In CAJ & CAK v CAI [2021] SGCA 102, the Singapore Court of Appeal has upheld the setting aside of an arbitral award on grounds that an eminent Tribunal exceeded its jurisdiction and breached the rules of natural justice.
The Court of Appeal was faced with a situation which arbitrators and counsel are very familiar with – a party's introduction of a previously unpleaded defence in its written closing submissions. The Tribunal's reliance on this defence ultimately proved fatal.
Background
The arbitration
The respondent was an owner of a polycrystalline silicon plant (the "Owner") and the appellants were contractors responsible for the construction of the plant (the "Contractors"). As at the mechanical completion date, there were unresolved issues relating to excessive vibrations in six compressors at the plant.
The Owner commenced ICC arbitration against the Contractors seeking liquidated damages due to an alleged 144-day delay.
The Contractors pleaded two defences:
- Mechanical completion was achieved on time as the vibrations did not materially affect operations or safety of the plant.
- The Owner had waived, or alternatively were estopped from pursuing, its rights to liquidated damages, due to the piecemeal nature of the rectification works that were performed pursuant to the Owner's instructions.
During its written closing submissions of the arbitration, the Contractors raised a third new defence – that they were contractually entitled to an extension of time for the deadline of completion ("EOT Defence").
In its written closing submissions, the Owner pointed out that the EOT Defence was not raised at any time prior and should be disregarded by the Tribunal.
The Award
The Tribunal rejected the two pleaded defences, but accepted the EOT Defence. The Tribunal considered that the Owner had the opportunity, in its written closing submissions, to respond on the EOT Defence. The Tribunal also considered that the Contractors were entitled to rely on existing evidence in the arbitration in support of the EOT Defence.
The Tribunal held that the Contractors were entitled to extend time for completion by 25 days. The Contractors' liability for liquidated damages was therefore decreased from 99 days to 74 days, which reduced the liquidated damages payable by the Contractors to the Owner by around S$20 million.
The High Court decision
The Singapore High Court set aside the Tribunal's decision on the EOT Defence and ordered that the number of days of delay set out in the Award to be rectified as 99 days.
The High Court held that the EOT Defence was not within the scope of parties' submission to the arbitration. It was not disputed that this defence was not pleaded in the request for arbitration, answer to request for arbitration, Terms of Reference, pleadings, draft list of issues, witness statements, opening submissions, or even during the oral hearing before the Tribunal.
The Court of Appeal's decision
Excess of Jurisdiction
The Court of Appeal upheld the High Court's decision that the EOT Defence was not within the scope of the arbitration since it was not raised at any time before the closing submissions.
The Court of Appeal rejected the Contractors' argument that the EOT Defence was within the scope of the arbitration just because it had a bearing on the Owner's claim for liquidated damages. The Court considered that this argument would undermine the purpose of pleadings – to define the scope of issues that require adjudication. In the present instance, the EOD Defence arose from the Contractors' reliance on a specific contractual provision and ought to have been, but was not, pleaded.
While the Court explained that a broad interpretation of the pleadings, List of Issues and Terms of Reference is necessary to avoid an inflexible and rigid analysis of the issues raised in the arbitration, the EOT Defence could not simply be shoehorned into these documents. The Court held that if the pleadings, the Lists of Issues and the Terms of Reference could be broadly construed to encompass the EOT Defence even though the EOT Defence did not arise from and was not a natural consequence of the existing pleaded defences, "it would make nonsense of the role of pleadings and other related documents".
Breach of Natural Justice
The Court of Appeal affirmed the High Court's finding that the Award was made in breach of the rules of natural justice.
The Court of Appeal noted that the EOT Defence was factually and conceptually distinct from the two pleaded defences, as the EOT Defence was based on a specific contractual provision with its own specific preconditions.
The Court further considered that the Tribunal had relied on its own "unarticulated experience", which the Owner had not been afforded any opportunity to address. The Court considered that this in itself constituted a breach of natural justice. It emphasised that any claim for an extension of time in a construction project was often fact sensitive, so the Tribunal's reliance on its own experience from other projects was therefore immaterial.
The Court of Appeal also disagreed with the Tribunal's view that the Contractors were entitled to rely on the existing evidence in the arbitration to advance the new EOT Defence. What mattered instead was whether the Owner was given sufficient opportunity to put forward its own evidence on this unpleaded point. The Contractors were unable to prove that the Owner would have simply put forward the same evidence even if the EOT Defence was properly pleaded.
Preclusion because of "hedging"
The Contractors argued that although the Owner had asked the Tribunal not to consider the EOT Defence, it also made substantive submissions on the merits of arguments against this defence in its written closing submissions. The Contractors submitted that this amounted to "hedging", and that the Owner should be precluded from seeking to set aside the Award.
The Court of Appeal disagreed since the Owner had pointed out in its written closing submissions that the entirely new EOT Defence should be disregarded. The Court further considered that it would be unfair to treat the Owner's substantive arguments to meet a new defence as an attempt to "hedge" its position.
As a matter of practicality, the Court of Appeal noted that it was not necessary for the Owner to specifically indicate that it would commence setting aside proceedings if its objections were ignored. It had already made its objections known in its written closing submissions, and at the time the arbitration was declared closed there was no indication by the Tribunal whether it would allow the EOT Defence. The Court noted that it would have been premature for the Owner to go even further and alert the Tribunal of a potential challenge to its Award before it was made.
Consequential orders
The Court of Appeal found that this was not an appropriate case to remit back to the Tribunal. The Court noted that appropriate cases are ones in which a tribunal could consider fresh evidence or submissions on a point that had been already pleaded. This was not the case here.
The Court further noted that the only way for the Tribunal to properly adjudicate on the EOT Defence was by way of an application to amend the defence, and that it would be manifestly unfair to the Owner to allow such an amendment at that late stage.
Given that the Contractors would have been liable in liquidated damages for a delay of 99 days if not for the Tribunal's ruling on the EOT Defence, the Court of Appeal upheld the High Court's consequential order that the number of days of delay in the Award, for which liquidated damages were payable, to be read as 99 days instead of 74.
Comments
The Court of Appeal's decision highlights the importance of pleadings in determining the scope of the issues the tribunal is to decide. This, in turn, makes it imperative that parties and their counsel conduct a thorough investigation of the facts of the case before and during the pleadings stage.
If new ideas and fresh arguments do arise at a later stage (e.g. during the document production process, after exchange of witness evidence, or even as late as the oral hearing), the prudent course would be to apply to amend the pleadings. Otherwise, the tribunal may not have a mandate to adjudicate on them.
The tribunal will weigh the prejudice caused by the proposed amendment against the applicant's right to be heard. The later the application is made, the more likely there will be significant prejudice caused to the other party. In our experience, tribunals lean towards allowing amendments before and even during the hearing, although each case depends on its specific circumstances. But the Court of Appeal's ruling highlights the risk of leaving amendments until after the merits hearing – they may well be too late.
The reason is that if the pleadings are amended to include a new point after an oral hearing, the tribunal may also require additional evidence and/or submissions. This could mean further consequential orders on discovery, witness statements, and cross-examination. The delay and expense caused by this will often be too prejudicial to the other party, and may therefore be refused.