Arbitration: Litigation by Another Name?

When parties enter into international contracts and agree to international arbitration as a forum for their disputes, it is unlikely they would expect their arbitrator to slavishly imitate the court processes of the seat of arbitration

Dispute lawyers raised and moulded in the courts of common law countries often perceive arbitration to be a facsimile of litigation, where the same rules, restrictions and strategies apply. This is unsurprising; over the years, the courts of many countries have been criticised for operating a 'judicial' approach when supervising or enforcing arbitrations, expecting arbitrators to respect the detailed rules and conventions that have developed over centuries in respect of court proceedings.

Of course, all lawyers and clients would like to see justice being administered fairly and properly. It is reasonable to expect an opportunity to be heard in a fair manner and have the issues decided by an unbiased tribunal. However, when parties enter into international contracts and agree to international arbitration as a forum for their disputes, it is unlikely they are expecting their arbitrator to slavishly imitate the Court processes of the seat of arbitration. This is even more so when the parties come from diverse legal systems, particularly civil law systems.

In Kempinski Hotels SA vs PT Prima International Development, the Singapore Court of Appeal has recently considered in detail the extent to which arbitration proceeding must imitate local court practice, particularly in respect of the issue of the status and importance of pleadings.

Kempinski concerned a referral to arbitration under the Singapore International Arbitration Centre Rules by Kempinski, a hotel operator, against PT Prima, the owner of a hotel in Jakarta, Indonesia. The contract was subject to the laws of Indonesia. Kempinski was claiming, amongst other things, damages for the alleged wrongful termination of the contract by PT Prima.

The progress of the arbitration was relatively complicated, leading to a series of awards. The parties agreed that the first two awards were effective but did not finally determine the substantive issues in the dispute between the parties. However, after the publication of the second award, PT Prima discovered that Kempinski had entered into a new management contract in respect of another hotel in Indonesia ("the New Management Contract").

PT Prima brought this development to the attention of the arbitrator in a letter, arguing that this new fact meant that Kempinski were unable to show that they had suffered a loss, thereby defeating the claim. Although PT Prima asked the Arbitrator to make a finding on this assertion as a new preliminary issue within the arbitration, PT Prima did not seek to amend its formal Answer in the arbitration to rely upon this new fact as a defence.

Following a conference between the Arbitrator and the parties, orders for the discovery of documents, written submissions, and expert opinions, the Arbitrator issued his Third Award on 20 May 2008 in favour of PT Prima.

Shortly after this time, PT Prima applied to the Singapore Court to set aside the Third Award on a number of grounds. For the purposes of this article, the most important ground relied upon by Kempinski was that the Arbitrator had decided issues which had not been formally pleaded in PT Prima's Answer, thereby acting outside the scope of his jurisdiction. In essence, Kempinski argued that since the Answer had not been formally amended, the Arbitrator lacked jurisdiction to make the Third Award; the dispute about the New Management Contract had not been referred to him for resolution in the formal pleadings.

In the meantime, PT Prima had made submissions to the Arbitrator for a Fourth Award, which would extinguish any possibility of Kempinski recovering damages. Kempinski declined to participate in this process, instead relying upon its application to the Court to set aside the Third Award which, if granted, would (they said) undermine the basis of the Fourth Award in any event. The Arbitrator made the Fourth Award in PT Prima's favour dismissing Kempinski's claim once and for all.

In respect of the Third Award, the Singapore High Court agreed with Kempinski and set it aside saying that the "...failure to plead the new management venture resulted in the Tribunal making a decision that was beyond the scope of the matters submitted to it." In doing so, the High Court relied on provisions within the UNCITRAL Model Law (incorporated into Singapore law), which allowed it to set aside an award on the basis that matters decided by the Tribunal were outside the scope of the submission to arbitration. The Judge found that the correct course would have been for PT Prima to have formally amended its Answer when it had learned of the New Management Contract, for Kempinski to then have amended its Reply and then for the Arbitrator to set a procedure before making the Third Award. The Judge added:

"Pleadings are an essential component of a procedurally fair hearing both before a Court and before a tribunal. I was therefore surprised that [Prima] argued that it was not required to plead material facts because this dispute was being adjudicated by an arbitrator."

Prima appealed to the Court of Appeal which identified the central issue as follows:

"[The] crucial point in relation to the pleadings argument is whether the legal effect of the New Management Contract was within the scope of the parties' submission to arbitration. This issue may be determined by considering what disputes between the parties were submitted to the Arbitrator for adjudication"

The Court of Appeal confirmed the principle that an arbitrator can only decide the issues which are within his jurisdiction, and that his jurisdiction is determined by the scope of the submission to arbitration. However, in this case, the pleadings themselves did not determine the jurisdiction of the Arbitrator. The Arbitrator had been asked by Kempinski in its Notice of Arbitration (i.e. its submission to arbitration) to award damages. Accordingly, any arguments, issues, or defences which failed to be determined as part of Kempinski's claim for damages naturally fell within the Arbitrator's jurisdiction. The Court of Appeal said:

"In our view, any new fact or change in the law arising after a submission to arbitration which is ancillary to the dispute submitted and which is known to all the parties to the arbitration is part of that dispute and need not be specifically pleaded. It may be raised in the arbitration, as Prima did when it raised the New Management Contract as part of its force majeure defence to Kempinski's claim. We should also point out that Kempinski was given sufficient notice of and opportunity to meet Prima's force majeure defence."

The fact that the defence raised in respect of the New Management Contract was not expressly pleaded therefore did not affect the Arbitrator's jurisdiction. However, under the rules of natural justice (which must be applied by an arbitrator), Kempinski were entitled to a reasonable opportunity to be heard on the New Management Contract issue. The Court of Appeal found that the Arbitrator acted correctly in allowing submissions on this issue, which Kempinski participated in without reservation. Accordingly, even though the New Management Contract Issue was not formally pleaded, there was no breach of the requirements of natural justice. Certainly Kempinski had not suffered any prejudice as a consequence.

From one perspective, the decision by the Court of Appeal was a reaffirmation of the position long understood by arbitration practitioners. The scope of the arbitrator's jurisdiction is constrained by the dispute referred to him in the Arbitration Notice and a defendant is generally entitled to raise any available defence as part of that dispute. Pleadings are not sacrosanct as they are in litigation, but the parties must have an opportunity to understand and respond to the case against them as part of the established principles of natural justice.

However, the case goes further than this narrow point. It shows that the Courts in Singapore are prepared to support the parties' contractual agreement to submit their dispute to arbitration. From that moment onwards, the arbitrator is entrusted to do his job; the Courts will only interfere where the arbitrator has genuinely exceeded his jurisdiction or the procedure is unfair.

This case also provides a salutary warning about the dangers of choosing to rely upon a technical strategy (here, the application to the Court to set aside the Third Award) at the cost of running a substantive defence (here, Kempinski's decision not to contest the Fourth Award on its merits). Kempinski chose to "place all its eggs in one basket" in relying upon the technical application to the Court, and ended up with nothing.

Disclaimer-The views expressed in this article are the personal views of the authors and are purely informative in nature.