CDX and another v CDZ and another

• Jurisdiction: Singapore
• Judge: Vinodh Coomaraswamy J
• Judgment Date: 02 December 2020
• Neutral Citation: [2020] SGHC 257
• Published date: 09 December 2020
• Docket Number: Originating Summons No 1081 of 2019
• Year: 2020
• Hearing Date: 13 March 2020
• Plaintiff Counsel: Philip Jeyaretnam SC (instructed), Ashwin Nair (Dentons Rodyk & Davidson LLP), Daniel Tay (Chan Neo LLP)
• Defendant Counsel: Andre Francis Maniam SC (instructed), Wang Chen Yan (WongPartnership LLP), Foo Soon Yien and Jennifer Ang (BR Law Corporation)
• Court: High Court (Singapore)
• Citation: [2020] SGHC 257
• Subject Matter: Arbitration,Award,Recourse against award

Vinodh Coomaraswamy J: Introduction

The plaintiffs apply to set aside an arbitral award issued in the defendants’ favour in May 2019.¹ In his award, the arbitrator found that the plaintiffs had made fraudulent misrepresentations to the defendants in order to induce the defendants to invest in a company. The arbitrator awarded the defendants substantial damages for the fraud, adopting as the measure of damages the sum necessary to restore the defendants to the position they would have been in if the plaintiffs had not fraudulently induced them to make the investment. He therefore awarded the defendants damages which were equivalent to the sums which the defendants had invested less the benefits which they had received by reason of the investment.²

The plaintiffs seek to set aside the award on two grounds. First, the plaintiffs submit that the arbitrator exceeded his jurisdiction.³ Second, the plaintiffs submit that the arbitrator breached the rules of natural justice in holding the plaintiffs liable to the defendants in damages and in assessing those damages.⁴

Having considered the parties’ submissions and evidence, I have dismissed the plaintiffs’ application. The plaintiffs have appealed against my decision. I now set out the grounds for my decision.

Background facts The parties

The first plaintiff is an individual. He is a Singapore citizen⁵ residing in India.⁶ The second plaintiff is a company incorporated in India.⁷ The first plaintiff is the managing director and a shareholder of the second plaintiff.

The first defendant is a company incorporated in Singapore.⁸ The second defendant is a company incorporated in India.⁹ The first defendant is a wholly owned subsidiary of the second defendant.¹⁰

The investment

The company at the centre of the parties’ dispute is incorporated in Singapore and carries on business in the building and construction industry.¹¹ I shall refer to it as “the Company”. The Company was initially a wholly owned subsidiary of the second plaintiff.¹² The Company was not a party to the arbitration or to the application before me.

Following an approach by the plaintiffs, the two defendants invested a total of US$1,999,238¹³ and S$1,179,085¹⁴ in the Company and came to hold 50% of the Company’s shares. The defendants made their investment in two stages. First, in 2014/2015, the defendants invested US$1,199,238 and S$1,000 in the Company. Then, in 2016, the defendants invested a further US$800,000 and S$1,178,085 in the Company. As a result of the investment, the second plaintiff’s shareholding in the Company was reduced to 50%.¹⁵

The defendants made their investment in the Company under two sets of two contracts. First, in December 2014, both plaintiffs, the second defendant and the Company entered into an Investment Agreement (“IA”).¹⁶ Then in January 2015, the same four parties entered into a Shareholders’ Agreement (“SA”).¹⁷ Second, in January 2016, the four parties entered into a Restated Investment Agreement (“RIA”).¹⁸ Also in January 2016, the four parties plus the first defendant entered into a Restated Shareholders’ Agreement (“RSA”).¹⁹ The RIA and RSA superseded the IA²⁰ and SA²¹ respectively. I shall refer to all four of these contracts collectively as “the contracts”.

There are three provisions in the RSA which are material to the present application. First, the RSA charges certain assets of the Company to the defendants as security for the plaintiffs’ obligations under that agreement and grants the defendants the accompanying right to appoint a receiver to take control of and realise those assets in an event of default. Second, the RSA provides expressly that it is governed by Singapore law.²² Finally, the RSA contains a tiered dispute-resolution clause which begins with an agreement to resolve disputes amicably and culminates in agreement to refer disputes to arbitration. The arbitration agreement provides that any arbitration is to be conducted before a sole arbitrator in Singapore and to be administered by the Singapore International Arbitration Centre (“SIAC”).²³ This is the arbitration agreement which the defendants invoked to commence the arbitration. The IA, SA and RIA have similar arbitration agreements which the defendants have never invoked.

The dispute

The parties’ relationship as equal shareholders in the Company descended into acrimony almost from the outset.²⁴ The defendants alleged that the first plaintiff had misapplied the funds which the defendants had invested²⁵ and had failed to develop the Company’s business with the result that the Company failed to win any new orders after the parties entered into the RIA and the RSA in January 2016.²⁶ The plaintiffs in turn denied that any funds had been misapplied and alleged that it was the defendants who were in fact in charge of the Company from March 2015²⁷ and who were therefore responsible for its failure to win new business from January 2016 onwards.²⁸

In July 2016, the defendants declared an event of default under the RSA.²⁹ They required the first plaintiff to remedy the default, failing which they would trigger the tiered dispute resolution clause in the RSA.³⁰ The default was not remedied.³¹

In October 2016, the defendants discovered the plaintiffs’ fraud.³²

In November 2016, the defendants appointed a receiver over the assets which the Company had charged to the defendants (see [9] above).³³ The receiver sold the assets³⁴ and duly paid over to the first defendant the net proceeds of sale amounting to $618,312.30.³⁵

The arbitration

In March 2017, the defendants issued a notice of arbitration against the plaintiffs, citing only the arbitration agreement in the RSA (see [9] above).³⁶ The defendants’ case was that the plaintiffs had made several false representations about the Company’s receivables, liabilities, fixed assets and future projects³⁷ in order to induce the defendants to enter into the contracts and invest in the Company and that these representations amounted either to actionable misrepresentations or breaches of the plaintiffs’ express representations and warranties set out in the contracts.

The tribunal was constituted in June 2017.³⁸ In accordance with the parties’ arbitration agreement, it comprised a sole arbitrator.

Pleadings in the arbitration opened with the defendants’ statement of claim in March 2017 and closed with the defendants’ reply in August 2017. The parties completed discovery in November 2017.³⁹ In December 2017, the arbitrator fixed the evidential hearing in the arbitration to take place in May 2018.⁴⁰ The parties exchanged their principal witness statements in January 2018 and reply witness statements in March 2018.⁴¹ Having failed to agree on a list of issues, they exchanged separate lists of issues in April 2018.⁴²

Due to the first plaintiff’s ill health⁴³ the evidential hearing was postponed from May 2018 to July 2018.⁴⁴ Neither party called any expert witnesses, whether on liability or on quantum. The plaintiffs’ only witness was the first plaintiff.⁴⁵ The defendants called five witnesses of fact.⁴⁶

Following the evidential hearing, the parties exchanged principal closing submissions in October 2018.⁴⁷ They exchanged responsive closing submissions in November 2018.⁴⁸

The award

The arbitrator issued his final award in May 2019. He found that the defendants’ witnesses were generally credible, and that they had given evidence which was not only consistent with each other’s evidence, but which was also supported by the contemporaneous documents.⁴⁹

The arbitrator was not, however, impressed with the first plaintiff:⁵⁰

The Credibility of The [Plaintiffs’] Factual Witness

69. I did not find the evidence of [the first plaintiff] to be very credible. He was frequently evasive during cross-examination and much of his evidence was inconsistent with the contemporaneous documents. When confronted with specific issues he often resorted to generalities or legalistic defences. …

The arbitrator found, further, that there was evidence of the second plaintiff’s fraud which was overwhelming, even bearing in mind the additional cogency required of evidence to prove fraud:⁵¹

Fraud Must Be Distinctly Alleged and Proved

214. In making this finding and the further finding below in relation to the allegation of fraudulent misrepresentation, I have of course taken account of the fact that, although the burden of proof remains the normal civil standard of ‘balance of probablities’ [sic], fraud must be distinctly alleged and proved. I however find that the [defendants] have satisfied this burden. A finding that fraud has been committed is not a finding that I make lightly but it is a finding that I believe to be overwhelmingly supported by the evidence that I have heard.

The arbitrator made the following further holdings and findings in his award which are material for the purposes of this application: The plaintiffs made multiple serious fraudulent misrepresentations to the defendants about the Company’s receivables, liabilities, fixed assets and future projects.⁵² The defendants were induced by the fraudulent misrepresentations into entering into the contracts and investing in the Company.⁵³ The defendants are accordingly entitled prima facie to the remedy of rescission, unless rescission is barred either because it is impossible or because the defendants have affirmed the contract.⁵⁴ For affirmation to bar rescission, the innocent party must, “with full knowledge of the fraud … take an action which unequivocally confirms that it wishes to be bound by the contract”.⁵⁵ The defendants were fully aware in November 2016 of the plaintiffs’ fraud but chose to rely on and invoke their rights as a secured creditor under the RSA to appoint a receiver instead of rescinding the RSA (see [13] above).⁵⁶ This amounts to affirmation of the RSA and therefore bars rescission.⁵⁷ Even though...