BRQ and another v BRS and another and another matter

• Jurisdiction: Singapore
• Judge: Vinodh Coomaraswamy J
• Judgment Date: 18 November 2019
• Neutral Citation: [2019] SGHC 260
• Year: 2019
• Docket Number: Originating Summons No 512 of 2018 and Originating Summons No 770 of 2018
• Published date: 21 November 2019
• Court: High Court (Singapore)
• Hearing Date: 17 January 2019,22 January 2019,28 January 2019,16 January 2019
• Plaintiff Counsel: Dhillon Dinesh Singh, Toh Jia Yi and Elyssa Lee (Allen & Gledhill LLP),Nakul Dewan (instructed), Wendy Lin, Goh Wei Wei and Stephanie Teh (WongPartnership LLP)
• Citation: [2019] SGHC 260

Vinodh Coomaraswamy J:

Before me are two applications to set aside the same arbitral award. The award is largely, but not entirely, in the claimants’ favour. The earlier of the two applications before me is the claimants’ application seeking to set aside that part of the award which is in the respondent’s favour. One of the respondents in the arbitration brings the later of the two applications before me, seeking to set aside those parts of the same award which are in the claimants’ favour.

I heard both applications together. I have dismissed both applications, thereby leaving the award intact. The parties have appealed against my decision. I now provide my reasons.

Facts The parties

The arbitration was between BRQ and BRR as the first and second claimants and BRS and BRT as the first and second respondents. To avoid confusion, I shall refer to the parties by their positions in the arbitration rather than by their anonymised names or by their positions in the cross-applications before me. I shall therefore refer to BRQ and BRR as the first and second claimants respectively and to BRS and BRT as the first and second respondents respectively.

All four parties to the arbitration are companies incorporated in the same country. All sums of money relevant to the parties’ dispute are denominated in the currency of that country. In order to preserve the parties’ anonymity, I shall call that country “Lemuria” and refer to all sums of money in their Singapore dollar equivalents, rounded off.

The first claimant owns and operates power plants in Lemuria and is a wholly-owned subsidiary of an international energy and water company.¹ The second claimant is a special purpose vehicle established for the sole purpose of pursuing a government concession to build and operate a hydroelectric power plant (“the Project”) along a major river in Lemuria.² The second claimant is now a wholly-owned subsidiary of the first claimant.

The first respondent constructs and develops infrastructure and power projects.³ The second respondent is the parent company of the first respondent. Until the first claimant acquired the entire share capital of the second claimant in 2012, the first and second respondents together owned 95% of the second claimant.

The first respondent is the only substantive party to both applications now before me. As a result of the claimants’ discontinuance against the second respondent, the first respondent is the sole remaining defendant to the claimants’ application. The first respondent is also the sole plaintiff in its own application. The second respondent is therefore not a party in substance to either application. Any reference to “the respondent” (in the singular) in these grounds is therefore a reference to the first respondent only.

The Securities Purchase Agreement

The second claimant carried on work on the Project between 2007 and 2010. By the end of 2011, however, it had run out of funds. The respondents, its controlling shareholders at the time, were not in a position to inject more funds into the second claimant.⁴ They therefore sought an external investor to fund the Project to completion.

The first claimant came in as that external investor. Under a Securities Purchase Agreement (“SPA”)⁵ entered into in 2012, the first claimant agreed to buy the entire share capital of the second claimant from the respondents.

The Project was still under construction when the parties entered into the SPA. The SPA therefore anticipated that the Project would be completed and commissioned in the near future.⁶ Under the SPA, the first claimant agreed to acquire the second claimant – and through it, a completed and commissioned Project – at a price of $70m. This feature of the parties’ transaction is the backdrop for a number of interconnected terms in the SPA. It is necessary to introduce these terms now to understand the parties’ dispute:Under cl 9.1.1, the parties recorded that the various payments under the SPA were based on the express assumption that the Project would be certified by the first claimant’s engineer as being fully operational, and therefore able to supply electricity for sale and to generate revenue, no later than 31 March 2013. This event is referred to as “wet commissioning”. The date on which it actually took place is referred to as the wet commissioning date (“WCD”).Under cl 9.1.4, the respondent undertook to be solely liable for any Cost Overrun in the Project so that neither claimant would have to bear any overrun. “Cost Overrun” is defined in the SPA as “any and all Project Costs in excess of” a stated figure.The respondent’s obligation to bear the Cost Overrun was reiterated in cl 10.2.4, in which the respondent undertook to “bear and contribute or indemnify and hold harmless” the claimants against any and all Cost Overrun as required by cl 9.1.4.Under cl 6.4.1(b)(iv), the first claimant agreed to pay $5.1m of the purchase consideration directly to the second claimant, to be recorded in the second claimant’s books as a loan due from the second clamant to the respondent (as the seller under the SPA). The SPA defines this loan as the “seller’s subordinated loan” or “SSL”.Under cl 9.7, if the respondent failed to pay any Cost Overrun despite being obliged to do so, the second claimant was entitled to reduce the SSL in its books against the unpaid Cost Overrun.Under cl 6.4.7, the respondent was obliged to furnish to the first claimant an unconditional irrevocable bank guarantee valid until 30 April 2013 in the amount of $6.9m (“Security Bond I”).Under cl 9.3, if the WCD was after 7 April 2013, the first claimant had the right to call on Security Bond I.Under cl 9.11, the first claimant was entitled to monitor the development and construction of the Project until the WCD. This included the right to have access to the work site and a right to information and documents.Under cl 9.10(a), if the WCD was after 31 March 2013, the first claimant was entitled to require the respondent to cede control of the construction and commissioning of the Project to the first claimant. But if the first claimant exercised this right, it was obliged “to undertake the construction and commissioning of the Project in the most prudent and cost effective manner” [emphasis added].

There is a separate contract, the Bulk Power Transmission Agreement (“BPTA”), which is also relevant to the parties’ dispute. In 2009, while the respondents still controlled the second claimant,⁷ the second claimant executed the BPTA with the company which runs the power grid in Lemuria (“the Grid Company”). Under the BPTA, the second claimant agreed to pay transmission charges to the Grid Company in exchange for access to its power grid for 25 years. Access to the grid was necessary for the second claimant to transmit electricity generated by the Project to consumers and thereby to earn revenue.⁸

The BPTA obliged the second claimant to begin paying transmission charges to the Grid Company even before wet commissioning. As the first claimant was paying the entire consideration under the SPA up front, it wanted to secure itself against the second claimant’s potential liabilities under the BPTA if wet commissioning was delayed.⁹ Accordingly, cl 11.4 of the SPA obliged the respondent (together with another party whose identity is not material) to indemnify the second claimant for any transmission charges which the second claimant became obliged to pay the Grid Company on or before the WCD.

Delays in the Project

It is undisputed that the Project failed to achieve wet commissioning on 31 March 2013 as contemplated in cl 9.1.1 of the SPA.¹⁰ One reason for this was the failure of the penstock. The penstock is a pipe which transports water at high pressure to the turbines. A section of the penstock known as the “Y-piece” was found to be defective.¹¹ The Y-piece failed twice under hydrostatic testing, in March and June 2013. It passed hydrostatic testing only in October 2013. But, during further hydrostatic testing in early November 2013, cracks developed in other sections of the penstock.

From November 2013, the first claimant began to oversee the Project more closely. But it did so without formally exercising its right to take control of the Project under cl 9.10(a) of the SPA (see [10(h)] above). Finally, in March 2014, the first claimant did exercise that right and issued a takeover notice taking full control of the Project.

The first claimant’s first order of business was to address the penstock failure. It did so by, amongst other things, re-lining a substantial section of the penstock with steel. At the same time, it also took steps to rectify defects in other areas of the Project such as the transmission line.¹²

A discrete part of the Project was eventually wet commissioned, but only on 31 October 2015. The claimants continued work on the remainder of the Project. The Project as a whole, however, never achieved wet commissioning. It was eventually abandoned when the penstock ruptured and tragically killed three people.¹³

For purposes of the arbitration and these applications, the parties have proceeded on the basis that the Project achieved wet commissioning on 31 October 2015, ie, the date on which the first discrete part of the Project was wet commissioned.

The arbitration

Clause 14 of the SPA provides for disputes to be arbitrated in Singapore under the SIAC Rules. On 31 December 2014, while the Project was still under construction, the claimants initiated the arbitration under cl 14 by filing a notice of arbitration with the Singapore International Arbitration Centre (“the SIAC”).

The claims and counterclaims

In the arbitration, the claimants sought to recover from the respondent the following principal sums:¹⁴The entire Cost Overrun up to the WCD, ie, 31 October 2015, amounting to $70.8m (“the Cost Overrun claim”); andThe...