Singapore High Court: whether arbitral tribunal empowered to issue ‘attorneys eye only’ order, and whether parties to arbitration have an implied duty to arbitrate in good faith

In China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another [2018] SGHC 101, the Singapore High Court dealt with the issue of whether the imposition of an attorney-eyes only (AEO) order by the arbitral tribunal amounts to a breach of natural justice that justifies setting aside the award when the scope of AEO has been limited by the tribunal before lifting the order altogether. The case also raises novel points concerning “guerrilla tactics” in arbitration. Before I proceed on with analysis, let me put some light on what is ‘attorneys’ eye only’.

What is ‘attorneys’ eye only’?

It is a form of restriction on disclosure used in trade secret litigation. It is the most restrictive form of limitation of information. Under this restriction, documents produced and information disclosed are only shared with the parties’ legal counsel, including legal staff, and under certain restrictions, outside experts.  None of the specific information can be revealed to anyone associated with the client or the client itself.  However, the party seeking this designation bears the burden of proving that each document labeled as “attorneys’ eyes only” is sensitive enough to warrant such a restriction. Courts strictly adhere to this requirement and have threatened sanctions against the parties that label documents “attorneys’ eyes only” arbitrarily or without “an adequate factual basis. (Fears v. Wilhemina, Case No. 02 Civ. 4911, 2003 U.S. Dist. LEXIS 12850, at *6-7 (S.D.N.Y. 2003)).

Factual Matrix

Jaguar Energy Guatemala LLC, a company incorporated under the laws of Delaware in the US and AEI Guatemala Jaguar Ltd (AEI Guatemala), a company incorporated under the laws of the Cayman Islands (collectively referred as Jaguar) procured services of China Machine New Energy Corporation (CMNC) as general contractor for the development of a strong fuel-fired plant close Port Quetzal, Guatemala. Jaguar entered into a lump-sum, turnkey building, engineering, procurement and construction contract with CMNC for the development of a 300 megawatt strong fuel-terminated power plant close Port Quetzal, Guatemala. The power plant was scheduled to begin development endeavors in spring 2010 and start functioning in mid-2013. The plant comprises of two units and can be worked with coal fuel and additionally oil coke, with the ability to keep running on 100 percent coal and up to 60 percent oil coke.

All through the project, CMNC neglected to timely perform its work, prompting lengthy unexcused schedule delays. In 2013, after CMNC failed to achieve the scheduled take-over dates, Jaguar terminated CMNC for default. Jaguar held a few subcontractors to finish the work post-end. Jaguar filed liquidated damages and re-procurement claims against CMNC in an ICC arbitral proceedings. The tribunal rendered the award as follows.

Award

In summary, the tribunal unanimously found that Jaguar had validly terminated the contract for default by CMNC and allowed Jaguar’s claim for liquidated damages and Jaguar’s claim for the costs of completion. The tribunal dismissed all but one of CMNC’s claims for extensions of time. The tribunal ordered CMNC to pay Jaguar a total sum of US$129,389,417, interest and costs.

Contentions of Parties before the High Court

CMNC contended the famous ‘breach of the rules of natural justice’ argument to set aside the award on two grounds- firstly, the AEO Regime deprived CMNC of a reasonable opportunity to present its case and second tribunal failed to consider CMNC’s arguments in relation to the a deferred payment security agreement (DPSA) between Jaguar and AEI Guatemala. At the time of the contract, the parties had anticipated that Jaguar would obtain external financing for the project from a consortium of banks. When it became clear that this was no longer possible, the parties agreed on vendor financing. To this end, the DPSA provided Jaguar with the option of issuing debit notes to CMNC instead of making certain milestone payments under the underlying contract. This enabled Jaguar to defer certain cash payments due under the contract. The debit notes were to be secured by security interests over assets of Jaguar. In substance, in the event Jaguar exercised the option, CMNC would provide financing for the project by deferring collection of its milestone payments on the terms of the DPSA. The governing law of the DPSA was also New York law; and the DPSA provided for disputes arising thereunder to be resolved by the same dispute resolution mechanism under the underlying contract, that is, arbitration in Singapore under the 1998 ICC Rules.

CMC further contended that arbitral procedure was in breach of Art 34(2)(a)(iv) Model Law and the parties’ agreement. It also contended that award is liable to be set aside under Art 34(2)(b)(ii) of the Model Law, on the basis that Jaguar’s “guerrilla tactics” which led to breach of public policy and tribunal failed to investigate allegations of corruption and fraud and/or the award was induced or affected by corruption.

Jaguar argued that it is settled law that subject to any arbitral procedure agreed by the parties, an arbitral tribunal has a wide power over the procedural management of the arbitration. Any disadvantage that CMNC suffered due to the AEO Regime was due to its own strategic choices and failures, rather than a breach of natural justice. Even if there was a breach of natural justice, CMNC did not suffer any prejudice due to the breach since Jaguar provided redacted copies of AEO designated material to CMNC. It was CMNC’s multiple changes of counsel and experts, and failings on CMNC’s part, including its delay in and disrupted CMNC’s preparation for the arbitration.

Conclusion

On whether or not AEO Regime amount to a breach of natural justice?

  • The High Court again cited Soh Beng Tee to hold that an award can be set aside on the ground of breach of natural justice pursuant to Art 34(2)(a)(ii) of the Model Law and Section 24(a) of the International Arbitration Act, (IAA) only if the applicant establish “(a) which rule of natural justice was breached, (b) how it was breached; (c) in what way the breach was connected to the making of the award; and (d) how the breach prejudiced its rights” In relation to requirement (d), it suffices for the applicant to show that the material it did not present, due to the breach of natural justice, could reasonably rather than necessarily have made a difference to the tribunal: L W Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd and another appeal [2013] 1 SLR 125. The notable thing that court came up in this case with regard to natural justice is that what natural justice demands in any case turns on, amongst other things, “a proper construction of the particular agreement to arbitrate”: Trustees of Rotoaira Forest Trust v Attorney-General [1999] 2 NZLR 452 at 463.
  • Second, even where a breach of natural justice obtains, a court must consider whether any prejudice is due to that breach or to the applicant’s own choices or failings: Sobati General Trading LLC v PT Multistrada Arahsarana [2010] 1 SLR 1065
  • The court reiterated that it is also trite that natural justice requires that parties be afforded a reasonable opportunity of presenting their case. This means not just that a party should have an opportunity to present its positive case, but also that it should have an opportunity to respond to the case against it.
  • The court restated that Singapore adopt a policy of minimal curial intervention in dealing with allegations of breach of natural justice.
  • Art 19(2) of the Model Law vests wide and flexible power to make procedural decisions in the tribunal: it states that absent agreement by the parties on the arbitral procedure, the tribunal “may, subject to the provisions of [the Model Law], conduct the arbitration in such manner as it considers appropriate. Sobati General and another matter [2014] 3 SLR 481
  • In the light of the wide power accorded to the tribunal to conduct the arbitration, a court will exercise its supervisory role over the tribunal’s exercise of this power with a “light hand”: Triulzi Cesare SRL v Xinyi Group (Glass) Co Ltd [2015] 1 SLR 114.
  • The Court held that AEO Regime did not amount to a breach of natural justice.

On whether tribunal had the power to issue AEO award

  • The AEO order is alluded to in Gary B Born, International Commercial Arbitration (Wolters Kluwer, 2nd Ed, 2014) (“Born”) at pp 2387–2388 as follows:

Tribunals also have the power to condition a discovery order on compliance with specified protective conditions, aimed at safeguarding the confidentiality of discovery materials or imposing other safeguards. The purpose of such conditions is to ensure that the discovery process does not inflict unnecessary damage on the parties. Protective orders are generally issued to safeguard the confidentiality of materials produced in discovery in the arbitration, particularly commercial confidences, intellectual property, or internal governmental or corporate records. … … There are also circumstances in which it is appropriate to include heightened protections for certain materials, including by limiting its review to specified individuals, requiring “counsel only” review, or restricting inspection of documents to a single location (with no right to copy).

  • Art 20(7) of the 1998 ICC Rules states that “[the] Arbitral Tribunal may take measures for protecting trade secrets and confidential information”. This language is mirrored in the second limb of Art 22(3) of the 2012 ICC Rules of Arbitration (“the 2012 ICC Rules”), which replaced Art 20(7) of the 1998 ICC rules. Art 22(3) of the 2012 ICC Rules states:

Upon the request of any party, the arbitral tribunal may make orders concerning the confidentiality of the arbitration proceedings or of any other matters in connection with the arbitration and may take measures for protecting trade secrets and confidential information. [emphasis added]

  • In Jason Fry, Simon Greenberg and Francesca Mazza, The Secretariat’s Guide to ICC Arbitration (ICC, 2012), the authors makes the following remarks at paras 3-811 to 3-812 in relation to the second limb of Art 22(3):

3-811 Measures for protecting trade secrets and confidential information. The second part of Article 22(3) concerns orders to protect the confidentiality of trade secrets or other information before it is disclosed or otherwise produced in an arbitration. …

3-812 In a protective order, the arbitral tribunal can, for example, authorize a party to redact a document to remove all parts that are not relevant to the dispute, restrict access to documents that the parties produce, or prohibit use outside the proceedings of any document produced by the opposing side. The provision places no limit on the arbitral tribunal’s creativity in making protective orders. [original emphasis omitted; emphasis added in italics and bold italics]

  • The court held that the Tribunal was empowered to impose an AEO order pursuant to Art 20(7) of the 1998 ICC Rules
  • The Court further dismissed CMNC’s contentions that the AEO Regime significantly undermined its opportunity to present its case.

On whether or not the tribunal breached its duty of equal treatment

  • Article 18 of the Model Law provides that the parties to an arbitration “shall be treated with equality and each party shall be given a full opportunity of presenting his case”. Article 18 therefore comprises two distinct limbs. First, a requirement of equal treatment. Second, a requirement that each party be given a full opportunity of presenting its case. In Triulzi Cesare SRL v Xinyi Group (Glass) Co Ltd [2015] 1 SLR 114, Belinda Ang J held that the requirements of equality of treatment and natural justice in Art 18 are “two of the non-derogable minimum procedural requirements under the Model Law” and accordingly, an arbitral award is liable to be set aside under the second limb of Art 34(2)(a)(iv) of the Model Law for being “not in accordance with [the Model Law]” if the arbitral procedure was in breach of Art 18. The court held that the arbitral procedure of the tribunal was not in breach of Art 18.

On whether tribunal has given CMNC a reasonable opportunity of presenting its case

  • The court rejected this contention of CMNC since CMNC agreed to the timelines confirmed on several occasions thereafter through its counsel that it would be able to meet them, and did not apply at various pertinent stages for timelines to be extended.

On whether there is breach of duty to act in good faith due to use of alleged guerrilla tactics by Jaguar

  • The court noted that the issue of whether an arbitration agreement includes an implied duty to arbitrate in good faith, has not been decided in Singapore before. Born claims at pp 1257–1259 that an arbitration agreement necessarily includes an implied duty to arbitrate in good faith:

… the positive obligation to participate in the resolution of disputes by arbitration also necessarily includes more general duties to participate in good faith and cooperatively in the arbitral process. This follows both from the nature of the arbitral process and from the general rule of pacta sunt servanda. As noted above, an arbitration agreement is not merely a negative undertaking not to litigate, but a positive obligation to take part in a sui generis process which requires a substantial degree of cooperation (e.g., in constituting a tribunal, paying the arbitrators, agreeing upon an arbitral procedure, obeying the arbitral procedure (notwithstanding the absence of direct coercive powers of the arbitral tribunal) and complying with the award.) When a party agrees to arbitrate, it impliedly, but necessarily, agrees to participate cooperatively in all of these aspects of the arbitral process.

an agreement to arbitrate necessarily entails a commitment to cooperate in good faith in the arbitral process … These positive obligations are buttressed by the obligation to perform contractual obligations in good faith – crystallized in the pacta sunt servanda doctrine – which is recognised both internationally and in all developed national legal systems. …[emphasis added]

  • The court held that the grounds in this case forms strong basis for holding that an arbitration agreement includes a duty to cooperate in the arbitral process. An agreement to arbitrate is an agreement to participate in a process that requires the mutual cooperation of the parties. A duty to cooperate in the arbitral process is therefore not so much implied as inherent in the very nature of an arbitration agreement…….the answer will turn on the interpretation of the arbitration agreement under the governing law of the same, which will differ between arbitration agreements….the governing law, however, may not recognise the general ground cited by Born in favour of an implied duty to arbitrate in good faith. This point is, with respect, not addressed in Born, where it is simply asserted that “the obligation to perform contractual obligations in good faith … is recognised both internationally and in all developed national legal systems”. Nevertheless, it may be that under the governing law, a duty of good faith will be implied into most or all arbitration agreements, even if there is no general duty to perform contractual obligations in good faith under that law, given the inherently cooperative nature of the arbitral process. In sum, while it seems clear that an arbitration agreement includes a duty to cooperate in the arbitral process, it is not clear if this is the same as or falls under a duty of good faith. Nor is it clear if the general ground relied on by Born founds a duty of good faith in every arbitration agreement. Still, it may be that most or all arbitration agreements include a duty of good faith or a similar duty given the cooperative nature of the arbitral process.

On Guerrilla Tactics in International Arbitration

  • The court cited Günther J Horvath et al, “Introduction to Guerrilla Tactics in International Arbitration”(“Horvath et al”) in Guerrilla Tactics in International Arbitration (Kluwer Law International, 2013) (Günther J Horvath and Stephan Wilske eds), to describe guerrilla tactics as follows:

– violation or unethical abuse (invoking the law or rules for purposes other than originally foreseen) of the law or (written) procedural rules;

– the intended aim is to obstruct, delay, derail and/or sabotage the arbitral proceedings; and

– the execution is deliberate, i.e., a conscious tactical decision.

  • The court held that certain “common” or “extreme” guerrilla tactics may already amount to grounds upon which an arbitral award may be set aside, under Art 34(2)(b)(ii) of the Model Law (for breach of public policy) and s 24(a) of the IAA, which applies where the making of the award was induced by fraud or corruption. The court held that Jaguar had not employed guerrilla tactics in breach of an implied duty to arbitrate in good faith.

On Breach of Public Policy

  • The court cited the famous case of PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 where the Court of Appeal held at [59] that the threshold would only be crossed if upholding the award would “shock the conscience”, or would be “clearly injurious to the public good or … wholly offensive to the ordinary reasonable and fully informed member of the public”, or would violate “the forum’s most basic notion of morality and justice” and held that the award should not be set aside for breach of public policy in this case.

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