SETTING ASIDE PART OF AN ARBITRAL AWARD ON THE BASIS OF BREACH OF NATURAL JUSTICE
In Phoenixfin Pte Ltd v Convexity Ltd [2022] SGCA 17, the Court of Appeal upheld the decision to set aside part of the arbitral award, holding that, among others, there was a breach of natural justice, as the respondent did not have a full opportunity to address the Penalty Issue which was unpleaded and for which evidence had not been led during trial.
The Court of Appeal dismissed an appeal against the High Court Judge’s (the “Judge”) decision (“Judgment”) to set aside part of an arbitral award on the basis that there had been a breach of natural justice which prejudiced the respondent, that the arbitral tribunal had exceeded the scope of submission to arbitration and that it had acted contrary to the arbitral procedure agreed to between the parties (at [1] Phoenixfin v Convexity).
Background. The respondent, Convexity Ltd, entered into a Services Agreement (“the Agreement”) on 18 December 2018 with the first appellant, Phoenixfin Pte Ltd, to provide the latter with IT security consulting services (at [2] Phoenixfin v Convexity). The Agreement provided for English law to be the governing law of the contract (at [3] Phoenixfin v Convexity).
The Agreement was for an initial term of 24 months but the first appellant purported to terminate it on 30 September 2019 alleging breach of contract by the respondent. The respondent asserted that the termination was wrongful and commenced arbitration proceedings against the appellants on 14 October 2019.
It suffices to say that at some point in the arbitration, the second and third appellants ceased to participate in the arbitration, leaving the first appellant as the active defendant (at [4] Phoenixfin v Convexity).
The key clauses of the Agreement provided that (at [5] Phoenixfin v Convexity):
Clause 10.2 – if it was terminated during the initial term, the first appellant would be liable to pay the respondent a “Make-Whole Amount” (“the Make-Whole Clause”).
Clause 11 – if the first appellant failed to meet its payment obligations, the respondent would be entitled to simple interest of 5% per month on the unpaid amount until the date of actual payment (“the Interest Clause”).
The respondent’s claim in the arbitration was for payment of US$2.8m allegedly due under the Make-Whole Clause and interest thereon at 5% per annum in accordance with the Interest Clause.
On 2 October 2020, the Tribunal issued the final award (“the Award”) in which the Tribunal dismissed the respondent’s claim on the sole basis that the Make-Whole Clause was unenforceable as it imposed an “unconscionable penalty that [was] unenforceable as [being] against public policy under English law.” (at [6] Phoenixfin v Convexity) The Tribunal further found that the Interest Clause was similarly an unenforceable penalty clause.
Conduct of arbitration proceedings. In this regard, it is important to note the following key events in the arbitration proceedings (at [7] – [15] Phoenixfin v Convexity).
On 18 May 2020, the first appellant applied to amend its Defence & Counterclaim (“Amendment Application”), which included a proposed amendment to “aver that the ‘Make-Whole Amount’ and interest claimed are ‘penalty clause[s]’ and unenforceable” (at [12] Phoenixfin v Convexity).
This was objected to by the respondent on the same day (at [13] Phoenixfin v Convexity). And it is noteworthy that by this point of time, all witnesses’ statements had been exchanged.
On 26 May 2020, the Tribunal reserved its decision on whether the Amendment Application should be granted, and by way of e-mail (“26 May 2020 e-mail”), reminded parties “of the Tribunal’s prior ruling issued orally at the 13 May 2020 telephonic session, which (i) denied the [first appellant’s] application to submit evidence on English law by way of an expert report from Dr. David McIlroy, but permitted such English law evidence to be presented by way of counsel or co-counsel submissions …” (at [14] Phoenixfin v Convexity; emphasis in original).
This reference to the 13 May 2020 telephonic session is important as “[t]he Tribunal appeared to be of the view that [the Tribunal’s] ruling at the 13 May Teleconference had kept the Penalty Issue within the scope of the arbitration.” (at [17] Phoenixfin v Convexity)
The Tribunal eventually disallowed the Amendment Application on 29 May 2020, the third day of the evidentiary hearing (at [15] Phoenixfin v Convexity).
But after the evidentiary hearing, and after the parties’ closing submissions were submitted (at [16] Phoenixfin v Convexity):
The Tribunal conducted an Oral Reply Hearing where it became clear that the Tribunal considered the Penalty Issue to be part of the arbitration (at [17] Phoenixfin v Convexity).
The Tribunal informed the parties that the Tribunal would require “more complete submissions” on the enforceability of the Make-Whole Clause and the Interest Clause, including the Penalty Issue (at [19] Phoenixfin v Convexity).
Having reviewed the submissions and the additional witness statement from the respondent, the Tribunal ruled that it would afford the respondent’s witnesses opportunity to explain the respondent’s position and to answer any questions in respect of the penalty issues at the resumed hearing date, and opposing counsel will be afforded opportunity for appropriate cross-examination (at [23] Phoenixfin v Convexity).
Throughout the course of events, the respondent had raised objections. The respondent also stated that its witnesses would not be attending the hearing, in line with its position that the Penalty Issue was unpleaded and “not part of the submission to arbitration” (at [26] Phoenixfin v Convexity).
Breach of natural justice. There were three issues which the Court of Appeal considered (at [39] Phoenixfin v Convexity). In this article, we will only focus on the first issue: whether there had been a breach of natural justice.
The Court of Appeal agreed with the High Court that a breach of natural justice had been occasioned, as the respondent did not have a full opportunity to address the Penalty Issue (at [40]).
The Court of Appeal found it reasonable that the respondent did not consider the Penalty Issue as a “live” issue in the arbitration. Among others:
The Penalty Issue was not mentioned in the pleadings, Agreed List of Issues, and the first appellant’s List of Issues (at [42] Phoenixfin v Convexity).
The first appellant’s attempt to introduce the Penalty Issue through the Amendment Application suggested that up to that stage the Penalty Issue was not a “live” issue in the arbitration.
The Penalty Issue involved factual and legal issues. The Tribunal’s ruling at the 13 May Teleconference for legal submissions by an expert of English law on the law of penalty “cannot adequately address the point of whether a particular provision is or is not a proscribed penalty, which is an issue of mixed law and fact” (at [46] Phoenixfin v Convexity).
As the Tribunal stated in rejecting the Amendment Application that the Tribunal was “not going to allow an amendment for entirely new claims that [were] found nowhere in the defence and nowhere in the counterclaim at this late stage”, the respondent could not be faulted for not having led evidence on this point during the evidentiary hearing (at [48] Phoenixfin v Convexity).
The Tribunal’s purported ruling given during the 13 May Teleconference and the Tribunal’s written guidance issued via the 26 May 2020 e-mail could not override the Tribunal’s dismissal of the Amendment Application which meant that the Penalty Issue was not brought into arbitration (at [49] Phoenixfin v Convexity).
The role of pleadings in arbitration and fair opportunity to address issues. The Court of Appeal also stated that while pleadings in arbitration are not as determinative in the same way as in court litigation (at [50] Phoenixfin v Convexity), “… the pivotal question is always whether that party has been given a fair opportunity to deal with an issue that has been raised in the arbitration either by the other party or by the tribunal itself.” (at [52] Phoenixfin v Convexity)
The pleadings will assume a more significant role “… if the issue is a factual one or a mixed fact and law question … apart from submitting on the law, a party needs to be able to question the evidence produced in support of the issue as well as have the chance to itself introduce relevant rebuttal evidence. And in order to do all this, there has to be clarity and precision regarding what issue is being raised and what evidence will be relied on to support it.” (at [52] Phoenixfin v Convexity).
On the facts, there was no evidence led on the Penalty Issue by the appellants, no cross-examination of the respondent’s witnesses on the issue, and the respondent did not have a case to respond to or rebut (at [54] Phoenixfin v Convexity).
Objections. The respondent’s counsel had also made clear its objection to the re-introduction of the Penalty Issue at many points during the proceedings and never deviated from its position that the Penalty Issue had to be pleaded (at [55] – [63] Phoenixfin v Convexity).
Burden of proof. Although the Court of Appeal made clear that it did not impugn the Award on the basis that the Tribunal got the law on burden of proof wrong (at [68] Phoenixfin v Convexity), the Court of Appeal observed that the Tribunal’s belated attempt to give the respondent the opportunity to adduce evidence to address the Penalty Issue was actually reversing the burden of proof by requiring the respondent to show why the presumptively penalty provisions were not proscribed penalty provisions as a matter of fact and law (at [67] Phoenixfin v Convexity). This is because, where the appellants had not put forward relevant factual evidence to establish even a prima facie case, there was no need for the respondent to respond.
Significance. This case reiterates the importance of the role of pleadings in arbitration. Even though parties may agree to an unpleaded issue being dealt with in arbitration, the requirement of natural justice necessitates fair opportunity being given to parties to address the issue.
The Court of Appeal’s observation on the distinction between factual and legal issues is particularly important. It is an important reminder that when an issue is a factual one, or if it concerns mixed fact and law, then a party must be able to address the evidence raised in support of the issue and to have the opportunity to introduce rebuttal evidence.
This is especially so because, as stated by the Court of Appeal, depending on the circumstances, even if the Tribunal grants leave for a party to introduce rebuttal evidence, it may nonetheless amount to an impermissible reversal of the burden of proof which creates a breach of natural justice.
Lastly, the importance of making timely objections and reservations of rights cannot be emphasised enough. Had the respondent not done so, the outcome of this setting aside application may possibly be different, as there may be issues of waiver and estoppel. In the present case, this issue did not arise as the respondent had made multiple and consistent objections in the arbitration proceedings.
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