Singapore International Commercial Court: Whether A Bad Commercial Deal Resulting Into A Financially Disproportionate Award Can “Shock The Conscience” Of The Court To Set Aside Such An Award?

SICC

Consider a situation wherein a party, A entered into 4 Contracts (‘Transaction 1’) with party B for the supply of certain commodity. The payment from B to A for Transaction 1 is not received and yet A entered into another set of 6 contracts (‘Transaction 2’) with B for supply of commodity knowing well that the payment from Transaction 1 is overdue. Further, in Transaction 2, A has not even put any condition/pre-condition which can ensure payment of Transaction 1 from B such as a term which provides a right to repudiate Transaction 2 to A in case B fails to make payments for Transaction 1 or a term which imposes a precondition to the effect that supply of goods in Transaction 2 are subject to payment from Transaction 1 from B. Subsequently, in the given scenario, B ultimately fails to pay for Transaction 1 and as a sequitur A repudiates Transaction 2 in anticipatory breach of contract. This repudiation was held bad in the eyes of law by the Arbitrator in its award on the ground that Transaction 1 and 2 are two separate transactions altogether. Then, can A successfully apply to set aside such an Award on the ground of breach of public policy of Singapore claiming that the Award, in financial terms is so disproportionate and gives B such financial advantage that the result “shocks the conscience” of the courts in Singapore?

The Singapore High Court answered this issue in negative in CEB v CEC [2020] SGHC(I) 11 holding that A took a risk in extending credit to B as it did not insert a clause in the original contracts requiring payment before shipment. Further, A entered into the later contracts in the knowledge that payments were overdue and B was in financial difficulties yet it did not insert clauses either requiring payment before shipment or providing that failure to pay for the  earlier contracts would entitle it to cancel the later contracts. Thus, A cancelled Transaction 2 taking the risk that the consequent breach would be held not to be a justifiable breach. In short, A had made certain commercial decisions which turned out to be disadvantageous. This is part and parcel of normal trading. There is nothing which “shocks the conscience” about this. This cannot turn a bad commercial deal into one that shocks the conscience. This ground for setting aside the award therefore failed for A.

Another important and unusual aspect of this case was the arbitration agreement based on which the arbitration proceedings were initiated in Singapore which reads as under:-

The parties hereby agree that the Disputes shall be resolved by binding arbitration. The arbitration shall be conducted in accordance with the Indian Arbitration Act of 1996 (herein after referred as “Act”)

The arbitral tribunal shall consist of sole arbitrator and the seat of the arbitration shall be Singapore. The Arbitration shall be governed by and construed in accordance with the laws of India. The Language of the arbitration shall be English.

Interpreting the above clause, the Singapore High Court observed that Clauses of this nature do require careful analysis in order to ensure that one focusses on the correct law in relation to the issues that arise. The seat of arbitration is Singapore, yet the arbitration agreement provide for the arbitration to be “conducted in accordance with the Indian Arbitration Act” and also that the arbitration “shall be governed by and construed in accordance with the laws of India”.

In the normal case no distinction is drawn between the law of the seat of the arbitration and either the substantive law of the arbitration or the law that is to govern the way in which the arbitration is to be conducted.

In Court’s view, one possible interpretation of such a clause is that parties have chosen not merely to have the arbitration conducted in accordance with the procedure of a different legal system from the arbitration law of the seat but also that the arbitration should be decided in accordance with the laws of that system. A reference in the arbitration agreement to the laws of a state other than the seat may constitute evidence of the choice of a foreign procedural law.[1] However, the practice of selecting a foreign procedural law is “extremely unusual” and “introduces serious complexity, uncertainty and risks into the arbitral proceeding”.[2]

However, since the question of whether the award is to be set aside is truly an “external” matter which is to be decided under the law of the seat of the arbitration, which was Singapore law in this case and since this fact was not even disputed by the parties, the Singapore High Court proceeded on with this unusual arbitration agreement.

Another important aspect which this case identifies is that before exercising its discretion on whether or not to set aside the award, the Singapore Court, will take into account whether the award debtor has exhausted the option of getting the defect in the award cured by the arbitral tribunal (provided in Art 33(3) of the Model Law and Section 33(4) of the Indian Arbitration Act) at the first instant before applying for setting aside of award. Albeit failure to exhaust such remedy may not be determinative, it will surely tilt the Courts in Singapore not to stop the enforcement of the award in its pro-enforcement and minimal judicial intervention approach.

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

[1] See Gary B Born, International Commercial Arbitration (Kluwer Law International, 2nd Ed, 2014) (“Born”) at p 1618

[2] Born at p 1605

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