By Daniel Seligman, Columbia Research Corp
Nature of the Case
Arbitration – Arbitral Tribunal – Jurisdiction
Arbitration – Award – Recourse against award – Setting aside
Facts and Chronology of Events
The respondents -- two individuals -- had been substantial shareholders in a group of companies (“the Group”). In 2012, they sold their interests to the appellants though the respondents continued working for the appellants after the sale. One appellant, BTN, is a company incorporated in Mauritius. It now owns the second appellant, BTO, an on-line travel agency with a registered office in Malaysia.
The acquisition and employment terms were spelled out in two separate contracts. Under the terms of a Share Purchase Agreement (“SPA”), BTN agreed to buy 100 percent of the ownership of the Group and pay the respondents a “Guaranteed Minimum” of US$25 million upon acquisition. In addition, BTO agreed to an additional sum, capped at US$35 million, in the form of “Earn Out Consideration” in tranches over three years following the acquisition. But the “Earn Outs” were not guaranteed and depended on the Group’s financial performance 2013-15. The SPA also contained an arbitration clause requiring arbitration under rules of the Singapore International Arbitration Centre (“SIAC”) and an exclusive jurisdiction clause in favour of Mauritian courts. The SPA jurisdiction clause stated it was “subject to” the arbitration clause.
In a separate contact, BTO agreed to employ the respondents pursuant to a Promoter Employment Agreement (“PEA”), which was annexed (in unsigned drafts) to the SPA. Under the PEAs, the respondents were employed as chief executive officer and chief technology officer of BTO for three years. Each PEA was signed by the relevant respondent and also by BTO, as the employer, and BTN, as the confirming party. The PEAs, in contrast with the SEAs, were governed by the laws of Malaysia. An arbitration clause in the PEAs required arbitration under SIAC rules and vested exclusive jurisdiction in the courts of Malaysia. The jurisdiction clause of the PEAs was also “subject to“ the arbitration clause.
Despite those differences, the agreements contained virtually identical provisions relating to the termination of the respondents’ employment with BTO. This similarity would prove important for the arbitral panel and the subsequent litigation and appeals. If the termination was “with cause,” the respondents were entitled to receive only the Guaranteed Minimum but no portion of the $35 million in Earn Out Compensation. On the other hand, if the termination was “without cause,” the respondents would be entitled to a maximum of $35 million in Earn Out Compensation.
The dispute came to a head in 2014 when BTO gave notice to the two respondents that they were dismissed from their positions with cause.
The Malaysian Industrial Court Awards
The respondents then invoked their remedies under Malaysian law and took action against BTO for alleged wrongful dismissal. Eventually, their arguments were submitted to the Malaysian Industrial Court (“MIC”), which scheduled and then adjourned several meetings because BTO did not attend even though notices were sent to its registered address in Malaysia. Finally, the MIC held hearings in BTO’s absence in April and May, and issued awards in favor of the respondents (“the MIC Awards”). According to the MIC, the dismissal of the respondents by BTO had been without just cause or excuse under the PEAs. Because BTO had not appeared in the MIC proceedings, the evidence of the respondents remained unrebutted and their dismissals were held to be unjustified.
Even when the respondents started non-compliance proceedings against BTO in relation to the MIC Awards, BTO did not respond. A hearing date was then set for February 2016. This time, BTO appeared through counsel and did not dispute that prior notices were validly served at BTO’s registered address. In April 2016, BTO wrote the president of the MIC (with copies to the respondents’ solicitors) that BTO had complied with the MIC Awards and effected full payments as required. BTO also apologized for its absence at the MIC proceedings, which it conceded was an “internal/domestic issue” that BTO was currently addressing. The next month, however, the respondents wrote to both BTO and BTN demanding payment of the Earn Out Compensation for US$35 million. No payment was received.
The SIAC Arbitration
The respondents commenced arbitration proceedings in July 2016 against both appellants under the SPA, claiming that they were dismissed without cause and were therefore entitled to receive the MIC Awards for the Earn Out Compensation.
A three-member Tribunal was constituted. The appellants took the position that the dismissals were “with cause.” The respondents responded that issues dealing with the cause of termination were res judicata by virtue of the MIC Awards (“the Res Judicata Issue”) and that as a matter of construction of the SPA and the PEAs, a determination under the PEAs by the MIC that the dismissals were without cause was binding for the purposes of the SPA (“the Construction Issue”).
After the Tribunal fixed the hearing dates for the arbitration, the respondent applied for an adjournment. In response, the Tribunal informed the parties that it was inclined to adjourn the evidentiary hearing but was willing to proceed on a hearing on agreed-upon legal issues alone if the parties agreed. The evidentiary hearing was formally adjourned and thereafter, the parties were able to agree on the legal issues. The Tribunal issued Procedural Order No 5 setting out the agreed list of legal issues.
The Tribunal issued a Partial Award in 2018, which concluded:
- The arbitration clause was mandatory but needed to be invoked by a party. When the respondents filed an action in Malaysia the appellants could have sought to stay the proceedings or otherwise restrain them or commence arbitration themselves. They did not. Nor did the appellants seek judicial review of the MIC Awards.
- The language in the SPA and PEAs regarding termination without cause was essentially the same (“the Construction Issue”). The termination provisions meant the same thing in the PEAs as they did in the SPAs and vice versa.
- The appellants were prevented from arguing that the respondents were terminated with cause by the doctrine of estoppel under Singapore law because the same question had been put before the MIC, which decided the issue when it rendered the MIC Awards (“the Res Judicata Issue”).
The effect of the Tribunal’s Partial Award was that the appellants could not introduce evidence at the arbitration proceedings to support their assertion that the respondents were terminated with cause under the PEAs or SPAs.
The High Court Decision
BTN and BTO then filed an application in the High Court seeking (among other things):
- A declaration pursuant to s 10(3)(b) of the International Arbitration Act (“IAA”) that the Tribunal had jurisdiction to determine whether the respondents were terminated without cause under the SPA. The Construction Issue and Res Judicata Issue were jurisdictional decisions made by the Tribunal and could be reviewed de novo by the High Court under s 10(3)(b); and
- In the alternative, a decision to set aside the Partial Award on the basis that the Tribunal made findings on disputed facts and that the Tribunal failed to adequately consider the companies’ arguments against giving the effect of res judicata to the MIC Awards and, more importantly, that the Partial Award was in conflict with the public policy of Singapore.
The High Court dismissed the applications - BTN and another v. BTP and another [2019] SGHC 212. The judge held that the Partial Award was not a ruling on jurisdiction because neither the Res Judicata Issue nor the Construction Issue was a jurisdictional issue. The judge also held that there was no breach of natural justice, nor did the Tribunal breach the parties’ agreed arbitral procedure, nor did it exceed its jurisdiction. The Tribunal was tasked with determining whether the findings of the MIC were contractually binding and had res judicata effect, and the Tribunal decided the very matters submitted to it on the Construction Issue and the Res Judicata Issue. The judge held that the Partial Award was not contrary to the public policy of Singapore because the appellants were not prevented from having their case heard, and there was no wrongdoing on the part of the respondents in commencing proceedings in the MIC.
The Court of Appeal Decision and Reasoning
On appeal, the appellants argued that the High Court erred in dismissing their application to set aside the Tribunal’s Partial Award and requested that the Court of Appeal conclude:
- The Tribunal committed a breach of natural justice in making the Partial Award.
- The Partial Award is contrary to the public policy of Singapore.
- The Tribunal’s decision on the Res Judicata Issue meant that it failed to decide matters contemplated by or falling within the submission to the Tribunal.
The Court of Appeal rejected all three arguments.
First, the Court concluded that the Tribunal had not permitted a breach of natural justice to occur under Art 34(2) of the UNICTRAL Model Law on International Arbitration 1985 (“Model Law”) and s 24(b) of the IAA. The inquiry consists of four stages, the Court said, citing Soh Beng Tee & Co. Pte Ltd v. Fairmont Development Pte Ltd [2007] 3 SLR(R) 86. The party who challenges the award must: 1) identify the rule of natural which was breached; 2) establish how the rule was breached; 3) establish the way the breach was connected to the making of the award; and 4) show that the breach prejudiced the rights of the party.
Although the appellants argued that the breach occurred when the Tribunal based its decision on the Construction Issue and the Res Judicata Issue on factual matters, the Court found that this was not so. The parties had agreed in advance to a non-evidentiary hearing to resolve legal issues, including whether the MIC Awards in Malaysia were binding on the applicants. The Tribunal’s decision was clearly within the scope of the parties agreement.
Furthermore, the appellants had ample opportunity to present their case before the Tribunal, the Court said. “What went wrong in regard to the MIC proceedings was an internal matter for BPO – procedurally the opportunity was afforded by the MIC but not utilized by BTO. Even if there had been a breach of natural justice at the level of the MIC proceedings, which we do not accept, such breach would not constitute ground for setting aside [the Tribunal’s] Partial Award. Section 24(b) of the IAA requires there to have been a breach natural justice ‘in connection with the making of the award’… [emphasis in the Court opinion.] That means that the breach must have been in relation to the arbitration proceedings before the Tribunal, not the MIC proceedings. An alleged breach of natural justice at the MIC proceedings and its effect on the Res Judicata Issue, if any, could and should have been brought up before the Tribunal. It has no place here….We are only concerned with an allegation of breach of natural justice that may have occurred in the arbitral proceedings.” [51-52] In the Court’s view, the Tribunal took pains to assure that a breach of natural justice did not occur.
Second, the Court said the award was not contrary to public policy under Art 34(2) of the Model Law. The inquiry is a narrow one because courts have held that this ground should only succeed in instances where upholding or enforcing the arbitral award would “shock the conscience” or be “clearly injurious to the public good,” citing PT Asuransi Jasa Indonesia (Persero) v. Dexia Bank SA [2007] 1 SLR(R) 597.
The doctrine of res judicata has long been part of the law of Singapore and its invocation is not unusual. “Accordingly, a decision based on res judicata principles can never in itself be described as shocking the conscience or wholly offensive to informed members of the public.” [56] Even if an arbitral tribunal’s findings of law and/or fact are wrong, “such errors would not per se engage the public policy of Singapore.”[56]
In this case, the appellants argued they were not aware of the MIC proceedings and the Tribunal’s decision on res judicata therefore deprived them of their right to defend themselves or make claims. But the respondents pointed out that no fewer than eight notices for the MIC proceeding were properly served on BTO. [59] The appellants also argued that the respondents were in breach of the arbitration agreements in the PEAs by seeking recourse from the MIC in the first place. Upholding the Partial Award, according to the appellants, would mean that the respondents had been allowed to take advantage of their breach, which would be contrary to public policy.
The Court rejected both arguments. The appellants knew of the MIC proceeding and could have invoked arbitration in response but failed to do so. “They neither commenced arbitration proceedings themselves nor sought to restrain the further conduct of the MIC proceedings…” [63] The res judicata argument failed, too, because it was a decision on the admissibility of evidence and was not a jurisdictional issue. Res judicata operates against litigants, not against a court. It bars litigants from raising an issue or advancing a contention if the matter has already been decided but it has no effect on a court (or tribunal’s) authority to hear the dispute in the first place.
Third, the Court concluded that the Tribunal did not abdicate its duty to decide the “with cause” termination issues because the MIC had already ruled on the subjects. This particular ground of appeal is moot, the Court said. The Tribunal determined those issues according to the parties’ agreement. As a result, “there can be no complaint by the appellants at this stage.” [80]
END