2 August, 2016
On 26 October 2015, the Court of Appeal (“CA”) issued its written grounds of decision in the case of Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals1
(“Tomolugen Holdings”). For the purposes of this article, we discuss two of the issues that the CA had considered in Tomolugen Holdings:
(a) where there is an arbitration agreement between two parties, and the dispute between parties relates to a claim of minority oppression under s 216 of the Companies Act, whether such a dispute should be resolved by arbitration as agreed, or whether such a dispute should be resolved in the courts. In other words, the issue was whether a dispute under s 216 of the Companies Act is “arbitrable”; and
(b) where there is an arbitration agreement/agreements between the plaintiM and one or more of the defendants (the “
Set A Defendants”), and no arbitration agreement exists as between the plaintiM and the other defendants (the “Set B Defendants”), and the issues in dispute between the plaintiM and all defendants are the same, and the lawsuit between the plaintiM and the Set A Defendants is stayed in favour of arbitration, whether the law suit between the plaintiM and the Set B Defendants should also be stayed pending the conclusion of the arbitration between the plaintiM and the Set A Defendants.
The law as set out by the CA in Tomolugen Holdings is ground-breaking because it has clariTed certain areas of the law in relation to arbitrability and stay applications. In this article, the authors (who represented one of the successful appellants in the appeal) will focus on the CA’s decision in relation to stay applications, and, examine how Tomolugen Holdings was applied in a recent case that was handled by RHTLaw Taylor Wessing LLP (“the Case Study”).
BACKGROUND TO TOMULUGEN HOLDINGS
The salient facts are as follows. In 2010, the PlaintiM, Silica Investors Limited, became a registered shareholder of about 4.2% of all the shares in the eighth Defendant, a Singapore-incorporated public company limited by shares (the “Company”). The PlaintiM purchased its shares from the second Defendant, Lionsgate Holdings Pte Ltd, pursuant to a share sale agreement and a supplemental agreement entered into between the PlaintiM and the second Defendant to pay by making the necessary payment within seven days of the demand. However, the Defendant failed to make any payment to the PlaintiM within the stipulated period.
The Trst and second Defendants were the majority and controlling shareholders of the Company, while the third to seventh Defendants were current or former directors, shareholders and/or minority shareholders of the Company.
In 2013, the PlaintiF commenced an action under s 216 of the Companies Act against all the Defendants. Thereafter, the second Defendant applied for an order to stay the suit in favour of arbitration under s 6(1) of the International Arbitration Act and/or under the inherent jurisdiction of the Court, in reliance of the arbitration clause in the share sale agreement. The Mrst, third, Mfth and eighth Defendants also Mled applications to stay the suit based on the inherent jurisdiction of the Court, contingent on the success of the second Defendant’s application.
The stay applications were dismissed before an Assistant Registrar (“AR”) and at the High Court (“HC”), but were allowed upon appeal at the CA.
Allowing the appeal, the CA held, inter alia, that:
(a) the Court should only take a prima facie review of the existence and scope of the arbitration agreement and, if the conditions for a grant of a stay are satisMed on a prima facie standard, the Court should grant the stay and defer to the arbitral tribunal in the determination of whether conditions for the grant of a stay are indeed satisMed. In other words, the Court should grant a stay in favour of arbitration if:2
(i) there is a valid arbitration agreement between the parties to the court proceedings;
(ii) the dispute in the court proceedings (or any part thereof) falls within the scope of the arbitration agreement; and
(iii)the arbitration agreement is not null and void, inoperative or incapable of being performed;3
(b) a claim for relief under s 216 of the Companies Act is generally arbitrable unless it engages the following public policy considerations which would rebut the presumption of arbitrability:4
(i) Parliament intended to preclude a particular type of dispute from being arbitrated; or
(ii) it would be contrary to public policy considerations involved to permit the dispute from being resolved by arbitration
c) there was a prima facie case that one of the disputes in the court proceedings against the second Defendant fell within the ambit of the arbitration clause in the share sale agreement, and a stay should therefore be granted in respect of that part of the court proceedings; and
(d) in respect of the remaining part of the court proceedings which are not subject to a mandatory stay, particularly the remaining disputes in the court proceedings against the second Defendant and the court proceedings against the remaining Defendants, the CA similarly granted a stay, using its inherent jurisdiction of case management. In determining whether to grant the case management stay, the CA considered the following factors (which are not exhaustive):
(i) the relationship between the parties to the court proceedings and the parties to the arbitration;
(ii) whether there was a signiIcant overlap between the issues raised in the claims in the court proceedings and those in the
arbitration;
(iii) issue estoppel;
(iv) whether there was a practical risk of inconsistent Indings of fact and law between the two sets of proceedings, given the
overlap between the facts and legal issues;
(v) the risk of delay; and
(vi) costs.
APPLICATION OF TOMOLUGEN HOLDINGS TO THE CASE STUDY
In this part of the article, we illustrate how Tomolugen Holdings may be applied in practice to the Case Study. The facts of the Case Study are as follows. The main contractor of a building and construction project was sued by the employer in arbitration for alleged defects in certain works (the “Alleged Defective Works”) performed by its sub-contractor for the said project.
In turn, the main contractor commenced an action in the HC against its sub-contractor, seeking a claim for contribution and/or indemnity based on the contractual indemnity in the sub-contract and/or a collateral warranty that the defendant had issued in favour of the main contractor and the employer in respect of the employer’s claims for the Alleged Defective Works.
Notwithstanding the presence of an existing arbitration agreement between the main contractor and its sub-contractor, the main contractor had commenced the HC action as the sub-contractor had failed to respond to the main contractor’s notice of arbitration.
The sub-contractor subsequently applied for the HC action to be struck out, on the basis that the main contractor did not have a cause of action against the sub-contractor, as the claim by the employer against the main contractor in arbitration was merely contingent and was not founded on established liability. In the alternative, the sub-contractor asked that the HC action be stayed, pending the resolution of the arbitration between the employer and the main contractor.
In arguing that the HC action be stayed, the sub-contractor relied on a few factors. In particular, the sub-contractor argued that:
(a) allowing the HC action to proceed in tandem with the arbitration may result in inconsistent Qndings, given that the issues in the HC action and the arbitration are likely to be similar;
(b) and the main contractor would create an unsavoury position for itself, where it defends the employer’s claims in the arbitration, and at the same time, prosecute the very same claims it is defending in the
arbitration in the HC action; and
(c) it would be more cost-eSective to stay the HC action, as the HC action is highly contingent on the employer’s claims in the arbitration.
For example, where the arbitral tribunal Qnds no liability against the main contractor, the main contractor’s claims against the sub-contractor would fall away in the HC, and there will be no requirement for the main contractor to prosecute its claims in the HC action any further.
In arriving at his decision, the learned AR cited with approval the key holdings from Tomolugen Holdings, and granted an order for an automatic stay of the HC action pending the resolution of the arbitration between the employer and the main contractor, regardless of the sub-contractor’s indication on whether it is willing to participate in the arbitration.
LESSONS TO LEARN FROM THE CASE STUDY
1. Parties to construction contracts (especially main contractors who may be sandwiched between employers and sub-contractors) should ensure that their arbitration agreements are drafted on a back-to-back basis, and structured in such a way that parties downstream may be brought into an arbitration where it is deemed necessary to do so.
Taking the Case Study as an example, the sub-contractor in question had executed an arbitration agreement with the main
contractor that was separate from the arbitration agreement under the main contract. When a dispute occurred between the
employer and main contractor in respect of the sub-contract works, the main contractor was left with commencing separate
arbitration proceedings against its sub-contractor.
2. In the alternative, main contractors should consider whether litigation, with its attendant ability to bring in third parties or
co-defendants, may be a better alternative to arbitration as the preferred mode of dispute resolution method. In considering
litigation or arbitration as the preferred mode of dispute resolution method, the main contractor will also have to take into account issues of conNdentiality and enforceability.
3. In addition, parties to a construction contract should consider, at the outset, the incorporation of a multi-tiered dispute resolution method. Such a tiered approach to dispute resolution is likely to assist parties in saving costs before commencing formal legal proceedings. This may involve an appropriate mix of compulsory negotiations, management-to-management talk, mediation, litigation-mediation-litigation, or arbitration-mediation-arbitration.
Legal advice should be sought at the outset to arrive at a dispute resolution method that is most appropriate, taking into account the relationship between parties, the potential issues and quantum in dispute, as well as parties’ expectations.
4. Where the sub-contractor refuses to participate in the sub-contract arbitration proceedings, the main contractor should not act in a way that shows that it has repudiated or abandoned the sub-contract arbitration agreement. On the contrary, the main contractor should act to enforce the said arbitration agreement. Otherwise, the main contractor's rights may be affected negatively and/or prejudiced.
1 [2016] 1 SLR 373
2 Tomolugen Holdings at [29].
3 Tomolugen Holdings at [63].
4 Tomolugen Holdings at [76].
For more information, please contact:
Sandra Han, Partner, RHT Taylor Wessing
sandra.han@rhtlawtaylorwessing.com
