AJT v AJU

Chan Seng Onn J:

[1] The plaintiff, AJT, took out Originating Summons No 230 of 2010 to set aside the Interim Award issued on 1 December 2009 (“the Award”) in SIAC Arbitration ARB No 86 of 2006 (the “Arbitration”), on the grounds that the Award is contrary to:

(a) the public policy of Singapore; and/or

(b) the principles of natural justice.

[2] The Award relates to the validity of an agreement entered into between AJT and the defendant, AJU, to terminate the Arbitration (“the Concluding Agreement”).

[3] AJT is a company incorporated under the laws of the British Virgin Islands and AJU is a public company incorporated under the laws of Thailand whose principal business is that of production of television programmes and the promotion of shows and events. The Arbitration relates to claims brought by AJT against AJU under an agreement between [P] (a related company of AJT) and AJU. Consequent to disputes arising under the agreement, AJT, as the assignee of [P] under the agreement, initiated the Arbitration against AJU by serving a Notice of Arbitration on AJU on 21 August 2006.

[4] On 21 November 2006, AJU made a complaint of fraud, forgery and the use of a forged document to the Thai police (“the Complaint”) against AJT’s sole director and shareholder, Mr [O] (“[O]”), [P], and [Q], another company related to AJT. The Thai police commenced investigations against all three pursuant to the Complaint. It is important to note at this point that under Thai law, fraud is a compoundable offence whilst forgery and the use of a forged document are both non-compoundable offences.

[5] While the police investigations were ongoing, the parties discussed and negotiated a settlement of their disputes and entered into the Concluding Agreement dated 4 February 2008. The salient terms were as follows:

(a) Clause 1 provided that “the Closing Date hereof [should] be the date that [AJU] has received the evidence of withdrawal and/or discontinuation and/or termination of all Criminal Proceedings” from the public prosecutor and/or the relevant authorities (the “Closing Date”);

(b) Clause 3 provided that “[t]he Agreed Final Settlement Amount [amounting to US$470,000.00], subject to the other terms and conditions of this Agreement, [should] be paid for value on the Closing Date to [AJT]’s bank account”;

(c) Clause 5.3 (i) provided that each party should, at the Closing Date, “take all such steps as are necessary or desirable to simultaneously and irrevocably terminate, withdraw and discontinue all actions, claims and counterclaims as applicable to the respective Parties in the Proceedings and in any other form of legal or other action, as well as to vacate any judgments, awards, or enforcement that may have been issued or are subsequently issued”;

(d) Clause 8 provided that all claims between the parties would be deemed to have been fully settled; and

(e) Clause 9.1 provided that the Concluding Agreement should be governed by and construed in accordance with the laws of Singapore.

[6] Soon after the Concluding Agreement was signed, AJU withdrew its complaint to the Thai Police, stating that the parties had reached an agreement and that AJU had no intention to proceed with further actions against [O] – whether civil, criminal or upon any other grounds. Consequently, in a letter dated 7 March 2008, the Special Prosecutor’s Office, Criminal Litigation Section revealed that a cessation order (“Cessation Order”) had been issued in respect of the criminal investigations. The relevant portion of the letter stated that:

[7] Payment of US$ 470,000.00 was made by AJU to AJT on 11 March 2008. On 10 June 2008, the Thai Prosecution again confirmed that a non-prosecution order had been issued with respect to the charges of forgery and the use of the forged document “because the evidence is not enough to prosecute”. On 18 June 2008, AJU gave [O], [P] and [Q] a letter of guarantee that it would not reinitiate criminal proceedings against them even though this letter of guarantee was not required under the terms of the Concluding Agreement. In the same letter, AJU requested AJT to withdraw and terminate all existing arbitration proceedings no later than 25 June 2008.

[8] In his response dated 25 June 2008, [O] however accused AJU of failing to comply with its obligations under the Concluding Agreement. According to him, the Concluding Agreement was meant to bring the Thai police investigations to an end; a mere statement from the Thai Prosecution that there was insufficient evidence in respect of the forgery charges was unacceptable because the investigations could still be reactivated by new or additional evidence. As a result of AJT’s refusal to terminate the Arbitration, AJU formally applied on 30 June 2008 to the Tribunal to terminate the process on the ground that the parties had reached a full and final settlement of all claims between themselves.

[9] Through its then lawyers, AJT challenged the validity and enforceability of the Concluding Agreement on grounds of duress, undue influence and illegality. It initially took the position that the Tribunal had no jurisdiction to determine the validity of the Concluding Agreement. However, at a procedural meeting held on 16 December 2008, the parties agreed to have the Tribunal determine the preliminary question of whether the Concluding Agreement should be set aside or declared void on the basis of duress, undue influence and/or illegality. The parties further agreed that if the Tribunal found that the Concluding Agreement was valid, the Arbitration would terminate automatically with immediate effect. Conversely, if the Tribunal was of the opinion that the Concluding Agreement was void, the Arbitration would continue.

[10] After a 5-day hearing, the Tribunal decided that the Concluding Agreement was not illegal. The relevant portions of the Award are as follows:

[11] As for the allegations that the Concluding Agreement was procured by undue influence or duress and the allegation that AJU had bribed the Thai authorities in order to obtain the non-prosecution order, the Tribunal found that there was insufficient evidence to support the same.

[12] AJT submitted that the Award should be set aside on the basis that it was contrary to public policy because of the following reasons:

(a) the Concluding Agreement, which the Award seeks to uphold, sought to stifle the prosecution of a non-compoundable offence;

(b) the Award sought to enforce a contract that was illegal and unenforceable in Thailand; and

(c) bribery and/or corruption of a public authority were involved in the performance of the Concluding Agreement.

[13] AJT further submitted that the Award should be set aside as there was a breach of natural justice. However, for reasons which will be explained below, this submission will only be briefly dealt with at the end of this judgment.

[14] Before considering the merits of AJT’s application, it is useful to first set out the relevant legal principles in relation to the setting aside of arbitration awards. Article 34(2)(b)(ii) of the UNCITRAL Model Law on International Commercial Arbitration (“the Model Law”) set out in the First Schedule of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“the IAA”) provides that an arbitral award may be set aside only if the court finds that the award conflicts with the public policy of the State. In PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597, the Court of Appeal held at [57] that errors of law or fact, per se, do not engage the public policy of Singapore under Article 34(2)(b)(ii) of the Model Law. The Court of Appeal further stated at [59]:

In Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd [2010] SGHC 62, Prakash J reiterated the principle she enunciated at [17] of VV v VW [2008] 2 SLR(R) 929 that assertions of breach of public policy cannot be vague and generalised. The party seeking to challenge an award has to identify the public policy which the award allegedly breaches and to show which part of the award conflicts with that public policy. Prakash J further cited PT Asuransi and stated that in order for a plaintiff to succeed on the public policy argument, it has to cross a very high threshold and demonstrate egregious circumstances such as corruption, bribery or fraud, which would violate the most basic notions of morality and justice.

[15] Thus, in order for AJT to succeed in setting aside the Award on the ground that upholding the Award would be in conflict with the public policy of Singapore, it has to establish, first, that the Tribunal decided erroneously on the issue of illegality of the Concluding Agreement. Next, it has to show that the error was of such a nature that enforcement of the Award would “shock the conscience,” be “clearly injurious to the public good” or would contravene “fundamental notions and principles of justice”.

[16] In determining whether the Tribunal decided correctly on the issue of illegality of the Concluding Agreement, the approach of the Court in exercising its supervisory jurisdiction has to be borne in mind. In Robert Merkin and Johanna Hjalmarsson, Singapore Arbitration Legislation Annotated (London Informa, 2009), the authors stated the following at p 75:

[17] In Soleimany v Soleimany [1999] QB 785, the parties entered into an agreement under which the plaintiff purchased and exported carpets out of Iran in contravention of Iranian revenue laws and export controls, and the defendant sold the carpets elsewhere out of Iran. Disputes arose between the parties over division of the proceeds of sale and they resolved to arbitrate their disputes before the Beth Din which applied Jewish law. The award referred to the illegality of the agreement and upheld the plaintiff’s claim. In an application to set aside the order granting enforcement of the award, Waller LJ, delivering the judgment of the English Court of Appeal, held at 800 that where public policy is involved, the interposition of an arbitration award may not isolate the successful party’s claim from the illegality which gave rise to it. He further elaborated:

[18] Waller LJ acknowledged that the Court was dealing with a situation where the arbitrator had found that the agreement was illegal and that different considerations would arise if the arbitrator had found otherwise. In the latter case, there would be tension between the public interest that the awards of arbitrators should be respected and the public interest that illegal contracts should not be enforced. Nevertheless, he stated that:

Finally, Waller LJ concluded at 803 thus:

[19] In the subsequent case of Westacre Investments Inc v Jugoimport-SDPR Holding Co Ltd [2000] QB 288, the Court of Appeal was concerned with the enforcement of a Swiss arbitration award arising from an agreement where the plaintiff was appointed as consultant in respect of the sale of certain military equipment to Kuwait by the defendant. In return, the plaintiff was to receive various payments. After securing several contracts with the Kuwaiti authorities, the defendant repudiated the agreement. The agreement provided for a Swiss arbitration clause. The arbitral tribunal upheld the plaintiff’s claim for damages as the defendant had not established that there had been any bribery which would have rendered the agreement illegal under the proper law, which was Swiss. The majority of the Court of Appeal held that enforcement of the award was not contrary to public policy.

[20] In his dissenting judgment at 314, Waller LJ elaborated on the principles which he stated in Soleimany:

[21] In contrast, Mantell LJ, with whom Sir David Hirst agreed, was of the opinion that the seriousness of the alleged illegality is not a factor to be considered at the first stage of deciding whether or not to mount a full-scale inquiry. Instead, it should be taken into account as part of the balancing exercise between the competing public policy considerations of finality and illegality – something which can only be performed at the second stage when deciding whether the award should be enforced.

[22] In Corvertina Technology Ltd v Clough Engineering Ltd 183 FLR 317, the defendant alleged that the plaintiff performed the contract in a manner which was illegal in the place of performance and that the enforcement of award based on the contract was therefore contrary to public policy. At an interlocutory application, the plaintiff sought a ruling on whether this defence could be raised. McDougall J stated at [14] that according to Soleimany, it is in principle open to a party to rely on the issue of illegality even if it had already been raised before and decided by the arbitrator; the majority of the Court of Appeal in Westacre did not say anything to the contrary. The judge further stated, at [18], that:

[23] A similar approach was adopted by Belinda Ang J in Denmark Skibstekniske Konsulenter A/S I Likvidation (formerly known as Knud E Hansen A/S) v Ultrapolis 3000 Investments Ltd (formerly known as Ultrapolis 3000 Theme Park Investments Ltd) [2010] SGHC 108 where she considered an application for leave to enforce a final arbitral award. Ang J held at [38]-[39]:

[24] Thus, on the facts of this present case, while the Tribunal determined that the Concluding Agreement was not illegal, this was not conclusive. In an appropriate case, the Court, in exercising its supervisory jurisdiction, may examine the facts of the case and decide the issue of illegality. While there is a need to uphold the public interest in ensuring the finality of arbitral awards, the Court must also safeguard the countervailing public interest in ensuring that its processes are not abused by litigants.

[25] As stated above at [5], the governing law of the Concluding Agreement is Singapore law. It is therefore necessary to consider the law relating to agreements to stifle prosecution. In The Law of Contract, Third Edition (Andrew Grubb series ed)(Michael Furmston gen ed)(LexisNexis Butterworths, 2007), the learned editors considered the types of contracts which are contrary to public policy and the reasons why they are contrary to public policy:

[26] In Windhill Local Board of Health v Vint (1890) LR 45 Ch D 351, Cotton LJ stated, at 364, that “stifling” of prosecution meant the prevention of any prosecution which has been instituted from being conducted in the ordinary course.

[27] The question of what constitutes an agreement to stifle the prosecution has been considered in a number of cases. In Kamini Kumar Basu and ors v Birendra Nath Basu AIR 1930 PC 100, the parties were concerned with the validity of an arbitrator’s award which held that the plaintiffs were entitled to a certain share in a market. The defendants argued that the arbitrator’s award was unenforceable because the parties’ referral of the dispute to arbitration was made in consideration for an agreement that a complaint of a non-compoundable offence by the plaintiff against the defendants would not be proceeded with. The Privy Council upheld the defence on the basis that the parties had agreed not to proceed with the complaint; the plaintiff had stated to the magistrate that the dispute was settled, which led to the magistrate dismissing the complaint for non-production of evidence. Sir Binod Mitter stated, at 102, that:

[28] In Shirpad v Sanikatta Co-Operative Sale Sale Society AIR 1945 Bombay 82, the defendants’ brother misappropriated certain consignment of goods which he had contracted with the plaintiffs to transport to various places. As a result, the plaintiffs filed a complaint with the police. The defendants subsequently obtained a promissory note from their brother (whose whereabouts were supposedly unknown) in favour of the plaintiffs and persuaded the latter to state to the police that they had no objection to withdrawing the case against him. However, the magistrate disallowed the withdrawal and convicted the defendants’ brother. The plaintiffs sought recovery of the money due under the promissory note when the defendants failed to make payment. Lokur J held that there was a mutual understanding between the parties that upon the execution of the promissory note, the plaintiffs would have no objection to the withdrawal of the case against the defendants’ brother and the agreement was thus against public policy. He stated at 84-85 that:

[29] In Shirpad, Lokur J relied extensively on Lord Atkin’s judgment in Bhowanipur Banking Corporation Ltd v Sreemati Durgesh Nandini Dasi AIR 1941 PC 95. There, the appellant bank sought to recover a sum due upon a mortgage bond executed by the respondent. The respondent argued that the mortgage bond was given as part of the consideration for a promise by the bank to withdraw criminal proceedings against her husband and therefore unlawful. Lord Atkin held at 98-99 that the agreement constituted an infringement of public policy since the bank had asked the magistrate to withdraw the case in consideration of the mortgage bond. His Lordship put it thus, at 96:

[30] In another Indian decision, Ouseph Poulo and ors v Catholic Union Bank Ltd and Ors AIR 1965 SC 166, the Supreme Court of India held at 161that:

[31] Similarly, in Ooi Kiah Inn Charles & Anor v Kukuh Maju Industries Sdn Bhd (former known as Pembinaan Muncul Hebat Sdn Bhd) [1993] 2 MLJ 224, the Supreme Court of Malaysia explained the rationale of the principle at 231:

[32] The prohibition against agreements to stifle prosecution has been adopted by the Singapore High Court in Teo Yong Seng & Ors v Lim Bweng Tuck & Ors [1998] SGHC 70 where the plaintiffs entered into a shares buy-out agreement with the defendants because of the latter’s threat to report their pocketing of money from the company. The plaintiffs subsequently sought to recover the money paid under the agreement. Warren Khoo J held that the agreement was essentially to stifle prosecution and hence it was an illegal contract. Consequently, the Court would not assist in the recovery of money paid under it.

[33] It is clear from the above authorities that agreements to stifle the prosecution of non-compoundable offences contravene public policy as they undermine the public interest in the maintenance of justice – particularly in the realm of law and order. To allow such contracts may, on the one hand, expose innocent accused persons to extortion, and on the other, allow a guilty person to escape punishments by offering reparation to the victim. The basic purpose of criminal law, and more fundamentally, the entire administration of justice will be defeated if such agreements are upheld.

[34] As stated in [4], under Thai law, while the offence of fraud is a compoundable offence, forgery and the use of a forged document are non-compoundable offences. In this regard, in Peh Teck Quee v Bayerische Landesbank Girozentrale [1999] 3 SLR(R) 842 at [45], Yong Pung How CJ (as he then was) cited the principle in Foster v Driscoll and Others, Lindsay v Attfield and Another, Lindsay v Driscoll and Others [1929] 1 KB 470 that the courts will treat a contract governed by its own law as void where the parties’ intention and object contemplated thereby jeopardises relations between its government and another friendly government. This was stated by Lawrence LJ, at 510, in the following manner:

[35] Similarly, Sankey LJ stated at 521-522 as follows:

[36] Yong CJ summarised the above from Foster as follows: that an agreement whose object to be attained is a breach of international comity will be regarded by the courts as being against public policy and void (supra, at [45]). He also cited Regazzoni v KC Sethia (1944) Ltd [1958] AC 301 where the House of Lords were concerned with a contract governed by English law for the sale and delivery of goods to be shipped from India to Genoa for resale to South Africa. The parties were aware that at the material time, there was a prohibition on the export of goods to South Africa by the Indian Government. One party repudiated the contract and the other brought an action for breach of contract. Lord Keith of Avonholm stated at 327:

[37] Further, Lord Reid stated at 323 the relevant principle as follows:

[38] Finally, in Lemenda Trading Co Ltd v African Middle East Petroleum Co Ltd [1988] QB 448, the plaintiff sought to recover commission from the defendants for assisting to procure the renewal of a contract between the defendants and the Qatar General Petroleum Co (“QGPC”). Phillips J found that the agreement between the parties which was governed by English law involved a transaction which was contrary to the public policy of Qatar. Hence, the agreement was void under the law of Qatar and unenforceable in Qatar. Phillips J noted that there was no authority to support the proposition that English courts should, as a matter of comity, refuse to enforce an English law contract on the sole ground that performance would be contrary to the public policy of the country of performance. However, even though the public policy of Qatar could not of itself constitute any bar to the enforcement of the agreement, it might be a relevant factor when considering whether the court ought to refuse the agreement under principles of English public policy.

[39] Phillips J also considered the case of Kaufman v Gerson [1904] 1 KB 591where the English Court of Appeal left open the question of whether an agreement to stifle prosecution was one which the English court would not enforce on grounds on public policy. Phillips J distinguished Kaufman v Gerson on the basis that the contract there (governed by French law and to be performed in France) was not contrary to French law and was valid and enforceable in France. In Lemenda Trading, however, the country in which the agreement was to be performed, i.e. Qatar, shared the same public policy as England. He further held the following at 461:

[40] Applying the above to the facts of the present case, if the Concluding Agreement was entered into by the parties in furtherance of an illegal purpose under the law of the place of performance, i.e. Thai law, it will have to be set aside on the ground that it is contrary to the public policy of Singapore under Article 34(2)(b)(ii) of the Model Law. Similarly, it will also have to be set aside if the Concluding Agreement was contrary to the public policy of both Singapore as well as Thailand.

[41] Having considered the relevant legal principles, it is now appropriate to consider the merits of AJT’s application. As stated above, AJU filed the Complaint on 21 November 2006 which provided as follows:

[42] In fact, AJU sought and obtained confirmation that, in truth, the licence contract that [Q] had been granted was only for 3 and not 5 years. AJU alleged, therefore, that the document they had received and which evinced a licence period of 5 years was forged. This document was forwarded by AJU to the Thai police for their investigation. The nature of the Complaint thus clearly encompassed the alleged offences of forgery and use of a forged document. Further, the Managing Director of AJU, [C], testified in his statement as follows:

[43] As submitted by AJT, any agreement between the parties must have required AJU to withdraw the Complaint in relation to both the allegations of forgery and the use of a forged document in addition to the fraud allegation. It would have been cold comfort to AJT if any such agreement only required AJU’s withdrawal of the complaint of fraud. In addition, before the actual execution of the Concluding Agreement, the parties negotiated on the terms to be contained therein. Clauses 5 and 6(c) of the initial draft provided that:

[44] As stated by the Tribunal, the initial draft clause 5 appeared to impose an obligation on AJU to both withdraw the charge against AJT and cause a non-prosecution order to be issued in respect of the fraud and forgery charges against [O], [P] and [Q]. Thus, the parties clearly intended to enter into an agreement with the object of compounding a non-compoundable offence. Following further discussion between the parties and their respective legal advisers, this initial draft clause 5 was amended to the final version as reflected in the Concluding Agreement, i.e. Clause 5.3(i) (see [5] above). Further, as shown by Clause 1 of the Concluding Agreement, the parties intended for the Arbitration to terminate when AJU received notice of the termination of all criminal proceedings against [O], [P] and [Q] subsequent to AJU’s withdrawal of the Complaint against them.

[45] However, the Tribunal stated that a plain reading of Clause 1 did not suggest that the Concluding Agreement was for an illegal purpose or that some illegal acts would be performed by AJU. Further, as the Thai Prosecution retained the power to continue with their investigations on forgery with whatever evidence they had, AJU’s withdrawal of the Complaint could not be said to be illegal.

[46] The Tribunal’s decision was based on the literal terms of the Concluding Agreement. The Tribunal appeared to limit itself to a consideration of the Concluding Agreement only as drafted without concerning itself with the relevant surrounding circumstances leading to the finalisation of the Concluding Agreement to ascertain the true object, purpose and intentions of the parties. However, as stated in Kamini Kumar Basu and Bhowanipur, agreements of an illegal nature are unlikely to be expressly stated. Inferences have to be made from the surrounding circumstances as to whether the Concluding Agreement involved any illegality or illegal act to be performed by the parties. AJU’s Opening Statement at the Arbitration proceedings is particularly telling. Paragraph 15 states that:

[47] Furthermore, [D], a consultant of AJU, admitted that his understanding of the Concluding Agreement was that AJU was under an obligation to withdraw its Complaint. The relevant portion of the transcript at the Arbitration hearing is as follows:

[48] Similarly, [C] testified that he understood that AJU was obliged to ask for withdrawal of the criminal complaint under the Concluding Agreement:

[49] After AJU withdrew its complaint to the Thai authorities, it sent an email to [O] stating that it had requested the Thai authorities to withdraw the forgery charges:

[50] It is thus patently clear from the evidence that the parties to the Concluding Agreement (and in particular AJU) understood that AJU was obliged to withdraw the Complaint in its entirety. This would involve the allegations of forgery and the use of a forged document – both of which are non-compoundable offences under Thai law. As shown in Shirpad, even if the complainant has no power to withdraw the prosecution for non-compoundable offences, an agreement consenting to or requiring any action directed at the charge’s withdrawal will still be against public policy. The fact that the Thai Prosecution retained the power to continue with (and prosecute) the criminal investigations against [O], [P] and [Q] does not mean that the Concluding Agreement was not illegal. It is in the nature of all non-compoundable offences that parties cannot unilaterally terminate the proceedings once a complaint has been made to the relevant authorities.

[51] As a result of AJU’s withdrawal of the Complaint, the charges of forgery and use of forged document against [O], [P] and [Q] were dropped due to a lack of evidence (see [6]-[7] above). Contrary to the Tribunal’s finding, this clearly amounted to a stifling of the prosecution process in Thailand in respect of these non-compoundable offences. By holding that the Concluding Agreement involved no illegality, the Tribunal effectively validated an agreement entered into by the parties with the intention and purpose of doing an act which undermined the administration of justice in Thailand. Accordingly, to uphold the Award would constitute a breach of international comity by enforcing a contract which is illegal under the law of Thailand, the place of performance. The illegality of the Concluding Agreement under Thai law is borne out by the evidence of the parties’ witnesses. For instance, AJT’s expert witness, one Dr [R] stated in her evidence that:

[52] The same position was taken by AJU’s expert witness under cross examination during the Arbitration proceedings:

[53] The Concluding Agreement was therefore illegal both under its governing law, i.e. Singapore law (see Teo Yong Seng & Ors v Lim Bweng Tuck above at [32]), and under the law of the place of performance. Further, as testified by Dr Srivanat, the Concluding Agreement would be void under Thai law on the basis that it was contrary to public order or good morals. In accordance with the principles enunciated in Peh Teck Quee (and the cases cited therein), Lemenda Trading and Soleimany, the Award ought to be set aside under Article 34(2)(b)(ii) of the Model Law on the ground that it is in conflict with the public policy of Singapore.

[54] In light of the above conclusion, it is unnecessary to deal with the other submissions of AJT, viz the alleged bribery of the Thai public authority and breach of the principles of natural justice. Suffice to say that the records show that the Tribunal had adequately dealt with and disposed of AJT’s submissions. There is no ground for arguing that there had been a breach of natural justice. The tribunal found that the allegation of bribery was not proved. I am not minded to interfere with this finding of fact by the tribunal.