PTPrima International Development v Kempinski Hotels SA and other appeals

• Jurisdiction: Singapore
• Judge: Chan Sek Keong CJ
• Judgment Date: 09 July 2012
• Neutral Citation: [2012] SGCA 35
• Year: 2012
• Date: 09 July 2012
• Published date: 25 July 2012
• Hearing Date: 03 May 2012
• Subject Matter: Setting aside,Arbitration,Recourse against award,Award
• Plaintiff Counsel: Michael Hwang SC and Ernest Wee (Michael Hwang Chambers) and Nicholas Narayanan (Nicholas & Tan Partnership LLP)
• Citation: [2012] SGCA 35
• Defendant Counsel: Adrian Wong, Jansen Chow and Andrea Baker (Rajah & Tann LLP)
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeals Nos 94, 95, 96 and 98 of 2011

Chan Sek Keong CJ (delivering the judgment of the court): Introduction

The four appeals before us all arise out of awards made by the arbitrator (“the Arbitrator”) in Singapore International Arbitration Centre (“SIAC”) Arbitration No 37 of 2002 (“the Arbitration”) between Kempinski Hotels SA (“Kempinski”) and PT Prima International Development (“Prima”). Three of the appeals – viz, Civil Appeal No 94 of 2011 (“CA 94”), Civil Appeal No 95 of 2011 (“CA 95”) and Civil Appeal No 96 of 2011 (“CA 96”) – are brought by Prima, while the fourth appeal, Civil Appeal No 98 of 2011 (“CA 98”), is brought by Kempinski. Kempinski had earlier applied to the High Court to set aside the Arbitrator’s third interim award dated 20 May 2008 (“the Third Award”), fourth interim award dated 20 October 2008 (“the Fourth Award”) and costs award dated 15 April 2009 (“the Costs Award”). In CA 94, CA 95 and CA 96, Prima is appealing against the decision of the High Court judge (“the Judge”) setting aside, respectively, the Costs Award, the Third Award and the Fourth Award. As for CA 98, it is Kempinski’s cross-appeal against the Judge’s decision not to set aside the Third Award and the Fourth Award on some of the grounds which it had relied on in its application to set aside those awards.

The Judge’s decisions setting aside the Third Award, the Fourth Award and the Costs Award are reported in, respectively, Kempinski Hotels SA v PT Prima International Development [2011] 4 SLR 633 (“the Judgment”), Kempinski Hotels SA v PT Prima International Development [2011] 4 SLR 669 and Kempinski Hotels SA v PT Prima International Development [2011] 4 SLR 670.

Background

Prima, an Indonesian company, is the owner of the Plaza Hotel at Jalan Jenderal Sudirman, Jakarta (“the Hotel”). Kempinski is a Swiss company which manages and operates hotels around the world. On 15 April 1994,¹ Kempinski and Prima entered into an Operating and Management Contract (“the Management Contract”) under which Kempinski was given the right to operate and manage the Hotel for 20 years.² Kempinski commenced managing the Hotel after its soft opening in June 1998.³

The Management Contract was subject to Indonesian law. It contained the following arbitration agreement in Art 20:⁴

Any dispute or difference arising out of or in connection with or resulting from [the Management Contract], its application or interpretation, where an amicable settlement cannot be reached, shall be referred to and determined by arbitration under the Rules of the [SIAC]. The arbitration shall be governed by the laws of Indonesia. All proceedings shall be in the English language. The place of arbitration shall be Singapore. The arbitral award shall be final and judgement thereof may be entered in any Court having jurisdiction thereof.

It should be noted that the applicable version of the SIAC’s Arbitration Rules for the purposes of the Arbitration was the SIAC Rules (2nd Ed, 22 October 1997) (“the SIAC Rules (1997 Ed)”).

Subsequently, the business relationship between the parties soured. On 6 February 2002,⁵ Prima gave Kempinski written notice of termination of the Management Contract on the ground that Kempinski had failed to perform its obligations under the Management Contract. Prima then entered into another management contract with a different company to manage the Hotel in place of Kempinski in April 2002.

Commencement of the Arbitration

The purported termination of the Management Contract by Prima led Kempinski to commence the Arbitration on 20 May 2002.⁶ In its Points of Claim, Kempinski sought the following remedies:⁷ a) declarations to the effect that:– i. [Prima] had wrongfully and unjustifiably purported to terminate the [Management] Contract; ii. [Kempinski was] not in material breach of the [Management] Contract; iii. [Kempinski] should be entitled to continue with the [Management] Contract; b) an injunction restraining [Prima] from entering into or continuing with any contract for the operation and management of the Hotel with any third party in place of or in addition to [Kempinski], or otherwise interfering with the [Management] Contract; c) further or alternatively, an order/award for the specific performance of the [Management] Contract; d) further or alternatively, the full extent of the loss and damage caused to [Kempinski], including loss of profits for the remainder of the term of the [Management] Contract, if [Kempinski is] not to continue with the [Management] Contract; e) if for any reason, [Kempinski is] not to continue with the [Management] Contract, the sum of about US$86,700.00 being the balance of the full amount of the management fees due to [Kempinski] as against the discounted figure, which discount was given on the basis of a continuation of the [Management] Contract; f) interest at such rate and for such period as the Arbitrator deems fit and just; g) costs; and h) such further and/or other relief which the Arbitrator deems fit.

In September 2002, Prima filed its Points of Defence and Counterclaim in which it pleaded that the termination of the Management Contract was valid under Indonesian law and counterclaimed for damages against Kempinski for breach of the Management Contract.

In the course of the Arbitration, Prima applied to the Arbitrator for leave to amend its pleadings to include the defence that the Management Contract had become illegal under Indonesian law because of three decisions issued by the Indonesian Ministry of Tourism in, respectively, November 1996, June 1997 and May 2000 which changed the regulatory conditions for the management of hotels in Indonesia (“the Three Decisions”). In substance, the Three Decisions made it illegal for a foreign entity to manage hotels in Indonesia unless it set up a company incorporated in Indonesia (a “PMA company”) or entered into a joint venture with Indonesian partners.

As either means of managing the Hotel had negative tax implications for Kempinski, it had, after the second of the Three Decisions was issued, sought legal advice on how to carry on managing the Hotel without contravening the altered regulatory framework. Kempinski’s legal counsel had advised that Kempinski would not contravene the altered regulatory framework if it managed the Hotel without having a commercial presence in Indonesia or without bringing any monetary assets into Indonesia.⁸ Kempinski’s legal counsel had further advised that since the general manager of the Hotel was employed by Prima (although he was nominated by Kempinski, which was then the industry practice),⁹ that meant that Kempinski did not have a commercial presence within Indonesia, and, as such, would not be acting in contravention of the altered regulatory framework.¹⁰ Acting on such legal advice, Kempinski had continued to manage the Hotel without any objection from Prima.

Prima’s purpose in applying for leave to amend its Points of Defence and Counterclaim to plead supervening illegality was not to rely on it to deny liability for breach of contract should Kempinski prove that Prima had indeed terminated the Management Contract wrongfully. Instead, Prima’s purpose was to rely on supervening illegality to limit the period for which Kempinski could claim damages. Specifically, Prima sought to argue that the relevant period should end on the date when the Management Contract began to be performed illegally by Kempinski. As Prima conceded that a reasonable period of time within which to comply with the Three Decisions would be one year from the date on which the last of the Three Decisions was issued (viz, 3 May 2000), it took the position that the period for which Kempinski could claim damages (in the event that it succeeded against Prima on the issue of liability) should end on 3 May 2001. The Arbitrator gave leave to Prima in June 2003 to make the aforesaid amendment.¹¹ On 18 August 2003, Prima filed its Points of Re-Amended Defence and Counterclaim specifically pleading supervening illegality and force majeure under Art 1245 of the Indonesian Civil Code.

Shortly thereafter, Prima applied for the issue of illegality to be tried as a preliminary issue for the reason that if Kempinski were not entitled to damages from 3 May 2001 onwards, it would be moot for the Arbitration to continue further on the issue of whether Prima was liable to Kempinski for breach of contract since the alleged wrongful termination of the Management Contract took place only after 3 May 2001 (specifically, on 6 February 2002). The Arbitrator granted Prima’s application and issued Procedural Order No 1 dated 8 July 2003¹² directing that the issue of illegality be tried after Kempinski had closed its case in the Arbitration.

The Arbitrator’s first interim award

The Arbitrator heard arguments on the issue of illegality in two tranches. The first tranche was heard between 26 and 28 July 2004, followed by two rounds of written submissions by the parties. Prima’s submission that the Management Contract had been rendered illegal by the Three Decisions was met by Kempinski’s response that, first, there was no doctrine of supervening illegality in Indonesian law and, second, the Three Decisions were constitutionally invalid.

On 18 February 2005, the Arbitrator published his first interim award (“the First Award”), which dealt with the issue of illegality as follows:¹³ 1. … [T]he [Management] [C]ontract remains valid but has become impossible of performance as a result of the [Three] Decisions. 2. Any benefits passed by [Kempinski] to [Prima] under the [Management] [C]ontract may be recoverable, subject to existing pleadings accommodating such relief and subject to counterclaims by [Prima]. It should be noted that although the Arbitrator decided that the Management Contract had become “impossible of performance as a result of the [Three] Decisions”,¹⁴ what he actually meant was that it had become impossible...