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Nature of Matter

Setting Aside of Arbitral Award – Whether an award may be set aside if an issue of law was decided wrongly; characterisation.

Case Summary

In 2001, the Claimant and the first Respondent entered into a shareholders agreement in respect of a joint venture company, Himalaya Simplot Pvt Ltd ("HSPL"). In 2012, the first and second Respondents (hereinafter referred to as the "Respondents"), the Claimant and HSPL entered into a master agreement ("MA") under which the second Respondent agreed to purchase Potato Processing Equipment ("PPE") that HIL had been using to produce potato products, and to lease a portion of HIL's food processing plant in India. It was envisaged that the second Respondent would use the PPE to produce and sell potato products to HSP for marketing and resale. 

Under the MA: 

1. HIL was to receive US$12.75m (including a US$500,000 Holdback Amount held in escrow, to be released to HIL upon certain targets being achieved); and
2. representations and warranties were provided as regards the capacity of the PPE, the operation and condition of the PPE, and that the PPE was fit for the use reasonably intended ("Representations and Warranties ").

Disputes arose between the parties in connection with the MA which were referred for arbitration. The tribunal ruled that HIL breached the Representations and Warranties as it was found the PPE was not fit for purpose to meet the production requirements on quality at the required volume. The tribunal therefore awarded the Respondents damages and retention of the Holdback Amount partly to cover expenditure on the PPE and partly as part of payment towards damages. 

The Claimant applied to set aside the arbitral award on the basis that it dealt with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration. 

The Claimant's first contention was that the tribunal exceeded the scope of submission to arbitration because the Representations and Warranties did not refer to the PPE producing "quality" potato products. In finding that the PPE had to also meet quality requirements, the Claimant contended that the tribunal had decided an issue that was not properly before it. 

The Court however disagreed with the Claimant’s contention:

1. The scope of submission to arbitration included the Representations and Warranties.
2. The Respondents had asserted in the arbitration that the warranties included the aspect of the potato products being "quality" products.
3. The Claimant had accepted, in its closing submissions, that "the Claimant and the Respondents accept that if the PPE was fit for the use reasonably intended, it must be able to produce good quality product… Accordingly, the [Respondents] have not discharged their burden of proof to conclusively show that the PPE was not capable of producing good quality product." It had also taken the position, in reply submissions, that “…the Respondent agrees with the Claimants apart from a quantitative aspect to the PPE being fit for purpose, there is also a qualitative aspect. The PPE being ‘fit for the use reasonably intended’ must mean that it should be able to produce good quality product …”.
4. An agreement to arbitrate is the foundation of an arbitral tribunal’s jurisdiction. Where the parties have agreed on what is in issue before the tribunal, the losing party cannot thereafter fault the tribunal for dealing with that issue. Here, it was common ground that whether the PPE could produce potato products of “quality” was in issue, and the tribunal did not exceed the scope of submission to arbitration in deciding that issue. The issue of whether the PPE was capable of producing “quality” products was therefore within the scope of the dispute resolution clause in the MA.
5. Even if the quality of the products were not within the scope of the dispute resolution clause, the parties had, by their conduct in the course of the arbitration, conferred jurisdiction on the tribunal to deal with that issue.

The Claimant next contended that the tribunal's finding in relation to the production requirements (i.e. quantity of product produced) was linked to its finding on the quality issue. The Court also did not accept this contention. On the facts, it was found that the tribunal had framed the issues independently. There were 2 distinct obligations the PPE had to meet: quantity and quality.

Finally, the Claimant contended that the tribunal exceeded the scope of the reference by awarding damages in excess of the Holdback Amount - by taking both qualitative and quantitative aspects into account in its assessment. The Court found that the argument on damages was dependent on its argument on "quality", and the Claimant was here seeking to challenge a point which had already been accepted before the tribunal.

The Claimant's application was therefore premised on a contentious interpretation of the MA (whether the Representations and Warranties imposed requirements not only as to quantity but also as to quality) and in reality a challenge to the substantive correctness of the tribunal's decision – i.e. a backdoor appeal. The application was accordingly dismissed.