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The Singapore Court of Appeal (SGCA) has held that the role of pleadings in an arbitration are particularly important when the issue in question is of mixed fact and law. In this case, the SGCA affirmed the setting aside of an arbitral award that was based on an unpleaded issue on the basis that this breached natural justice.

What happened between the parties?

The respondent (Convexity) entered into a services agreement with the appellant (PhoenixFin). The appellant alleged the respondent breached the agreement and purported to terminate it. The respondent commenced arbitration against the appellant, alleging termination was wrongful. It claimed US$2.8 million plus interest which was allegedly due under a ‘Make-Whole’ clause contained in the parties’ agreement.

The appellant applied to the sole arbitrator to adduce expert evidence on, among other issues, whether the Make-Whole clause amounted to a penalty clause (the Penalty Issue). The arbitrator ruled that she would receive submissions on this issue by way of counsel’s submissions, rather than by way of expert reports. The appellant subsequently applied to amend its pleadings to include the Penalty Issue, but the arbitrator denied the application during the course of the evidential hearing (which had not dealt with the Penalty Issue). The arbitrator reasoned that granting the application would have the effect of introducing a new claim at a late stage of the proceedings.  

However, during an oral reply hearing following the evidential hearing, the arbitrator unilaterally considered that the Penalty Issue was to be determined as part of the arbitration. The arbitrator held that since in her earlier ruling she had permitted the Penalty Issue to be determined based on submissions from counsel, the issue was within the scope of matters to be determined. She then allowed the parties to file submissions on the issue and a further hearing was set. The respondent argued that this was a previously unpleaded issue and, by denying the appellant’s application, the arbitrator had thereby disallowed the issue. As a result, the respondent refused to produce its witnesses at the further hearing.

In her final award, the arbitrator dismissed the respondent’s claim on the basis that the Make-Whole clause was an unconscionable penalty unenforceable under English law. The respondent applied to set aside the arbitral award. 

What did the courts decide?

The Singapore High Court set aside part of the award on the basis that there had been a breach of natural justice, that the tribunal exceeded the scope of submission to arbitration and that the tribunal had acted contrary to the procedure agreed to between the parties. The appellant appealed. The SGCA concurred with the High Court judge and dismissed the appeal.

Breach of natural justice

  1. The SGCA found that the arbitrator had misunderstood that the respondent had agreed to the introduction of the Penalty Issue, when it had not. The respondent had been prejudiced as it had not been afforded the opportunity to address its objections to the issue’s introduction.
  2. It was reasonable for the respondent to have considered that the issue was not live until it was unilaterally reintroduced by the arbitrator at the oral reply hearing. By applying to amend its pleadings to introduce the Penalty Issue, the appellant had also recognised that, up to that stage of the proceedings, the issue had not been part of the dispute and would involve factual and legal issues which had to be fleshed out in pleadings. As the arbitrator dismissed the appellant’s application, it was not clear to the parties that the Penalty Issue had been admitted into the scope of the arbitration, and the arbitrator’s reintroduction of the issue later in the proceedings could not override this.
  3. The Penalty Issue was a mixed question of law and fact. The SGCA found that the appellant had failed to establish the factual underpinnings of the case, and the respondent therefore was unable to address the issue, question any evidence produced in support or have the chance to introduce relevant rebuttal evidence. Mere notice of the issue did not burden the respondent to lead evidence on it.
  4. The arbitrator’s reintroduction of the Penalty Issue incorrectly reversed the burden of proof – it was for the appellant to show that the Make-Whole clause was invalid as a penalty provision, but it failed to establish its case. The arbitrator presumed the clause was a penalty, and therefore failed to appreciate that the appellant first had to adduce evidence of such before the respondent would have the burden to adduce rebuttal evidence.

For the reasons above, the SGCA found there to have been a breach of natural justice.