Singapore High Court: Whether an Arbitral Award on Substantive Merits can be Termed as Ruling on Negative Jurisdiction? Does Doctrine of res judicata Have Effect on the Tribunal’s Authority to Hear the Dispute?

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In BTN and another v BTP and another, [2019] SGHC 212, the Singapore High Court dismissed an application to either review a partial arbitral award under Section 10(3)(b) of the International Arbitration Act (Cap. 143A) (‘IAA’) of Singapore, or in the alternative, to set aside the partial award under Section 24(b) of the IAA and Article 34 of Model Law. In this case, Justice Belinda Ang made some significant observations while addressing the subjects such as whether issues decided by the arbitral tribunal in the partial award can be termed as jurisdictional decisions which can be reviewed by the Court de novo under Section 10(3)(b) of IAA, whether doctrine of res judicata operates against litigants and not against courts and whether res judicata is a jurisdictional objection or an admissibility objection. Detailed case analysis given below:-

Factual Matrix

BTN, a company incorporated in Mauritius, entered into a Share Purchase Agreement (‘SPA’) with the defendants, BTP & BTQ, who were the owners of a group of companies (‘the Group’). The Second Plaintiff, BTO, a Malaysian company, was the principal holding company of the Group. Pursuant to the SPA, BTN acquired 100% ownership and control of the Group on both the shareholder and board level.

The consideration for the acquisition was made up of two elements: the Guaranteed Minimum Consideration of USD25m and the Earn Out Consideration. The latter element depended on the financial performance of the Group in financial years 2013, 2014 and 2015, calibrated based on the different levels of Earn Out Targets for each financial year as specified in the SPA, up to a maximum amount of USD35m.

The SPA also stipulated that the defendants had to be employed by BTO. The employments of the defendants were governed by the respective Promoter Employment Agreements (‘PEAs’), unsigned versions of which were annexed to the SPA. Consequently, the PEAs were signed by BTO, as an employer (‘Employer’), BTP and BTQ, as employees (‘Employees’) and BTN as the confirming party.

Both the SPA and PEAs contained materially identical provisions as to the Employees’ ‘With Cause’ and ‘Without Cause’ termination. The SPA provided that the consequence of a without-cause termination was that BTN was to pay the Employees an amount equal to 100% of the Earn Out Consideration Tranche that would have been payable to them for the unpaid term of the Earn Out Period, assuming achievement of a percentage level of Earn Out Targets equal to 100% for the remaining financial years in the Earn Out Period. This means that on the facts, if the dismissals of the Employees were without cause, then they would be entitled to USD35m. Whereas if the dismissals were with cause, then they would not be entitled to any Earn Out Consideration.

The dispute resolution clause in SPA was substantially the same as of the PEAs. However, the governing law and jurisdiction clause under the SPA was different. The SPA was governed by the laws of Mauritius with exclusive jurisdiction to the Courts of Mauritius to decide all matters arising out of it whereas PEA’s were governed by the laws of Malaysia with exclusive jurisdiction to the Courts of Malaysia to decide all matters.

Later, BTO dismissed the Employees with notice and in response the Employees triggered proceedings before the Malaysian Industrial Court (‘MIC’). The MIC gave judgment in their favour (‘MIC Award’) and awarded compensation for lost salary. BTO initially resisted to make payments but later decided to make full compensation to the Employees. Thus, the MIC Award remained unchallenged.

Subsequently, the Employees commenced arbitration proceedings under the SPA, claiming that they had been dismissed without cause and were therefore entitled to receive the Earn Out Consideration, in the amount of USD35m. However, the Plaintiffs did not paid to the Employees. In the arbitration, the Plaintiffs rebutted that the dismissals were with cause on the basis that the Employees had failed to cause the Group to achieve a positive growth in financial year 2013 and behaved in ways that were materially detrimental to the interests of the Group. The Employees claimed that these issues were res judicata by virtue of the MIC Awards (the ‘Res Judicata Issue’) and that as a matter of construction of the SPA and the PEAs, a determination under the PEAs that the dismissals were without cause was binding for the purposes of the SPA (the ‘Construction Issue’).

Upon hearing both sides, the Arbitral Tribunal rendered a Partial Award wherein it was held as under:-

  • The determinations by the [MIC] that the Claimants were terminated without just cause or excuse is binding and conclusive for the purposes of termination “Without Cause” under the [SPA] and the [PEAs];
  • The Respondents are in addition prevented from arguing that the Claimants were terminated “With Cause” under the [SPA] and the [PEAs] by the doctrine of issue estoppel under Singapore law;
  • A valid termination under the [SPA] requires the existence of “Audited Accounts” at the time of termination, which “Audited Accounts” must comply strictly with the [SPA] definition.

Against this Partial Award, Plaintiffs filed the present proceedings before the Singapore High Court seeking review of the Partial Award pursuant to Section 10(3)(b) of the IAA and, in the alternative, to set aside the Partial Award pursuant to Section 24(b) of the IAA and Art 34(2) of the Model Law.

Parties Contentions

Plaintiffs’ contended as under:

  • That the Partial Award is in substance a negative jurisdiction ruling, as the Tribunal abdicated the jurisdiction conferred on it by the parties to decide disputes under the SPA;
  • That the jurisdiction was given to the Tribunal by virtue of the SPA to determine any dispute arising out of the SPA, including the dispute as to whether the PEAs had been terminated without cause within the meaning of the SPA. But the Tribunal did not enter into the merits of this question at all. Since as per the law settled in PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597, an award must deal with the substance or merits of the dispute, failing which it is not an award, it was contended that the MIC Award is not an award;
  • That in the alternate, the Partial Award should be set aside pursuant to Art 34(2) and/or Section 24(b) IAA on the basis that
    • the Tribunal breached the parties’ agreed arbitral procedure (Art 34(2)(a)(ii)),
    • there was a breach of natural justice as the Tribunal closed its mind to the factual disputes (Section 24(b), Article 34(2)(a)(iii)), and
    • the Tribunal exceeded its jurisdiction by making factual findings in the hearing on legal issues (Art 34(2)(a)(iv)).

Defendant (Employees) contended as under:

Applicable Legal Principles

Section 10(3)(b) of IAA states:

If the arbitral tribunal rules –

(a) on a plea as a preliminary question that it has jurisdiction; or

(b) on a plea at any stage of the arbitral proceedings that it has no jurisdiction,

any party may, within 30 days after having received notice of that ruling, apply to the High Court to decide the matter.

Judgement

The Court held as under:

  • That the Partial Award is not a ruling on jurisdiction, because neither the Construction Issue nor the Res Judicata Issue is a jurisdictional issue and in any event, the Partial Award also ruled on the Audited Accounts Issue, which the parties agree is a decision on substantive merits;
  • That the doctrine of res judicata “does not have any effect on the court’s authority to hear the dispute before it”. This statement of principle is applicable to arbitral tribunals as well;
  • That the doctrine of res judicata and the concept of jurisdiction are distinct and cannot be conflated. The doctrine of res judicata falls within the concept of admissibility of claim: it takes aim at the claim, and not at the defect of the improper forum. Where the doctrine applies to preclude a party from arguing a certain issue or claim, it would mean that it is “inappropriate” or “unsuitable” for the tribunal to hear the substantive merits of the issue or claim, thus going to its admissibility;
  • That where a party alleges that a dispute has already been resolved and should not be reheard, the party is actually raising an issue with the claim itself. The party is not attempting to get the dispute resolved in a different forum; rather the party does not want the claim to be resolved in any forum. Thus, a res judicata objection is conceptually not a jurisdictional objection, but an admissibility objection;
  • But there may be instances where the doctrine of res judicata is correctly classified as a jurisdiction challenge notwithstanding the conventional understanding that it is an objection to the admissibility of a claim. This may occur when the doctrine is directly linked to the consent of the parties, because party’s consent lies at the core of an arbitral tribunal’s jurisdiction. Such an instance may arise where both parties are unhappy with an arbitral award and sign an agreement for the same dispute to be re-arbitrated, or where the parties’ agreement expressly provides for a review into a previous decision. [CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] 4 SLR 305]
  • That the concept of admissibility is useful as a foil to better illustrate the ambit of the concept of jurisdiction, for challenges as to the admissibility of claims are not jurisdictional objections. Instead, they can be said to be a subset of the category of claims on merits. Drawing on the concept of admissibility does not in any way undermine the integrity of the Model Law or the IAA.
  • In PT Asuransi (supra), the Court of Appeal was of the view that the decision on estoppel was an issue the tribunal was entitled to determine and therefore could not be set aside under Art 34(2)(a)(iii). This reasoning supports the view that the courts should not review a tribunal’s decision on res judicata.
  • That neither was there a breach of natural justice, nor did the Tribunal breach the parties’ agreed arbitral procedure, nor did it exceed its jurisdiction.

Thus, the Court refrained to review the Partial Award pursuant to Section 10(3) of IAA and in the alternative, to set aside the Partial Award pursuant to Art 34(2) and Section 24(b) of IAA and dismissed the application with costs.

Position in India

The Indian Courts have held a similar view on the issue. In this regard, it is worth discussing the case of National Thermal Power Corporation Ltd. v. Siemens Atkeingesellschaft (2007) 4 SCC 451 which was decided on similar facts by the Supreme Court of India. In the case, the Court was concerned with an arbitration that took place before the ICC Court of Arbitration. The claims which were raised by the Respondent related to compensation on account of delay on the part of Appellant in procuring import licences and belatedly opening letters of credit. Besides filing a defence to the claims of the Respondent, the Appellant filed several counter claims. The arbitral tribunal rendered a partial award inter alia holding that the claims of Appellant were not admissible on the ground that they had been resolved and settled in terms of a meeting which was held between the parties. The Appellant moved to the Delhi High Court in an appeal under Section 37 of the Arbitration & Conciliation Act, 1996 (‘the Indian Arbitration Act’). The High Court held that the provisions of Section 37 could not be validly invoked inasmuch as the Tribunal had not come to the conclusion that it lacked jurisdiction. The judgment of the Supreme Court which affirmed the judgment of the Delhi High Court ruled that the decision of the Tribunal was one that was rendered on merits upon which the Tribunal disposed of the counter claim while rendering a partial award. Since the decision of the Tribunal was one on merits, an appeal under Section 37 was not maintainable.

While deciding the issue, the Supreme Court observed that when in an application under sub-section (2) of Section 16 of the Indian Arbitration Act, the arbitral tribunal rendered a final decision on the merit of the claim of the claimant and the counter-claim of the respondent in arbitration, such decision amounted to an award under the Indian Arbitration Act, which could be assailed by the aggrieved party in an application under Section 34 of the Indian Arbitration Act. Thus, the Supreme Court by this decision held that against the partial award, Appellant’s remedy was under Section 34 of the Act and not under Section 37 of the Act.

In that case, the Court was also concerned with what is a jurisdictional question and whether declining to go into the merits of the claim would amount to a refusal to exercise jurisdiction. While deciding this issue, the Court inter alia held that declining to go into the merits of a claim in a particular case may amount to a refusal to exercise jurisdiction. Thus, it is apparent that the view taken by the Supreme Court of India is in line with the Singapore High Court in the present case.

My Comments

The equivalent of Section 10(3)(b) of IAA is Section 37(2)(a) of the Indian Arbitration Act which deals with negative ruling on jurisdiction passed by the Arbitral Tribunal. Under Section 37(2) of the Act an appeal lies to the Court from an order accepting the plea of lack of jurisdiction or exceeding the scope of reference raised before an Arbitral Tribunal under section 16 of the Indian Arbitration Act. Whereas no appeal is prescribed under Section 37 of the Indian Arbitration Act in a case of rejection of the plea of lack of jurisdiction or exceeding the scope of reference, in which case the remedy would be to await for the Arbitral Award and then take recourse against the same under section 34 of the Indian Arbitration Act.

However, by Section 10 of IAA, the Singapore legislature provided the avenue of court recourse for a party to an arbitration who is dissatisfied with a preliminary ruling of the tribunal as to jurisdiction. Going further than Section 37 of the Indian Arbitration Act and Article 16 of the Model Law, Section 10(3) of IAA provides this recourse when the arbitral tribunal has ruled that it has no jurisdiction as well as when it has found that it has jurisdiction. In contrast, Section 37 of the Indian Arbitration Act as well as Article 16 of Model Law provides for court recourse (appeal) only in the former situation and not in latter case. A positive ruling on jurisdiction by the Arbitral Tribunal is not appealable under Section 37 of the Indian Arbitration Act and in such case, the Arbitral Tribunal will continue with the arbitral proceedings and make an arbitral award. The aggrieved party can then make an application for setting aside such an award in accordance with Section 34 of the Indian Arbitration Act.

The scholars are evenly distributed on this aspect of the Indian Arbitration Act. For those who favours the view that a positive ruling on jurisdiction is rightly made non-appealable under Section 37 of the Indian Arbitration Act believes that this provision filters out vexatious and unscrupulous attack on the jurisdiction of the Arbitral Tribunal by a defaulting party which may delay and disturb the arbitration proceedings. While those who are against this notion believes that making a positive jurisdictional decision of an Arbitral Tribunal non-appealable saddles a bona fide party to go through the entire process of arbitration proceedings and then challenge the final award. One may imagine the plight of a party who had unsuccessfully challenged the jurisdiction of the arbitral tribunal at first instance and later it was found by the Court while deciding an application to set aside an award under Section 34 of the Indian Arbitration Act that the Arbitral Tribunal did indeed lacked jurisdiction.

Disclaimer: The views expressed on this post are mine and do not reflect the views of the organisation(s) I am engaged with

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