Sue And Forfeit Arbitration
The Court of Appeal recently dealt with the issue of whether the commencement of court proceedings in respect of a dispute covered by an arbitration agreement can constitute a repudiatory breach of the arbitration agreement, and what would amount to an acceptance of such repudiation, in the decision of Marty Ltd v Hualon Corp (Malaysia) Sdn Bhd  SGCA 63.
This decision highlights the importance of clear communications between parties when litigation is initiated notwithstanding a subsisting arbitration agreement. Claimant who wish to reserve their position in relation to the arbitration agreement must clearly communicate a satisfactory explanation for commencing litigation, whereas defendants must ensure that their conduct is consistent with the position they wish to take as regards any purported repudiation of the arbitration agreement.
Facts. Briefly, the respondent commenced court proceedings against the appellant in the British Virgin Islands ("BVI"), alleging that the respondent had been wrongfully deprived of shares in another company.
The appellant challenged the jurisdiction of the BVI court on the grounds of forum non conveniens. The appellant’s jurisdictional challenge was dismissed by the BVI court.
Subsequently, the respondent filed its Notice of Arbitration with the SIAC. According to the respondent, it had only discovered the relevant arbitration clause after the conclusion of forum non conveniens application.
At this juncture, the SIAC arbitration proceedings were running in parallel with the BVI court proceedings. The appellant applied to the BVI court for summary judgment in its favour or to strike out the respondent's action.
Thereafter, the respondent applied to the BVI court to stay the proceedings in favour of arbitration.
Meanwhile, the appellant challenged the jurisdiction of the arbitral tribunal upon its constitution. The tribunal disagreed with the appellant and decided that it had jurisdiction over the dispute. The appellant applied to the High Court to challenge the tribunal's decision on jurisdiction. This Court of Appeal decision is in respect of the appeal from the decision of the High Court to dismiss the appellant’s application.
Whether a repudiatory breach of the arbitration agreement was committed . One of the issues before the Court of Appeal was whether the respondent committed a repudiatory breach of the arbitration agreement and, if so, whether the appellant accepted such repudiation.
The Court of Appeal held that the commencement of court proceedings is itself a prima facie repudiation of the arbitration agreement. This is because parties to an arbitration agreement are contractually obliged to refer disputes thereunder to arbitration and can reasonably expect that such disputes would be resolved by arbitration. Therefore, where court proceedings are commenced without any explanation or qualification, and with a view to resolving the dispute on the merits, the defendant is entitled to take the position that the claimant no longer intends to abide by the arbitration clause.
In such circumstances, it would still be open to the claimant to displace the prima facie conclusion (as to repudiation) by furnishing a satisfactory explanation for the commencement of court proceedings. The claimant would have to do that either on the face of the proceedings or by reference to events and correspondence occurring before the court proceedings were commenced. The onus would be on the claimant to show, objectively, that it had no repudiatory intent in commencing litigation.
Ignorance is generally not a satisfactory explanation. The respondent in this case sought to argue that it had furnished an explanation for commencing the litigation in BVI: it did not have actual knowledge of the arbitration clause.
The Court of Appeal rejected the argument based on alleged lack of knowledge. The Court held that even on the assumption that the respondent was unaware of the arbitration clause, the respondent's lack of awareness was not something the appellant could have been aware of. In this regard, the Court emphasised that whether an agreement has been repudiated is an objective inquiry. A repudiatory breach consists of "manifested intentions" of the breaching party that would be apparent to a reasonable person in the position of the innocent party. Here, however, it was not possible for a reasonable person in the position of the appellant to know that the respondent commenced the BVI litigation because it was unaware of the arbitration clause. Therefore, the prima facie conclusion that the respondent had repudiated the arbitration agreement was not displaced.
Whether the repudiatory breach was accepted . To bring the arbitration agreement to an end, the appellant would have had to accept the repudiation.
Given that the acceptance of the repudiation is irrevocable, an innocent party is only taken to accept the repudiatory breach if its words or actions clearly and unequivocally demonstrate so.
The appellant argued that the forum non conveniens application was an acceptance of the repudiation because the forum non conveniens challenge made clear that litigation, not arbitration, was the appropriate dispute resolution mechanism.
The Court of Appeal disagreed, finding that the forum non conveniens application was not sufficiently unequivocal. By taking out the forum non conveniens application, the appellant was challenging the BVI court's jurisdiction; the appellant was not accepting the jurisdiction of any other court. The Court of Appeal observed that if the BVI court declined jurisdiction and the respondent commenced proceedings elsewhere, it would still be open to the appellant to contest the jurisdiction of such court on the basis of the arbitration agreement.
The Court noted that if the appellant had given an undertaking that it would submit to the jurisdiction of another court, such act may constitute an unequivocal acceptance of the repudiation. This was not the case here.
The Court of Appeal, however, found that the summary judgment application was an acceptance of the repudiation because the appellant was, in this regard, requesting the BVI court to determine the dispute on the merits. The summary judgment application clearly engaged the jurisdiction of the BVI court and was an unequivocal acceptance of the respondent's repudiation of the arbitration agreement.
Comments. The Court of Appeal's decision highlights the importance of clear communications between parties. Parties who wish to commence court proceedings in the face of an arbitration clause must have good reasons for doing so. Such reasons must be clearly communicated to the opposing party, while expressly reserving the party’s position in relation to the arbitration agreement. Likewise, when defending court proceedings brought in breach of an arbitration agreement, a party must also ensure that its words and actions clearly and unequivocally communicate its position (ie, whether it intends to accept the repudiation and proceed with litigation or insist on the performance of the arbitration agreement).
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