Quarella SpA v Scelta Marble Australia Pty Ltd

Judith Prakash J:

[2] The central issue the plaintiff, Quarella SpA (“Quarella”), wanted me to decide was this: Does a purportedly wrong interpretation of the choice of law clause (chosen by the parties to govern their distributorship agreement) by a tribunal justify a setting aside of an award under Articles 34(2)(a)(iii)-34(2)(a)(iv) of the UNCITRAL Model Law on International Commercial Arbitration ("the Model Law")? The basis of the plaintiff’s application was that the tribunal had failed to apply the rules of law that were agreed upon by the parties to govern the merits of the dispute.

[3] In its Originating Summons, Quarella had also alleged that the rules of natural justice were breached in connection with the making of the first award and that its rights had been prejudiced thereby. This ground for setting aside the first award was, however, abandoned at the start of the hearing.

[4] At the conclusion of the hearing I dismissed the application. I now set out my grounds.

[5] Quarella is a company incorporated in Italy which manufactures and exports composite stone products.

[6] The defendant, Scelta Marble Australia Pty Ltd (“Scelta”), is a company incorporated in Australia which supplies composite stone products in Australia.

[7] In the proceedings before me, the President of Quarella, Giuseppe Godi (“Mr Godi”), filed two affidavits. The Managing Director of Scelta, Stewart Macciolli (“Mr Macciolli”), filed one affidavit. There was also a legal opinion from Professor Marco Torsello, a professor at the Department of Law of the University of Verona in Italy.

[8] Quarella and Scelta entered into a distributorship agreement (“the Agreement”) dated 27 January 2000 for the distribution of Quarella’s products in Australia. The Agreement provided, inter alia:

[9] A dispute subsequently arose. Scelta filed a Request for Arbitration dated 19 October 2009 with the Paris Secretariat of the International Chamber of Commerce (“ICC”) International Court of Arbitration.

[10] On 10 December 2009, Associate Professor Gary F Bell was nominated jointly by Quarella and Scelta to be the sole arbitrator. On 17 February 2010, the Secretary General of the ICC International Court of Arbitration, pursuant to Article 9(2) of the ICC Rules of Arbitration, confirmed Associate Professor Gary Bell as the sole arbitrator (“the Tribunal”). The parties and the Tribunal subsequently agreed on the Terms of Reference.

[13] The question as to what the law applicable to the arbitration was, did not at first appear to be in doubt. Scelta took the position that Italian law applied rather than the Uniform Law for International Sales (“CISG”) under the 1980 UN Vienna Convention and Quarella seemed to agree. In Quarella’s Answer to the Request for Arbitration, it stated:

[14] Scelta pointed out in its submissions that Quarella had, from a very early stage of the arbitration, accepted that Italian law was the law applicable to the merits of the dispute. Scelta argued that it was clear from the excerpt that Quarella considered and accepted that the CISG did not apply to the Agreement, which was described as a “Distributorship Agreement”. Scelta also argued that Quarella exclusively referred to and relied on Italian law in its subsequent submissions.

[15] But Quarella changed its stand. In a letter dated 15 April 2011, Quarella’s Australian solicitors, Baker & McKenzie stated:

[16] This change of position took place three weeks before the re-scheduled hearing of the arbitration. As a result, Scelta objected to Quarella raising the application of the CISG at such a late stage in the arbitration proceedings.

[17] The Tribunal decided three preliminary issues prior to determining the main issue of whether the CISG applied to the Agreement.

[18] The first was whether arguments that the CISG applied should be heard at such a late stage. On this, the Tribunal allowed Quarella to raise the new argument on the applicable law and gave Scelta an opportunity to reply.

[19] The second preliminary issue was whether the agreement of the parties on the applicable law found in Clause 25 of the Agreement was modified by mutual agreement so that the CISG did not apply. On this, the Tribunal found that there was no modification of Clause 25 to completely exclude the application of the CISG.

[20] The third preliminary issue was whether Clause 25 of the Agreement should be interpreted as a direct choice of the substantive rules of the CISG by the parties so that the CISG applied even if the conditions for the application of the CISG stated in the CISG were not met. On this, the Tribunal decided that the correct interpretation of Clause 25 was that the parties intended the CISG to apply to the extent that the CISG was applicable according to its own rules on applicability, and if it did not apply in part or in whole, then Italian law applied.

[21] Having decided the above, the Tribunal then considered the issue of whether the CISG, according to its own internal criteria, applied to the Agreement. On this, the Tribunal decided that the CISG was not applicable because the Agreement did not contain a contract of sale but was a framework agreement.

[22] Quarella’s counsel, Mr Ang Wee Tiong (“Mr Ang”) submitted that the Tribunal’s decision on the applicable law was wrong, and that the Tribunal failed to apply the law chosen by the parties. Quarella’s submission on this contained three points. First, Quarella noted that by cl 26 of the Agreement, the parties had agreed that:

Quarella pointed out that Art 17 of the ICC Rules provides that:

[23] Quarella then went on to argue that the option given to parties was not limited to the election of a national law, and that parties could also use a different set of rules, including otherwise non-binding principles (such as the UNIDROIT Principles of International Commercial Contracts), or otherwise non-applicable conventions, such as the CISG in cases where it would not apply on the basis of the rules on its applicability.

[24] Second, Quarella submitted that it was a well established principle of contractual interpretation that a construction which entailed that a contract and its performance was lawful and effective was to be preferred, and referred to Sheng Siong Supermarket Pte Ltd v Carilla Pte Ltd [2011] 4 SLR 1094 at [40]. Quarella argued that the Tribunal had, in deciding that the CISG was not applicable because the Agreement did not contain a contract of sale but was instead a framework agreement, deprived Clause 25 of any effect.

[25] Third, Quarella argued that Italian law was to be used to supplement the CISG when there was a lacuna, and was not intended to replace the CISG.

[26] These three arguments appeared to me to be arguments that invited this court to review the merits of the Award and come to a different conclusion from that of the Tribunal. Professor Torsello’s instructions, given to him by Quarella, also sought answers that went to the findings of the Tribunal. In his affidavit, Professor Torsello stated:

[27] Assuming Professor Torsello is correct in his opinion (on which I make no comment), and the Tribunal has erred, there can be no right of appeal against such errors, independent of the Act (see, Sui Southern Gas Company Ltd v Habibullah Coastal Power Company (Pte) Ltd [2010] 3 SLR 1 at [19]-[22], applying the Court of Appeal’s decisions in PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 ("PT Asuransi") and Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR(R) 86). Mr Ang, in oral submissions before me, accepted that an error of law was not a ground for setting aside. However, he also submitted that the application of the wrong law was a distinct situation.

[28] Scelta’s counsel, Mr Cavinder Bull SC (“Mr Bull”), submitted that the arguments put forward by Quarella were not being advanced with any real seriousness. In addition, Mr Maciolli stated in his affidavit that Quarella was in a precarious financial position (an allegation Mr Godi described as misconceived) and the present application was an attempt to frustrate Scelta’s enforcement of the Award.

[29] Mr Bull argued that:

(a) The Tribunal applied the correct substantive law;

(b) Even if the Tribunal was wrong to apply Italian law rather than the CISG to the merits of the dispute, this was not a ground for setting aside the Award under Article 34(2)(a)(iv) of the Model Law;

(c) It was not a ground for setting aside the Award under Article 34(2)(a)(iii) of the Model Law to allege that the Tribunal applied the wrong substantive law.

[30] I now turn to deal with the parties’ arguments as they relate to the relevant Articles of the Model Law.

[31] Article 34(2)(a)(iv) of the Model Law states:

[32] Quarella’s argument here was that by failing to apply the CISG and by applying Italian law, the Tribunal had failed to comply with Article 17 of the ICC Rules and therefore the arbitral procedure was not in accordance with the agreement of the parties.

[33] Scelta submitted that Quarella’s argument was wrong. In support, Scelta cited a passage from Gary B Born, International Commercial Arbitration (Kluwer Law International, 2009) (“Born”):

[34] In discussing Article 17 of the ICC Rules, Yves Derains and Eric A. Schwartz in A Guide to the ICC Rules of Arbitration (Kluwer Law International, 2 ed, 2005) (“Derains and Schwartz”) state:

[35] A footnote to the paragraph excerpted above reads:

[36] The case cited in the footnote was discussed in Craig, Park, Paulsson, International Chamber of Commerce Arbitration (Oxford University Press, 3 ed, 2000) (“Craig, Park, Paulsson”):

[37] Several points can be made from the excerpts cited. First, with respect to the Chromalloy case cited in Derains and Schwartz and Craig, Park, Paulsson, there is no equivalent to Article 53(1)(d) in Singapore’s arbitration law. Second, the learned authors of Born and Craig, Park, Paulsson and Derains and Schwartz use the words “fails to apply”, “express refusal [to apply]”, and “respect [the choice of the applicable law]”. The facts of the present case did not take it within the situation referred to by the learned authors where there is a failure to apply the choice of law clause or an express refusal to apply the said clause. The Tribunal in this case respected the choice of law clause chosen by the parties, interpreted the law so chosen and came to the conclusion that the CISG did not apply and Italian law applied. In the Award, the Tribunal took pains to explain the process by which he derived the applicable law. I set out the relevant portions of the Award (at [42] – [53] of the Award):

[38] The Tribunal decided the third preliminary issue as such (at [61]-[72],[74]):

[39] The Tribunal then went on, in the next 31 paragraphs of the Award, to set out the reason as to why the decision was made that the CISG was not applicable; in the Tribunal’s opinion the Agreement did not contain a contract of sale but was a mere framework agreement.

[40] Accordingly, the Tribunal did, pursuant to Article 17 of the ICC Rules, respect the choice of law clause set out in the contract. Parties did agree on the rules of law to be applied to the dispute, and the Tribunal did apply the chosen rules of law to the dispute. The real point of dispute was that Quarella considered that the Tribunal applied the chosen law wrongly. That dispute was not one that engaged Article 34(2)(a)(iv) of the Model Law. Accordingly, I declined to set aside the Award under Article 34(2)(a)(iv) of the Model Law.

[41] Article 34(2)(a)(iii) of the Model Law states:

[42] Quarella’s arguments in support of this ground were scant and lacking in substance. It began by setting out the text of Article 34(2)(a)(iii). Following that, Quarella cited a passage from an article entitled Getting to the Law Applicable to the Merits in International Arbitration and the Consequences of Getting It Wrong by Linda Silberman and Franco Ferrari (“the Ferrari/Silberman article”), which read:

[43] Quarella acknowledged that the passage was written in the context of Article V(1)(c) of the New York Convention, but asserted that the words used in Article V(1)(c) are in pari materia with the words in Article 34(2)(a)(iii) of the Model Law. Accordingly, it submitted, the Tribunal, in applying Italian law (which was not the law expressly chosen by the parties) had gone beyond the scope of submission to arbitration. The entire written submission on this argument was made up of four short and underdeveloped paragraphs.

[44] This was not a particularly novel argument. In The Arbitrators’ Duty to Respect the Parties’ Choice of Law in Commercial Arbitration, 79 St. John's L. Rev. 59, Cindy Buys states (at 69-72):

[45] And in a footnote to the last sentence of the excerpt, Buys states:

[46] Scelta argued that, in reality, what Quarella was saying was that the Tribunal made the wrong decision and fell into error. Scelta also argued that the Tribunal did not decide matters beyond its ambit of reference; the Tribunal was specifically asked by Quarella to decide on the applicability of the CISG.

[47] Scelta also cited two passages from Born, the first of which read:

[48] The paragraph which followed (which was not cited) read:

[49] The second passage cited by Scelta read:

[50] I turn to explain why the setting aside application under s 34(2)(a)(iii) was misconceived.

[51] In PT Asuransi, the Court of Appeal said, in discussing Article 34(2)(a)(iii) (at [37]):

[52] In CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK [2011] 4 SLR 305 (“Persero”), the Court of Appeal set out the law relating to Article 34(2)(a)(iii) of the Model Law (at [30]-[33]):

[53] The first and third principles are what I applied to this case. With regard to the first principle, on the facts before me, this was not a case where the arbitral tribunal improperly decided matters that had not been submitted to it or failed to decide matters that had been submitted to it. The issue of the applicable law was submitted to the Tribunal; the Award addressed this explicitly (at [48] of the Award). The Tribunal did decide the matters that were submitted to it.

[54] With regard to the third principle, besides examining the guidance set out by the Court of Appeal in the excerpts above, Quarella would not have had to venture too far to find literature that would have indicated that the prospects of it succeeding in the setting aside application on this ground were dim. A recently published monograph by Chan Leng Sun, Singapore Law on Arbitral Awards (Academy Publishing, 2011) states (at para 6.127):

[55] Quarella’s attempt to set aside the Award under 34(2)(a)(iii) was based entirely on a disagreement with the interpretation the Tribunal took regarding the choice of law clause. The dispute was not one that engaged Article 34(2)(a)(iii) of the Model Law.

[56] Whilst it is not strictly necessary for me to do so, I would like to explain why the Ferrari/Silberman article did not assist Quarella.

[57] From a reading of the whole article, it is apparent that the article was making a proposal, as was stated in the heading to the concluding section. The article was not stating the current legal position. It was also conceded by the authors that the suggested position was based less on case law than on policy or views from commentators. Further, the article refers to the deliberate disregard or the ignoring by the arbitrator of the choice of law clause agreed on by the parties. It is even made clear on more than one occasion that cases of that nature should be distinguished from situations where the arbitrators applied the applicable law incorrectly.

[58] It would appear that the arguments in the Ferrari/Silberman article were similar to those put forward earlier under s 34(2)(a)(iv), albeit under a different subsection of the same Article in the Model Law. In response to the arguments, I found that the Tribunal here did not deliberately disregard or ignore or overrule the parties’ choice of law clause. It did not fail to honour (or in the words of Buys, fail to respect) the choice of law clause set out by the parties. Accordingly, Quarella failed to convince me that I should set aside the Award pursuant to Article 34(2)(a)(iii).