Crossing the Rubicon in Cross-Border Disputes – When is an arbitration agreement repudiated?
Why this is important?
Can a party to an arbitration agreement commence court action? Would doing so prejudice his rights to commence or continue the arbitration? A recent Singapore Court of Appeal decision suggests that it would.
This piece will share how commercial parties can safeguard their arbitration rights. This will guide parties and corporate counsels to safely and strategically use court applications without prejudice to their arbitration rights and actions in a larger cross-border strategy.
Recent judicial developments
In Marty Limited v Hualon Corporation (Malaysia) Sdn Bhd [2018] SGCA 63 (“Marty”), the question raised before the SGCA was whether there was still a binding arbitration agreement between the parties, notwithstanding that the Respondent, Hualon, had commenced litigation in respect of a dispute which should properly have been arbitrated.
4 points of note from Marty:
- Arbitration agreements can be repudiated, giving the innocent party the right to accept the breach and bring the arbitration agreement to an end.
- Whether an arbitration agreement has been repudiated is an objective inquiry.
- A party wishing to commence litigation in the face of an existing arbitration agreement has to provide satisfactory reasons for commencing litigation other than its rejection of the arbitration agreement. Any explanation provided by the breaching party is only relevant if manifested in its conduct.
- The SGCA opined that the commencement of court proceedings was itself a prima facie repudiation of the arbitration agreement. It is then open to the plaintiff to displace this prima facie conclusion by furnishing an explanation for commencement of the court proceedings.
Brief Facts
In Marty, the Appellant, Marty, was a company incorporated in the BVI while the Respondent, Hualon, was a Malaysian company. The Respondent had, through its receiver and manager, commenced proceedings in BVI courts against the Appellant and the Respondent’s directors (the “BVI Action”) in July 2014. The Respondent later filed a Notice of Arbitration at the Singapore International Arbitration Centre (“SIAC”) to commence arbitration against the Appellant in March 2015. One of the questions on appeal before the SGCA was whether the Respondent had repudiated the arbitration agreement by commencing and taking steps in the BVI Action.
SGCA Holding
To this end, the Court found that the Respondent had shown repudiatory intent when it commenced the BVI Action. The Respondent had contended in its Statement of Claim in the BVI Action that once a receiver was appointed over the Appellant, the Respondent’s directors no longer had authority to act on its behalf. The Court found this pleaded statement to mean that the Respondent had disavowed all documents entered into by its directors after the receiver’s appointment, including the arbitration agreement.
While the Court in Marty did not decide based on its prima facie repudiation analysis (in point 4 above), it articulated the following points of principle:
- Parties who enter into a contract containing an arbitration clause can reasonably expect that disputes arising out of the underlying contract would be resolved by arbitration (and indeed have a contractual obligation to do so).
- Where court proceedings are commenced without an accompanying explanation or qualification and the relief sought will resolve the dispute on the merits, the defending party in the court proceedings is entitled to take the view that the plaintiff no longer intends to abide by the arbitration clause
Applying the above principles, the Court in Marty rejected the Respondent’s argument that it had commenced the BVI Action as it did not have actual knowledge of the arbitration agreement at the time. This was as the Respondent had merely asserted its alleged ignorance of the arbitration agreement. It would have been impossible for a reasonable person in the shoes of the Appellant to have known the Respondent’s reasons for commencing litigation. Accordingly, the Court held that the Respondent had repudiated the arbitration agreement when it commenced the BVI Action.
Following Marty, a party seeking to take out a court application should exercise an abundance of caution in expressing its reasons for doing so. It would be wise for such parties to take precautionary steps in commencing litigation. Amongst others, this could take the form of express carve-outs in the Statement of Claim of any claims falling within the arbitration agreement. On a practical note, such a party may also choose to demonstrate his continued participation in the ongoing arbitration (e.g. by accepting the arbitrator’s power to make procedural orders).
Conclusion
Often, parties may choose to take out tactical court applications to support their ongoing arbitration proceedings or as part of a larger cross-border strategy to apply pressure on their counterparties. In such situations, parties should take express steps on record to preserve their arbitration rights. This is to prevent any ambiguity as to their intention to repudiate their right to arbitrate.
Eversheds Harry Elias has extensive experience advising and successfully representing commercial parties in cross-border disputes resolution.
For further information, contact:
Francis Goh
Head, International Arbitration
Partner, Eversheds Harry Elias
francisgoh@eversheds-harryelias.com
+65 6361 9835
Shaun Leong
Of Counsel, Eversheds Harry Elias
shaunleong@eversheds-harryelias.com
+65 6361 9369
Janice Lee
Foreign Legal Associate, Eversheds Harry Elias
janicelee@eversheds-harryelias.com
+65 6361 9821
Chua Ting Fang
Legal Associate, Eversheds Harry Elias
tingfangchua@eversheds-harryelias.com
+65 6361 9808