Hong Kong court stays proceedings for arbitration, honouring arbitration agreement in insurance policy

The Hong Kong Court of First Instance stays third party proceedings commenced by an insured against an insurer, on the basis that the parties are bound by the arbitration clause contained in the insurance policy. Despite the outcome being that the main action and the third party proceedings will ultimately be pursued in different forums, by upholding the parties’ contractual agreement to arbitrate, the Court reinforces its pro-arbitration credentials and the principle of party autonomy.

Lau Lan Ying v Top Hill Company and another [2021] HKCFI 290

Background

On 22 November 2017, the plaintiff, a casual worker employed by the first defendant (D1), the sub-contractor, suffered bodily injury at work. As principal contractor, the second defendant (D2), was responsible for compensating the sub-contractor’s employees for work injuries. At the time of the accident, D2 was covered by an insurance policy (Policy) with Asia Insurance Co, Ltd (Insurer), in compliance with its obligation to obtain insurance cover under the Employees’ Compensation Ordinance. D2 accordingly made an insurance claim against Insurer on 27 November 2017, for compensation in respect of the plaintiff’s work injuries. On 30 April 2019, the Insurer repudiated its liability under the Policy, on the ground of D2’s alleged failure to submit relevant documents.

On 2 January 2020, the plaintiff commenced the present action against D1 and D2  for damages suffered as a result of the injury. D2 commenced the third party proceedings to enforce policy liability against the Insurer. Relying on the arbitration clause contained in the Policy, the Insurer applied to stay the proceedings for arbitration pursuant to section 20 of the Arbitration Ordinance.

Stay Application

Section 20 of the Arbitration Ordinance provides for a mandatory stay of legal proceedings in favour of arbitration where the action is the subject of (i) an arbitration agreement (ii) which is not null and void, inoperative or incapable of being performed, and there is (iii) a dispute/difference between the parties (iv) that is within the ambit of the arbitration agreement.

The Policy contained an arbitration clause which provides “[all] differences arising out of this Policy shall be determined by arbitration…”

Since the validity of the arbitration clause was not in dispute, the essence of the stay summons was whether there was any “difference” between D2 and the Insurer that would justify the mandatory stay in favour of resolving that “difference” through arbitration. In answering this question, the Court examined both the arbitration clause in question (particularly the word “differences”) and the wider public policy considerations.

Difference Issue

The central question before the Court was whether there was any difference falling within the ambit of the arbitration clause. In this regard, the threshold test is uncontroversial – the court will be satisfied where there is a prima facie or plainly arguable case that there is such a difference.

In construing the arbitration clause, Marlene Ng J observed three guiding principles:

  1. there is a prima facie assumption that contracting parties intend all disputes relating to a particular transaction to be resolved by the same tribunal;
  2. arbitration clauses should be construed as broadly and liberally as possible and any doubts on the scope of arbitration should be resolved in favour of arbitration; and
  3. each arbitration clause should be considered in its own context, and earlier decisions on the meaning of particular words or phrases may be persuasive depending on the similarity in contract and circumstances between such earlier decisions and the instant case.

With the above principles in mind, the Court’s analysis turned on the meaning of word “differences” in the Policy arbitration clause. Following Mimmie Chan J’s decision in VK Holdings (HK) Limited v Panasonic Eco Solutions (Hong Kong) Company Limited HCCT19/2014 (unreported), the Court confirmed that the word “differences” confers the widest possible jurisdiction. Significantly, the Court held that it is wide enough to cover a claim of repudiation. In reaching this conclusion, Ng J highlighted the distinction between repudiating a contract and a contractual liability. As per Lord Wright in Heyman & anor v Darwins Limited [1942] AC 356, in repudiating policy liability, the insurers “do not repudiate the policy or dispute its validity as a contract; on the contrary they rely on it and say that according to its terms, express and implied, they are relieved from liability”. As such, the substantive difference in this case, being whether or not the Insurer has wrongfully repudiated the Policy, is a difference arising out of the Policy and falls squarely within the arbitration clause.

Further, the Court reiterated that it is concerned only with the existence of any difference and will not evaluate the merits of that difference. Ng J drew support from the remarks by Ma J (as he then was) in Dah Chong Hong (Engineering) Limited v Boldwin Construction Company Limited HCA1291/2002 (unreported) that “even an unanswerable claim will not mean that a dispute or difference does not exist unless there is a clear and unequivocal admission of liability and quantum”.

Policy Issue

The Court went on to address whether the arbitration clause could extend to the present claim, which D2 argued to be a statutory claim rooted in the Employees’ Compensation Ordinance. D2 contended that the claim should be excluded from arbitration for public policy reasons.

At the outset, the Court pointed out that D2’s claim cannot be said to be a statutory claim. First, the plaintiff in the main action sought common law damages rather than damages under the Employees’ Compensation Ordinance. Second, in the third party proceedings, D2 similarly did not rely on the Ordinance but sought indemnity and contribution based on the Policy.

Nevertheless, the Court conducted a thorough review on principles concerning the arbitrability of statutory claims or claims based on statutory rights. The Court confirmed that:

  1. in determining whether a dispute is arbitrable, the parties’ arbitration agreement is an important starting point, which the law should respect unless there are compelling reasons not to do so; and
  2. save when the statutory provision reserves exclusive jurisdiction to the courts, in considering whether the arbitration should be precluded by public policy considerations, a high threshold is required given the countervailing policy considerations of party autonomy and compliance with international treaty obligations (such as the duty to recognise and enforce an arbitration agreement under the New York Convention).

Consistent with English law authorities, the Court clarified in dicta that, the facts that (i) relevant legislation is motivated by public policy considerations, (ii) there may be procedural complexity in referring the matter to arbitration, (iii) third parties may possibly be impacted, or that (iv) there may be limitation on the power of the arbitrator to give full remedies may not be sufficient to preclude arbitration.

In light of the foregoing, the Court decided that the present difference on policy repudiation was essentially a private matter which did not trigger wider public policy interests.

Comments

While the Court’s decision does not establish new law, it is a useful reminder of the mandatory nature of a stay of legal proceedings under section 20 of the Arbitration Ordinance. This is exemplified by the low threshold test adopted by the Court where a prima facie case would be made out so long as there is an assertion of a dispute or difference, even in circumstances where no valid defence may exist.

On the other hand, the case also illustrates that despite the one-stop-shop presumption, there is a real possibility that matters relating to the same underlying transaction may be tried at different forums. In this respect, the Court cautioned that the presumption would not be sufficient to defeat a mandatory stay in light of an unequivocal arbitration agreement. As such, if parties intend to exclude a certain subject matter of dispute from arbitration, such intention must be expressly incorporated into the arbitration clause. As demonstrated in the present case, the court will endeavour to hold parties to their contractual bargain as reflected in the arbitration clause.

For more information, feel free to get in touch with any of the contacts below, or your usual Herbert Smith Freehills contact.

May Tai
May Tai
Managing Partner - Asia
+852 21014031
Simon Chapman
Simon Chapman
Partner
+852 21014217
Kathryn Sanger
Kathryn Sanger
Partner
+852 21014029
Briana Young
Briana Young
Professional Support Consultant
+852 21014214

SINGAPORE COURT OF APPEAL INTRODUCES A LOWER STANDARD OF REVIEW FOR DEBTORS DEFENDING A DISPUTED DEBT THAT IS SUBJECT TO AN ARBITRATION AGREEMENT

In AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33, Justice Steven Chong, delivering the judgment of the Court, (1) overturned the decision of the High Court which allowed a creditor (VTB Bank) to proceed with its winding up petition against a debtor (AnAn), and (2) upheld the arbitration agreement pursuant to which the dispute underlying the debt should first be resolved.  In doing so, the Court of Appeal reaffirmed Singapore’s pro-arbitration stance while also recognising that special considerations may apply in the context of possible insolvency.

The Court of Appeal removed the “triable issue” standard that ordinarily applies to debtors who challenge a winding up application on the basis of an underlying dispute. The Court of Appeal found that where any such dispute is subject to an arbitration agreement, the standard to be applied should be the lower “prima facie” standard of review. This does not mean, however, that debtors will be permitted to defeat all winding up applications by raising disputes which are subject to arbitration agreements. A debtor must still prove its bona fides in alleging a dispute over the debt. Further, where the creditor has legitimate concerns over the solvency of the debtor company, the ‘triable issue’ standard is reintroduced: if the debtor is unable to prove any triable issues, the winding up application will be stayed, and not dismissed, offering the creditor some security over the management of the company’s assets until the arbitration is concluded. Alternatively, the debtor may be required to provide an undertaking to that effect until the arbitration is concluded.

The facts

VTB and AnAn entered into a ‘global master repurchase agreement’ (GMRA) under which AnAn would sell global depository receipts (GDRs) of certain shares and then repurchase the GDRs later at (higher) pre-agreed rates. The difference between the original sale price and the pre-agreed rates was in essence, interests and costs. Therefore, despite being structured as a sale and repurchase, the GMRA was in substance a loan arrangement between VTB (as lender) and AnAn (as debtor).

VTB alleged multiple events of default under the GMRA. In such circumstances, the GMRA entitled VTB to accelerate the repurchase of the GDRs at a designated value. VTB therefore sent a notice of default to AnAn, exercising this right and stating that a sum of approximately US$170 million was owed by AnAn. VTB then served a statutory demand for the sum (in essence, a demand for payment which, if not complied with, is taken as prima facie evidence of a company’s inability to pay debts, for the purposes of Singapore’s insolvency legislation).  When AnAn failed to pay the demand within the statutory timeline, VTB applied to the Singapore court to wind up AnAn on  the basis of alleged insolvency.

AnAn resisted the winding up application by challenging both the substance and the quantum of the alleged debt. AnAn argued that VTB was not entitled to the accelerated debt and that it was, in any case, not entitled to the quantum of the debt claimed.  For example, AnAn argued that there were genuine disputes including (amongst others) whether VTB had followed the agreed procedure for obtaining bids from appropriate markets before relying on the new value of the GDRs.

In resisting a winding up application, a debtor must ordinarily raise “triable issues” (i.e. the existence of a substantial and bona fide dispute over the debt claimed) in order to obtain a stay or dismissal of the application. This ‘triable issue’ standard is an exacting one: mere assertion of a dispute will not suffice. Put simply, the court must critically consider and be convinced that the debtor has a credible defence to the dispute, such that the matter requires further examination and the winding-up should be stayed or dismissed.

However, AnAn argued that where the (alleged) matters in dispute were subject to an arbitration agreement, a lower standard of review (than that of a triable issue) should be applied: the court should only consider if (i) there exists a dispute over the debt; and (ii) that the dispute falls within the scope of the arbitration agreement.  If the answer to both questions is ‘yes’, the court should stay or dismiss the winding up application in favour of the dispute being determined by arbitration.  AnAn argued that the merit of the debtor’s case on the disputed debt, or indeed, whether there existed any ‘triable issues’ at all, must be determined by the arbitral tribunal in accordance with the parties’ arbitration agreement.

 

The Court of Appeal’s decision

The High Court rejected AnAn’s arguments. On appeal, however, the Court of Appeal agreed with AnAn and adopted the “prima facie” standard of review in place of the triable issue standard that would otherwise normally apply. The Court of Appeal’s reasons included (amongst others):

(1) Coherence of the law across regimes

The adoption of the prima facie standard of review in this context is consistent with the standard adopted for stay applications for all other court proceedings under Singapore’s arbitration regime: court proceedings are stayed so long as claims with prima facie merit fall within the scope of a valid arbitration agreement.

(2) Party autonomy in selecting arbitration as the dispute resolution mechanism

The lower prima facie standard of review also avoids the risk of claimant creditors exercising a tactical choice to bypass their arbitration agreements.  If the higher ‘triable issue’ standard applied in the context of winding up applications, a claimant creditor would have the option of pursuing a winding up application over a disputed debt that it should properly have pursued in arbitration, pressuring the debtor to prove the existence of substantive defences according to a higher standard (or to settle the claim) in order to avoid summary liquidation and reputational damage.

Further, as the Court of Appeal noted, arbitration could have been preferred by the parties for a multitude of reasons, including finality and confidentiality, even in determining debt claims. That agreement to arbitrate should be respected regardless of the merits of the dispute i.e. regardless of whether the debtor’s case appears weak, as long as it met the prima facie standard. The fact that the ‘triable issue’ standard would require the court to critically consider the merits of the company’s defences would itself be contrary to the parties’ arbitration agreement: only the arbitral tribunal should assess the merits of any dispute arising under the contract.

Under the lower prima facie standard of review, the court is merely required to determine whether it appears, on a prima facie basis, that (i) there is an arbitration agreement; and (ii) the dispute of the debt is caught by the arbitration agreement. If so, the court must not undertake a review of the merits of the dispute; a stay or dismissal of the winding up application should be granted in favour of such arbitration.[1] A winding up application should only follow once the arbitration determines the debt to be owing and unpaid.

Grounds for refusal of a stay: avoiding debtor’s abuse of process

As an important safeguard, however, the Court of Appeal also held that the lower standard of review does not entitle the debtor to an automatic stay once it alleges the prima facie existence of a dispute: the bona fides of the debtor in raising the dispute remains a relevant factor to avoid any abuse of process. Various jurisdictions have adopted different ‘tests’ for ensuring that a debtor does not raise an entirely meritless dispute over the debt in order to buy time under a process of arbitration and avoid liquidation.

For example, the English courts, which also adopt the lower prima facie standard of review, require “wholly exceptional circumstances” to be proven before refusing a stay in favour of arbitration: such circumstances have been stated to be so rare as to be “difficult to envisage”. The result, as the English courts have described, is to place a “very heavy obstacle in the way of a party who presents a petition claiming sums due under an agreement that contains an arbitration clause … where there is an arbitration clause, it is sufficient to show that the debt is ‘disputed’ and for that it is sufficient to show that the debt is not admitted”.

The position in Singapore diverges here in favour of the creditor’s interests: the Court of Appeal held the standard of “wholly exceptional circumstances” is pitched too high, leading at times (as seen in some English cases) to situations where a debtor is able to stay a winding up proceeding to pursue arbitration even though it had previously admitted liability to the debt, although denying such liability at the winding up application.

In Singapore, as decided in AnAn v VTB, stays or dismissals of insolvency proceedings in favour of arbitration will be granted unless there is an ‘abuse of process’. Examples of when this “high threshold” is met include:

  • where the debt is admitted on both liability and quantum;
  • where the debtor has waived or may be estopped from asserting his rights to insist on arbitration, such as where the parties have subsequently agreed that the dispute may be resolved by litigation; or
  • where there exist substantiated concerns which justify the invocation of the insolvency regime: for example, where the assets of the debtor company have gone missing or where there is a proper basis to conclude that there had been fraudulent preferences.

This test therefore reserves to the Singapore courts the flexibility to determine each application in its context. The Court of Appeal has stressed, however, that the ‘abuse of process’ control is not an avenue for creditors to introduce arguments challenging the merits of the underlying dispute. Consequently, an argument that there has been an abuse of process because the dispute alleged by the debtor is “so obviously lacking in merit” will not succeed on that ground alone.

Recognising creditors’ interests: avoiding an abuse of process by choosing to stay and not dismissing the winding-up application

Ordinarily, the court should dismiss the entire winding up application in favour of arbitration, given that the stay of a winding up application itself carries severe reputational consequences for the company.

However, in certain scenarios, if the winding up application is dismissed, that too could lead to an unfair result. As examples, the Court of Appeal suggested:

  • a company which does not appear to be immediately insolvent; but
  • if faced with a substantial claim, would become insolvent; and
  • which has been able to raise a prima facie dispute but not triable issues over the debt.

If the winding up application is dismissed in favour of arbitration, that company would continue to trade (without restraint) until the conclusion of the arbitration. Having then been unable to raise triable issues in relation to the dispute, the arbitration may be resolved in favour of the creditor, but by that time the assets of the company have been further depleted. Similar situations arise where a company faces multiple debt claims, each arbitrable and each independently capable of bankrupting the company. Dismissal of the winding up applications in favour of arbitration in these scenarios adds to the risk of recovery for the otherwise innocent creditor.

Singapore has chosen to adopt a middle ground: any dismissal of a winding up application would require the prompt resolution of the dispute which is to be referred to arbitration, to militate against any undue delay or risk of recovery of a legitimate debt. In this regard, the Court endorsed the approach considered in Hong Kong i.e. to only dismiss an application where the debtor company shows that it had taken steps to commence arbitration in relation to the disputed debt. Further, a debtor who has not satisfied the court that there are triable issues in its dispute over the debt can only expect a short adjournment to commence the arbitration; if sufficient evidence to establish a genuine dispute is still absent, it should expect to have to give an undertaking to proceed with the arbitration. Such orders are to be made on a case by case basis by the court hearing the winding up application.

Therefore, even in applying the prima facie standard of review, where an applicant creditor is able to demonstrate legitimate concerns about the solvency of the debtor company, and that no triable issues have been raised by the debtor, the court offers a control mechanism by ordering a stay instead of a dismissal of the winding up proceedings. The creditor will have the liberty to apply to the court to proceed with the winding up if it is shown that the debtor company has no genuine desire to arbitrate, is taking active steps to stifle or delay the arbitration, or is paying off other creditors to the detriment of the claimant.

Conclusion

The Singapore Court of Appeal’s approach is potentially complex in that it may sometimes require the court to apply multiple standards to the issues before it; for example (as discussed above), whether the issues raised by the debtor satisfy a prima facie test but fail to amount to triable issues.  Nevertheless, it is a measured approach which aims to balance competing interests by ensuring that the creditor’s interest in enforcing its rights to payment is protected, while also reaffirming Singapore’s stance of minimal curial intervention where parties have agreed to arbitrate their disputes. The safeguards that have been introduced (unlike other jurisdictions) also provide certainty to both creditors and debtors as to the limits of their case even under the lower prima facie standard of review.

In light of this decision:

  • Claimants should carefully consider whether there are strategic advantages in pursuing a winding up application rather than an arbitration where the claim, is in substance, a debt claim, given the low standard of proof required in order to enforce the arbitration agreement.
  • Debtor companies should similarly be aware of their rights to insist on arbitration rather than litigate their disputes through insolvency proceedings, as well as the consequence of admitting liability or quantum of a debt.
  • A debtor presented with a winding up application would also do well in considering the need to argue both the prima facie and triable issue standards in order to have the application dismissed, rather than stayed.
  • Importantly, all parties should carefully consider their arbitration agreements and whether to include any carve outs for debt recovery and/or insolvency proceedings relating to specific obligations under the contract.

For more information, please contact Alistair Henderson, Partner, Gitta Satryani, Of Counsel, Daniel Waldek, Of Counsel, Reshma Nair, Associate, or your usual Herbert Smith Freehills contact.

Alastair Henderson
Alastair Henderson
Partner
+65 68688058

Gitta Satryani
Gitta Satryani
Of Counsel
+65 68688067

Daniel Waldek
Daniel Waldek
Of Counsel
+65 686 88068

Reshma Nair
Reshma Nair
Associate
+65 68688002


[1] Indeed, the Court of Appeal described the arbitration of any disputed debt as a “necessary precondition” to engaging the insolvency regime: the presentation of an unsatisfied statutory demand only leads to the presumption of insolvency; where that presumption is disputed, the debt is only established to be due and owing to the creditor by way of arbitration (and cannot be determined by the court) – an important characterisation at law that further supports the need for a lower standard of review.

ENGLISH COURT REFUSES TO STAY COURT PROCEEDINGS UNDER ARBITRATION ACT 1996 IN CASE INVOLVING COMPETING JURISDICTION AND ARBITRATION CLAUSES

In the recent case of Albion Energy Ltd v Energy Investments Global BRL [2020] EWHC 301 (Comm) (available here) the English High Court refused to stay court proceedings under section 9 of the Arbitration Act 1996 in a case involving competing jurisdiction and arbitration clauses.

The case concerned a claim for summary judgment in the English High Court brought by the seller of shares against the buyer for an outstanding payment due under a sale and purchase agreement (“SPA”). The SPA contained an exclusive English court jurisdiction clause. However, after the SPA had been executed (and before the court claim commenced), the parties had agreed to hold the disputed payment in escrow, in order to attempt to resolve the dispute. The escrow agreement contained an arbitration clause providing for London-seated ICC arbitration.

The relevant question before the court was whether the arbitration agreement in the escrow agreement operated to supplant the jurisdiction clause in the SPA. If it did, the seller’s summary judgment claim would have been commenced in breach of the arbitration agreement and would be stayed by the court under section 9 of the Arbitration Act 1996 (the “Act”).

The court determined, after analysing the contractual documents, that the arbitration agreement in the escrow agreement did not supplant the jurisdiction clause in the SPA in respect of the summary judgment claim. It therefore refused to stay the court proceedings under the Act. In reaching this decision, the court provided useful guidance in resolving conflicts between competing jurisdiction and arbitration clauses across different agreements.

Background facts

The dispute arose from an SPA for the sale of shares between Albion Energy Ltd (“Albion”) as seller and Energy Investments Global BRL (“EIGL”) as buyer. The SPA provided that EIGL would pay for the shares in instalments. In addition to Albion and EIGL, there were four other parties to the SPA including the owner of Albion, a Mr Buckingham. The SPA contained an exclusive court jurisdiction clause which provided as follows:

The Parties submit to the exclusive jurisdiction of the courts of England and Wales as regards any claim, dispute or matter (whether contractual or non-contractual) arising out of or in connection with this agreement (including its formation).

EIGL paid the first two instalments under the SPA but refused to pay the third instalment of US$33.3 million. It argued that it had legal claims against Mr Buckingham and Albion which entitled it to withhold payment under the SPA.

Following solicitors’ correspondence, Albion and EIGL agreed that US$20 million would be paid unconditionally by EIGL to Albion and that the remaining US$13.3 million would be held in escrow pursuant to an Escrow Agreement. The parties to the Escrow Agreement were Albion, EIGL and Mr Buckingham (but not the other three parties to the SPA). The Escrow Agreement provided that the parties would exchange information, would attempt to resolve the dispute, and would not commence proceedings before a specified date. The Escrow Agreement expressly provided that payment into escrow was without prejudice to the parties’ legal rights under the SPA.

The dispute resolution clause in the Escrow Agreement provided that:

Any dispute or difference (whether contractual or non-contractual) arising out of or in connection with this letter (including any question regarding its existence, validity, interpretation performance or termination) shall be referred to and finally settled by arbitration [in London under the ICC Rules].”

Commencement of proceedings and applications to the court

Albion commenced proceedings against EIGL and brought an application for summary judgment in respect of the outstanding US$13.3 million held in escrow.

EIGL applied to stay the court proceedings under section 9 of the Act, which provides:

Stay of legal proceedings.

(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

[…]

(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.

EIGL’s position was that the arbitration agreement in the Escrow Agreement varied or supplanted the exclusive jurisdiction clause in the SPA in respect of the claim for US$13.3 million. Alternatively, it argued that summary judgment should not be granted because it had a realistic prospect of defending the claim for payment on the merits.

Court’s decision

The court observed that:

  • Before ordering a stay under section 9 of the Act, the court must be satisfied both that there is an arbitration clause and that the subject matter of the claim falls within that clause.
  • There are occasions when the court is willing to stay proceedings under its case management jurisdiction, in order to allow the arbitration tribunal to consider these matters under its kompetenz kompetenz
  • However, in this case neither party (in the judge’s view, correctly) suggested that this was the appropriate course or that the court should not finally determine the question.

The court considered the guidance provided by Hamblen LJ in BNP Paribas v Trattamento Rifiuti Metropolitani SpA [2019] EWCA Civ 768 in interpreting competing dispute resolution provisions across different contracts which are part of a single transaction. These guidelines include the following:

  • Where the parties’ overall contractual arrangements contain two competing jurisdiction clauses, the starting point is that a jurisdiction clause in one contract was probably not intended to capture disputes more naturally seen as arising under a related contract.
  • A broad, purposive and commercially-minded approach is to be followed.
  • Where the jurisdiction clauses are part of a series of agreements they should be interpreted in the light of the transaction as a whole, taking into account the overall scheme of the agreements and reading sentences and phrases in the context of that overall scheme.
  • It is recognised that sensible business people are unlikely to intend that similar claims should be the subject of inconsistent jurisdiction clauses.
  • The starting presumption will therefore be that competing jurisdiction clauses are to be interpreted on the basis that each deals exclusively with its own subject-matter and they are not overlapping, provided the language and surrounding circumstances so allow.
  • The language and surrounding circumstances may, however, make it clear that a dispute falls within the ambit of both clauses. In that event the result may be that either clause can apply rather than one clause to the exclusion of the other.

The court noted, however, that this guidance may apply with less force where (as in the present case) the parties had entered a second agreement after the first agreement, rather than multiple agreements at the same time.

The court also observed that in situations where there is a principal agreement and a security agreement, it is not unusual for the parties to agree to submit disputes under the principal agreement to one form of dispute resolution (often arbitration) and disputes concerning security to another (often court).

In the court’s view, the claim brought by Albion concerned its entitlement to be paid the purchase price under the SPA, rather than the operation of the Escrow Agreement so as to realise the benefits of the security. As a consequence, the claim fell outside the scope of the arbitration agreement in the Escrow Account and the application for a stay under section 9 was refused. The reasons for this conclusion included:

  • It was inherently more likely that the arbitration agreement was intended to address the security and other ancillary obligations under the Escrow Agreement, rather than to displace the jurisdiction clause under the SPA for determining EIGL’s liability to Albion.
  • The reference in the arbitration agreement to disputes arising in relation to “this letter” suggested that the focus of the clause was on obligations under the letter (i.e. the Escrow Agreement) rather than obligations under the SPA.
  • The express recognition in the Escrow Agreement that it was without prejudice to the parties’ rights under the SPA suggests that the arbitration agreement was not intended to take away the right conferred under the jurisdiction clause in the SPA to commence court proceedings.
  • The Escrow Agreement only involved three of the six parties to the SPA. This suggested that it was intended only to have a localised effect, in order to avoid the commercially unattractive position where claims between some of the parties to the SPA are subject to court jurisdiction, while other related claims under the SPA are subject to arbitration.

After dismissing EIGL’s application for a stay, the court decided to grant Albion’s application for summary judgment.

Comment

The case provides a useful illustration of the interpretation exercise that will be carried out by the English court in determining which of two competing dispute resolution clauses ought to apply to a claim. In particular, it reinforces that:

  • Some of the guidelines which generally apply where multiple contracts are entered at the same time may apply with less force where the parties have entered successive agreements at different times.
  • The court may consider that there is nothing unusual about the parties choosing to resolve disputes relating to security in a different forum from disputes relating to the parties’ principal obligations.

The case also serves as a reminder that care must be taken when drafting dispute resolution clauses across multiple contracts. Had the arbitration clause in the Escrow Agreement expressly addressed its relationship with the jurisdiction clause in the SPA, the case – and the associated expenditure of time and money – might have been avoided.

For more information, please contact Nicholas Peacock, Partner, Aaron McDonald, Senior Associate, or your usual Herbert Smith Freehills Contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803

Aaron McDonald
Aaron McDonald
Senior Associate
+44 20 7466 2980

MALAYSIA’S FEDERAL COURT SETS ASIDE DEFAULT JUDGMENT OBTAINED IN BREACH OF AN ARBITRATION AGREEMENT

In Tindak Murni Sdn Bhd v Juang Setia Sdn Bhd (Civil Application No. 03-2-11/2018(B) and Civil Application No. 02(i)-104-11/2018(B)), the Federal Court was asked to decide whether a default judgment from a Malaysian court which was obtained in breach of an arbitration agreement in the underlying contract between the parties should be set aside on the basis of the existence of the arbitration agreement.

Background

The appellant (“Tindak Murni”) entered into a building construction contract (“Contract”) with the respondent (“Juang Setia”), which contained an arbitration clause. Following a dispute over an alleged failure to make payment by Tindak Murni, Juang Setia commenced civil proceedings against Tindak Murni in the High Court in Shah Alam to claim the alleged outstanding sums.

At the High Court, Tindak Murni did not formally enter its appearance under the rules of the court, nor take immediate steps to stay the court proceedings under the section 10 of the Arbitration Act 2005 (the “Act”). As a result, on 1 March 2017, Juang Setia obtained a default judgment against Tindak Murni to pay the outstanding liquidated sums.

On 10 April 2017, Tindak Murni applied to set aside the default judgment on the basis that it had valid disputes against Juang Setia’s claims and that there exists an arbitration agreement between the parties. On 31 July 2012, the Registrar of the High Court set aside the default judgment on the basis that “there was a defence on the merits in that there were disputes and/or triable issues justifying the matter being heard on the merits”.

Upon setting aside the default judgment, Tindak Murni did not file a defence in the court proceedings, but instead applied for a stay of the court proceedings pending arbitration. Unsatisfied, Juang Setia appealed to the High Court Judge against the decision of the Registrar, and for a determination of Tindak Murni’s application to stay the court proceedings. The High Court Judge held that (1) there was, on its face, a potential defence which could be raised, which substantively justified the setting aside of the default judgment; and (2) a valid arbitration clause to which the parties had agreed to be bound. The court proceedings where therefore stayed pending referral of the dispute to arbitration.

Following the decision of the High Court Judge, Juang Setia then filed two appeals to the Court of Appeal against the (1) decision to set aside the judgment in default (“Default Judgment Appeal”); (2) the decision granting the stay of court proceedings pending arbitration (“Stay Appeal”).

Decision at the Court of Appeal

Administratively, the Court of Appeal dealt with both appeals separately (as did the High Court), and proceeded to hear and decide the Default Judgment Appeal before the Stay Appeal.

On the Default Judgment Appeal, Juang Setia argued that the relevant clauses of the Contract and applicable Malaysian law relating to interim certification was such that its claim was beyond dispute. In other words, the existence of a debt due and owing to the Contractor was undisputed. As such the contention was that there was simply no dispute that could be arbitrated. The Court of Appeal agreed that the certificates of payment were conclusive in fact, which effectively dismissed any possibility of defects in the work done. It concluded that there could not be any merits to Tindak Murni defending the claim, which meant that the High Court had wrongly set aside the default judgment. The Court of Appeal allowed the contractor’s appeal, restoring the default judgment.

As a result of the decision on the Default Judgment Appeal, the Court of Appeal allowed the Stay Appeal without addressing its merits.

Decision at the Federal Court

The Federal Court held that both appeals should have been heard together (as opposed to the sequential and isolated manner adopted by the Court of Appeal), and thereafter determine which of the two appeals should be decided first in time. It determined that section 10 of Act requires the court to first ascertain whether there is, in fact, an arbitration agreement in respect of the dispute. Section 10 of the Act reads as follows:

A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

The Federal Court observed that the Court of Appeal, having heard and decided the Default Judgment Appeal first, was left with no choice but to allow the Stay Appeal, given that it would be inconsistent with the Court of Appeal’s decision in the Default Judgment Appeal to make a subsequent finding on the merits of the Stay Appeal. In so doing, the Court of Appeal failed to recognise that the subject matter of both appeals were “inextricably intertwined”, and that an application to stay court proceedings pending arbitration is an “essential jurisdictional issue”, which a Malaysian court is bound to consider. As such, the Federal Court proceeded to hear both appeals simultaneously.

Having found a valid arbitration agreement between the parties, the Federal Court considered that the existence of a default judgment is immaterial to the parties’ right to arbitrate the dispute as long as (1) no procedural steps which can be construed as a submission to the court’s substantive jurisdiction have been taken in the court proceedings; and (2) that the arbitration agreement is not null and void, inoperative, or incapable of being performed.

Interestingly, the Federal Court starkly disapproved of Juang Setia’s attempt to circumvent the arbitration agreement by procuring a judgment of a Malaysian court and thereafter argue that the default judgment should take precedence over the breached arbitration agreement, thereby eliminating any consequence for the breach of the arbitration agreement. In doing so, Juang Setia argued that the effect of allowing the arbitration agreement to take precedence is to render the judgment of the court as a ‘subordinate’ to an arbitration agreement, which cannot be done without specific statutory legislation. The Federal Court rendered strong criticism of this argument, stating that:

if this form of legal rationale is allowed to persist … all forms of dispute resolution agreed to between parties in their contracts would be rendered ineffectual and nugatory as it would be open to one party to breach the same and effectively put an end to the agreement to resolve disputes by way of arbitration.

Comment

The case demonstrates a number of interesting trends.

First, Malaysian courts no longer consider whether a ‘dispute’ exists for the purposes of an application to stay court proceedings. The Court of Appeal took the wrong approach by making a substantive determination over whether a ‘dispute’ could properly exist. This approach echoes section 10(1) of the Act prior to its amendment in 2011. The pre-2011 provision of the Act reads:

A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds –

(a) that the agreement is null and void, inoperative or incapable of being performed; or

(b) that there is in fact no dispute between the parties with regard to the matters to be referred.

Section 10(1) of Act as it now stands makes no reference to the non-existence of a dispute as a ground for resisting an application to stay court proceedings in favour of arbitration. The Federal Court’s approach is consistent with other post-2011 cases which have dispensed with any formal or substantive review over the existence of a dispute by the courts (see TNB Fuel Services Sdn Bhd v China National Coal Group Corp [2013] 4 MLJ 857, paragraph 24; Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd [2016] 5 MLJ 417, paragraph 33).

Second, a party seeking to circumvent an arbitration agreement may sometimes choose to obtain a default judgment from a national court, and then seek to enforce that judgment as a debt in the courts of the country where the counterparty is located or has assets. By then, depending on the jurisdiction involved, difficulties may arise under national law to properly challenge the default judgment or the validity of any enforcement proceedings arising out of the default judgment on the basis of an existing arbitration agreement between the parties. In order to avoid the risk of costly procedural complications in any national court, parties should take prompt and proactive steps to stay any court proceedings brought in breach of an arbitration agreement.

Finally, the procedural steps and substantive arguments on the merits of the payment dispute canvassed by both the Court of Appeal and the Federal Court underscores the Malaysian construction industry’s increasing need for arbitrations to address disputes in the construction industry efficiently. To this end, the Queen Mary University of London 2019 International Arbitration Survey (Driving Efficiency in International Construction Disputes) found that the top procedural feature which respondents consider to have the greatest potential to improve efficiency in international construction arbitration was the summary disposal of unmeritorious claims or defences at an early stage. The latest commercial arbitrations rules of a number of institutions, including the Hong Kong International Arbitration Centre (“HKIAC”), the International Chamber of Commerce (“ICC”), the Singapore International Arbitration Centre (“SIAC”) and the Stockholm Chamber of Commerce (“SCC”), provide summary disposition procedures, including early dismissal procedures and summary judgment procedures. It remains to be seen whether the Asian International Arbitration Centre (“AIAC”) would provide such procedures in the revised arbitration rules which it expects to introduce this year.

The judgment of the Federal Court is available in English here.

For further information, please contact Peter Godwin, Regional Head of Practice – Dispute Resolution, Asia and Managing Partner, Kuala Lumpur, Daniel Chua, Associate, or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Peter Godwin
Peter Godwin
Partner
+60 3-2777 51042

Daniel Chua
Daniel Chua
Associate
+60 3 2777 5101

 

English Commercial Court refuses to grant interim injunctive relief requiring a party to withdraw a claim in another jurisdiction

In A v OOO “Insurance Company Chubb” and other companies [2019] EWHC 2729 (Comm), the English Commercial Court (the Court) refused, for various reasons, to consider an application for interim relief. The application sought an order requiring a party to withdraw a claim in the Russian courts and seek a stay of those proceedings. The application was made on an urgent ex parte (but on notice) basis. The Court found that the matter, although capable of quick disposal, was not yet in a position to proceed any further because it was insufficiently prepared to enable there to be a fair hearing.

Continue reading

Implied horizontal contract prompts stay of proceedings S9 AA 1996

In Mercato Sports v Everton[1], the English High Court found that two parties were bound by an implied horizontal contract containing an arbitration clause. Accordingly, it granted a stay of proceedings under section 9 of the Arbitration Act 1996 (‘S9 AA 1996’). In this case, a football agent (the Claimant)[2] sought payment for bringing a player to the attention of Everton (the Defendant) and by doing so, it enabled them to sign the player. While Claimant and Defendant had no direct contractual relationship, the Court established that both were bound by the Football Association’s Rules (‘FA Rules’), in particular by the arbitration agreement therein. While the Court emphasized that such arrangements would not always automatically lead to an implied horizontal contract, the parties’ dealings in this case did lead to an implied contractual relationship, governed by the FA Rules.

Continue reading

HONG KONG COURT OF FIRST INSTANCE STAYS COURT PROCEEDINGS TO ARBITRATION, REITERATES S.20 PRINCIPLES

In Leung Kwok Hung trading as Kaiser (M&E) Decoration Engineering Company v. Johnson Controls Hong Kong Limited [HCCT 56/2017], the Hong Kong Court of First Instance granted the Defendant’s application under s.20 of the Arbitration Ordinance, staying Court proceedings in favour of arbitration. In doing so, Justice Mimmie Chan noted that the principles for granting such a stay were clear and had not been disputed by the parties.

In light of the termination of the parties’ subcontract containing the arbitration clause, the Court reiterated that the arbitration agreement is separable from the underlying contract and confirmed that the matters in dispute between the parties relating to alleged breach, termination of contract and payment fell within the scope of the clause.

Continue reading

Parallel court and arbitration proceedings: English High Court grapples with further case management issues in Panama Canal dispute, clarifying that service of a defence pending appeal on refusal to grant a stay will not constitute “a step towards answering the substantive claim”

In our previous blog post on Autoridad del Canal de Panama v Sacyr, S.A. & Ors, we considered a failed application to stay English court proceedings brought in a dispute in which related ICC arbitration proceedings are also on foot. In a subsequent judgment, the English Court considered further the practical implications of the parallel proceedings. The Court rejected the Consortium’s application for permission to appeal the decision refusing to grant a stay under s9 of the Arbitration Act 1996 and refused to stay the proceedings pending an application to the Court of Appeal for permission to appeal.  In so doing, the Court held that service of a defence in the proceedings by the Consortium would not constitute a “step […] to answer the substantive claim” within the meaning of s9(3) of the Act which would deprive the Court of Appeal of its jurisdiction to grant a stay on appeal. Consequently, it allowed the proceedings to proceed pending the review by the Court of Appeal of the Consortium’s application for permission to appeal.

Autoridad del Canal de Panama v Sacyr, S.A and Others [2017] EWHC 2337 (Comm) Continue reading

English High Court refuses stay of proceedings despite possible overlap with issues subjected to parallel ICC arbitration proceedings.

A consortium of construction companies (the Consortium) was unsuccessful in obtaining a stay of court proceedings pending before the English High Court (the Court), even though parallel related ICC arbitration proceedings are ongoing. The Court rejected the application for a stay under section 9 of the English Arbitration Act 1996 (s9) on the basis that the proceedings, which concerned advance payment guarantees governed by English law and containing exclusive English jurisdiction clauses, concerned a “matter” outside the scope of the arbitration agreements. The Court found further that there was no compelling case for a stay to be granted under its inherent jurisdiction.

This decision illustrates the practical difficulties, costs and delays, caused when parties agree that disputes related to the same construction project are to be determined in different fora.

Autoridad del Canal de Panama v Sacyr SA and others [2017] EWHC 2228 (Comm) Continue reading

Should I stay or should I go? Singapore High Court declines to stay arbitration pending review of jurisdictional ruling

Overview

In a recent ex tempore judgment in the case of Loblaw Companies Limited v Origin & Co Ltd & Another [2017] SGHC 59 ("Loblaw v Origin"), the Singapore High Court declined to exercise its discretion under s10(9) of the International Arbitration Act ("IAA"), and refused to stay an arbitration pending final determination by the Singapore courts of a separate application by Loblaw to review the Tribunal's finding on its jurisdiction.

In its decision the High Court acknowledged the lack of authority on when and how a court shall exercise its discretion under s10(9) of the IAA, finding that "[u]ltimately, very much depends on the unique facts and circumstances of each case". However, an applicant would generally be required to show "special circumstances" justifying a stay, over and above the (alleged) merits of the jurisdictional objection or the obvious risk of wasted time and costs.

Continue reading