Singapore Court of Appeal: Whether Commencement of Parallel Court Proceedings may amount to Repudiation of Arbitration Agreement

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In Marty Ltd v Hualon Corp (Malaysia) Sdn Bhd (receiver and manager appointed) [2018] SGCA 63, the Singapore Court of Appeal (“COA”) dealt with the issue of whether the commencement of court proceedings by a party, in breach of arbitration agreement, would amount to repudiation of the arbitration agreement by such party, and thus, whether such breaching  party can be precluded from invoking arbitration if the repudiation was accepted by the non-breaching party. The COA inter alia held that commencement of court proceedings per se by a party who is subject to an arbitration agreement may prima facie amount to repudiation of the arbitration agreement in the absence of any explanation for commencement of the court proceedings which can show objectively that it had no intention to repudiate the arbitration agreement in doing so. Detailed case analysis given below

Factual Matrix

The Respondent (“Hualon”) was a Malaysian company which was owned by two brothers (“Oung brothers”). It has incorporated a wholly owned subsidiary company in Vietnam (“Vietnamese Subsidiary”). Later, Hualon sold its stake in the Vietnamese Subsidiary to two related companies. The financial conditions of Hualon deteriorated and as a result a Receiver was appointed to take control of it.

The Appellant (“Marty”) was a British Virgin Island (“BVI”) company owned by Oung brothers. The two related companies which effectively held the Vietnamese Subsidiary, transferred their stake to Oung brothers first in 2007 and subsequently in 2008 (“Share Transfers”). In the above backdrop, it was the case of Hualon that the Share Transfers were invalid and that its ownership of the Vietnamese Subsidiary was unlawfully diluted to almost nothing.

Subsequently, the Receiver of Hualon commissioned a due diligence and it was found that the Hualon’s authorized representative was not authorized to act for the Share Transfers in question. Based on the due diligence report, the Receiver initiated legal proceedings in BVI courts. Hualon obtained an interim injunction restraining Marty from disposing of its interest in the Vietnam Subsidiary. Marty challenged the jurisdiction of BVI court in those proceedings which was later rejected by the said court.

Thereafter, the Receiver of Hualon discovered that there exists an arbitration clause amongst parties and invoked arbitration in SIAC. Hualon wrote a letter to Marty, stating that although it had challenged the validity of the underlying contract, Hualon accepts the existence and validity of, the arbitration clause, and would be seeking to rely on it. In the same letter, the Hualon proposed that the BVI proceedings be stayed pending the outcome of the arbitration. However, Hualon took no concrete steps in this regard instead Hualon applied to the BVI court to stay the BVI action in favour of arbitration.

Marty challenged the jurisdiction of the Arbitrator on the ground that Hualon had waived its right to refer the dispute to arbitration in Singapore or had repudiated the arbitration agreement by its actions in a foreign court. This challenge was dismissed by the Arbitral Tribunal and Marty challenged this decision of the Arbitral Tribunal before the High Court of Singapore. The Ld. Single Judge of the High Court found himself in agreement with the Arbitral Tribunal and dismissed Marty’s application. The present proceedings culminated as an appeal from this decision of the Ld. Single Judge.

Parties’ Contentions

Marty contented that the Respondent cannot approbate and reprobate the agreement between the parties at the same time i.e. it cannot rely on arbitration clause on one hand while challenging the validity of underlying contract on the other. Further, Marty contended that there is no reason in principle or authority why waiver by election should only be available to the innocent party. Rather, the doctrine should be applicable whenever any party is faced with choosing between two inconsistent courses of action. Lastly, it was argued from Marty that Hualon committed a repudiatory breach of the arbitration clause when it pursued litigation in the BVI courts for many months without reserving its right to arbitrate.

Hualon premised its arguments on the reasoning given by the Ld. Single Judge.  Hualon contended that it is no longer challenging the validity of the underlying contract, Hualon was the party in breach of the arbitration clause and in that sense the wrong-doer, whereas only an innocent party could waive its rights by election and that Hualon had not committed a repudiatory breach of the arbitration clause by commencing litigation because Hualon was not aware of the arbitration clause and therefore, did not have the required intent.

Issue

Whether Hualon committed a repudiatory breach of the arbitration clause that Marty accepted?

Applicable Legal Principles

Section 6(1) of the Arbitration Act (Cap 10, 2002 Rev Ed)

“Enforcement of international arbitration agreement

6—(1)  Notwithstanding Article 8 of the Model Law, where any party to an arbitration agreement to which this Act applies institutes any proceedings in any court against any other party to the agreement in respect of any matter which is the subject of the agreement, any party to the agreement may, at any time after appearance and before delivering any pleading or taking any other step in the proceedings, apply to that court to stay the proceedings so far as the proceedings relate to that matter.”

Judgement

The COA held as under:

Repudiation

  • That the Hualon cannot rely on the arbitration clause while challenging the validity of the underlying contract as a whole for lack of authority. The Court further held that although the principle of separability generally protects an arbitration clause from challenges to the underlying contract, it cannot shield the arbitration clause from a challenge that affects the underlying contract as a whole. One such example is an allegation that the entire contract was entered into without authority, because this amounts to saying that each and every clause within the contract, including the arbitration clause, was entered into without authority.
  • That although the commencement of the BVI Action alone was not sufficient to amount to repudiation and Hualon had commenced and maintained the BVI Action without qualification, it is strongly arguable that the commencement of court proceedings is itself a prima facie repudiation of the arbitration agreement.
    • This is because 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.
    • Thus, 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 party who commenced those proceedings (“the claimant”) no longer intends to abide by the arbitration clause.
    • It would, however, still be open to the claimant to displace this prima facie conclusion by furnishing an explanation for commencement of the court proceedings, either on the face of the proceedings themselves or by reference to events and correspondence occurring before the proceedings started which showed objectively that it had no repudiatory intent in doing so.
    • But in the absence of any explanation or qualification, the commencement of court proceedings in the face of an arbitration clause is sufficient to constitute a prima facie repudiation of the arbitration agreement.
  • Where a party has two methods of dispute resolution open to him, his reliance on one to resolve a dispute on the merits signifies that he does not intend to rely on the other to resolve the same dispute. [relying on Sadruddin Hashwani v Nurdin Jivraj [2015] EW HC 998 (Comm) and taking divergent view from Rederi Kommanditselskaabet Merc-Scandia IV v Couniniotis SA [1980] 2 Lloyd’s Rep 183]
  • Applying this approach to the present case, the Court found that the Hualon was bound to arbitrate all disputes arising from the underlying contract. Thus, when such a dispute arose, a reasonable person in the Marty’s position would have expected Hualon to either commence arbitration proceedings, or commence court proceedings but at the same time make clear its position in relation to the arbitration. For instance, Hualon could have stated that it acknowledged the obligation to arbitrate but took the view that the dispute did not fall within the scope of arbitration clause, or that it only commenced court proceedings for ancillary relief in support of arbitration. Hualon did not do so but instead, in the BVI Action, sought substantive relief that would have resolved the dispute. Faced with the BVI Action, a reasonable person in the Marty’s position would have concluded that the Hualon no longer intended to abide by the arbitration clause of the underlying contract.
  • That where a party to the arbitration agreement disavows the entire contract that contains the arbitration clause, it can be inferred that the intention was also to disavow the arbitration agreement specifically (relying on Downing v Al Tameer Establishment and another [2002] 2 All ER (Comm) 545)
  • That in the present case, the reason for Hualon’s conduct (of initiating arbitration later) was a purely subjective one, i.e., its own ignorance, and was not communicated to the Marty. Thus, there would have been no basis for a reasonable person in Marty’s position to conclude that despite starting the BVI Action and in effect disavowing the contract that contained the arbitration clause, the Hualon did not intend to abandon its right to arbitrate.
  • That a party who is bound by the underlying contract must also be taken to have actual knowledge of the contents of the same including any arbitration clause contained therein.

Acceptance of Repudiation

  • That the innocent party, in this case the Marty, may elect to accept the repudiation and bring the contract to an end, or it may choose to reject the repudiation and affirm the contract. The decision to accept the repudiation is irrevocable; consequently, an innocent party is only taken to have accepted the repudiation if its words or actions clearly and unequivocally demonstrate this (The Law of Contract in Singapore at para 17.223). These principles apply equally to arbitration agreements which, in relation to repudiation, are no different from other species of contract.
  • That the Marty’s contention that it had accepted the Hualon’s repudiation by challenging the BVI court’s jurisdiction is wrong because
    • a forum non conveniens application is, in general, too equivocal to constitute acceptance of a repudiation of an arbitration agreement. Since the breach lies in the commencement of litigation, the acceptance of the breach must lie in accepting the court’s jurisdiction and engaging it on the merits. However, the very nature of a jurisdictional challenge based on forum non conveniens is the opposite: the applicant disputes rather than accepts the chosen court’s jurisdiction to hear the case.
    • Hualon had simply stated that Malaysia and Vietnam were possible fora without committing to submit to the jurisdiction of either court. The result was that even if the BVI court had declined jurisdiction and the respondent had initiated proceedings in Malaysia or Vietnam, Hualon would still have been free to contest jurisdiction in the chosen forum on the basis of the arbitration agreement.
  • However, Marty’s had accepted the repudiation by its summary judgment application in the BVI Action which it served on the Hualon.

Waiver

  • While waiver by election typically involves a response by the “waiving” party to the other party’s breach of contract, this need not always be the case.
  • A waiver by election can operate so long as a state of affairs arises in which a party becomes entitled to exercise a right, whether because the terms of a contract give it that right or the right arises by operation of the general law (see The Law of Contract in Singapore at para 18.089). Such a right need not always be exercisable upon breach.
  • Thus, it is not entirely accurate to say that waiver by election only applies to the “innocent party”, since there may well be no breaching or innocent party in some situations.
  • Where, however, a party to an arbitration agreement breaches that agreement by starting court proceedings instead of arbitration in respect of a dispute covered by the agreement, the waiver analysis may not be applicable since one has to look to the agreement itself to discern the effect or potential effect of the breach.
  • If, as would generally be the case, the breach operates as a repudiation and that repudiation has been accepted, as here, then considerations of waiver become wholly academic.
  • It is only if the breach does not amount to a repudiation or the repudiation is not accepted that waiver may become relevant (and in that case only if the other party does not apply for the action to be stayed and the enforcement of the agreement to arbitrate, which would be the usual reaction of the objecting party).

My Comment

In this case, the Singapore COA digressed itself from some of the English Authorities (Rederi Kommanditselskaabet Merc-Scandia IV v Couniniotis SA (supra) and others which relied them around the world) which supports the notion that the commencement of court proceedings per se is insufficient to amount to the repudiation of an arbitration agreement.

By virtue of this dicta, following conclusions can be drawn

  • When a party breaches an arbitration agreement and initiates court proceedings, the innocent party has two options i.e. to either join the court proceedings (i.e. accept the repudiation of arbitration agreement); or pursue arbitration in accordance with the arbitration agreement. Once communicated to the breaching, this choice is irrevocable.
  • Further, the breaching party is expected to either furnish an explanation for commencement of the court proceedings, either on the face of the proceedings themselves or by reference to events and correspondence occurring before the proceedings started which showed objectively that it had no repudiatory intent in doing so. But in the absence of any explanation or qualification, the commencement of court proceedings in the face of an arbitration clause is sufficient to constitute a prima facie repudiation of the arbitration agreement. Thus, the burden of proof is on the breaching party to prove its lack of intent to abandon the arbitration agreement.
  • Although taking a step in the Court proceedings on the part of innocent party would clearly evince an unequivocal acceptance of the repudiation, the converse is not always true i.e. not taking part in Court proceeding would not always amount to acceptance of repudiation by the innocent party.
  • The clearest way of accepting the repudiation on the part of innocent party is to send a clearly worded letter to the breaching party noting that the latter had repudiated the arbitration agreement and purporting to accept the breach.

Thus, in light of this ruling, in case there is an arbitration agreement between the parties and a party seeks interim measures from the Court, then it must communicate its clear and unequivocal intent of upholding the arbitration agreement to the other party.

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