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Singapore Sling: Singapore court sets aside Investment Treaty Award on merits for the first time

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Summary: The decision in Kingdom of Lesotho v Swissbourgh Diamond Mines is significant. It is the first time that an application to set aside an Investment Treaty Award on its merits has been considered by the Singapore courts and the application was successful. Here, we consider the court’s approach to the preliminary objections to its jurisdiction and the implications of the decision on the interpretation of Singapore’s International Arbitration Act.

In Kingdom of Lesotho v Swissbourgh Diamond Mines (Pty) Ltd [2017] SGHC 195, Judge Ramesh, sitting in the Singapore High Court, set aside an Investment Treaty award in a dispute between the Kingdom of Lesotho and a group of South African mining investors headed by Josias Van Zyl and formed of his company - Swissborough Diamond Mines - and various of his family trusts.

The case is significant because this is the first time that an application to set aside such an award on the merits has been considered in Singapore and, obviously, the first time the applicant has been successful. This article focuses on the court’s approach to the preliminary objections to the jurisdiction of the Singapore courts - both of which raised issues concerning the interpretation of Singapore’s International Arbitration Act (IAA).

Background

The dispute arose in relation to the revocation of mining licences awarded to the Van Zyl entities by the Lesotho authorities in 1988.

In 2009, the Van Zyl entities commenced an arbitration against Lesotho claiming that the mining interests had been expropriated by the state. The arbitration was commenced before the Southern African Development Community Tribunal (SADC Tribunal), a permanent regional court established to hear disputes under the SADC Treaty.

In 2010, the SADC Tribunal was effectively suspended by the SADC members. In 2012, SADC members initially agreed that the SADC Tribunal could only hear inter-state matters, but later agreed to disband the SADC Tribunal entirely.

In 2012, the Van Zyl entities commenced UNCITRAL proceedings against Lesotho at the Permanent Court of Arbitration (PCA).  In 2016 the PCA Tribunal found, by majority, that Lesotho had denied the investors justice by acquiescing in the termination of the SADC Tribunal which had been hearing the investors’ claims.

The tribunal refused to step into the shoes of the discontinued SADC Tribunal and determine the  expropriation claim. Instead they directed that the underlying claim should be pursued via fresh arbitral proceedings. The Van Zyl entities commenced a second UNCITRAL arbitration which is ongoing and seated in Mauritius.

The Van Zyl entities also contended that Lesotho’s conduct in allowing the SADC Tribunal to be shut down violated the obligation of fair and equitable treatment under the SADC Treaty.  The majority of the tribunal accepted this to be a “true dispute” which they were required to determine.  They found in favour of the Van Zyl entities and ordered Lesotho  to pay US$2.5 million in costs.

At the outset of the arbitration the PCA tribunal considered submissions as to the seat of the arbitration and determined that the seat would be Singapore.  As a result, the application by Lesotho to set aside the award was made to the Singapore court.

Section 10(3) IAA - Appeal against the ruling on jurisdiction

The Kingdom of Lesotho sought to have the award set aside pursuant to section 10(3) of the IAA.

Section 10(3) provides that if an 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.
The investors submitted that the court did not have jurisdiction to set the award aside under section 10(3) on the basis that the provision did not apply to arbitral awards containing decisions on both jurisdiction and merits. 

The Singapore court accepted that it did not have jurisdiction under section 10(3).  The court referred to the judgment in AQZ v ARA [2015] 2 SLR 972, which considered the drafting history of section 10(3), which is derived from Article 16(3) of the UNCITRAL Model Law, and concluded that Article 16(3) does not apply to an award that deals with the merits of a dispute, however marginally, and that the same principle applies to section 10(3) of the IAA.

Section 3(1) IAA – Award exceeded scope of submission to arbitration

The Kingdom also sought to have the award set aside pursuant to section 3(1) of the IAA read with Art 34(2)(a)(iii) of the UNCITRAL Model Law on the basis that the award exceeded the terms or scope of the submission to arbitration.
Article 34(2)(a)(iii) provides that an arbitral award may be set aside by the court if the party making the application furnishes proof that the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration.

The Van Zyl entities argued that Article 34(2)(a)(iii) only applies to situations where the dispute concerns the scope of the tribunal’s jurisdiction as opposed to disputes relating to the existence of the tribunal’s jurisdiction.  They cited various authorities to support this contention, including Aloe Vera of America, Inc v Asianic Food (S) Pte Ltd and another [2006] 3 SLR(R) 174 (“Aloe Vera”), and PT First Media TBK (formerly known as PT Broadband Multimedia TBK) v Astro Nusantara International BV and others and another appeal [2014] 1 SLR 372 (“Astro”).

The court disagreed, holding that Article 34(2)(a)(iii) applies to both scenarios.

It held that the passages cited from the Aloe Vera and Astro decisions simply sought to clarify the boundary between challenges to the existence and validity of the arbitration agreement (covered by Article 34(2)(a)(i) of the Model Law) and challenges to the substantive jurisdiction of the tribunal (covered by Article 34(2)(a)(iii)).  The court found that the award under challenge dealt with a dispute not contemplated by and not falling within the terms of the submission to arbitration, contrary to Article 34(2)(a)(iii).

Residual Discretion

The judgment also deals with the court’s residual discretion not to set aside an award even where grounds under Article 34(2) of the Model Law are made out – stating that this discretion should only be exercised “if no prejudice has been sustained by the aggrieved party.”  The prejudice in this case was the fact that jurisdiction had been wrongly assumed by the PCA tribunal and the award was set aside in its entirety. 

The court cited the Singapore Court of Appeal decision in CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33 as authority for the proposition that the court’s residual discretion should only be exercised “if no prejudice has been sustained by the aggrieved party”.  Interestingly, CRW did not offer any direct case authority for this proposition but relied on paragraph 20.140 of Halsbury’s Laws of Singapore volume 2, the context for which is enforcement (rather than set aside) of arbitral awards and the footnote to which refers to an earlier Singapore case (itself referencing a Hong Kong case) on the issue of enforcement as opposed to set aside.

It therefore appears that there is no proper authority in Singapore (beyond treating enforcement and set aside applications identically) for the proposition that the court retains a discretion not to set aside the award where no prejudice has been sustained by the aggrieved party. It could be argued that the use of the word “may” at the beginning of Article 34(2) of the Model Law confers the necessary discretion and indeed this point might be something which Van Zyl and his team look more closely at as the appeal - which the investors confirmed would be made when the judgment was released - is prepared (albeit such reasoning, whilst academically interesting, is not going to assist unless the finding that jurisdiction was wrongly assumed can be reversed).

Conclusions

The decision of the Singapore High Court is highly unlikely to be the end of this story. The Van Zyl entities have indicated that an appeal will follow. Further, the status of further arbitral proceedings in Mauritius may be under threat since they were directed as part of the award which has now been set aside. Indeed, the investors have indicated that they will look to suspend those proceedings (which relate to the original complaint of expropriation) pending the appeal.

The court took a firm line in finding that where a tribunal has assumed jurisdiction which has not been conferred upon it by the parties and one party has suffered prejudice, it will not use its residual discretion to ‘save’ the award. The judge was clear that this approach extended to applications made pursuant to Articles 34(2)(a)(i), (ii) and (iv) and Article 34(2)(b) where prejudicial circumstances exist.

However, the judge’s analysis on the issue was not detailed and the authorities referenced were not directly on point, suggesting that in a future case this could be an interesting area for challenge by a party resisting a set aside application.
Sanum Investments vs. Macau, a case involving a set aside application in respect of a jurisdictional award - and another arbitration which had no connection to Singapore other than Singapore being the seat of arbitration - was the first investor-state matter to reach the Singapore courts. Together with Sanum, the Lesotho case underlines that the Singapore judiciary is gaining experience in addressing important questions of investment law (including as to jurisdiction). Indeed, Singapore continues to grow in popularity as a seat for arbitration (including commercial arbitration) and these cases serve to further highlight the growing importance of Asia in the world of treaty arbitration. This is underlined by SIAC’s recent launch of its Investment Arbitration Rules which have been in force since 1 January 2017 and HKIAC’s current consultation with users in respect of a possible rules update, which includes consideration as to whether it should introduce its own administered investment arbitration rules.

An abridged version of this blog post first appeared on Practical Law Arbitration Blog on 23 October 2017.
 

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