In the recent case of Convexity Ltd. v. Phoenixfin Pte Ltd., Mek Global Ltd. and Phoenixfin Ltd.  SGHC 88, the Singapore High Court departed from its pro-arbitration stance and set aside an arbitral award. The Singapore High Court found that the arbitral tribunal had labored under the misapprehension that parties had agreed to include an unpleaded issue into the scope of submission, though the applicant had repeatedly objected to the same. The unpleaded issue formed the central basis for the tribunal’s decision to dismiss the applicant’s claims. In setting aside the arbitral award, the Singapore High Court agreed that there had been a breach of natural justice, the award had dealt with issues outside the scope of submission, and the arbitral procedure agreed by the parties had been departed from.
In Singapore, judicial philosophy is strongly pro-arbitration.
The Singapore courts may only set aside arbitral awards under certain narrow grounds provided in Section 24 of the International Arbitration Act (Cap 143A) (IAA) and Article 34(2) of the UNICITRAL Model Law on International Commercial Arbitration (MAL). They include having to prove that
Convexity Ltd (Convexity) had commenced arbitral proceedings under a services agreement to provide certain services to the respondents. The governing law of the services agreement was English law and the arbitration clause provided for arbitration in Singapore, administered under the rules of the Singapore International Arbitration Centre (SIAC). The arbitration was to be conducted in the SIAC under an expedited procedure. The first respondent, Phoenixfin, was the sole active respondent.
Convexity’s main claim was against Phoenixfin for breach of the services agreement in that Phoenixfin had wrongly terminated it and owed it effectively a break fee (the Make-Whole Amount). Convexity also claimed against the second and third respondents as guarantors/ indemnitors. Convexity sought payment of the Make-Whole Amount and late interest. Phoenixfin defended the claim on the basis that the conditions for the Make-Whole Amount were not satisfied. It also counterclaimed, alleging that Convexity had hacked its systems and misused confidential information, thereby breaching its obligation of confidentiality.
Less than a month before the scheduled evidentiary hearing, Phoenixfin sought to introduce a new defense that Clauses 10.2 and 11 of the services agreement were unenforceable penalty clauses (the Penalty Issue).
The procedural timeline of the arbitration is to be noted:
Despite the Amendment Decision, the Tribunal subsequently decided to deal with the Penalty Issue, claiming that parties had agreed that the Penalty Issue would be in issue in the arbitration as of May 13, 2020 (the Belief). The Tribunal first sought to do so at the first hearing of oral reply submissions (held after written closing submissions were submitted) on June 17, 2020, all the way to the second oral reply submissions hearing on September 4, 2020. During this entire period, the Tribunal and parties had several correspondences in which Convexity maintained its objections to the reinsertion of the Penalty Issue.
On October 2, 2020, the Tribunal issued its final award (the Award). Convexity’s claims were dismissed on the sole basis of the Penalty Issue.
The Singapore High Court set aside the Tribunal’s decision on the Penalty Issue and parts of the Award affected by it.
The Court found that that (1) there was a breach of natural justice prejudicing Convexity, (2) the Tribunal had exceeded the scope of submission to arbitration, and (3) the Tribunal had acted contrary to the agreed arbitral procedure.
The Court found that the Belief was erroneous as Convexity had never agreed to the introduction of the Penalty Issue. The Court examined the arbitral record to see if the Tribunal was justified in its belief. In this vein, the Court noted that the Tribunal’s own justification of its Belief based on the May 4, 2020 Email could not stand up to scrutiny because the said email was not before the Tribunal at the time of the May 13, 2020 Teleconference—having only been disclosed to the Tribunal as part of the parties’ correspondence months later. In any case, the Court also agreed that the May 4, 2020 Email, on a plain reading, did not show that Convexity had agreed to include the Penalty Issue as an issue in the arbitration.
The Court also noted that events preceding and subsequent to the May 4, 2020 Email, such as the lists of issues, the May 7, 2020 Email, the Amendment Application, and the Amendment Decision, also illustrated objectively that there was no agreement on the inclusion of the Penalty Issue as of May 13, 2020 or at any time. The respondents’ counsel also accepted that the Tribunal did not rule that the Penalty Issue was an issue in the arbitration during the May 13, 2020 Teleconference. Importantly, the Court recognized that Convexity had in fact repeatedly objected to the introduction of the unpleaded Penalty Issue throughout the arbitration, and such objections appear to simply have been ignored by the Tribunal, which continued to make rulings and directions based on its Belief.
The Court held that as a result of the Tribunal’s erroneous Belief, Convexity was denied the opportunity to address its objections to the mind of the Tribunal. This resulted in a breach of natural justice and the Tribunal dealing with a matter outside the scope of submission, both of which caused Convexity real prejudice.
The Court also held that the Tribunal’s directions (after the first hearing of oral reply submissions) for only Convexity to file supplemental submissions, for there to be an additional full-day evidentiary hearing, and for only Convexity’s witnesses to be cross-examined after closing submissions were all “cold comfort” and did not cure the Tribunal’s breach. They were in fact contrary to the agreed procedure of the parties—and significant departures from the agreed procedure in Procedural Orders No. 1 and 2. The Court did not accept that the Tribunal could embark on such a course even though the Tribunal was master of its own procedure. Finally, the Court also found that Convexity did not waive the Tribunal’s breach as it properly reiterated its objections to the inclusion of the Penalty Issue and declined to recall its witnesses for questioning or put in further evidence.
The Tribunal’s conduct, which flowed from the Belief, justified the setting aside of the arbitral award.
The above decisions serve as a warning for tribunals to follow and adopt procedures that avail parties the proper opportunity to be heard. While the Tribunal in Convexity v. Phoenixfin had on the surface appeared to give more time to Convexity to put in more evidence and call more witnesses, the Singapore High Court recognized that these directions did not actually address the core issue that Convexity was making: that the Penalty Issue was not an issue in the arbitration (especially after the Amendment Decision) and should not be dealt with or reinserted into the arbitration at the stage of reply oral closing by the Tribunal of its own accord.
It also serves as an instruction point for parties and their counsel. Often, parties may slip into blindly following the directions of a tribunal even though there might be genuine objections to the procedure or approach of the tribunal. It is important to maintain such genuine objections at the earliest opportunity and to reserve the client’s position on the same. A failure to do could result in a waiver of any breaches. It is also prudent for counsels to ensure that the client’s position and objections are well documented, as set out as in the case of Convexity v. Phoenixfin, wherein the Court relied and referred extensively to counsel’s objections in the arbitration.
Morgan Lewis Stamford LLC, led by litigation partner Daniel Chia, with senior associate Yanguang Ker and associate Jeanette Wong, acted for Convexity in the successful setting-aside application.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers, who are solicitors of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP: