Alastair Henderson, Priya Aswani and Kin-Hoe Loi have recently published an article in the Asian Dispute Review (October 2022 edition) on the recent developments in the Brunei courts which underscores the Brunei’s judiciary support for arbitration and the choice of parties in deciding where and how their disputes should be resolved. The article provides an update on these developments and considers what may lie ahead.

Legal Infrastructure

Brunei has a relatively small legal community. Only 36 law firms and 129 lawyers are registered with the Law Society of Brunei Darussalam.

Many of the domestic disputes are either resolved out of court through private unofficial mediation, other informal measures or, where there is a commercial dispute between sophisticated parties, in the country’s courts.  These comprise the Subordinate and Intermediate Courts, both of which have limited civil and criminal jurisdiction, and the High Court, which has unlimited original jurisdiction in civil and criminal cases.  Appeals are heard by the Court of Appeal, which includes a panel of International Judges, and a limited right of further appeal gives recourse to the Judicial Committee of the Privy Council in London in civil matters only, reflecting the country’s English common law heritage.

Despite the general preference for resolving domestic disputes either out of court or through the court system, there is clear legislative and judicial support for arbitration.  As Brunei Darussalam (hereinafter Brunei) continues to diversify its economy to attract foreign investment, it has endeavoured to provide domestic and foreign investors with the option of arbitration, which tends to be relatively efficient, user-friendly and confidential when compared with court litigation.  Notably, the availability of arbitration allows foreign investors to feel that they are able to engage with the government in a fair, neutral and independent environment.  This is particularly relevant because under the constitution and laws of Brunei, the government remains immune from lawsuits before the Brunei courts. Domestic and international contractors and investors entering into transactions with the government are in fact requiring arbitration to be stipulated in the relevant contract as the applicable form of dispute resolution.  Arbitration is, as a result, slowly gaining popularity.  As for cases not involving the government, the common types of dispute that are generally referred to arbitration include those relating to building and construction, infrastructure, investment and joint ventures, and oil and gas.

The statutory framework for arbitration in Brunei is modern, arbitration-friendly and on a par with its larger neighbours around the region.  It has also been a Contracting State to the New York Convention since 1996.

The Arbitration Order 2009 governs domestic arbitrations in Brunei. This modern statute contains provisions similar to those in the 2006 UNCITRAL Model Law (the Model law), including those as to the definition and form of an arbitration agreement and how it can be evidenced. Other Model Law based provisions include those concerning the commencement of arbitral proceedings, the appointment and jurisdiction of arbitral tribunals, arbitral procedure and grounds for challenging and setting aside awards.

The International Arbitration Order 2009 as amended governs Brunei-seated international arbitrations.  It provides that the 1985 version of the Model Law, except for Chapter VIII (Recognition and Enforcement of Awards), shall have the force of law in Brunei.  Recognition and enforcement of awards is provided instead in the main body of the Order in accordance with the New York Convention, which is set out in the Second Schedule of the Order.  Further and with regard to Brunei-seated arbitrations, the International Arbitration Order 2009 incorporates the provisions of the 2006 version of the Model Law on interim measures into the main body of the Order. In particular, it confers powers on the arbitral tribunal to (1) maintain or restore the status quo pending determination of the dispute; (2) prevent a party from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral proceeding itself; (3) provide a means of preserving assets out of which a subsequent award may be satisfied; and (4) preserve evidence that may be relevant and material to the resolution of the dispute.  As previously mentioned, there is clear judicial support for arbitration.  Under the International Arbitration Order 2009 a stay of proceedings is mandatory, unless the court is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed.

Both the international and domestic Arbitration Orders confer powers on the arbitral tribunal, to make orders or give directions for security for (inter alia) costs, discovery of documents and interrogatories, and the giving of evidence by affidavit.  There are some key differences, between the Orders, however. These include the following: (1) the domestic order allows appeals against arbitral awards in some circumstances, while there is no right to appeal under the international Order (although a party may apply to set aside an award on limited grounds); (2) unlike the domestic Order, the international Order provides for a single arbitrator to hear the dispute; and (3) the international order provides for two additional grounds on which an award may be challenged; these are where (i) the making of the award was induced or affected by fraud or corruption; and (ii) a breach of natural justice occurred in connection with the making of the award by which the rights of any party have been prejudiced.

Aside from legislation, there are other elements that make up Brunei’s arbitration related framework.  The Arbitration Association of Brunei Darussalam (AABD) is an independent arbitral body that was established on 18 May 2005 to help Brunei in developing arbitration and in providing advisory support and other assistance in arbitration.  The AABD arranges venues for arbitration hearings and also maintains a list of experienced, reputable and leading arbitrators for parties to choose from where they wish to arbitrate.

In addition, the government established the Brunei Darussalam Arbitration Centre (BDAC) on 24 December 2014 to help promote arbitration and mediation as preferred modes of settling disputes.  The BDAC uses a modified version of the UNCITRAT Arbitration Rules 2010 as its BDAC Arbitration Rules. At the time of writing, there are no publicly available official statistics on BDAC’s caseload, but it is anecdotally reported to be very low.

An arbitration-friendly jurisdiction

Brunei, like many of its neighbours in the region, possesses some of the key ingredients required for it to be considered arbitration-friendly.  It has adopted UNCITRAT based instruments, in terms of both legislation and its institutional arbitration rules.  It is a signatory to the New York Convention and has an arbitration-friendly judiciary.  In addition, recent decisions of the Brunei Court of Appeal show that its judges will adopt and follow the international jurisprudence that has developed around the Model Law and international arbitration standards. Illustrative cases include the following recent decisions.

Pro-Builder Sdn Bhd v Ong Tiong Oh (Pro-Builder)

In a case that was described by the Brunei judiciary as “important as more and more litigants look towards alternative dispute resolution avenues”, the Brunei Court of Appeal recently decided on the issue of whether the court should stay or strike out court proceedings in favour of arbitration where an arbitration clause existed.  Although the case turned on its facts as the Court of Appeal held that the subject arbitration clause had not taken effect at all, the decision makes it clear that the proper procedure is that court proceedings should be stayed in favour of arbitration and not struck out.

The dispute arose out of a construction contract between the parties, pursuant to which the plaintiff was engaged by the defendant to build a pedestrian bridge for the provisional sum of US$769,746.  During the course of the contract there were several variations to the works and the final sum claimed by the plaintiff was US$1,261,316.  This was almost double that of the provisional contract sum.  The defendant, however, only paid US$1,000,000 to the plaintiff, who commenced court proceedings claiming the difference of US$261,316.

The defendant invoked the arbitration clause in the contract and applied to the court to have the proceedings stayed in favour of arbitration.  The relevant part of the arbitration clause stated that “in case any dispute of difference… shall arise… the Superintending Officer shall determine such dispute of difference by a written decision given to the Contractor. The said decision shall be final and binding on the parties unless the Contractor within 14 days after a written request to him by the Contractor [sic] fails to give a decision as aforesaid, such dispute or difference shall be referred to the arbitration.”

A Senior Registrar of the Brunei courts dismissed the defendant’s stay application.  The matter was then appealed to the Intermediate Court, which reversed this decision, struck out the court proceedings, and gave effect to the arbitration clause in the contract by referring the dispute to arbitration.  The plaintiff then appealed to the Court of Appeal, in which the appeal was heard before a panel of international judges, who overturned the decision of the Intermediate Court on the basis of factual errors made by the judge below and reinstated the decision of the Senior Registrar.

The Court of Appeal held that, in deciding whether or not the arbitration clause should operate to refer the matter to arbitration, the court first had to determine if there was indeed a dispute to be referred to arbitration, and only then could the matter be so referred in accordance with the arbitration clause.  The Court of Appeal also held that the appropriate course of action where a dispute was indeed found to exists, was not to have struck out the court proceedings, but to have stayed them, so that the action could be continued in the event that the arbitration could not proceed.

In delivering judgment, Burrell P based his decision on two points.  Firstly, he noted that there was no documentary evidence to support the defendant’s contention that there was a dispute as to the agreed final sum.  On the contrary, the documentation showed that there was but one final determination which required the defendant to pay the plaintiff the sum of US$1,261,316.  Secondly, Burrell P noted that the Superintending Officer had requested additional time to prepare the final account, being an extension to the original 14-day requirement in the arbitration clause.  The plaintiff had replied to the Superintending Officer stating that they had no objection to both the preparation of the final account and the additional time requested.  The defendant, on the other hand, had not replied to the Superintending Officer at all.  This constituted a waiver of the 14-day requirement and the final determination as described in the arbitration clause was therefore completed and had become final and binding.  Crucially, this meant that the parties were barred from referring the dispute to arbitration.

This decision by the Brunei Court of Appeal is significant as it clarifies the proper procedural steps the courts should follow when faced with a valid arbitration clause, in line with similar jurisdictions, viz to stay the court proceedings rather than strike them out.  It also demonstrates that the court will not hesitate to dive into facts at an appellate level to assess whether there is a ‘dispute’ which may in turn determine whether the arbitration clause is in fact operable.  The Court of Appeal examined the factual evidence in detail, before arriving at its decision that the lower court’s finding was flawed and that in fact there was no dispute in the matter which could be referred to arbitration.

Arguably, the Pro Builder case also demonstrates that the Brunei courts will not hesitate to hold that parties have not complied with the provisions of their agreed arbitration clause and that such failure could bar them from referring their dispute to arbitration.  Although it may appear on the face of it, that the Court of Appeal was reluctant to refer the matter to arbitration, in fact the Court of Appeal’s decision reflects quite the opposite.  It demonstrates the Brunei courts’ respect for contractual terms and, in particular, those to which parties have agreed in their arbitration clauses.  It was the defendant’s own wrongdoing or omission that barred it from seeking relief by way of arbitration pursuant to the clause.

Seawise Sdn Bhd v Mashhor General Contractor Sdn Bhd & Anor
(a) High Court

In a case which came to the Brunei High Court on appeal from a decision of a Senior Registrar, the Court decided on what amounted to ‘sufficient reason’ in an application to stay an action under section 6 of the Arbitration Order 2009.  Section 6(2)(a) provides that in an application for a stay of legal proceedings in favour of arbitration, the Court may stay the legal proceedings where, among other requirements, it is satisfied that “there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement”.

Although what amounts to “sufficient reason” under s. 6(2)(a) had never been considered before the Brunei courts, it is identical to the corresponding provision on stay of legal proceedings in s. 6(2)(a) of the Singapore Arbitration Act 2001. Woolley JC, in delivering his judgment, relied on Singaporean jurisprudence, holding that sufficient reason was where “the Plaintiff has to demonstrate that their claim is undisputable, or that there is no genuine dispute, or that the defence is so weak that the claim is undisputable, in which case it would be absurd for the court to stay such an action.”

Similar to the approach the Court of Appeal took in Pro Builder (decided after Seawise), Woolley JC in Seawise considered the evidence in some detail before arriving at his decision that there was “lack of evidence of a serious dispute”, and that the Defendants’ case was weak.  The judge accordingly held that the case should not be referred to arbitration and the legal proceedings need not be stayed.

(b) Court of Appeal

The matter was appealed to the Brunei Court of Appeal, with leave being primarily granted based on an apparent error by the High Court judge in that he had not made a finding as to whether the seat of the arbitration was Brunei or Singapore.

This facet of the dispute arose out of the wording in the parties’ arbitration clause, which provided for arbitration under “English law preferably in Brunei or otherwise in Singapore”.  The defendant had unilaterally selected Singapore as the place of the arbitration and the question then arose as to whether the clause permitted it to do so.  The Court of Appeal held that they were not. The phrase “preferably in Brunei” was held to have indicated an agreed preference between the parties and the words “or otherwise” indicated that the displacement of that preference must come from a reason other than the unilateral whim of one of the parties.  The court therefore held that there had to be a cogent, and agreed, reason for preventing an arbitration in Brunei.

In addition, the Court of Appeal noted, rightly so, that the decision on whether the seat of the arbitration was Brunei or Singapore had a critical bearing on the relevant test to be applied for stay pending arbitration, i.e., whether the test under the International Arbitration Act (Cap 143A) of Singapore or the Brunei Arbitration Order 2009 applied.  Having decided that the test was that under the Brunei Arbitration Order, the Court of Appeal affirmed Woolley JC’s reliance on Singaporean jurisprudence and held that the standard was indeed that the party making the stay application had to satisfy the court that a bona fide prima facie dispute existed.  The Court of Appeal went on to hold that to determine if indeed such a bona fide prima facie dispute existed, it was “incumbent on the judge to consider the contemporaneous documents, or lack of them”. Accordingly, the Court of Appeal examined the evidence in the case in some detail before agreeing with Woolley JC and dismissing the appeal.

The Brunei Court of Appeal decision is similar to the position taken in other Model Law jurisdictions like Hong Kong, where the threshold test to be applied for a stay pending arbitration is “whether there is a prima facie or plainly arguable case” that there is a dispute, which is satisfied “if the evidence is cogent and arguable and not dubious or fanciful”.

The Brunei Court of Appeal’s decision once again demonstrates the Brunei judiciary’s respect for the terms in the arbitration clauses agreed by the parties.  Notably, the Brunei courts will not allow parties to delay the repayment of debts by alleging, without substantive evidence, a ‘dispute’ which needs to be referred to arbitration pursuant to an agreement to arbitrate in the relevant contract.

Looking ahead

Apart from the Court of Appeal decisions discussed above, there have not been any other noteworthy arbitration-related developments in Brunei in the last couple of years.  Despite slow growth, however, Brunei’s trajectory is moving in the right direction.  It has many of the tools it needs to develop its arbitration industry further.  There have also been calls for Brunei to develop itself into a hub for international Islamic finance-related arbitration as it is uniquely placed in this regard.

According to the ICD Thomson Reuters Islamic Finance Development Indicator 2021, Brunei ranked twelfth out of the 135 countries that practise Islamic finance.  The global expansion of Islamic financial institutions and rapid growth of such assets have created a need for appropriate dispute resolution mechanisms for such disputes.  Going to court is often not a viable option, as the secular courts are reluctant to recognise Syariah as a body of law capable of governing commercial transactions.  As a result, such financial institutions have tended to gravitate towards arbitration because they can appoint Syariah scholars as arbitrators.  Arbitration awards can then be enforced through secular courts by way of the New York Convention.  Taking advantage of this unique opportunity can give Brunei an edge and raise its regional status as a dispute resolution hub.

Attempting to raise Brunei’s game in this regard is likely to be met with stiff competition from, in particular, its neighbour Malaysia, which is currently regarded as one of the dispute resolution hubs in South East Asia for Islamic Finance disputes.  Brunei is, however, in an apt position to do so, given that it shares a language and much of their culture, to promote itself as a neutral arbitral seat in disputes between parties from Malaysia and Indonesia.

For further information, please contact Alastair Henderson, Priya Aswani, Kin-Hoe Loi 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.

Alastair Henderson
Alastair Henderson
Managing Partner, Singapore
+65 6868 8058
Priya Aswani
Priya Aswani
Professional Support Lawyer, Singapore
+65 6868 8077
Kin-Hoe Loi
Kin-Hoe Loi
Associate, Kuala Lumpur
+603 2777 5158