Contributed by DLA Piper Singapore Pte Ltd

March 08 2007
 
“In Government of the Republic of Philippines v Philippine International Air Terminals Co Inc [2006] SGHC 206 the Singapore High Court considered an application by the Philippines government to set aside an arbitral award under the Singapore International Arbitration Act (Cap 143A). The court had to consider whether: (i) the award dealt with a dispute which was not contemplated by or not within the terms of the submission to arbitration, or which contained matters beyond the scope of submission under Article 34(2)(a)(iii) of the United Nations Commission on Trade Law Model Law on International Commercial Arbitration; and (ii) a breach of natural justice had occurred in connection with the making of the award, such that the applicant’s rights had been prejudiced under Section 24(b) of the act.

Facts

The government, the applicant, awarded the respondent, Philippine International Air Terminals Co (PIATCO), the right to build and operate a third terminal building at the Ninoy Aquino International Airport in Manila under various concession agreements, including an amended and restated concession agreement dated November 26 1998, which was the underlying agreement. PIATCO commenced construction of the building and asserted by November 2002 that it was practically ready as it prepared to commence operations in the same month.

The government asserted that the award of the project to PIATCO and the concession agreements were null and void ab initio (ie, from the beginning); between September 2002 and December 2002 it filed several petitions in the Supreme Court of the Philippines to enjoin the enforcement of the concession agreements. PIATCO responded by commencing arbitration proceedings against the government under the underlying agreement of November 1998 for claims of US$565 million for breach of the concession agreements; the government put forward a counterclaim of US$900 million.

On May 5 2003 the court held that there had been serious violations of the Constitution and certain statutes and rules of fundamental public policy, and that therefore the concession agreements, including the underlying agreement, were null and void ab initio - this was termed ‘the Aghan decision’. The government advised PIATCO accordingly.

PIATCO had commenced arbitration proceedings against the government pursuant to the arbitration clause in the underlying agreement, which stated as follows:

“All disputes, controversies or claims arising from or relating to the construction of the terminal and/or terminal complex or in general relating to the prosecution of the works shall be finally settled by arbitration in the Republic of the Philippines following the Philippine Arbitration Law or other relevant procedures. All disputes, controversies or claims arising in connection with this agreement, except as indicated above, shall be finally settled under the rules of arbitration of the International Chamber of Commerce (ICC) by three arbitrators appointed in accordance with the said rules [emphasis added]. The place of arbitration shall be Singapore and the language of the arbitration shall be English.”
The government took the position from the outset that the arbitration agreement was null and void and that an ICC arbitral tribunal had no jurisdiction to adjudicate in a dispute between the government and PIATCO. Notwithstanding the government’s objections, the arbitral tribunal was constituted pursuant to ICC rules and the ICC advised the parties that the arbitral tribunal would have to decide on its own jurisdiction.

Following PIATCO’s filing of its reply in the arbitration proceedings in April 2004, the parties agreed to divide the proceedings into jurisdiction and liability phases. The government’s lawyers proposed (and the arbitral tribunal recognized) that the parties would have to brief the tribunal on (i) the applicable law governing the arbitration agreement, and (ii) the law governing the arbitration proceedings. The determination of these issues was a necessary prerequisite to enable the parties to make submissions on jurisdiction and the validity of the arbitration agreement.

The parties made their submissions and the tribunal published its partial award on the two issues on October 20 2004, deciding that Singapore law governed the arbitration agreement and the arbitration proceedings.

In respect of the first issue, the tribunal considered that Singapore had been designated as the place of arbitration in order to obtain a neutral venue for the resolution of disputes in view of the fact that PIATCO was contracting with the Philippines government. Therefore, it followed that the law governing the arbitration proceedings was Singapore law.

In respect of the second issue, the tribunal considered the principle of the severability of an arbitration agreement from the underlying agreement and found that this principle applied. The tribunal considered it significant that the parties had drawn a distinction in the arbitration clause between the arbitration of construction disputes (to be heard in the Philippines) and all other disputes (to be heard in Singapore under ICC rules). It concluded that there was a “strong implication” that the parties had implied a choice of Singapore law to govern the arbitration agreement for such disputes.

The government applied to the Singapore High Court to set aside the partial award. The court held that the government failed in both aspects of its application.

Severability

In light of the 2003 Aghan decision, the issue of severability was critical to the determination of the governing law of the arbitration agreement; if the concession agreements were null and void ab initio, the arbitration agreement was also null and void ab initio, unless it could be severed from the concession agreements.

The government asserted that, contrary to the directions agreed with the tribunal (ie, that the parties were to provide submissions on the laws governing the arbitration proceedings and the arbitration agreement only), the partial award contained a finding that the principle of severability applied. Under the circumstances, the government could not reasonably have considered that the issue of severability would be decided before the jurisdictional phase of the arbitration; as a consequence, the government had been deprived of an opportunity to present its case on this issue. In any event, the tribunal could have decided on the applicable law by applying choice of law principles and without addressing the issue of severability. However, PIATCO contended that the issue of severability had been a necessary part of the reasoning process that had led the tribunal to rule that Singapore law was the proper law of the arbitration agreement.

The court agreed with PIATCO’s arguments. It held that it had been a prerequisite for the tribunal to consider the issue of severability in order to reach the first and second decisions. Therefore, the issue of severability had been a “necessary ingredient” in the tribunal’s reasoning. The court further reasoned that the government, in recognizing in its submissions that there could potentially be different choices of law in relation to the main contract, the arbitration agreement and the arbitration procedure, had implicitly admitted that the principle of severability would necessarily be involved when the issue of the governing law of any of these matters arose. The court concluded that the government had had ample opportunity to address the issue of severability; therefore, it had not been denied an opportunity to present its case.

In light of this, the issue of severability was within the scope of the matters submitted to arbitration. There had been no breach of natural justice in the circumstances, as the government had been given sufficient opportunity to address the issue. Therefore, the government’s challenge on the grounds of Section 24(b) of the act and Articles 34(2)(a)(ii) and (iii) of the Model Law failed.

Neutrality

The government’s objections on the question of neutrality were essentially twofold.

First, it argued that the tribunal had not informed the parties that it would be making a determination on the neutrality of Singapore as an arbitration venue; as a consequence, the government had not been afforded an opportunity to address this issue or tender evidence.

Second, it argued that the tribunal’s finding had caused grave prejudice to the government because it was tantamount to a predetermination of one of the government’s jurisdictional objections at the second phase of the arbitration.

The court pointed out that an arbitral award is not liable to be struck down because of allegations that it was premised on incorrect grounds, whether of fact or of law. The court said that the government’s complaint in relation to the neutrality issue and the tribunal’s finding that the law governing the arbitration proceedings was Singapore law were entwined with the issue of jurisdiction. In the premises, the government’s challenge on the neutrality issue was really an appeal on the merits against this part of the tribunal’s decision.

Further, in the absence of evidence of the circumstances in which the arbitration agreement was concluded, it had been fair for the tribunal to approach the construction of the contract as it would construe a commercial contract - that is, by understanding the words as they would be understood objectively by a reasonable person. The court considered that, in interpreting the contract, the tribunal had proceeded properly and logically with regard to the document before it, the arbitration agreement in the context of the document as a whole and the surrounding circumstances as they were made known to the tribunal. Therefore, the government’s challenge on the grounds of breach of natural justice (under Section 24(b) of the act and Article 34(2)(a)(ii) of the Model Law) failed.

Comment

The court’s decision demonstrates that Singapore courts will not readily interfere with the arbitral process, particularly to set aside awards in respect of international arbitrations, unless it is manifestly clear that a breach of the rules of natural justice has occurred.

This decision highlights the need for parties to arbitrations to consider thoroughly the substance of their respective submissions to arbitral tribunals on any substantive question or issue. In particular, parties should carefully assess the steps in reasoning that an arbitral tribunal would need to adopt to determine a particular issue, including any ancillary issue or reasoning. If in doubt, parties should seek clarification from tribunals on the issues to be determined, including whether the tribunal would need to consider an ancillary issue as a step in the reasoning.

Singapore courts are unlikely to be sympathetic towards a party seeking to challenge an arbitral award by alleging a breach of the rules of natural justice if the party was under a misapprehension of the requisite submissions to be provided to the arbitral tribunal and persisted in not duly addressing the tribunal, despite having had ample opportunity to do so subsequently (but before the making of the award). Nevertheless, arbitrators should be circumspect in their deliberations on questions or issues leading to the publication of an award in order to ensure that the parties have been given an opportunity to present their respective cases on every issue to be decided in the proceedings.
For further information on this topic please contact Gordon Smith or Wei Yaw Lam at DLA Piper Singapore Pte Ltd by telephone (+65 6512 9595) or by fax (+65 6512 9500) or by email (gordon.smith@dlapiper.com or weiyaw.lam@dlapiper.com).”