Setting aside of part of arbitral award – breach of natural justice; Tribunal’s power
Case Summary
The applicant was the Claimant in the arbitration.
The main active Respondent (1st Respondent) in the arbitration had engaged the Claimant to provide certain services on the terms of a services agreement dated 18 December 2018 (“SA”) which included the following provisions: (1) the SA was for an initial term of 24 months and (2) clause 10.2 provided that if the SA was terminated during the Initial Term, the 1st Respondent would pay a “Make-Whole Amount” to the Claimant. The exception was if the termination had occurred pursuant to the grounds under clause 16.3 (including clause 16.3.1).
In the course of the Initial Term, the 1st Respondent purported to terminate the SA. The Claimant alleged that the 1st Respondent had wrongly terminated the SA and in doing so, the 1st Respondent has committed a material breach which brought the SA to an end.
The Claimant commenced an arbitration claiming, among other things, the Make-Whole Amount in the sum of USD 2.8 million against the 1st Respondent.
In the course of pleadings, the 1st Respondent pleaded in its Defence and Counterclaim (“D&CC”) that the Services Agreement had been terminated pursuant to clause 16.3.1, and so the Make-Whole Amount was not payable. The 1st Respondent did not plead that the relevant provisions on the Make-Whole Amount, or interest thereon, were unenforceable penalty clauses. (The “Penalty Issue”).
The Penalty Issue was first mentioned on 28 April 2020 (less than a month to the Evidentiary Hearing) when the 1st Respondent circulated the witnesses list, which included a legal expert on English law. The Claimant responded on the basis that “any issues involving the application of the law of England arising in [the Arbitration] can be addressed by way of submissions instead of adducing opinions via expert witnesses”.
On 6 May 2020, the 1st Respondent filed the Agreed List of Issues but did not list the Penalty Issue as an issue.
On that same day (6 May), the 1st Respondent filed an application for (among other things) to call an expert witness. This was objected to by the Claimant, specifically pointing out that the 1st Respondent had intended for the expert to cover issues, that were unpleaded, including the Penalty Issue.
Subsequently on 13 May 2020, during a telephone conference between the Tribunal and the Parties, the Tribunal rejected the 1st Respondent’s expert witness application and asked that the expert be co-counsel for the Respondent and make submissions on the English law.
On 18 May 2020, the 1st Respondent applied to amend its D&CC (“Amendment Application”) to plead the Penalty Issue as a defence but this was objected to by the Claimant and rejected by the Tribunal at the Evidential Hearing on 29 May 2020.
At the 17 June Oral Reply Hearing, the Tribunal asked that the Claimant addressed the Penalty Issue in full (the Claimant’s counsel objected to this).
Correspondences and directions ensued in which the Claimant maintained its objectionto the Penalty Issue while the Tribunal maintained that it was in issue (collectively, the Claimant’s counsels emails as mentioned and its other objections, the “Email Objections”).
On 2 October 2020, the Tribunal issued the final award (“Award”) dismissing the Claimant’s claims on the sole basis of the Penalty Issue (among other orders).
The Claimant commenced this present application to (among other things) set aside the part of the Award where the Tribunal’s decision dismissed the Claimant’s claims on the basis of the Penalty Issue. The Claimant argued that:
There had been a breach of natural justice prejudicing its rights;
The Claimant was unable to present its case;
The Award contains decisions on matters beyond the scope of the submission to the Arbitration; and
The arbitral procedure was not in accordance with the agreement of the Parties.
Ruling
The Court set aside the Tribunal’s decision on the Penalty Issue, and the parts of the Award affected by it. The Court found that the Tribunal had erroneously thought that the Claimant had agreed to the late introduction of the Penalty issue, when in fact the Claimant had objected to this (and had kept objecting to it).
There was a breach of natural justice prejudicing the Claimant, the Tribunal had exceeded the scope of submission to arbitration, and the Tribunal had acted contrary to the arbitral procedure agreed between the Parties.
A. Breach of Natural Justice/Inability to Put One’s Case
The Court found that the Tribunal never regarded the Penalty Issue to have been introduced of its own initiative; instead, it regarded that the Penalty Issue as having been introduced by the agreement of the Parties as of 13 May 2020 (but there was no such agreement).
Here, the penalty issue is a mixed question of law and fact: the 1st Respondent had acknowledged that the Amendment Application was necessitated by the need for a factual pleading to support its intended legal arguments. Where an issue is not properly before the decision maker (in this case, not pleaded), a decision on the issue is susceptible to being set aside.
In this present case, there was a breach of natural justice in the way the Tribunal concluded that the Penalty Issue had become an issue in the Arbitration – it misapprehended that the Claimant had agreed to what it was, in fact, objecting to and this misapprehension continued through to the making of the Award with the Tribunal persistently failing to engage with the Claimant’s objections.
On the facts, the Penalty Issue was not pleaded at 1st instance and the Tribunal’s rejection of the 1st Respondent’s amendment application to plead the Penalty Issue as a defence signalled to the Parties that this was not an issue in the Arbitration.
B. Exceeding the Scope of the Arbitration
As the Court concluded that the Penalty Issue was never properly introduced into the Arbitration – instead, the Tribunal acted in breach of natural justice – the Court also found that the Tribunal’s dismissal of the Claimant’s claims on the basis of the Penalty Issue was outside the scope of the Arbitration. This was a further ground justifying the setting-aside of the affected parts of the Award.
C. Proceeding Contrary to the Parties’ Agreed Procedure
The Parties had agreed on the following: the Arbitration is to be expedited with completion by 2 July 2020; the procedural time-table that was embodied in PO1 (as adjusted by PO2) contemplated pleadings, document production, witness statement, oral testimony (evidential hearing) and written closing submissions and reply by 17 June 2020 and the award by 1 July 2020.
What happened instead was that on 17 June 2020, the Tribunal indicated that it regarded the Penalty Issue to be in issue in the Arbitration and in relation to this issue, the Tribunal asked that the Penalty Issue be addressed more fully including and allowing the Claimant to recall its witnesses.
The Court found that Penalty Issue was never pleaded as a defence by the 1st Respondent and its Amendment Application to plead this in its D&CC was dismissed by the Tribunal. There was therefore no responsive pleading by the Claimant. Nor did the Tribunal provide for document production on the issue. The Tribunal also only ordered the Claimant’s witnesses to be cross-examined on the Penalty Issue but did not provide for the 1st Respondent’s witnesses to return to be cross-examined.
The Court pointed out that had the Penalty Issue been pleaded in the D&CC, the dispute would have been dealt with quite differently from the way things actually transpired. The Tribunal then had expected the Claimant to respond to the Penalty Issue only at the stage of oral reply submissions – in short order, and in a limited fashion.
The Court held that these were departures from the procedure agreed by the Parties and the manner in which it has happened affirmed its conclusion that the part of the Award affected by the Penalty Issue ought to be set aside.
