Singapore Court of Appeal finds party who fails to participate in arbitration proceedings can raise jurisdictional objection after issue of final award
27 June 2019
Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Pte) Ltd [2019] SGCA 33
The UNCITRAL Model Law on International Commercial Arbitration (“Model Law”) provides a mechanism for parties to challenge the jurisdiction of an arbitral tribunal in the early stages of an arbitration. In particular, under Article 16(3) of the Model Law (“Art 16(3)”), if an arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may, within 30 days, appeal that decision to a supervisory court. In Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Pte) Ltd, the Singapore Court of Appeal decided that a respondent to an arbitration which did not avail itself of court recourse pursuant to Art 16(3) and failed to participate in the arbitration proceedings could in certain circumstances still raise the jurisdictional objection before the supervisory court in setting-aside proceedings after the issue of the final award.
Facts
Rakna Arakshaka Lanka Ltd (“RALL”), a Sri Lankan company owned by the Government of Sri Lanka, and Avant Garde Maritime Services (Private) Limited (“AGMS”), a Sri Lankan company in the business of providing maritime security services to vessels at risk of piracy, entered into a private-public partnership to carry out certain projects. Their agreements were subsequently incorporated into a master agreement (“Master Agreement”), which provided for disputes to be settled by arbitration in Singapore in accordance with the rules of the Singapore International Arbitration Centre (“SIAC”).
In January 2015, a vessel chartered and operated by AGMS was detained by the Sri Lankan authorities. AGMS requested RALL to take certain actions to clear AGMS’ name but RALL did not do so. AGMS then commenced arbitration proceedings against RALL on the basis that RALL had breached clause 3.1 of the Master Agreement by failing to “provide its utmost assistance to AGMS”. RALL did not respond to the Notice of Arbitration despite having been granted extensions of time to do so.
In November 2015, RALL informed the SIAC that RALL and AGMS had reached a settlement and agreed to withdraw the arbitration. The settlement was encapsulated in a memorandum of understanding (“MOU”) entered into between the parties. However, AGMS subsequently informed the SIAC that in light of certain developments, it took the view that there was no settlement and the arbitration remained afoot. Following an application by AGMS, the arbitral tribunal (“Tribunal”) issued an Interim Order which stated that since RALL had failed to ensure the continuity of the Master Agreement, which went to the root of the MOU, the dispute in the arbitration was still alive. The Tribunal thus proceeded with the arbitration and rendered a Final Award (“Award”), finding that RALL had breached clause 3.1 of the Master Agreement. RALL was ordered to pay AGMS US$5 million and the costs of the arbitral proceedings. RALL had not participated in the arbitration.
RALL then commenced proceedings in the Singapore High Court to set aside the Award. Dismissing RALL’s application, the judge noted that a party’s failure to challenge a tribunal’s ruling on jurisdiction as a preliminary issue had a preclusive effect in that such party could not afterwards bring a jurisdictional challenge in subsequent setting aside proceedings in the seat court. The judge also held that the preclusive effect of Art 16(3) applied equally to a party that had stayed away from the arbitral proceedings. Even if RALL was not precluded from bringing its jurisdictional challenge, the judge was of the view that the Tribunal’s mandate was not terminated by virtue of the MOU. Dissatisfied with the judge’s decision, RALL appealed to the Court of Appeal.
Decision of the Court of Appeal
Effect of non-compliance with Art 16(3) on a non-participating party
The Court of Appeal allowed the appeal. The court noted that Art 16 of the Model Law requires parties to an arbitration to make their challenges to jurisdiction at an early point of the proceedings. However, the court was of the view that this requirement presupposes that parties are before the arbitral tribunal and that a party to an arbitration agreement who is served with a notice of arbitration by a counterparty has no option but to participate in the ensuing proceedings. In the court’s view, Art 16(3) should not be construed so as to prevent a respondent who chooses not to participate in an arbitration because he has a valid objection to the jurisdiction of the tribunal from raising that objection as a ground to set aside that tribunal’s award.
The court addressed two objections levelled against the adoption of this view. The first was that Art 16(3) is intended to avoid wastage of resources by allowing the entire proceedings to continue, without further doubt as to jurisdiction. However, the court mentioned that this objection has little weight where there is either no arbitration agreement to begin with or the arbitration proceedings are in some way contrary to the agreement. In this regard, the court observed that a respondent who chooses not to participate does not contribute to the wastage of costs. Instead, where the claimant insists on proceeding in such circumstances, he must take the risk of wasted costs.
The second objection was that delimiting the preclusive effect of Art 16(3) would allow parties to stay silent about jurisdiction during proceedings, only to raise a jurisdictional challenge after a final award is issued. However, the court was of the view that where a party does not participate in the arbitration proceedings, this objection does not apply. Indeed, with the absence of a participating respondent during arbitration proceedings, less time would be needed for evidence-taking and submissions. Furthermore, a non-participating party who seeks to set aside an award that a tribunal has granted would be subject to the same time constraints as a participating respondent would have been.
Thus, the court concluded that the preclusive effect of Art 16(3) does not extend to a respondent who stays away from the arbitration proceedings and has not contributed to any wastage of costs or the incurring of any additional costs that could have been prevented by a timely application under Art 16(3).
The court then addressed the issue of whether RALL had “participated” in the arbitration proceedings. The court noted that the conclusion of the MOU created a fundamental change in position, after which RALL made clear that the arbitration should be stopped because the settlement had resolved the dispute which had been submitted to arbitration. While RALL had written to inform SIAC of the facts and for information to apprise of itself of the actions taken by AGMS and the Tribunal, the making of such queries could not amount to participation.
Setting aside under Art 34 of the Model Law on the ground of lack of jurisdiction
Next, the Court of Appeal turned its attention to the effect of the MOU. The court found that as the MOU had resolved the dispute between the parties, there was no longer a dispute to be arbitrated. Thus, from the date of the MOU, the mandate given to the Tribunal to decide the dispute between the parties had ended. Accordingly, the Award contained decisions on matters that were, in the language of Art 34(2)(a)(iii) of the Model Law, “beyond the scope of the submission to arbitration”. The court therefore set aside the Award on that basis.
Comment
This decision establishes that a non-participating respondent in an arbitration remains entitled to raise a jurisdictional objection when seeking to set aside the arbitral award, even though it did not utilise the mechanism provided in Art 16(3) to appeal to the High Court against the tribunal’s decision on its jurisdiction.
Nonetheless, as the Court of Appeal noted, the decision not to participate in the arbitration and a failure to utilise the appeal procedure of Art 16(3) could be a risky move. If it subsequently turns out during the setting aside application that the respondent is mistaken in his belief that an arbitral tribunal lacks jurisdiction, then the respondent would be left with a valid award against it. In contrast, utilising Art 16(3) would allow the respondent to determine at an early stage whether its views about jurisdiction were mistaken; and if so, to continue to defend the arbitration claims on substantive grounds.