BVU v BVX

• Jurisdiction: Singapore
• Judge: Ang Cheng Hock JC
• Judgment Date: 13 March 2019
• Neutral Citation: [2019] SGHC 69
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 249 of 2016, Originating Summons No 249 of 2016 (Summons No 1731 of 2018)
• Published date: 19 March 2019
• Year: 2019
• Hearing Date: 23 November 2018,31 May 2018,22 November 2018
• Plaintiff Counsel: Jainil Bhandari, Tng Sheng Rong and Stella Ng (Rajah & Tann Singapore LLP)
• Defendant Counsel: Lin Weiqi Wendy, Jill Ann Koh Ying and Wong Yan Yee (WongPartnership LLP)
• Subject Matter: Arbitration,Award,Recourse against award,Setting aside
• Citation: [2019] SGHC 69

Ang Cheng Hock JC: Introduction

The originating summons before me is an application to set aside an international arbitral award on grounds of fraud and public policy. The accompanying summons (Summons No 1731 of 2018 ("SUM 1731”)) is an application to set aside a subpoena to produce documents issued against [E], an employee of the respondent, which was the party who succeeded in the arbitration. The issue at the heart of these proceedings is this – after the conclusion of arbitration and the issuance of the final award, did the successful party’s decision not to call certain witnesses to give evidence and disclose certain internal documents, which it did not view as being relevant to its case in the arbitration, render the award that was issued by the tribunal liable to be set aside on grounds of fraud or public policy?

Facts The lead-up to the arbitration

In January 2011, in response to spiralling food prices and growing concerns about scarcity, the South Korean government embarked on a project (the “Project”) to secure long-term stable lines of food supply from international sources and supplement the domestic food supply. The defendant, BVX (“the Purchaser”), a state-owned company, was appointed to spearhead the Project.

The Purchaser was put in touch with the plaintiff, BVU (“the Supplier”), which recommended that the Purchaser procure food (“the Products”) from South America. The Supplier and the Purchaser began negotiations in mid-2011. On 14 June 2012, after governmental approval was obtained, the Purchaser and the Supplier formally entered into an agreement (“the Agreement”).

The material terms of the Agreement are as follows: The Supplier shall be the Purchaser’s “most preferred Supplier” (Clause 4.1 and Schedule 1). The Agreement will commence on 1 October 2012 (“the Commencement Date”) and shall continue for 20 years (“the Contract Period”) and any renewal thereof unless and until terminated in accordance with the termination clause (Clause 4.3). The Supplier shall use its “best commercially reasonable efforts in performing its supplying obligations” and that it will source for the Products mainly from Latin America (Clause 5.1). The Purchaser too shall use its “best commercially reasonable effort to order and purchase” the Products over the duration of the agreement, in accordance with the Forecast Range, which is defined to be “[m]inimum of 1,000,000 tons in total per annum” (Clause 6.1 and Schedule 2). The Purchaser is to provide “a rolling twelve months forecast of purchase orders” (Clause 6.5). Clause 6.1 was the critical clause in dispute in the arbitration, as I will explain later. The Agreement is to be governed by the “rules of the Vienna Convention on Contracts for the International Sale of Goods (“the CISG”)” (Clause 10.1). Disputes arising out of or in connection with the Agreement will be finally settled by way of Singapore-seated arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce (“ICC”) (Clause 10.2).

Following the execution of the Agreement, the Purchaser did not submit a rolling forecast. In a letter to the Supplier on 26 December 2012, the Purchaser confirmed a rumour that it had entered into a Memorandum of Understanding (“MOU”) with one of the Supplier’s competitors, [Y Co]. Subsequently, a series of meetings between the parties took place.

On 19 April 2013, the Purchaser forecasted a purchase of 170,000 tons of the Products. This was considerably less than what was stated in the Forecast Range. The Purchaser, however, refused to place any orders under the Agreement. Instead, it began a public tender process. On 25 April 2013, it sent a letter inviting the Supplier to take part in the public tender for the amount of the Products earlier forecasted. Up to the time of the arbitration hearing, the Purchaser had not placed any orders with the Supplier.

The arbitration

On 25 July 2013, the Supplier commenced ICC Arbitration No 19630/CYK (“the arbitration”) against the Purchaser claiming US$2.25m in damages plus interest for breach of the Agreement, among other requests for relief. According to the Supplier, this figure represented its loss of approximately 3 months of profit from October to December 2012.

The parties’ positions in the arbitration

The Supplier alleged that the Purchaser had breached the Agreement by: failing to place purchase orders for the Products either in accordance with the Forecast Range or at all; failing to treat the Supplier as the “most preferred Supplier” by its actions in holding a public tender; and failing to submit an adequate rolling forecast in accordance with Clause 6.5 of the Agreement.

The Purchaser’s position was that its obligations under the Agreement were not absolute or binding, but was to instead use its “best commercially reasonable effort” to order and purchase the Products as per the Forecast Range. According to the Purchaser, this was supported by the plain words used in the Agreement. Recourse to extrinsic evidence to interpret the Agreement was therefore unnecessary. It was pointed out that an earlier draft of Clause 6.1 originally provided in mandatory terms that the Purchaser “shall order and purchase the Products as per the Forecast Range” [emphasis added]. So, the fact that this was watered down in the finalised version of the Agreement to become an obligation to use “best commercially reasonable effort” was significant.

The Purchaser argued that the Agreement was “a type of framework agreement”. This was supported by the fact that the Agreement left out key commercial terms such as quantity, quality, supply method, supply date and, in particular, price. The parties had therefore contemplated that separate sale and purchase agreements would have to be concluded between the parties subsequently. Further, there could not have been a binding obligation to order a million tons of the Products annually over a 20-year period given that there was no guarantee that food production, distribution or price would remain stable over the entire period.

The Purchaser added that it was subject to certain laws and regulations in Korea that required it to call for a public tender as it was a state-owned enterprise. This should have been known to the Supplier given that it had knowledge of the Project, and should have aware that the Purchaser, as a state-owned corporation, would be under a statutory obligation to supply goods through a public or competitive tendering process. The standard of “best commercially reasonable effort” did not require the Purchaser to flout Korean public procurement laws by entering into a specially negotiated contract with the Supplier.

On Korean procurement law, the Purchaser took the position that Article 6.1 of the Contractual Affairs Regulations of Public Corporations and Quasi-government Entities (“the Contract Regulations”) required it to conclude contracts by way of a competitive bidding process, which meant, in short, that it had to call a public tender. The Contract Regulations are enacted under the State Act on Contracts to which the State is a Party (“the State Contracts Act”). In addition, the Purchaser contended that none of the exceptions, which would permit a specially negotiated contract (without the need for a public tender) under Article 8 of the Contract Regulations or Article 26 of the Enforcement Decree of the State Contracts Act applied to the situation at hand. The Purchaser disagreed with the Supplier’s reading of Article 4 of the Contract Regulations (see [15] below) as it contended that “international tendering procedures” were different from “public competitive tendering”. As a general rule, even if the Purchaser was exempt from international tendering procedures, it would still have to comply with Article 6 of the Contract Regulations and conduct a public tender.

The Supplier disagreed with the Purchaser’s interpretation of the phrase “best commercially reasonable effort”. The Supplier also argued that the invitation to hold a public tender and the entering of the MOU with [Y Co] were breaches of the Purchaser’s obligation to treat the Supplier as the “most preferred Supplier”.

On Korean procurement law, the Supplier relied on Article 7.1 of the State Contracts Act read with Article 26(1)(1)(a) of the Enforcement Decree of the State Contracts Act. The Supplier submitted that the effect of both of these provisions is that specially negotiated contracts would be permitted instead of public bidding exercises if deemed necessary, such as in cases of “natural disasters, movement of military forces for military operations … urgent events … sharp rises in raw material prices, or others similar thereto”.

In addition, and alternatively, the Supplier relied on a Note to Annex 3 of the World Trade Organisation Agreement on Government Procurement, as well as Article 4(1)(1) of the Contract Regulations, to argue that the Agreement was exempt from “international tendering procedures” because the goods procured thereunder were intended for resale. Article 4(1) of the Contract Regulations provides as such:

Article 4

(1) When Public corporations and/or quasi-government entities enter into procurement agreements… it will do so by way of international tendering procedures: provided, that the following cases shall be excluded from transactions subject to a procurement contract of public corporations/quasi-government entities made through international tendering procedures. 1. Where goods or services are procured as necessary for sale or resale…

…

5. Where a negotiated contract is made in accordance with Article 8. The Supplier’s position in the arbitration was that, if Article 4(1)(1) of the Contract Regulations was engaged, the exception under Article 4(1)(5) would not apply, and correspondingly, Article 8 of the Contract Regulations and Article 26...