The Singapore High Court recently set aside an arbitral award for breach of natural justice in JVL Agro Industries Ltd v Agritrade Int’l Pte Ltd. The tribunal majority decided the case on the basis of a point raised for the first time and in passing by the tribunal in the final minutes of closing arguments, and on which the parties were not then directed to make submissions.
The facts can be addressed briefly. JVL (the buyer) and Agritrade (the seller) entered into a price-averaging arrangement for palm oil in mid-2008, by which the parties’ earlier high-priced contracts would be averaged with current, market-priced contracts to reduce the impact of higher historic prices in light of declining market prices. Some of those lower-priced contracts remained unperformed in 2010 and the parties disagreed as to whether the price-averaging exercise should be performed for those contracts. JVL declared Agritrade to be in default under the unperformed contracts and mitigated its losses by purchasing palm oil on the market. It then commenced arbitration against Agritrade to recover the difference between the contract and market prices.
In arbitration, the tribunal raised the parol evidence rule and directed the parties to file submissions on whether the price-averaging arrangement fell within an exception to it. JVL asserted that no exceptions applied; Agritrade contended that several did, but failed to raise the collateral contract exception. The tribunal raised the collateral contract exception in a hypothetical question to JVL in the final minutes of JVL’s closing arguments. The tribunal directed the parties to file further written submissions but did not direct them to address the collateral contract exception, and neither party addressed the issue.
In its award, the tribunal majority held that the price-averaging arrangement constituted a collateral contract and held in favor of Agritrade. One arbitrator dissented, finding that the parties’ arrangement was too uncertain to constitute a collateral contract. JVL filed for set-aside, claiming inter alia that the tribunal had breached a rule of natural justice by denying JVL a fair hearing on the collateral contract exception. The High Court suspended the proceeding to allow the tribunal to take action to eliminate the grounds for set-aside. The tribunal declined to do so, finding that the parties had made submissions on the price-averaging arrangement and that it had acted properly in characterising that arrangement as a collateral contract.
The High Court set aside the award. It held that the tribunal had breached a rule of natural justice by deciding the case on an issue that neither party had raised and which the parties had not been directed to address in their submissions. The High Court acknowledged that:
“… [t]he dividing line between permissible robustness in arbitral reasoning and impermissibly denying a party a reasonable opportunity to present its case is a fine one…”
However, it noted the Singapore Court of Appeal’s admonition in Soh Beng Tee & Co. Pte Ltd v Fairmount Development Pte Ltd, that:
“… [a]rbitrators who exercise unreasonable initiative without the parties’ involvement may attract serious and sustainable challenge.”
The High Court emphasised that:
“… the overriding concern is not whether a tribunal has complied with arid technicality but whether it has achieved substantive fairness.”
In addressing the dividing line between “permissible robustness” and “unreasonable initiative” in arbitral decision-making, the High Court considered two recent decisions of the Court of Appeal. In PT Prima International Development v Kempinski Hotels SA, the Court of Appeal refused to set aside an award that the tribunal had decided on an issue that had not been pleaded. The party that raised the issue had given actual notice to the other party, and the tribunal had repeatedly directed both parties to make submissions on that issue. In AKN v ALC, the Court of Appeal set aside an award where the tribunal had raised an alternative basis for quantum at the end of a 20 day hearing. It acknowledged that it would need further submissions to determine quantum on that basis, but then proceeded to award quantum on that basis without inviting or receiving further submissions.
The High Court concluded that the circumstances in JVL were more analogous to AKN than to Kempinski, stating:
“In both cases, the tribunal raised an issue of its own accord at the eleventh hour and in passing. In both cases, that issue turned out to be dispositive. And in both cases, the tribunal did so without giving the parties the right to present evidence or submissions on that dispositive issue and without directing the parties to address the issue.”
The High Court’s reasoning leaves the door open to tribunals to engage in robust decision-making (and to raise potentially dispositive issues where the parties have failed to address them) while providing practical guidance as to how this can be achieved within the principle of “substantive fairness”. If a tribunal raises an issue on its own initiative, the parties should be given an opportunity to present evidence or submissions on that issue, and the tribunal should consider taking the additional step of directing the parties to address the issue.
The High Court’s decision acknowledges but does not resolve the anterior question of when the tribunal’s exercise of its inquisitorial power to raise issues to the parties intrudes impermissibly upon the parties’ right to define the boundaries of their dispute through their submissions. As the High Court observed:
“… [a] tribunal which decides an issue which neither party has consented for it to decide runs the risk not only of breaching the rules of natural justice, but also of acting without jurisdiction.”
While the High Court found that the tribunal properly exercised its inquisitorial power by raising the parol evidence rule and directing the parties to make submissions on it, tribunals should be mindful of the parties’ right to frame the issues for decision through their written and oral submissions.