Singapore Court of Appeal Partially Sets Aside Arbitral Award for Breach of the Fair Hearing Rule, and Declines to Adopt the “No Evidence Rule” as Part of Singapore Law

In a recent set aside action, the Singapore Court of Appeal (SGCA) has once again demonstrated its pro-arbitration stance. Being a Model Law jurisdiction, the Singapore courts will only set aside arbitral awards on limited grounds, for example, for breach of Singapore’s public policy and breach of natural justice. In CEF and other v CEH, the SGCA had the opportunity to consider whether the “no evidence rule” should be adopted as a specific rule of natural justice such that an arbitral award would be liable to be set aside for breach of natural justice if it contains findings of fact made with no evidential basis whatsoever. The SGCA declined to adopt the rule, reaffirming Singapore’s policy of minimal curial intervention in arbitral proceedings.

The SGCA, however, partially set aside the arbitral award on the ground that the tribunal’s chain of reasoning breached the fair hearing rule such that part of the arbitral award was obtained in breach of natural justice. This is the second SGCA decision this year in which the SGCA has set aside a tribunal award on the basis that the tribunal’s chain of reasoning breached the fair hearing rule.

This decision provides helpful clarification on when and how a breach of the fair hearing rule might arise from the chain of reasoning that a tribunal adopts in its award and calls on arbitration practitioners to carefully consider their approach to burden of proof arguments and damages claims.

Background

In June 2011, the first appellant entered into a services and equipment contract (Contract) with the respondent’s parent company (Parent) to build a steel-making plant (Plant). Soon after, the Parent assigned its rights under the Contract to the respondent. In May 2014, the first and second appellants and the respondent entered into a service agreement (Service Agreement), under which the first appellant assigned to the second appellant some of its obligations under the Contract.

Delays occurred in the construction of the Plant and the completed Plant failed to achieve its production target. The Contract and the Service Agreement provided for Singapore-seated arbitration under the ICC Rules. The appellants first commenced arbitration against the respondent under both the Contract and the Service Agreement, and the respondent soon after commenced a separate arbitration under the Contract and the Service Agreement against the appellants. The two arbitrations were later consolidated by consent.

In November 2019, the tribunal issued the award. A majority of the tribunal found that the respondent had been entitled to rescind the Contract and the Service Agreement and made the following orders:

• The respondent was to “transfer the title to the Plant, including the additional equipment installed” to the appellants (Transfer Order).
• The appellants were to pay the respondent the contract price, less the amount of the loans that the first appellant had extended to the respondent and the diminution in value of the Plant (Repayment Order). The tribunal found that it did not have any evidence on the current value of the Plant, but nonetheless held that the appellants were entitled to a deduction from the contract price equivalent to the gross revenue of the Plant.
• The appellants were to pay the respondent damages to compensate the respondent for losses it would not have incurred but for the first appellant’s misrepresentations (Damages Order). The tribunal found the respondent’s evidence on the quantum of its losses to be deficient, but nevertheless adopted a “flexible approach” and permitted the respondent to recover 25% of the damages it had sought.

The appellants applied to the Singapore High Court to set aside the award. The High Court dismissed the appellants’ application in its entirety.

Decision

On appeal, the SGCA set aside the Damages Order and dismissed the rest of the appeal.

Transfer Order

The appellants challenged the Transfer Order under Section 24(b) of the International Arbitration Act (IAA) and Article 34(2)(a)(ii) of the Model Law on the grounds, among others, that the Transfer Order contained decisions on matters beyond the scope of submission to the arbitration, and that the Transfer Order was obtained in breach of natural justice and without giving the appellants an opportunity to present their case.

The SGCA rejected the appellants’ contentions. The SGCA agreed with the High Court that transfer of title to the Plant was the “natural legal consequence” of the respondent’s claim for rescission. Therefore, even though the issue of counter‑restitution in specie and a transfer of title to the Plant was not expressly included in the Terms of Reference, it was within the scope of submission to arbitration. The SGCA also held that the issue was live throughout the arbitration, and that the appellants had a reasonable opportunity to present their case on the issue.

Repayment Order

The appellants argued that the Repayment Order should be set aside under Section 24(b) of the IAA and Article 34(2)(a)(ii) of the Model Law on two grounds.

First, the appellants argued that they were unable to present their case on the burden of proof and the condition or value of the Plant. As a result, there was a breach of natural justice, specifically the fair hearing rule.

The SGCA disagreed. It found that the parties’ pleadings showed that the issue of the Plant’s diminution in value since 2016 was live in the arbitration. Further, the SGCA noted that the tribunal had held that the appellants bore the burden of proving the quantum of the Plant’s diminution in value. The SGCA concluded that having failed to adduce any evidence on the quantum of the diminution, the appellants could not complain in court that they were denied a fair hearing.

Second, the appellants argued that the Repayment Order should be set aside because the tribunal had no evidence on the current value of the Plant or the diminution in value of the Plant. The appellants urged the SGCA to consider adopting the “no evidence rule,” a rule that has sometimes been applied in Australia and New Zealand, as part of Singapore law.

The SGCA turned down the appellants’ invitation. The “no evidence rule”, in the words of the SGCA, stands for the proposition that “an award which contains findings of fact made with no evidential basis at all is liable to be set aside for breach of natural justice.” The SGCA declined to adopt the rule as part of Singapore law, as to do so would impermissibly invite courts to reconsider the merits of a tribunal’s factual findings and would run contrary to the policy of minimal curial intervention in arbitral proceedings. In any event, the SGCA found that even if the “no evidence rule” were to be applied in the present case, it could not apply where the tribunal had no evidence before it because the party that bore the burden of proof had failed to adduce any evidence.

Damages Order

The SGCA, however, set aside the Damages Order under Section 24(b) of the IAA on the ground that the Damages Order was obtained in breach of natural justice, specifically the fair hearing rule.

Under Singapore law, a breach of the fair hearing rule can arise from the chain of reasoning that a tribunal adopts in its award. To comply with the fair hearing rule, a tribunal’s chain of reasoning must be one that:

• The parties had reasonable notice that the tribunal could adopt.
• Has a sufficient nexus to the parties’ arguments.

The SGCA found that the tribunal’s chain of reasoning in respect of the Damages Order was not one that the parties had reasonable notice that the tribunal could adopt. The SGCA reasoned that both parties would have expected the tribunal to award the respondent damages only for the losses that the respondent could prove. Since the tribunal had expressly stated that there were deficiencies in the respondent’s evidence on its losses, the parties would have expected the tribunal to dismiss the respondent’s claim for damages in its entirety, not to adopt a “flexible approach” and then award 25% of the damages claimed.

The SGCA also found that the tribunal’s chain of reasoning did not have a sufficient nexus to the parties’ arguments. The tribunal justified the “flexible approach” by reference to a case citation found in the respondent’s pleadings, but the respondent’s citation to the case was for a proposition different from the “flexible approach.”

The SGCA therefore concluded that the Damages Order was obtained in breach of the fair hearing rule.

Comment

The question of whether the “no evidence rule” should be recognized as a separate, free-standing rule of natural justice had previously been left open in several Singapore High Court decisions (for example, AQU v AQV [2015] SGHC 26 and AUF v AGF [2015] SGHC 305). The SGCA has now put this question to rest in CEF and others by confirming that the “no evidence rule” should not be adopted as part of Singapore law and affirming Singapore’s policy of minimal curial intervention in arbitral proceedings. Although framed as a procedural challenge, the “no evidence rule” in effect invites a supervisory court to conduct a substantive review of a tribunal’s reasoning to determine if there was any probative evidence. Other Commonwealth jurisdictions, such as Australia and New Zealand, have adopted the rule in the arbitration context, while simultaneously recognizing the significant hurdles that a party must overcome to avail itself of the rule (Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214; Downer-Hill Joint Venture v Government of Fiji [2005] 1 NZLR 554). The SGCA, in contrast, categorically rejected the rule so as to remove any avenue or incentive for courts to reconsider the merits of a tribunal’s factual findings.

Yet at the same time, Singapore courts have shown themselves to be a robust supervisory court. While the SGCA has repeatedly affirmed that it would not reconsider the merits of a tribunal’s decision, it does not hesitate to set aside an award where natural justice is breached. Following BZW and another v BZV [2022] SGCA 1, CEF and other is the second SGCA decision this year in which the SGCA set aside a tribunal award on the basis that the tribunal’s chain of reasoning breached the fair hearing rule. The two cases together provide helpful clarification on when and how a breach of the fair hearing rule could arise from the chain of reasoning that a tribunal adopts in its award.

CEF and other also raises two important practical points for arbitration practitioners to consider. First, it illustrates the perils of resting one’s case entirely on the burden of proof. Tempting as it is as a strategy to reduce costs, following CEF and other, it is clear that a party who chooses to adduce no evidence on an issue and loses on its relevant burden of proof arguments cannot turn around and argue that it has been denied a fair hearing in respect of the underlying issue. This is especially risky because even if a tribunal makes an error of law in its finding on which party bore the burden of proof, this is not a ground for setting aside an award under the IAA or the Model Law (Prometheus Marine Pte Ltd v King, Ann Rita and another appeal [2018] 1 SLR 1).

Second, counsel may wish to reconsider whether to adopt an all-or-nothing approach in relation to damages claims, that is, putting forward a single, consolidated measure of damages that does not provide a tribunal any room for adjustments or variation. Given the fair hearing rule, an all-or-nothing approach will leave a tribunal with little room for flexibility. Parties adopting an all-or-nothing approach risk, as claimants, recovering nothing or, as respondents, being ordered to pay the entire amount of the claimed damages.

This article was originally published on Practical Law Arbitration Blog on October 31, 2022 and is reproduced with the permission of Thomson Reuters.