30 November, 2018
In the recent decision of Marty Ltd v Hualon Corp (Malaysia) Sdn Bhd (receiver and manager appointed) [2018] SGCA 63 (“Marty”), the Singapore Court of Appeal held that a party who commences court proceedings in breach of an arbitration agreement, would lose the right to switch back to arbitration unless it can show that the court proceedings are not inconsistent with the agreement to arbitrate. Further, the counterparty would lose the right to insist on arbitration once it has accepted the court’s jurisdiction to decide on the merits of the dispute. The case is important as it shows that the Singapore Courts will apply an orthodox contractual approach to determining the outcome of a breach of an arbitration agreement.
Brief background to the case
The dispute concerned the validity of share transfers in a Vietnamese company (the “Vietnam Subsidiary”) from the Vietnam Subsidiary’s Malaysian-incorporated parent, Hualon Corporation (“Hualon”), to Marty Ltd, a BVI company formed by Hualon’s former directors known as the Oung brothers. The share transfers gradually reduced Hualon’s shareholding in the Vietnam Subsidiary from 100% to 0.19%, and rendered Marty Ltd the 99.7% shareholder of the Vietnam Subsidiary. The parties’ respective shareholdings were recorded in the Vietnam Subsidiary’s constitution which was revised in 2008 (the “Revised Charter”). After Hualon went into receivership, Hualon’s Receiver alleged that the Revised Charter and the associated share transfers were invalid.
Hualon then commenced several legal proceedings, which gave rise to the question of whether Hualon intended to resolve the dispute by arbitration or litigation:
Please click on the image to enlarge.
The main questions before the Court of Appeal were whether Hualon had repudiated the arbitration clause by commencing the BVI Action; and if so, whether Marty Ltd had, by the steps it took in the BVI Action, implicitly accepted such repudiation.
Key findings
Arbitration agreement repudiated by commencement of court proceedings
Implied acceptance of repudiation of arbitration agreement only if the innocent party engages the court on the merits of the dispute
Arbitration agreement repudiated by commencement of court proceedings
The Court held that Hualon’s commencement of the BVI Action without any accompanying qualification or explanation, was per se sufficient to show its intention not to abide by the arbitration agreement, and therefore constituted a prima facie repudiation of the arbitration agreement. It would, however, be open for Hualon to displace this prima facie conclusion by explaining how its commencement of court proceedings was objectively not inconsistent with the continued operation of the arbitration agreement.
The cases suggest that the prima facie intention to repudiate an arbitration agreement by commencing court proceedings, might be displaced in the following situations:
Where there is uncertainty as to whether arbitration or litigation is the correct mode of dispute resolution, and in the meantime the claimant commences court proceedings to avoid being subsequently time-barred from doing so1.
Where the court proceedings pursue persons who are not party to the arbitration agreement, but in respect of the same matters falling within the scope of the arbitration agreement2.
Where the claimant expressly carves out of the court proceedings any aspect of the dispute which might fall within the scope of the arbitration agreement3.
Conversely, the Court in Marty found that the following conduct on Hualon’s part did not displace the prima facie intention to repudiate the arbitration agreement:
Hualon’s alleged ignorance of the existence of the arbitration clause. Whether there is an intention to repudiate is assessed objectively, and a reasonable person in Marty Ltd’s position would not have known that Hualon commenced litigation only due to ignorance of the arbitration agreement4.
Hualon’s writing to Marty Ltd to propose a stay of the BVI Action pending the outcome of the arbitration, without actually taking any steps to seek such a stay until after Marty Ltd had accepted the repudiation5.
Practice Tips
A claimant who wishes to commence court proceedings should first consider whether the dispute in question might be covered by an arbitration agreement. Once court proceedings are commenced without any qualification or carve-out for arbitration, it will be difficult to switch back to arbitration, even if the party was unaware of the existence of the arbitration agreement.
A claimant who wishes to pursue court proceedings against persons with whom there is an arbitration agreement but in respect of matters which could arguably fall outside the arbitration agreement; or against parties with whom there is no arbitration agreement but in respect of events which might fall within the scope of an arbitration agreement, should make clear in the court proceedings (such as through express language in its Statement of Claim) that any issues between the parties to the arbitration agreement and issues which might fall within the scope of the arbitration, are excluded from determination in the court proceedings.
If a claimant discovers that there is an obligation to arbitrate only after having commenced court proceedings, the claimant can resume performance of the arbitration agreement as long as the respondent has not yet accepted the repudiation. The claimant can do so by commencing arbitration and at the same time applying to stay the court proceedings pending the outcome of the arbitration. Once the claimant makes clear that it is resuming performance of the arbitration agreement, the respondent will no longer be able to accept the repudiation and thereby challenge the Tribunal’s jurisdiction.
Implied acceptance of repudiation of arbitration agreement only if the innocent party engages the court on the merits of the dispute
Marty Ltd had not expressly accepted Hualon’s repudiation of the arbitration agreement, such as by sending a letter to Hualon clearly stating that it was prepared to have the dispute resolved by litigation instead of arbitration.
In the absence of any such express acceptance, the Court had to consider whether Marty Ltd’s conduct constituted implied acceptance of the repudiation.
The Court held that Marty Ltd’s Forum Challenge did not constitute acceptance of the repudiation of the arbitration agreement, because it was not sufficiently clear and unequivocal in communicating an intention to resolve the dispute by litigation instead of arbitration. By the Forum Challenge, Marty Ltd disputed rather than accepted the court’s jurisdiction to hear the dispute. The Court’s view would have been different if Marty Ltd had, whilst bringing its Forum Challenge, gone further and submitted to, or given an undertaking to submit to, the jurisdiction of another court (such as the Malaysia or Vietnam courts) – the Court held that such an action might have constituted an acceptance of the repudiation6.
On the other hand, the Court found that Marty Ltd had accepted the repudiation by applying for summary judgment in the BVI Action, as such an action displayed an intention for the BVI courts to determine the dispute on the merits.
An interesting question is whether Marty Ltd’s application to strike out the BVI Action on the basis of time-bar or non-payment of security would likewise have amounted to acceptance of a repudiation of an arbitration agreement (the Court in Marty did not have to decide on the point). Such applications, if made in Singapore court proceedings, are likely to amount to a “step in the proceedings” such that the applicant would lose the ability to stay the court proceedings in favour of arbitration under the Singapore Arbitration Act7, but the Court in Marty noted that a slightly different (and arguably more stringent) test applies to determining whether the party has accepted the repudiation of an agreement to arbitrate – the focus here is on whether the party clearly and unequivocally communicated its desire to have the dispute determined by litigation instead of arbitration. Based on this more stringent test, it might be that applications to strike out based on purely procedural grounds which do not engage the court on the merits of the dispute, might not be taken as an acceptance to resolve the dispute by litigation instead of arbitration.
Practice Tips
Where a party (the breaching party) commences court proceedings in breach of an arbitration agreement, the other party (the innocent party) can either allow the dispute to be resolved by the court proceedings (i.e., accept the repudiation of the arbitration agreement); or it can insist on the dispute being resolved by arbitration (i.e., affirming the arbitration agreement). The innocent party’s choice is irrevocable once it has been communicated to the breaching party.
The clearest way to accept a repudiatory breach is to do so expressly, i.e., by issuing a letter to the breaching party noting the repudiation and stating that the repudiation is accepted.
The innocent party must carefully consider the implications of any defensive steps it takes in the (wrongly commenced) court proceedings, as such steps could be taken as an affirmation of those court proceedings. For example, an innocent party who seeks to bring an end to the litigation by way of an application for summary judgment or striking out on the merits, is likely to be treated as having accepted the resolution of the dispute by litigation, and will be unable to insist on arbitration thereafter.
It is possible for the repudiation of an arbitration agreement to be accepted after the arbitration has commenced, resulting in the Tribunal losing its jurisdiction in the midst of the arbitration8. In Marty for example, the repudiation was only accepted when Marty Ltd sought summary judgment in the BVI Action two weeks after the arbitration was commenced. However, the innocent party should not assume that it is entitled to continue engaging in the arbitration proceedings, and only accept the repudiation subsequently (e.g., if the arbitral proceedings develop unfavourably), so as to retain the alternative of relief in court. The innocent party’s engagement in the arbitral proceedings (other than to challenge the Tribunal’s jurisdiction) would likely be taken as a decision to affirm the arbitration agreement, resulting its losing the right to later terminate the arbitration agreement and switch to litigation.
For further information, please contact:
Melvin Sng , Partner, Linklaters
melvin.sng@linklaters.com
1 Lloyd and Others v Wright [1983] 1 QB 1065, cited at Marty at [64]
2 BEA Hotels N V v Bellway LLC [2007] EWHC 1363
3 BEA Hotels N V v Bellway LLC [2007] EWHC 1363
4 Marty at [70]
5 Marty at [92]
6 Marty at [84]-[87]
7 See Carona Holdings Pte Ltd and others v Go Go Delicacy Pte Ltd [2008] 4 SLR(R) 460 at [93] on the requirements of a stay under s 6(1) of the Arbitration Act
8 Marty at [91]
