatively late in the process. Damages in the CEF and CEG v CEH [2022] SGCA arbitration appear to have been limited to so-called ‘reliance losses’ i.e., those costs that were incurred as a result of the contract, which are often referred to as wasted expenditure.

The general principles and purpose with respect to reliance loss is subject to the principle that:

“A contracting party who is unable to establish the precise measure of his or her loss is not thereby deprived of his or her right to recover damages. In some cases, a court will make the best estimate it can... In other cases, a court may proceed on the basis that ‘a starting-point’ for the calculation of loss is the ‘expenditure incurred and wasted in reliance on the... promise.^"5 (emphasis added)

Whilst there may need to be some estimation as to whether a cost was, indeed “wasted in reliance on the promise”, the starting point is the actual expenditure incurred, and the burden of proof of such expenditure lies with the claimant. In this respect, this decision acknowledged that:

“Where precise evidence is obtainable, the court naturally expects to have it. Where it is not, the court must do the best it can.^"6

However, doing the best it can is only relevant where precise evidence is not obtainable. In our experience, this is rarely the case for reliance losses, as it should be relatively straightforward for the claimant to demonstrate, and provide verifiable proof, that such expenditure was incurred. Critical of the ‘flexible approach’ taken by the Tribunal, the Court of Appeal decision stated:

“The Tribunal had expressly stated that there were deficiencies in the respondent’s evidence due to the respondent’s failure to produce the relevant supporting documents or to explain how the existing documents substantiated its claim. ^"7

Verification of costs

Some estimation and lay evidence may be required regarding the question of whether a particular element of expenditure was “wasted in reliance on the promise”, compared with so-called expectation costs. However, whether such expenditure has been incurred (and paid) should be a matter of fact, verifiable through suitable documentation.

Typically, invoices, purchase orders, supply contracts, general ledger records, payment records, bank statements and related documentation can be provided to answer the following questions:

• Was the cost incurred?

• Has the cost been paid?

There may be questions as to, say, whether costs were incurred in the relevant period, or whether such costs may include inter-company uplifts to recover group overheads. In verifying the extent and nature of costs incurred, it is important to focus only on those items (if any) where there is some question as to whether certain costs were actually incurred and/or paid.

While invoices and related documents may show that a liability has been incurred, such invoices may subsequently be updated by credit notes such that the actual amount incurred may be lower than the original invoice. Alternatively, a particular amount may have been incurred and paid by a related entity, raising the question of whether the amount was then charged through to the claimant. Therefore, depending on the nature of the expenditure, it may be appropriate to trace the amount on the invoice through to the actual payment and, in some circumstances, to consider subsequent general ledger information for the (relatively rare) situation where a credit note is provided after full payment.

Wasted?

It is not sufficient to simply show that a cost was incurred as a result of an act or breach; it is necessary to show that it was “wasted in reliance on the promise”. Often, non-accounting evidence is required to help the tribunal assess whether the cost was incurred as a result of the act or breach, or if it would have been incurred anyway. However, accounting evidence may be required to help show whether the expenditure gave rise to an asset which may subsequently generate some value for the claimant, either through use or sale.

Reasonably incurred?

Reliance losses are often claimed in situations where there is sufficient uncertainly as to the extent (if any) of expectation profits that would have been earned but for the act or breach. In those circumstances, reliance losses are claimable based on the implicit assumption that a rational claimant would not have incurred costs if it did not have a reasonable expectation of at least recovering those costs. However, there are some cases where the respondent seeks to show that it was not reasonable for the claimant to have incurred a cost, as there was no realistic chance of that money being recouped even absent the act or breach. Our understanding is that in these circumstances the burden of proof shifts; it is for the respondent to provide sufficient appropriate proof that such amounts would not have been recouped.

Proof for expectation losses

Whilst the CEF and CEG v CEH [2022] SGCA judgment focussed on reliance losses, we understand that the general burden of proof still lies with the claimant for expectation losses. Comparatively, the nature (if not the extent) of evidence required to prove expectation losses can often be more complex.

Whilst financial information may be required to show the historical performance of the claimant (whether before or after the alleged act or breach being arbitrated about), it is likely that forecasts will need to be made regarding the ‘but for’ financial performance that would have happened but for the complained of act or breach being complained about. It is, therefore, less likely that expectation losses can solely be supported by the sort of information, such as invoices, purchase orders etc., that are required for reliance losses. However, actual budgets or forecasts that were prepared prior to the relevant act or breach may help to give guidance over the likely financial performance that may have been experienced in the ‘but for’ or ‘counterfactual world’.

As one starts to consider the counterfactual historical performance, the actual future performance that may occur and the counterfactual future performance that may have occurred, the degree of risk and uncertainty grows. It is in these circumstances that the legal cases refer to the need for doing the ‘best one can’.

Conclusion

It is often heard that arbitrators may look to give a Judgment of Solomon and simply look for a damages figure that will leave both parties unsatisfied. The relative lack of public arbitral awards (outside of the investor state field, or where challenged via a Court) means the extent to which this fear is justified is hard to quantify, but the CEF and CEG v CEH [2022] SGCA judgment highlights the risks for arbitrators if they apply such ‘wisdom’ without a proper basis, as well as the risk to the claimant if they do not satisfy the basic burden of proof for losses.

In arbitration, as well as litigation, the quantification of damages is not always an exact process; there is often an element of estimation rather than calculation of known amounts. Triers of fact, whether a judge or arbitrator(s), need to do the best they can with the evidence provided. However, a claimant must still put forward sufficient appropriate evidence to support its claim. Whether, when and why an actual cost was incurred are facts which can normally be verified based on relatively straightforward documentation; the claimant should include documentation to support such costs. They should not rely on the tribunal being ‘flexible’ in their approach to such proof.

¹ Civil Appeal No 153 of 2020, Originating Summons No 241 of 2020

² Paragraph 114, Civil Appeal No 153 of 2020, Originating Summons No 241 of 2020

³ Paragraph 110, Civil Appeal No 153 of 2020, Originating Summons No 241 of 2020

⁴ Paragraph 115, Civil Appeal No 153 of 2020, Originating Summons No 241 of 2020

⁵ Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54, at 19

⁶ Devlin J in the English High Court decision of Biggin & Co Ld v Permanite, Ld [1951] 1 KB 422, as quoted at Paragraph 115, Civil Appeal No 153 of 2020, Originating Summons No 241 of 2020

⁷ Paragraph 117, Civil Appeal No 153 of 2020, Originating Summons No 241 of 2020