Himalaya Food International Ltd v Simplot India LLC and another [2020] SGHC 222

Introduction

Does an arbitral tribunal only have jurisdiction to decide a matter correctly, such that an erroneous decision would go beyond the scope of submission to arbitration and justify setting aside the resulting award? That would be tantamount to allowing a right of appeal, when it is well accepted that there is generally no such right: see Sui Southern Gas Co Ltd v Habibullah Coastal Power Co (Pte) Ltd [2010] 3 SLR 1 (“Sui Southern”) at [15]–[22] and [40]; Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86 at [65(c)].

Mindful of this, the plaintiff (“HIL”, formerly known as “Himalya International Ltd”) stresses that it is not mounting a backdoor appeal, and that it is not merely complaining about an error of law. But HIL’s contention that the tribunal had exceeded the scope of its reference is based on a contentious interpretation of the relevant contract; it says that the tribunal could not properly have interpreted the contract otherwise. If that is not a mere error of law, what is?

Background

In 2001, HIL and the first respondent (“Simplot USA”, also known as “Simplot India LLC”) entered into a shareholders agreement (“SA”) in respect of a joint venture company, Himalya Simplot Pvt Ltd (“HSPL”), which was subsequently incorporated. In 2012, the defendants (collectively, “Simplot”) and HIL entered into a master agreement (“MA”), to which HSPL was also a party.

Pursuant to the MA, the second respondent (“Simplot India”, also known as “Simplot India Foods Pvt Ltd” and formerly known as “Comida Foods Pvt Ltd”) agreed to purchase the equipment (the “Potato Processing Equipment” or “PPE”) that HIL had been using to produce potato products, and to lease a portion of HIL’s food processing plant at Vadnagar, Gujarat, India. The MA envisaged that Simplot India would use the PPE to produce and sell potato products to HSPL for marketing and resale.

Pursuant to the MA, HIL was to receive a total consideration of US$12.75m (including a US$500,000 Holdback Amount). The Holdback Amount was to be held in escrow and paid out from time to time following the consummation of certain transactions. Clause 1.03(c) of the MA provided for the Holdback Amount to be used as follows:

By clause 9.01 of the MA, HIL gave various representations and warranties to Simplot India, including:

Clause 9.01(e) was a representation and warranty that the PPE meets the Production Requirements as defined in clause 1.03(c), and clause 9.01(g) contained further representations and warranties, inter alia, that the PPE “is fit for the use reasonably intended”.

The arbitration

In 2017, Simplot gave notice of arbitration to HIL pursuant to clause 10.09 of the MA, which provided as follows:

Clauses 12.1 and 12.2 of the SA made provision for certain “Deadlock” matters. Clause 12.3 of the SA then provided, in material part, as follows:

HIL and Simplot USA were the “Members” for the purposes of clause 12.3 of the SA, and HSPL was the “Company”.

The ensuing arbitration culminated in the arbitral award dated 23 March 2020 as corrected by a memorandum of correction dated 8 May 2020 (the “Award”). The tribunal found that HIL (which was the respondent in the arbitration) had breached clauses 9.01(e) and 9.01(g) of the MA. The following paragraphs from section C3 (“Decision on Breach of Contract”) running from paragraphs 562 to 765 of the Award are of note:

The setting-aside application

By this originating summons (“OS”), HIL applied to set aside all of the findings in respect of and in relation to its breaches of clauses 9.01(e) and 9.01(g) of the MA, on the basis 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”.

HIL relies on Art 34(2)(a)(iii) of the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”), which has the force of law in Singapore by virtue of s 3 of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (the “IAA”). Article 34(2)(a)(iii) of the Model Law states that an arbitral award may be set aside only if the applicant 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 …”

HIL accepts that a mere error of law (or even fact) does not constitute a valid ground for setting aside an arbitral award, per CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] 4 SLR 305 (“CRW”) at [33]. More specifically, HIL accepts that if a tribunal’s interpretation of a contract between the parties is supposedly wrong, the tribunal has not thereby exceeded the scope of the reference: see Sui Southern ([1] supra) at [26]–[28], [36] and [38].

Did the tribunal exceed the scope of the reference?

Was the issue of “quality” within the scope of the reference?

HIL contends that the tribunal had exceeded the scope of submission to arbitration because the warranties in the MA did not make any express reference to the PPE producing “quality” potato products: accordingly, in finding that the PPE had to be capable of doing so, the tribunal had decided an issue that was not properly before it.

In the arbitration, Simplot asserted, inter alia, that HIL had breached clauses 9.01(e) and 9.01(g) of the MA; HIL disputed this. Prima facie, there was within the agreement to arbitrate, a dispute which Simplot could and did submit to arbitration (see [8]–[10] above).

Indeed, HIL accepts that the scope of submission to arbitration included whether clause 9.01(g) of the MA had been breached, but it contends that under Indian law (which governs the MA), there was a sale of the PPE by description, and there is generally no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale by description.

Further, HIL recognises that Simplot had asserted in the arbitration that the warranties included the aspect of the potato products being “quality” products: Simplot had raised this in the notice of arbitration, the pleadings, and in the course of the arbitration. Nevertheless, HIL contends that the “quality” issue was outside the scope of the arbitration agreement in the first place, and so although Simplot had repeatedly raised the issue, the tribunal exceeded the scope of the reference by dealing with it.

HIL’s written submissions however fail to address the express reference in clause 9.01(g) to the PPE being “fit for the use reasonably intended”. What that encompasses, and whether the PPE had failed to meet the requisite standard, were issues before the tribunal. Ironically, in one of the affidavits HIL filed in support of this setting-aside application, the deponent recognised that fitness for purpose did involve the potato products being of “sellable” quality:

I note that the deponent’s understanding of fitness for purpose was materially the same as that of the tribunal, which stated at para 563 of the Award (see [11] above) that “[t]he Tribunal refers to “Fitness for Purpose” as a convenient shorthand for the PPE being able consistently to produce a volume of quality commercially saleable product at the level of the Production Requirements” [emphasis added].

Indeed, it was common ground before the tribunal that the potato products produced had to be “quality” products or “quality commercially saleable” products or of “reasonable product quality” (see paras 563 and 616 of the Award, quoted above at [11]).

Thus, in HIL’s closing submissions in the arbitration dated 29 April 2019, it stated at paras 302 and 309:

Similarly, in HIL’s reply submissions in the arbitration dated 31 May 2019, it stated at para 178:

An agreement to arbitrate is the foundation of an arbitral tribunal’s jurisdiction. Where the parties have agreed on what is in issue before the tribunal, the losing party cannot thereafter fault the tribunal for dealing with that issue. Here, it was common ground that whether the PPE could produce potato products of “quality” was in issue, and the tribunal did not exceed the scope of submission to arbitration in deciding that issue.

The issue of whether the PPE was capable of producing “quality” products was within the scope of the dispute resolution clause in the MA read with the SA (see [8]–[10] above). But even if that were not so, the parties by their conduct in the course of the arbitration would have conferred jurisdiction on the tribunal to deal with that issue – see PT Prima International Development v Kempinski Hotels SA and other appeals [2012] 4 SLR 98 at [32]:

In stark contrast to the submissions made in this OS, in the arbitration HIL did not dispute its obligation to ensure that the PPE could produce quality potato products; it simply disputed the breach of that obligation.

In any event, the tribunal decided that the warranties had been breached not only because the PPE could not produce “quality” potato products, but also because the PPE could not meet the Production Requirements (see [11] above). HIL recognises this.

HIL however argues that the tribunal’s finding in relation to the Production Requirements was inextricably linked to its finding on the “quality” issue, in the sense that the finding of breach of clause 9.01(e) was dependent on the finding of breach of clause 9.01(g). However, it is clear from the Award that this was not so.

The tribunal framed the issue as follows: “Whether the PPE was of satisfactory quality and/or was fit for purpose, including whether the PPE was capable of meeting the Production Requirements and producing quality Fries” [emphasis added]. Nothing in that suggests that a finding on whether the PPE could meet the Production Requirements would be dependent on whether quality fries could be produced. Rather, there were two distinct obligations on HIL – the PPE had to:

(a) meet the Production Requirements; and

(b) produce quality fries.

As the tribunal put it at para 563 of the Award (quoted above at [11]), the PPE had to be able “consistently to produce a volume of quality commercially saleable product at the level of the Production Requirements”. It is clear from the Award that the tribunal’s finding on breach of clause 9.01(e) was not dependent on a finding of breach of clause 9.01(g) or the issue of “quality” – see further paras 578, 580, 587, 588, 592, 595, 609 and 610 of the Award.

Did the tribunal exceed the scope of the reference, in awarding damages and costs as it did?

HIL also submits that the tribunal exceeded the scope of the reference when it awarded damages in excess of the Holdback Amount. HIL’s argument appears to be that if the PPE failed to meet the Production Requirements, Simplot was only entitled to the Holdback Amount, and the tribunal had no jurisdiction to award Simplot any sum beyond that (even if Simplot would have to spend more than the Holdback Amount for the PPE to meet the Production Requirements).

HIL’s counsel however clarified in oral submissions that if the “quality” aspect had not featured at all, an award of damages going beyond the Holdback Amount in clause 1.03(c) of the MA (see [5] above) would not exceed the scope of the reference. But HIL argues that here, the tribunal had taken both qualitative and quantitative aspects into account in awarding damages.

What damages Simplot should receive for HIL’s breach of clauses 9.01(e) and 9.01(g), and how that related to clause 1.03(c) on the Holdback Amount, were issues before the tribunal. HIL’s argument on damages is dependent on its argument on “quality”, and HIL seeks to challenge a point which it had accepted before the tribunal: that the warranties did include an aspect of the quality of the potato products produced. HIL’s case is premised on a contentious interpretation of the MA; it is a challenge to the substantive correctness of the tribunal’s decision; it is a backdoor appeal.

Conclusion

The tribunal had not exceeded the scope of the reference, and HIL has not established any basis for setting aside the adverse findings it complained of.

Postscript – foreign lawyer’s affidavit on the merits of the application

In support of its application, HIL filed an affidavit from an Indian-qualified lawyer who gave his opinion that the tribunal had exceeded the scope of submission to arbitration.

The foreign lawyer had however not been admitted to the Singapore bar such that he could properly make submissions on behalf of HIL.

Nor was the affidavit properly an expert affidavit on foreign law. Although the MA was governed by Indian law, the issue in this OS was whether the tribunal had exceeded the scope of submission to arbitration (under the IAA and the Model Law) – that was not an issue of Indian law. If HIL were merely relying on the foreign lawyer’s affidavit as an Indian legal opinion on how the MA should have been construed (so as to resile from the position it had taken in the arbitration), this was not the time or place to do so. Moreover, the affidavit did not satisfy the requirements for expert affidavits under O 40A r 3(2) of the Rules of Court (Cap 322, R 5, 2014 Rev Ed) – it did not contain a statement that the expert understands that in giving his report, his duty is to the Court and that he complies with that duty (per O 40A r 3(2)(h)). Understandably there was no such statement, because the foreign lawyer was effectively acting as the plaintiff’s lawyer rather than as an independent expert.

In Gleeson v J Wippell & Co Ltd [1977] 1 WLR 510 at 519, Megarry VC deprecated the inclusion in an affidavit of a Queen’s Counsel’s opinion and a journal article:

I respectfully agree with those views. The foreign lawyer’s affidavit in the present case should never have been filed.