CFJ and another v CFL and another and other matters

• Jurisdiction: Singapore
• Judge: Kannan Ramesh JAD
• Judgment Date: 31 January 2023
• Neutral Citation: [2023] SGHC(I) 1
• Court: International Commercial Court (Singapore)
• Docket Number: Originating Summonses Nos 7 and 8 of 2020 and Originating Summons No 9 of 2021
• Hearing Date: 29 June 2021,15 March 2021,18 March 2021,19 March 2021,18 July 2022,19 July 2022
• Citation: [2023] SGHC(I) 1
• Year: 2023
• Plaintiff Counsel: OS 7 and OS 8 Yeo Khirn Hai Alvin SC, Chan Hock Keng, Jill Ann Koh Ying, Low Sze Hui Jasmine, Ho Yi Jie, Tang Xi-Rui Charlotte and Liang Fang Ling Elisabeth (WongPartnership LLP),Toby Landau QC (Essex Court Chambers Duxton (Singapore Group Practice)) (instructed), Liew Wey-Ren Colin (Colin Liew LLC)
• Defendant Counsel: Toby Landau QC (Duxton Hill Chambers (Singapore Group Practice)) (instructed), Liew Wey-Ren Colin (Colin Liew LLC)
• Subject Matter: Arbitration,Award,Recourse against award,Setting aside
• Published date: 04 February 2023

Kannan Ramesh JAD (delivering the judgment of the court): Introduction

How strictly does an arbitral tribunal have to adhere to the pleadings (or memorials) of the parties? In what circumstances is the fair hearing rule not satisfied? When is there apparent bias as regards an arbitrator? These questions arise in the three applications before us which relate to a long-running arbitration between two substantial energy groups that began over a dispute regarding the sale of shares in a member of one to members of the other. Specifically on the first question, one party alleges that the arbitral tribunal should have strictly followed the case as framed in the pleadings filed by the parties and that its failure to do so was a breach of natural justice or an act in excess of the tribunal’s jurisdiction. That party also calls into question the conduct of the arbitral tribunal and the impartiality of one of its members, specifically its President.

These are not uncommon grounds for challenge and a pragmatic approach must be adopted by the court in resolving such challenges when exercising its supervisory jurisdiction over arbitral tribunals and their awards. As recently observed by the Court of Appeal in CAJ and another v CAI and another appeal [2022] 1 SLR 505 (“CAJ”) at [2]: “it is not common in Singapore for awards to be set aside, and the courts have only done so in exceptional cases when the grounds are clearly made out” [emphasis in original]. This strikes a balance between the need to respect the autonomy of arbitration proceedings and to give effect to the principle of minimal curial intervention, while ensuring that meritorious challenges are properly ventilated: CAJ at [1]. Parties who agree to arbitrate their dispute do not have a right to a “correct” decision, but only a right to a decision that is within the ambit of their agreement to arbitrate, and a decision that is arrived at following a fair process. These are salutary observations. With this in mind, we consider the background to the three applications before us.

Background

CFJ and CFK (collectively, “the Seller”) and CFL and CFM (collectively, “the Purchaser”) are two corporations in the oil and gas industry. They are respectively members of substantial groups in the same industry. On 23 July 2012, the Purchaser acquired a 49% stake in one of the Seller’s subsidiaries (“the Subsidiary”) by way of a Share Purchase Agreement (“the SPA”) to which the Seller and the Purchaser were parties. Thereafter, the Purchaser alleged that the Seller had, inter alia, deceived it into investing in the Subsidiary by making several representations. The Purchaser commenced arbitration proceedings (“the Arbitration”) against the Seller for the tort of deceit in relation to misrepresentations concerning five aspects of the operations of the oil and gas fields which were owned and operated by the Subsidiary: Reserves, Projects, Production, Decommissioning and Maintenance (“the Five Topics”). There were two additional claims. First, a claim for breach of contractual warranties. Second, a claim (described as “the PEDI Claim”) for an indemnity for losses arising after 1 January 2012 as a result of the conduct of the Seller before that date concerning three of the Five Topics: Reserves, Decommissioning and Maintenance. The various claims are explained in detail later in this judgment at [26]–[27] below.

Pursuant to Procedural Order No. 1, the Arbitration proceeded on the basis of the memorials and not the pleadings track. Thus, while the documents filed carried titles commonly used to describe pleadings in a pleadings track, they were not “pleadings” in the sense used in the pleadings track and therefore did not adhere to the strict rules of pleadings in such a track. Instead, consistent with the memorial system, the case was set out in a mix of assertion of facts, and submissions on the facts and the law supported by key documents, witness statements and expert reports annexed thereto.

The Arbitration was heard by a three-member tribunal (“the Tribunal”), who are esteemed and experienced members of the international arbitration community. The Arbitration was bifurcated into a liability phase and an assessment of damages phase. Over the course of two years, three partial awards were issued by the Tribunal. The first partial award concerned the claim for breach of contractual warranties (“the First Partial Award”). The second partial award related to the deceit claim concerning Reserves and the PEDI Claim (“the Second Partial Award”). The third partial award related to the deceit claims concerning Production, Projects, Maintenance and Decommissioning (“the Third Partial Award”). We elaborate on the findings of the Second Partial Award and the Third Partial Award respectively at [29] and [35] below.

The Seller was dissatisfied with the Second Partial Award and Third Partial Award. It filed Originating Summons No 7 of 2020 (“OS 7”) on 28 April 2020 and Originating Summons No 9 of 2021 (“OS 9”) on 19 July 2021 to respectively set aside the Second Partial Award and Third Partial Award. The Seller also filed Originating Summons No 8 of 2020 (“OS 8”) on 8 July 2020 to remove the Presiding Arbitrator (“the President”) on the grounds of apparent bias. We shall refer to OS 7, OS 8 and OS 9 individually by the cause number and collectively as “the Applications”.

Having considered the evidence and the parties’ submissions, we dismiss the Applications in their entirety. Given that the Applications share the same factual substratum and raise similar legal principles, we have sought to streamline our analysis by setting out the relevant facts and applicable legal principles collectively before addressing the submissions for each of the Applications in turn.

Commercial context of the dispute

We begin with the commercial context of the dispute before the Tribunal. One of the key factual inquiries before the Tribunal was whether the Subsidiary’s oil and gas reserves were properly evaluated and recognised by the Seller in accordance with the applicable standards. The main set of standards that was referred to was the US Securities and Exchange Commission (“SEC”) oil and gas reserve standards (“the SEC Standards”).

To understand the SEC Standards, the Tribunal relied on a joint report that was prepared by the experts of both parties dated 4 October 2017 and updated on 1 June 2018 (“the Joint Reserves Report”) which was tendered in the Arbitration. While the experts disagreed on how the SEC Standards should be interpreted and applied, they reached a high level of agreement on the applicable standards and most of the definitions therein.

The Joint Reserves Report set out the structure of the SEC Standards. The SEC Standards comprised Regulation S-X Part 210 Rule 4-10 of the United States Code of Federal Regulations (“Rule 4-10”), which provides definitions and requirements for booking reserves, and the further guidance provided by the SEC in formal documents known as the “Compliance and Disclosure Interpretations” (“C&DI Questions”). We reproduce definitions of the relevant terms in Rule 4-10 and salient extracts from the C&DI Questions: The term “reserves” is defined in Rule 4-10(a)(26) as follows:

Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project…

[emphasis added]

The term “economically producible” is defined in Rule 4-10(a)(10) as follows:

[t]he term economically producible, as it relates to a resource, means a resource which generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation.

The term “proved reserves”, which we shall refer to as “1P Reserves”, is defined in Rule 4-10(a)(22) as follows:

Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time…

[emphasis added]

The term “reasonable certainty” is defined in Rule 4-10(a)(24) as follows:

If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical, and geochemical), engineering, and economic data are made to estimated ultimate recovery (EUR) with time, reasonably certain EUR is much more likely to increase or remain constant than to decrease.

The term “probable reserves” is defined in Rule 4-10(a)(18) as follows:

Probable reserves are those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered. (i) When...