Arbitration Law

Citation(2006) 7 SAL Ann Rev 51
Published date01 December 2006
Date01 December 2006
Nature of arbitration
‘Success fee’ arrangements and their use in arbitration

3.1 Lawyers, experts and other professionals assisting parties in claims, whether in litigation or arbitration, are normally paid for the services which they render independent of the outcome of the case. Contingency or ‘success fee’ arrangements are considered champertous arrangements which courts have consistently held as unenforceable due to public policy. Ironically, the argument made in favour of permitting contingent fee arrangement is also the public policy of ensuring access to justice for those who would otherwise not be able to afford it. Contingency fees arrangements have generally been allowed in the US. In 1999, in England, unhappiness with the rising costs of litigation led to the introduction of a controlled form of contingency fee arrangement, termed ‘conditional fees’ (see s 58 of the Courts and Legal Services Act 1990 (c 41) (UK), as amended in 1999). It permits arrangements for ‘no-cure-no-pay’ arrangements in personal injury actions, with the lawyer collecting up to double his normal fees if the claim succeeds. These arrangements apply whether the case is before the courts or in arbitration (see Bevan Ashford v Geoff Yeandle (Contractors) Ltd[1999] Ch 239per Sir Richard Scott VC).

3.2 Champerty is an arrangement where one party agrees to aid another to bring a claim on the basis that ‘the person who gives the aid shall receive a share of what may be recovered in the action’ (Andrew Phang Boon Leong, Cheshire, Fifoot and Furmston”s Law of Contract — Singapore and Malaysian Edition (Butterworths Asia, 2nd Ed, 1998) at p 639). The public policy which renders champertous agreements illegal rests on the need to protect the integrity of public justice against perversion from the proper course of justice. Champertous arrangements are almost always spoken in relation to litigation, but have recently also been raised in relation to arrangements relating to claims made in arbitration.

3.3 In Otech Pakistan Pvt Ltd v Clough Engineering Ltd[2006] 3 SLR 1 (HC), [2007] 1 SLR 989 (CA), the first defendant (‘Clough’), which had entered into two contracts for the construction of gas-condensate plants with

the Oil and Gas Development Company Limited (‘OGDCL’), a government-owned corporation in Pakistan, had disputed claims by and against OGDCL. Clough engaged the services of the plaintiff (‘Otech’) to assist it in relation to OGDCL”s claims against it and in prosecuting its own claims against OGDCL. The fee arrangement for Otech as agreed to between Clough and Otech in 1997 was based on a formula linked to the rate of recovery, viz, 40% of any sum in excess of US$8m recovered from OGDCL in respect of one contract and 50% of any amount in excess of US$3m recovered in respect of the second contract. A meeting was held in 1999 with some discussions on revision of the fee arrangement. It was, however, inconclusive. In February 2002, Clough was dissatisfied with Otech”s performance and terminated the latter”s services. In July 2004, Clough finally settled its disputes with OGDCL for US$7.515m. Otech demanded to be paid 20% of the settlement sum paid by OGDCL to Clough, alleging that that was the fee arrangement as revised in 1999, and commenced action for recovery of its fees. The High Court found in favour of Clough, noting that there was no agreement reached on the revision of the fee arrangement in 1999. As the amount recovered by Clough was less than US$8m, no fee would be payable to Otech. The court declined to decide on whether the original fee arrangement was a champertous arrangement. Before the Court of Appeal, Clough repeated its grounds for resisting payment, including the fact that the arrangement was a champertous contract. Otech argued that even if the contract was champertous, the law of champerty would not apply to arbitration. The Court of Appeal affirmed the High Court”s findings and decision, but decided that it was necessary to rule also on the applicability of champerty to arbitration.

3.4 Judith Prakash J, delivering the judgment of the Court of Appeal, examined the conflict of judicial opinion in other jurisdictions on the applicability of champerty to arbitration. The learned judge disagreed with the Hong Kong High Court”s decision in Cannonway Consultants Limited v Kenworth Engineering Ltd[1995] 2 HKLR 475, which took the view that the doctrine of champerty had developed for the public justice system in the courts and should not be extended to the private consensual system of arbitration. Kaplan J, who had relied on the English Court of Appeal”s and the House of Lords” decision in Giles v Thompson(1993) 143 NLJ 284 (CA), [1994] 1 AC 142 (HL), also stated at 484 that ‘[t]he trend in recent years has all been the other way’.

3.5 The Court of Appeal analysed the decisions in Giles v Thompson, but could not agree with Kaplan J”s observation that there was a strong

inclination among the judges in England not to apply the doctrine of champerty to arbitration proceedings. The court concluded (at [36]) that:

[T]he purity of justice and the interests of vulnerable litigants are as important in such proceedings as they are in litigation. Thus, the natural inference is that champerty is as applicable in the one as it is in the other.

Similar sentiments had been expressed by Sir Richard Scott VC in Bevan Ashford v Geoff Yeandle (Contractors) Ltd (supra para 3.1). Agreeing, the Court of Appeal expressed its views very succinctly as follows (at [38]):

The law of champerty stems from public policy considerations that apply to all types of legal disputes and claims, whether the parties have chosen to use the court process to enforce their claims or have resorted to a private dispute resolution system like arbitration. In our judgment, it would be artificial to differentiate between litigation and arbitration proceedings and say that champerty applies to the one because it is conducted in a public forum and not to the other because it is conducted in private. The concerns that the course of justice should not be perverted and that claims should not be brought on a speculation or for extravagant amounts apply just as much to arbitration as they do to litigation.

3.6 This decision also dispels the commonly held misconception that the rule against ‘success fee’ or champertous arrangements applies only to practising lawyers. While lawyers, both advocates and solicitors, are prohibited by their professional ethical rules from entering into success fee arrangements, the principle underlying champerty is not one of ethics or discipline, but of public policy. Fee arrangements which, by their nature, pervert the proper outcome of litigation or arbitration are champertous arrangements and would be struck down as offending public policy. It matters not whether the same is entered into by lawyers, claims consultants or advisors, costs clerks or persons of other calling. It should similarly apply to people who are called as expert witnesses in litigation or arbitration for, if there is a threat that these witnesses” objectivity may be clouded by a contingency fee arrangement, it follows that it would pose a danger to the proper administration of justice.

3.7 Whether this policy has prevented access to justice in court or to arbitration is, of course, a matter of assessment and review. It does not appear, at the moment at least, that there is any such concern.

Enforcement of the arbitration agreement
Winding-up proceedings and arbitration

3.8 The existence of an arbitration agreement would normally give a party a right to refer disputes arising under the underlying contract to arbitration. In some jurisdictions, the courts would refuse to entertain claims on the ground that they lack jurisdiction; in others, the courts would dismiss an action commenced in breach of the arbitration agreement. In Singapore, as with many jurisdictions with common law roots, the courts maintain their own curial jurisdiction, but will usually stay the pending action in favour of arbitration.

3.9 There are specific provisions both in the Arbitration Act (Cap 10, 2002 Rev Ed) (‘AA’) and the International Arbitration Act (Cap 143A, 2002 Rev Ed) (‘IAA’) that empower the court before which an action is pending to grant a stay. Whereas the power to do so in an arbitration under the AA is discretionary, the court is mandated under the IAA to stay the proceedings if the arbitration is an international arbitration or has its seat outside Singapore.

3.10 Singapore courts have invariably exercised these powers in support of the arbitral process. One area that remains ambiguous, however, is that concerning companies in the winding-up process. While the presentation of a winding-up application may be regarded as the commencement of an action in court (see Re W Carter Smith, ex parte Commissioners of Taxation(1908) 8 SR (NSW) 246), it may nevertheless not amount to the commencement of proceedings under the contract in dispute. The courts seem to treat the grant of a winding-up order as an exercise of their specific statutory duty, as opposed to their adjudicatory jurisdiction in resolving matters in dispute arising out of a commercial contract. On this basis, winding-up proceedings have sometimes been allowed to proceed even though there is an arbitration clause in the contract between the applicant and the company (see Re Sanpete Builders (S) Pte Ltd[1989] SLR 164). At times, this can lead to the anomalous situation where a party who is faced with a substantive claim in arbitration can frustrate the arbitral process by applying for the winding up of the claimant, with the immediate result that the arbitration (being a legal proceeding) has to be stayed in the first instance and discontinued eventually (see Four Pillars Enterprises Co Ltd v Beiersdorf Aktiengesellschaft[1999] 1 SLR 737 (CA)). At other times, the filing of an application...

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