SIArb Newsletters

By  Duncan Turner - Johannesburg Bar/Arbitration Foundation of South Africa

Nature of matter: (i) arbitrator removal (apparent bias); (ii) setting aside of Award - breach of agreed procedure, excess of jurisdiction, breach of natural justice

Case Summary

1. The Singapore International Commercial Court dealt with three applications arising from the same arbitration, in which the Arbitral Tribunal was required to address disputes between two energy groups arising from the sale of shares in a subsidiary of one group (Seller) to the second group (Purchaser). Damages of USD5 Bn were claimed under three main claims: (a) A claim for breach of contractual warranties; (b) A claim that the Purchaser had been deceived into investing in the subsidiary by misrepresentations concerning five aspects of the operations of the oil and gas fields of the subsidiary: Reserves, Prospects, Production, Decommissioning and Maintenance and, as a result, had overpaid; (c) A claim under a “Pre-Effective Date Indemnity” (PEDI) clause which it alleged applied to three of the five topics in the deceit claim, namely : Reserves, Decommissioning and Maintenance.
2. At an early procedural conference, the Tribunal ordered a bifurcation, with liability to be determined first (liability phase) and damages to follow if liability was established. Also at an early stage, the Tribunal dealt with the breach of Warranty claim as a preliminary issue and in August 2017 it delivered its First Partial Award, in which it upheld a limitation clause relied upon by the Seller and dismissed the breach of warranties claim.
3.  The arbitration on the remaining liability phase issues was then heard over 35 days, with oral evidence of 34 factual witnesses and 11 expert witnesses, with the record running to over 472,000 pages. Having heard all the evidence and received all of the parties’ submissions on the liability phase matters, the following occurred:

Arbitrator bias – OS8

4. The challenge to the President’s impartiality was made on the grounds of apparent bias - there was no allegation of actual bias. The perception of bias was alleged to arise from the President’s appointment to a panel of experts advising the national Court in the Purchaser’s home country (“R”). The appointment had occurred in 2018, around the time that the post-hearing briefs were delivered in the arbitration. The Seller alleged that the appointment was problematic because : the Purchaser was state-owned by R; senior executives in the Purchaser were appointed by the R government; the R government had an interest in the outcome of the arbitration; the R Courts were not independent of the government and therefore were part of and shared the interests of the R government; by accepting the appointment by the R Court, the President was in direct engagement with R government, the owner of the Purchaser (a party in the arbitration); the President did not disclose his appointment to the parties.
5. In assessing these allegations, the Court was critical of the allegations having been made, reminding the parties that “an assertion of bias, whether apparent or actual, has to be carefully considered and made only where there is a compelling factual basis.”  The Court then went on to explain why a factual basis did not exist in this case. Accepting that the Purchaser was owned by R government, the Court found that no probative evidence had been placed before it to establish that the R Courts did not exercise their power independently of R government. It rejected the Seller’s reliance on internet searches, excerpts from speeches at conferences and newspaper articles and relied instead on the expert evidence presented by the Purchaser. While confirming that it was not necessary for the Purchaser to have proved an actual lack of independence and that the test for apparent bias assumes the assessment is done by a “fair minded and informed observer” who is not a lawyer, the Court  emphasised that such a person is not “wholly uninformed and uninstructed about the law in general” and would “take the trouble to inform himself or herself on all relevant facts that are capable of being known by members of the public generally”.  While the hypothetical observer may not have “specialised knowledge” of the law, the Court held that such a person would make an effort to understand the true legal position before drawing conclusions from newspaper articles and other commentary.
6. The Court also looked at the factual basis on which the President had been appointed to the panel: first, that his appointment required him to provide “opinions, advice and suggestions independently, objectively and impartially, and to do so in an individual capacity based on professional expertise”, which indicated an absence of shared interest with R Court or R government. Second, the appointment was not a standing appointment and he had not in fact been appointed to provide services – he was merely a member of a panel available to do so. In the process of its assessment, the Court discussed and distinguished two decisions of the Privy Council, Bolkiah v Brunei Darussalam [2007] UKPC 62 and Almazeedi v Penner [2018] UKPC 3.
7. Although it decided the issue of bias on the above findings, the Court also referred to the Third Partial Award, rejecting the Seller’s challenge to the admissibility of the Third Partial Award in the assessment of apparent bias.  The Seller had argued that the Third Partial Award was not admissible inter alia because it was delivered after the challenge had been made. The Court, relying on Halliburton Company v Chubb Bermuda Insurance Ltd [2020] UKSC 48 confirmed that the correct approach when assessing a challenge based on bias was to assess all circumstances as they exist at the time that the Court hears the application. For this reason, the Court held that the content of the Third Partial Award was admissible and confirmed that it also dispelled any doubts over the President’s impartiality. 

Breach of agreed arbitral procedure – Second Partial Award

8. The Seller argued that the Tribunal was required to deliver a single Award on the liability phase issues and that by delivering two Awards (the Second and Third Partial Awards), it breached the agreed procedure.  The Court summarised the questions to be answered as follows: (a) whether there was an agreed arbitral procedure; (b) whether it was breached; and (c) whether such breach was material enough for the Court to set aside the Award.
9. The Court held that the Seller failed at the first hurdle – finding that parties had not agreed on a specific procedure that required a single Award and therefore there had been no breach. It rejected the Seller’s argument that “the Tribunal gave the parties the impression that a full Award addressing all five topics was forthcoming and there was no indication otherwise”. The Court found that in any event, if such an impression was created, especially one unilaterally given by the Tribunal, it does not amount to an agreement between the parties. It also upheld the Purchaser’s contention that Rule 28 of the SIAC Rules, being the applicable arbitral rules, states that the Tribunal “may make separate Awards on different issues at different times”.  As such, in the absence of an express contrary agreement or specific procedural order that there would be a single Award,  no such procedural restriction was imposed on the Tribunal. 

Excess of jurisdiction and breach of natural justice – Second Partial Award

10. The remaining challenges to the Second Partial Award were all based on allegations that the Tribunal had exceeded its jurisdiction and/or breached the Seller’s right to natural justice.  After setting out the relevant legal principles, the Court addressed the four grounds on which the Seller challenged the Second Partial Award.
11.  The first ground related to the proper interpretation of the SEC Standards (“the SEC Standards Complaint”), which was crucial to the Deceit Claim on the Reserves Representation.  Having found that the interpretation of the SEC Standards was clearly a central question to be answered by the Tribunal, the Court re-emphasised that “it is important to remember that excess jurisdiction concerns the question  of whether the issue that has been determined by a Tribunal falls within the scope of submission to arbitration. The issue must be distinguished from the arguments of the parties on the issue. If the question is whether the Tribunal made a determination that does not adopt or is not in line with the parties’ respective position on the issue, then that is more pertinent to the question of natural justice (not to an excess of jurisdiction).”
12. Tribunal dealt with the “breach of natural justice” allegations on a factual basis first. It found, with reference to the record of evidence, that the interpretation adopted by the Tribunal was in fact raised during the proceedings and put to the Seller’s witness. The Court also emphasised that a Tribunal is not bound to adopt an either/or approach and may choose to embrace a middle path between the two parties’ positions, as long as it is based on the evidence before it.  If it does so, there is no need to consult the parties unless the Tribunal’s reasoning represents a dramatic departure from what has been presented by the parties.
13. The second ground was directed at the findings on the PEDI.  The Purchaser alleged that the Seller had overstated the value of the Reserves in its 2011 accounts, having done so “other than in accordance with SEC Rules and [the subsidiary’s] own internal Reserves Policies”. Having overstated the Reserves prior to the Sale, those reserves had to be “de-booked” after the effective date, resulting in a subsequent writing-down of the value of the subsidiary’s assets and causing a loss to the Purchaser, as the new shareholder. The Tribunal found, on the facts, that the Reserves had been overstated in 2011 and that the SEC standards were breached.  The Seller’s challenge based on excess of jurisdiction on this point was dismissed out of hand, because there was no dispute that the PEDI claim on the Reserves was an issue within the scope of submission to the arbitration. The Seller also alleged a breach of natural justice, asserting that there was a difference between: i) the SEC standards for the determination of Reserves which had formed the subject matter of the expert evidence and the Tribunal’s decision; and ii) the standard used in the Subsidiary’s financial statements, which were prepared in terms of the SORP (not the SEC) standard. The Seller argued that no expert evidence had been given on the differences (or similarities) between the SEC and SORP standards and consequently, when the Tribunal made a finding that the Reserves in the financial statements had been misstated, it did not provide the Seller with an opportunity to distinguish the SEC standards from the SORP standards. The Court rejected these arguments on the facts, pointing out specifically that the Seller had conceded that the Reserve volumes estimated for the 2011 year had been estimated according to SEC standards, not SORP, despite the reporting obligations of the subsidiary being under the SORP standard.  It found that the Seller itself had had little or no regard for the relevant standards when it came to recognition of the Reserves and that the distinction it sought to draw in challenging the Tribunal decision was inconsistent with the way in which the Seller itself had reported on and represented the Reserves.
14. The third ground was the so-called “Business Plan Complaint”.  Here, the Seller contended that its 2012 business plan had made necessary disclosures which should protect it from the allegations of deceit in respect of the Reserves. This defence was rejected by the Tribunal, finding that the 2012 business plan had been “contaminated” by other misrepresentations. The Seller contended that this rejection was made in excess of the Tribunal’s jurisdiction and in breach of natural justice. The Court dismissed both these arguments pointing out inter alia that the Seller had conflated matters of evidence with matters of jurisdiction. The business plan had been raised by the Seller as a reason (i.e. evidence) in support of its defence. As such, it was appropriate and within the Tribunal’s jurisdiction, to consider and evaluate the integrity of the 2012 business plan and its probity as evidence. On the alleged breach of natural justice, the Seller alleged that the  finding impugning the 2012 business plan was not an issue specifically pleaded and therefore the Seller had been denied a fair hearing or opportunity to present its case on this issue.  For the same reasons given in respect of the “excess of jurisdiction” argument, the Court found that the Tribunal was fully entitled to make its finding on the 2012 business plan, as it constituted the Tribunal’s assessment of the evidence presented in respect of the Deceit and PEDI claims. As the Seller had relied on the integrity of the 2012 business plan as a central evidential plank of its case, there could be no complaint that the Tribunal, in its decision, assessed and interrogated the integrity of that plan. In addition, the Court showed that the issue had in fact been raised with the witnesses and that, having regard to the manner in which the arbitration unfolded, the reasonable litigant would have foreseen the possibility that the Tribunal would find that the 2012 business plan had been “contaminated”, having regard to the manner in which it was dealt with in the evidence.
15. The fourth ground was the “Reliance Point”, challenging the Tribunal’s finding that the Purchaser had relied on the alleged misrepresentations. The Tribunal found that the Seller had made the Reserves Representation (inflating the Reserve values) with the intention of inducing the Purchaser to enter into the SPA, and that the Purchaser was so induced. The Seller contended that the Tribunal’s finding was made in breach of natural justice because: first, the Tribunal did not consider its submissions on lack of credibility of the Purchaser’s witnesses; and second, that the Tribunal did not take account of two fundamental contentions and had instead used the PEDI clause as “a definitive indication that the Purchaser relied on the Reserves representation even though this argument was never suggested or advanced by the parties”.
16. The Court did not entertain these challenges. In doing so, the Court emphasised the high threshold to be met in a case where a Tribunal is accused of “not bringing its mind to bear on an important aspect of the dispute before it”. Such a case is actionable only where it is “clear and virtually inescapable” that the Tribunal disregarded an important issue or submission. The Court dismissed the Seller’s objections as it found that they were really attacks on the merits of the Tribunal’s decision and did not meet the required threshold. Either the Tribunal did specifically address the points or it reasoned that they were immaterial and did not require extensive consideration. 

Challenges to the Third Partial Award

17. The Seller raised six grounds of complaint in challenging the Third Partial Award. Again, these grounds rested on “excess of jurisdiction and/or breach of natural justice” allegations.  Each of the challenges to the Third Partial Award were, like those directed against the Second Partial Award, focussed on detailed factual distinctions which the Seller sought to draw between the matters submitted to arbitration and the Award delivered by the Tribunal. The Court undertook a detailed analysis of each of these challenges and set out why each challenge was without merit, applying the principles it had set out when dealing with the Second Partial Award.

Ruling

18. The Court dismissed all three of the Seller’s applications in their entirety.