Singapore: Procedural Innovations Not Anticipated in Arbitration Agreement

Case Note on AQZ V ARA [2015] SGHC 49

Introduction

There have been many procedural innovations in the past few years as arbitral institutes strive to keep up with current best practices, such as the emergency arbitrator procedure, raising the quantum limits for an expedited procedure to apply, joinder of parties and consolidation of related arbitrations etc.

AQZ v ARA [2015] SGHC 49 (“AQZ”) touches on the question on whether new procedural innovations that the parties did not anticipate when they made their arbitration agreement are binding on them. In addition, AQZ offers insight into how the expanded definition of the ‘in writing’ requirement for an arbitration agreement would be treated (i.e. brought about by the 2006 revisions to the UNCITRAL Model Law and subsequently incorporated into Singapore legislation by Section 2A of the International Arbitration Act (Cap. 143A) (“IAA”)). In particular, AQZ considered the question of whether a unilateral written record of an arbitration agreement that has not been acknowledged by the other party will suffice to fulfil this expanded ‘in writing’ requirement.

Facts

The Supplier is a mining and commodity trading company and the Buyer is a Singapore subsidiary of an Indian trading conglomerate. The Parties negotiated for the sale of two shipments of coal and agreed on the first shipment of coal. The arbitration agreement in the contract for the first shipment (the “Contract”) provided:

“16. ARBITRATION

Any dispute, difference or disagreement between the parties arising under or in relation to this Contract, including (but not limited to) any dispute, difference or disagreement as to the meaning of the terms of this Contract or any failure to agree on any matter required to be agreed upon under this Contract shall, if possible, be resolved by negotiation and mutual agreement by the parties within 30 (thirty) days. Should no agreement be reached, then the dispute shall be finally settled by arbitration upon the written request of either party hereto in accordance with the rules of conciliation and arbitration of the Singapore International Arbitration Centre (SIAC) by three arbitrators in English Language. The result of all such arbitration shall be final and binding for the parties and for all purposes.”

However, a dispute arose over the second shipment. The Buyer alleged that there was an oral agreement over the terms of the second shipment which was varied and recorded in two draft contracts sent to the Supplier. The two draft contracts contained the same arbitration clause as the one in the Contract. The Supplier alleged that there was no agreement for the second shipment, so no delivery was made by the Supplier under the second shipment.

The Buyer alleged that the Supplier had breached the contract for the second shipment, so the Buyer commenced arbitration under the SIAC Rules (2010 Edn) against the Supplier to recover its losses. The SIAC Rules (2010 Edn) (now superseded by the 2013 Edn) contained an Expedited Procedure, which provided, inter alia, for an accelerated timetable and for the matter to be decided by a sole arbitrator, unless the Chairman of the SIAC decides otherwise, if the amount in dispute was below a certain threshold. The SIAC President granted the Buyer’s application for the Expedited Procedure to be used. The arbitration therefore proceeded under the Expedited Procedure before a sole arbitrator. The Supplier proceeded under protest because:

1. there was no contract between the Parties for the second shipment, so there was no arbitration agreement between the Parties and hence the sole arbitrator had no jurisdiction over the matter;
2. the SIAC Rules (2010 Edn) should not be applied because they were not in existence at the time when the alleged contract for the second shipment was made;
3. the applicable version of the SIAC Rules should have been the 2007 Edn, which were in existence at the time when the alleged contract for the second shipment was formed; and
4. the arbitration was not being conducted in accordance with the arbitration agreement because the Expedited Procedure was administered by a sole arbitrator but the arbitration agreement provided for three arbitrators.

The arbitration was bifurcated into jurisdiction and liability as the first tranche followed by quantum in the second tranche. The sole arbitrator published his interim award on jurisdiction and liability upholding his jurisdiction and finding in favour of the Buyer on liability.

The Supplier applied to the Singapore High Court to appeal against the interim award under Section 10(3) of the IAA read with Article 16(3) of the Model Law or (in the alternative) set aside under Section 3(1) of the IAA read with Article 34(2)(a)(iv) of the Model Law (i.e. arbitral procedure not in accordance with the agreement of the parties).

Judith Prakash J heard the application and rendered judgment on 13 February 2015. Various issues were canvassed at the hearing, which are discussed in turn below.

Does the ‘de novo’ nature of court hearing on jurisdiction mean that the Court has to re-hear the jurisdictional challenge before the tribunal?

Initially, the Supplier argued that Prakash J should hear the oral evidence all over again because the Court’s determination of the jurisdictional challenge should be on a de novo basis. However, the Supplier subsequently abandoned this argument, but Prakash J took the opportunity to make some observations on this issue as her guidance would be important for future cases.

1. The established position is that a jurisdictional challenge before the Court would be heard de novo and that the views of the tribunal carried no legal or evidential value. However, this does not mean that the Court will have a full re-hearing for every application.
2. In most cases, the Court will be able to rely on the award, the transcripts of the arbitration and documents relied upon by the parties in order to determine the jurisdictional challenge. However, the Court will allow oral evidence and/or cross-examination in limited circumstances when it considers that:

1. there is or may be a dispute on facts; and
2. a re-hearing would secure the ‘just, expeditious and economical’ disposal of the application.

3. The existence of factual disputes alone is not sufficient to justify a re-hearing if the Court is not disadvantaged by sifting through the transcripts and documentary evidence produced to the tribunal.
4. If a party considers that a re-hearing is necessary, that party should, at an early stage and preferably when it makes the application, file the affidavits of evidence of the witnesses it intends to call and apply to have these witnesses heard and cross-examined in Court.
5. Although there is no restriction on the introduction of new evidence for the application before the Court, the Court may feel sceptical about why such evidence was not before the tribunal and may take this into account in determining costs.

Should the supplier have used Article 16(3) or Article 34(2) of the Model Law to challenge jurisdiction?

Given that the sole arbitrator had published his interim award on both jurisdiction and liability, the Court needed to decide whether the Supplier could still challenge the ruling on jurisdiction by way of an appeal under Article 16(3) of the Model Law or whether its only remedy is to apply to set aside the interim award under Article 34(2) of the Model Law?

To answer this question, Prakash J reviewed the drafting history of the Model Law. The drafters noted that there were two competing policy considerations on the proper timing of court intervention on jurisdictional issues. On the one hand, an early intervention by the court could prevent wastage of time and costs by a tribunal without jurisdiction, but on the other hand, easy accessibility to such relief could be abused by a recalcitrant party to delay the arbitration.

Eventually, the drafters decided that a reasonable compromise would be to allow early court intervention only if the tribunal decided to rule on jurisdiction as a preliminary issue. The tribunal was therefore empowered to weigh the two competing policy considerations and decide if allowing jurisdiction to be tried as a preliminary issue would be the best way forward. If not, the court was only permitted to intervene on jurisdiction at the setting aside stage.

Having considered the drafting history, Prakash J held that, so long as an interim award dealing with jurisdiction also dealt with the merits (albeit to a marginal extent), it was not open for a dissatisfied party to the appeal against the interim award under Article 16(3) of the Model Law.

Can the requirement that an arbitration agreement be ‘in writing’ mean that a unilateral written record by one party which is not acknowledged by the other party will suffice?

Prakash J heard arguments from the Parties on whether a contract for the second shipment was formed. She held that the contract was formed orally and that the terms were identical to the terms of the first shipment (apart from one term). Hence, the only written records of the arbitration agreement were in the Contract and the two draft contracts for the second shipment that were disputed by the Supplier.

The question arose whether the Contract and the two draft contracts satisfied the requirement that an arbitration agreement be ‘in writing’. In this connection, Section 2A of the IAA provides, inter alia, that:

“…
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if its contents is recorded in any form, whether or not the arbitration agreement or contract has been concluded orally, by conduct or by other means.”

Prakash J reviewed the parliamentary debates on whether the IAA should incorporate the 2006 revisions to the UNCITRAL Model Law and the UNCITRAL Secretariat’s drafting history on the 2006 revisions of the ‘in writing’ requirement. She found that the rationale behind the expanded definition of the ‘in writing’ requirement was to eliminate the need to sign the arbitration agreement or an exchange of messages agreeing to the same because of:

1. the commercial impracticality in some situations for parties to have a written agreement; and
2. the need for commercial flexibility triumphed the need for certainty in requiring signed agreements or an exchange of messages.

Accordingly, a written record by one party of the arbitration agreement would suffice and it did not matter that the arbitration agreement was neither signed nor confirmed by all the parties. Any dispute over the existence of the arbitration agreement due to such unilateral records (eg. authenticity of the arbitration agreement, conflicting written records etc…) would be resolved by the Court in the usual way.

Hence, Prakash J ruled that the Contract and the two draft contracts for the second shipment satisfied the ‘in writing’ requirement under Section 2A of the IAA.

Were the parties bound by the SIAC Rules (2010 edn) which post-dated the contract?

Prakash J noted that, based on prior case law, there is a presumption that reference to rules of an arbitral institute would refer to such rules as are applicable at the date of commencement of arbitration, provided that such rules contain mainly procedural provisions. However, if the rules contain mainly substantive provisions, then those in force at the date of the contract would apply.

The rationale behind this presumption was that procedural provisions can easily become out of date, so the operation of the arbitration agreement could be frustrated if the arbitration agreement did not incorporate the revised procedures.

It was irrelevant that the reference to the SIAC Rules in the arbitration agreement were not followed with the words ‘for the time being in force’. If the parties’ intention was to refer to a particular version of the SIAC Rules, they should expressly state the applicable version in their arbitration agreement.

Accordingly, Prakash J held that the Parties were bound to undergo the Expedited Procedure, even though the SIAC Rules at the time of the Contract did not have such a procedure.

Was the arbitration in accordance with the parties’ agreement given that a sole arbitrator was appointed instead of three arbitrators?

Rule 5.2(b) of the SIAC Rules (2010 Edn) provided that the Expedited Procedure shall be referred to a sole arbitrator unless the SIAC Chairman decides otherwise. The question which arose was whether the SIAC Chairman was bound to appoint three arbitrators since the arbitration agreement expressly provided for three arbitrators and the Parties did not contemplate that their provision of three arbitrators could have been overridden by the SIAC Chairman when they formed the arbitration agreement.

Prakash J held that a purposive approach should be taken in interpreting the arbitration agreement (read with the SIAC Rules (2010 Edn)), which meant that SIAC Chairman has the discretion to decide whether to appoint one or three arbitrators. Otherwise, a sole arbitrator can never be appointed to hear the dispute, regardless of the complexity or quantum of the dispute. The factors that the Contract pre-dated the SIAC Rules (2010 Edn) and that the Parties had expressly provided for three arbitrators were just some of the considerations which the SIAC Chairman should take into account.

Even if the Supplier was right to argue that the Expedited Procedure should be heard by three arbitrators, Prakash J noted that the Supplier had failed to show that the breach was material or that it suffered prejudice as a result of the breach, which are material factors that the Court takes into account in deciding whether to set aside the interim award.   As the Supplier has failed to show why the discretion should be exercised in its favour, Prakash J upheld the interim award.

TAKE AWAY POINTS

AQZ is a salutary case where Prakash J eschewed legal technicalities for a pragmatic approach that is in line with what commercial parties expect.

1. As most hearings today are largely documented, it is only very rarely that a full re-hearing of the jurisdictional challenge is required. A de novo hearing does not necessarily mean that the duplicate work has to be done by the parties. Prakash J’s decision that the need for a re-hearing is fact sensitive is to be applauded.
2. The ruling that parties are bound by the latest procedural innovations in arbitration would allow them to enjoy the efficiency and cost effectiveness which such innovations were designed to bring. In reality, how many parties (or their lawyers) would really object to such innovations if they had these innovations in mind at the time of contracting? In this regard, the Supplier’s objections would appear to be ‘after-thoughts’ by a dissatisfied party to thwart the arbitral process.
3. The setting aside of an award leads to serious consequences, such as the tremendous waste of time and costs and frustration of parties’ commercial expectations that the award is the final step in a long journey to end their dispute. It is therefore only fair that the losing party should show that any breach of the arbitration agreement was sufficiently material and serious before the Court considers setting aside the award.

However, it is unfortunate that Prakash J did not elaborate more on what constituted ‘procedural changes’ versus ‘substantive changes’ in determining whether revisions to the arbitral rules would apply. A similar dichotomy between the ‘substantive’ and ‘procedural’ exists in conflict of laws in determining whether the applicable rule should be that of the procedure of the forum state or the substantive law of the contract. Case law shows that this dichotomy is apt to generate much controversy.

In the context of international arbitration, the number of arbitrators (whether three or one) could be just as ‘substantive’ as it is ‘procedural. For example, one party may have expected to have the right to appoint their own arbitrator whom they feel is experienced in the subject matter and understands their culture. This is the reason why some cross-border contracts provide for a tribunal of three arbitrators, so that the parties can each have a cultural representative on the tribunal. Classifying the number of arbitrators as a ‘procedural’ rule may thwart such substantive expectations.

It is hoped that future case law can clarify the dichotomy further.