Court of Appeal in Singapore warns against "backdoor appeals" as it dismisses UNCITRAL section 33 challenge

Out-Law News | 22 Aug 2014 | 12:06 pm | 3 min. read

Parties to arbitration have been warned against using the courts to "launch backdoor appeals" by the Court of Appeal in Singapore.

In a recent judgment, the court overturned a decision by the country's High Court that partially annulled an award by the Singapore International Arbitration Centre (SIAC) on the grounds that the arbitrator had not addressed the challenging party's counterclaim. Finding that the arbitrator had in fact addressed the counterclaim, the Court of Appeal restated the principle of "minimal curial intervention" in the arbitral process and suggested that parties that appealed similar issues with courts rather than the tribunal should be penalised.

"In looking at the relevant facts, the court must be extremely careful not to do more than is necessary, bearing in mind the principle of minimal curial intervention as well as the salutary reminder that the substantive merits of the arbitral proceedings are beyond the remit of the court," the Court of Appeal said in its judgment.

"In this regard, it is important not to underestimate the ingenuity of counsel who seek to launch backdoor appeals or, worse still, completely reinvent their client's cases with the benefit of hindsight in the guise of a challenge based on an alleged breach of natural justice. The latter is a simple – yet profoundly important – point in so far as the present appeal is concerned. The court must be wary of a party who accuses an arbitrator of failing to consider and deal with an issue that was never before him in the first place," he said.

Due to the confidentiality of the arbitral process, the Court of Appeal referred to the parties as BLC and BLB in its judgment. However, one of the parties later referred to the case as part of its regulatory disclosures. The dispute related to a failed joint venture between members of the Schulz Group, which is a German manufacturer of piping components; and Malaysian automotive company Sapura Industrial.

Schulz brought two arbitrations against Sapura in 2007, seeking $10 million in lost profits and expenses resulting from the supply of allegedly defective goods as well as damages for breach of fiduciary duties. Sapura submitted counterclaims worth $69m. In his final award, issued in 2012, the arbitrator awarded Schulz $1.4m plus interest for lost profits and expenses but dismissed the fiduciary duties claim. He dismissed Sapura's counterclaims in their entirety.

Sapura applied to the Singapore High Court to set aside the entire award, arguing that the arbitrator had failed to consider part of its counterclaim relating to unpaid invoices. The High Court ruled in its favour in September 2013, finding that by failing to do so the arbitrator had breached the rules of natural justice. This was overturned by the Court of Appeal, which found that the arbitrator had dealt with the point when he found that the goods to which the unpaid invoices related were defective and effectively nulled that particular contract.

"There was no real need for the arbitrator to expressly identify the legal basis of the disputed counterclaim if he took the view (as he plainly must have) that the question as to who was responsible for the alleged defects in the goods in general was directly linked to the issue of payment for any goods delivered," the judge said. "Hence, when the arbitrator found that [Sapura] was in breach of [the agreement], he had also (and simultaneously) determined the disputed counterclaim on [Sapura's] own case."

"In the circumstances, there was plainly no breach of natural justice in this situation; nor can it be said that the arbitrator failed to apply his mind to the critical issues and arguments in the dispute. In the circumstances, we would allow the appeal," the judge said.

Although the Court of Appeal was able to settle the case on these grounds, he also decided to address additional points raised by the High Court judge on the operation of Article 33 of the UNCITRAL Model Law on International Commercial Arbitration. This provision enables parties to request an additional award as to claims presented in the arbitral proceedings but omitted from the award, provided that they do so within a specified time period. The High Court judge said that parties in "future cases of a similar nature" should "attempt to avail themselves of any available opportunities to seek redress from the tribunal itself, before turning to the courts".

The Court of Appeal judge said that it was unlikely that this provision applied in the present case since the arbitrator had in fact determined the counterclaim. However, assuming that it did apply, failing to penalise a party that did not pursue such a case with the tribunal would render the provision "toothless and moribund as there is simply no incentive for a disgruntled party to invoke it," the judge said.

International arbitration expert Daniel Wilmot of Pinsent Masons, the law firm behind Out-Law.com, said that these comments were of "particular interest".

"Whilst the court did not rule definitively on the penalisation point, it did leave open the possibility that a national court could take into account the failure to exhaust the Article 33(3) process," he said.

"Although the practical implications of this judgment remain to be seen, the decision underlines the fact that parties should generally seek to resolve all issues within the confines of the arbitral process before turning to the national court; and is demonstrative of the court's support for the finality of arbitral awards," he said.