Singapore judgment provides guidance on setting aside arbitral awards

The court said a decision which is “manifestly incoherent” demonstrates that an arbitral tribunal had not understood or dealt with the case, and the parties would not be accorded a fair hearing.

Cases should not be remitted to the tribunal if the breach of justice did not rest on a single point, and there was a good chance the tribunal would be tempted to reach the same decision as previously.

Arbitration expert Rakesh Nelson of Pinsent Masons said detailed guidance in both areas was still being developed by the courts, and the judgment in the case of BZV v BZW and another would be a helpful addition for practitioners in the future.

The dispute arose between the buyers of a ship under construction and its builders after delays to the construction of the vessel. The buyers claimed against the builders for the delays and for an alleged failure to meet certain standards, which they said meant the builders were in breach of contract.

The builders counterclaimed for around US$2.5 million for additional works which they said they had been required to carry out.

An arbitral tribunal dismissed both the buyer’s claims and the builders’ counterclaim, and said both parties should bear their own costs.

The buyer then took the case to the Singapore High Court, applying for the part of the award dismissing its claims to be set aside under either or both of the International Arbitration Act (IAA) and the UNCITRAL Model Law on International Commercial Arbitration.

The judge granted the order, finding there was a breach of the fair hearing rule on two grounds. The judge said the arbitral tribunal had adopted a chain of reasoning which had no connection to the parties’ cases; and that the tribunal failed to apply its mind to an essential issue arising from the parties’ arguments.

In their appeal to the Singapore Court of Appeal, the builders argued that the buyers’ supporting affidavit to the High Court application had been filed outside the Model Law’s three-month time limit. They also argued that the tribunal did not breach rules of natural justice and, even if it did, the court should exercise its power to suspend the setting aside proceedings and remit the award to the tribunal, pursuant to article 34(4) of the Model Law so as to give the tribunal and opportunity to take steps to eliminate the grounds for setting aside.

The Court of Appeal dismissed all of the builders’ arguments.

First, it said the setting aside application was not out of time, and an applicant only had to state the sub-articles and sub-sections of article 34(2) of the Model Law and section 24 of the IAA as the grounds upon which it was relying. The court held a party is not required to file a supporting affidavit at the same time as filing its application.

Second, the court said the tribunal’s decision showed it had not understood the case and the parties had not had a fair hearing. It said the tribunal had made factual findings which were often mere assertions rather than the result of examination of the documentary evidence or consideration of witness credibility. Accordingly, the court agreed with the judge that there had been a breach of natural justice that prejudiced the buyer’s rights.

Third, as the tribunal “failed entirely to appreciate the correct questions it had to pose to itself, let alone apply its mind to determining those questions”, the court said it was inappropriate to remit the award to the tribunal.

The Court of Appeal ruled there was a real risk that even a competent and respectable tribunal, whose acts amounted to serious irregularity causing substantial injustice, may subconsciously be tempted to reach the same conclusion as it had done previously. Additionally, it found that a reasonable person would no longer have confidence in the tribunal’s ability to come to a fair and balanced conclusion on the issues.

Pinsent Masons’ Nelson said: “The Court of Appeal’s seminal decision sheds light on several important areas of international arbitration law, namely on the procedural elements on of bringing a setting aside application as well as the factors that the court will look at when deciding whether to set aside an award for breach of natural justice or to remit that award to the tribunal.”

“Despite the Court of Appeal’s decision in this case to set aside the award, it should be emphasised that the threshold for setting aside is still a high one and the courts will not interfere even if it considers that, in reaching its decision, the tribunal made mistakes of facts or law or both,” Nelson said.