South Pacific Oil Limited v Pacific Islands Energy Pte Ltd

Outcome: The Singapore International Commercial Court (“SICC”) dismissed an application for an order to set aside an award of an arbitral tribunal. The application was brought on the grounds that there was a breach of natural justice, that the arbitral tribunal failed to determine an essential issue in the proceedings, that the arbitral tribunal erred in making a negative jurisdictional ruling and that the award was in conflict with public policy. The SICC was satisfied that there was no basis to set aside the award.

1 The dispute arose from an arbitral tribunal’s (the “Tribunal”) final award in which the Tribunal allowed Pacific Islands Energy Pte Ltd’s (the “Defendant”) claim against South Pacific Oil Ltd (the “Claimant”) for approximately US$18.7m along with the Defendant’s costs and arbitration fees.

2 The Claimant is a state-linked company incorporated in the Solomon Islands, which owns and operates a fuel terminal storage and distribution business. The Defendant is a privately owned company incorporated in Singapore engaging in the business of supplying petroleum products and lubricants in the Pacific Islands. The Claimant had entered into a contract with the Defendant for the Defendant to supply petroleum products to the Claimant (the “Contract”). Clause 2.1 of the Contract obliged the Claimant to meet minimum purchase quantities of these products (the “MPQ”) for each year of the Contract. Where the Claimant failed to accept delivery of the MPQ, Clause 2.1(g) provided that the Claimant shall pay to the Defendant “on demand liquidated damages equivalent to the costs incurred by [the Defendant] due to such failure + 5%”.

3 The arbitration proceedings were bifurcated in two tranches. At the conclusion of the first tranche on liability, the Tribunal issued a partial award (the “Partial Award”) in which the Tribunal found that the Claimant had breached clause 2.1 of the Contract (the “MPQ breach”). The Tribunal further found that the Defendant was entitled to liquidated damages under clause 2.1(g) and set out a formula to calculate the quantum of damages under the same clause. During the second tranche of proceedings on quantum, the Claimant argued that clause 2.1(g) was unenforceable as a penalty and that there must be a causative connection between the MPQ breach and the costs incurred by the Defendant due to the MPQ breach.

4 At the close of the second tranche on quantum, the Tribunal issued a final award (the “Final Award”). The Tribunal rejected an application by the Claimant to argue that clause 2.1(g) was void as a penalty, on the basis that (a) the Tribunal was functus officio having already concluded that the Defendant was entitled to liquidated damages under clause 2.1(g) in the Partial Award; and (b) that while the Claimant did not argue penalty in the first tranche of proceedings, the Claimant was nonetheless precluded by issue estoppel or the extended doctrine of res judicata from raising the issue in the second tranche of proceedings.

5 The Claimant applied for the Final Award to be set aside on the following grounds:

(a) It failed to address an essential question relating to the causative connection between the MPQ breach and the costs incurred by the Defendant due to the MPQ breach (the “causative connection issue”);

(b) It conflicted with public policy by effectively conferring on the Defendant a windfall disguised as damages in the abject absence of any consideration by the Tribunal regarding causation of loss (the “public policy issue”);

(c) It should be set aside under a de novo review of the Tribunal’s negative jurisdictional ruling in respect of the question whether clause 2.1(g) was an unenforceable penalty (the “review issue”);

(d) The Tribunal’s determination of res judicata and Henderson v Henderson rule render the Final Award liable to be set aside under s 24(b) of the International Arbitration Act 1994 (2020 Rev Ed) (“IAA”) and/or Art 34 of the UNCITRAL Model Law on International Commercial Arbitration (the “natural justice issue”).

6 The Court rejected all four propositions and dismissed the application.

7 In respect of the causative connection issue, the Court was satisfied that the Tribunal had in the Partial Award determined that damages for failure to take the MPQ were to be assessed by reference to a formula and there was no requirement for any further proof of loss including any causative connection. It was therefore not the case that the Tribunal had failed to address the requisite causative connection in the Final Award: at [51]–[57].

8 In respect of the natural justice issue, the Court was satisfied that the issue of penalty had been raised in the proceedings leading up to the Partial Award. It was also clear that the Tribunal did not deal with the question of whether clause 2.1(g) constituted a penalty. The effect of this was that it would have been open to the Claimant to challenge the Partial Award, but the Claimant did not make such an application within the stipulated time period. It was not open for the Claimant to challenge the Final Award on the basis that the penalty issue was left open, because the Tribunal had concluded that the Defendant was entitled to liquidated damages in the Partial Award and this was a final and binding determination. The Tribunal had no jurisdiction to embark on that issue following the Partial Award, and the decision in the Partial Award also gave rise to an issue estoppel in respect of the validity of clause 2.1(g) including the question of penalty. Any denial of natural justice occurred by virtue of the Tribunal failing to consider the issue in the Partial Award which the Claimant failed to challenge in the prescribed time: at [58]–[70].

9 In respect of the review issue, the Court held that the Claimant could not rely on s 10(3)(b) of the IAA to challenge the Final Award. In AQZ v ARA [2015] 2 SLR 972, Judith Prakash J (as Her Honour then was) held that s 10(3) of the IAA could not be used to set aside an award which deals with the merits of the dispute as well as the question of jurisdiction. The Court did not find any reason to depart from Prakash J’s conclusion: at [71]–[75].

10 In respect of the public policy issue, the Court found that the Final Award did not violate public policy. The liability arose as a result of a contract freely entered into between parties. While clause 2.1(g) may have been liable to be set aside as a penalty (which the Court did not express any view on), the Claimant had the opportunity to challenge the Tribunal’s failure to deal with the issue in the Partial Award but did not do so. While the Court had considerable sympathy for the position of the Claimant, the Final Award was not against public policy: at [76]–[77].