Did the Striking Out application amount to taking steps in the proceedings? / Did the non-payment of deposits render the arbitration agreement inoperative?
Overview
If a party initiates court proceedings with a substantive claim that falls under an arbitration agreement, the court is obligated to issue a stay order on such proceedings and direct the parties to arbitration. This is unless the court determines that the agreement is null and void, inoperative, or incapable of being performed. The authority for the court's power to order a stay is derived from section 10(1) of the Arbitration Act 2005 ("Arbitration Act"). The relevant provision is reproduced below for ease of reference;
“ s.10(1) A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”
[emphasis added]
Therefore, in order for a stay to be granted, the court must be satisfied that;
a) There subsists an agreement to arbitrate;
b) The party seeking for a stay has not taken any other steps in the proceedings; and
c) The arbitration agreement is not;
i) Null and void;
ii) Inoperative; or
iii) Incapable of being performed.
In a situation where one party files an application for a striking out or a stay under section 10(1) of the Arbitration Act, and the opposing party contends that conditions (b) and (c)(ii) have not been satisfied, the resolution of this dispute would likely involve a thorough examination of the specific facts and circumstances surrounding the case. This issue was a point of contention in the recent Court of Appeal case of JKP Sdn Bhd v Anas Construction Sdn Bhd.
Before delving into the case's details, it is essential to emphasize that the subsequent legal analysis and the resulting opinion are highly dependent on specific facts and circumstances. Therefore, the same should not be construed as establishing broad principles governing the issue under consideration.
Brief facts of JKP Sdn Bhd v Anas Construction Sdn Bhd
Background
Anas was appointed by JKP as the main contractor pursuant to a construction project in Penang. The parties entered into a construction contract wherein all disputes arising from and/or related to the contract shall be referred to and be determined by arbitration.
A dispute subsequently arose between the Parties.
JKP initially initiated a civil suit against Anas in the Penang High Court but later withdrew it in response to Anas's objection, which was based on the existence of an arbitration agreement. It is noteworthy that the parties did not dispute the existence of the arbitration agreement, and this was not a point of contention in the subsequent legal proceedings outlined below.
Proceedings at Arbitration
JKP subsequently initiated an arbitration action based on the same subject matter of dispute. The arbitration was subject to AIAC Arbitration Rules 2018 (“Arbitration Rules”) as per the terms contained in the arbitration agreement in the construction contract. Both parties actively participated in the proceedings and complied with the directions as seen below;
a) Both parties paid their respective portion of the 1st Provisional Advance Deposit to AIAC;
b) JKP filed its Points of Claim;
c) Anas filed an application to include Strong Mixed Concrete Sdn Bhd (SMC) as a third party in the arbitration proceedings;
d) Based on the affidavits and submissions filed, SMC was included as a party to the proceedings;
e) Anas then filed its Points of Reply and Counterclaim against JKP and indemnity against SMC.
Subsequently, a 2nd Provisional Advance Deposit was requested by the Arbitrator where Anas took the position that it would not pay the same. Given Anas’s outright refusal to pay its portion for the 2nd Provisional Advance Deposit, JKP faced two main options moving forward;
a) Exercise its right to pay the 2nd Provisional Advance Deposit on Anas’s behalf as provided for under Rules 14(3) and/or 14(7) of the Arbitration Rules; or
b) Continue with its claim against Anas without paying Anas’s portion of the 2nd Provisional Advance Deposit whereby Anas will only be entitled to defend its claim without being allowed to proceed with its counterclaim against JKP and indemnity claims against SMC (as per the directions dated 23.8.2021 given by the arbitrator).
Notwithstanding the above, JKP sought to terminate the entire arbitration on the basis of Anas’s wilful refusal to pay its portion of the 2nd Provisional Advance Deposit. JKP asserts that the arbitration agreement had become inoperative due to Anas’s breach.
On 25.10.2021, the arbitrator terminated the entire arbitration proceedings based on JKP’s request.
Proceedings at the High Court & Court of Appeal
On 16.2.2022, JKP initiated a civil suit against Anas at the Penang High Court. Anas filed a Memorandum of Appearance on 28.2.2022 and informed JKP of their objection to the commencement of suit due to the presence of an arbitration agreement. Anas subsequently filed an application to strike out or stay the civil suit.
At the hearing of Anas’s application, the High Court was tasked to determine two main issues;
a) Did Anas’s application for striking out constitute a step in the proceedings? (in other words, did Anas submit to the jurisdiction of the High Court by virtue of its application to strike out?); and
b) Did the arbitration agreement become inoperative as a result of the parties’ respective conduct?
Pursuant to a thorough analysis, the High Court found both issues in the negative. Upon appeal, the High Court decision was overturned on both grounds and found in favour of JKP. The salient details of the High Court and Court of Appeal decisions will be discussed below.
The forthcoming legal examination will initially address point (a) before proceeding to point (b).
Overview on the general principles for ‘taking steps in the proceedings’
Before delving into the Courts’ findings, it is imperative to first outline the principles for taking steps in the proceedings in the context of s.10(1) of the Arbitration Act.
Upon the establishment of an arbitration agreement, it becomes mandatory to exclusively address all associated disputes through the arbitration process. However, there are instances where one party, despite being bound by such an agreement, may disregard this obligation and instead choose to initiate legal proceedings in court rather than opting for arbitration. If the opposing party actively engages in the court proceedings, they may inadvertently fall into a legal pitfall, as such actions are considered a waiver of their right to resolve the dispute through arbitration. This inadvertently signifies an acknowledgment of the court's jurisdiction over arbitration and bars the party from subsequently seeking a stay of proceedings. This concept is commonly referred to as "taking steps in the proceedings."
When examining the principles taking step in the proceedings, it is essential to refer to the legal precedent established by the Federal Court in the case of Sanwell[1]. The court's ruling provides a foundational understanding that can be summarized as follows;
“(a) the entry of appearance is the mandatory procedural step to be taken by an applicant in proceedings in the High Court. It is a step in the proceedings as required by the RHC. However, it is a permitted, excluded or an exempted step in the proceedings that does not amount to a step in the proceedings within the meaning of the s 6 of the Act which would prejudice the applicant’s right to apply for a stay of the proceedings;
(b) if the applicant has served any pleadings, then he has clearly taken a step in the proceedings within the meaning of s 6 of the Act. He has thereby elected to proceed with the proceedings in the High Court and would be barred from applying for a stay of proceedings to refer the dispute to arbitration;
(c) if he has taken any other action in the proceedings (other than steps (a) or (b) abovementioned), the court will then have to consider whether such action amounts to a step in the proceedings by determining the nature of the action and whether or not it indicates an unequivocal intention to proceed with the suit and to abandon the right to have the dispute disposed off by arbitration.”
[emphasis added]
The prevailing principles for taking steps in the proceedings, derived from various authorities pre and post Sanwell precedent, can be summarized as follows- so long as a clear and unequivocal indication of an intention not to abandon the right to have the dispute determined by arbitration can be made out, whether through some sort of qualification or reservation, it would be difficult to assert that the party has taken ‘steps in the proceeding’. [2]
While the above encapsulates the general principle, its applicability is contingent on the specific facts presented in each case.
Issue A: Did Anas’s application for striking out constitute a step in the proceedings?
Brief Summary of the High Court’s Findings
In response to JKP's re-initiation of the lawsuit at the Penang High Court, Anas submitted an application to strike it out or alternatively stay the proceedings. JKP however argued that Anas had taken steps in the proceedings as evidenced by the filing of the striking out application.
The High Court, rejecting JKP’s argument, concluded that Anas had not taken steps in the proceedings. The Court, in adopting the precedents established by the cases of Sanwell[3] and Comos[4], held that Anas unequivocally demonstrated an intention not to abandon the right to have the dispute settled by arbitration, relying on four key grounds:
a) JKP withdrew the initial civil suit after Anas’s express objection, citing the existence of an arbitration agreement (1st ground);
b) Anas actively participated in the arbitration proceedings until JKP sought termination (2nd ground);
c) Anas's solicitor's covering letter to the Memorandum of Appearance expressly objected to the commencement of the second civil suit, emphasizing that the arbitral forum was the appropriate venue for dispute resolution (3rd ground); and
d) Anas's application for striking out or alternatively staying proceedings pending arbitration was procedural and preliminary, focusing solely on the argument that the Court lacked jurisdiction due to the arbitration agreement (4th ground).
The High Court determined that, after a thorough examination of the affidavit, Anas primarily grounded the striking-out application on the non-compliance of the arbitration clause in the contract, which necessitates dispute resolution through arbitration.
Taking into account Anas's explicit reservation of rights and the totality of presented evidence, the Court found that the affidavit in support of the striking-out application consistently contested the court's jurisdiction with an unequivocal intention not to proceed with the present suit or abandon their right to have the dispute resolved through arbitration.
The High Court concluded that the evidence did not necessitate an examination of merits but sought to strike off the suit as an abuse of process (which is procedural in nature). Taking into account the sequence of events and the Anas’s explicit reservation of rights, the Court concluded that the application could not be considered as taking steps in the proceedings.
Brief Summary of the Court of Appeal’s Findings
Intriguingly, the Court of Appeal did not extensively focus or place much emphasis on these initial three grounds nor cited the cases of Sanwell [5] and Comos [6] in its extensive judgment. Instead, it placed emphasis on the fourth ground, concluding that Anas had taken steps in the proceedings by filing its Striking Out Application, drawing from the precedent set in the cases of L Capital Jones [7] and Kebabangan Petroleum[8].
According to the Court of Appeal’s rationale, 'taking any other steps in the proceedings' appears to be synonymous with filing an application that necessitates determining the merits of the case. The Court of Appeal suggested that the act of filing a striking-out application inherently invoked the court's jurisdiction to deliberate on the substance of the plaintiff's claim.
Analysis & Opinion
The first three grounds as highlighted by the High Court, undeniably showcase Anas's unequivocal indication and reservation not to abandon its right to have the dispute resolved through arbitration. This perspective is consistent with the observation made by the Court in the case of Comos[9]. Nonetheless, the pivotal inquiry for a thorough analysis is to ascertain whether the Striking Out application per se resulted in adverse consequences for Anas’s case.
To initiate the analysis, it is essential to first scrutinize the cases of Kebabangan Petroleum[10] and L Capital Jones Ltd[11], which can be distinguished from the current case due to the fundamental mistakes made by the parties involved in both instances;
a) Firstly, in both cases, parties had framed their striking out application on merits. In the case of Kebabangan Petroleum, the applicant filed their striking out application under the specific limb of O 18 r(1)(b), while the applicant in L Capital Jones Ltd filed their striking out application in a cumulative manner, thus inviting the Court to investigate the merits of the case;
b) Secondly, despite asserting that the matter should be stayed pending arbitration, the evidence indicated that the merits of the claim were extensively expounded in the respective affidavits supporting these applications; and
c) Thirdly, as the striking-out application was filed as a primary relief and not as a stay pending arbitration, this approach was deemed as a direct invitation for the court to first adjudicate on the matter on merits before scrutinizing the application for stay.
In contrast to the aforementioned cases, a perusal of the High Court judgment will show that Anas's application for striking out was presented under the four limbs of O18 r 19(1) of the Rules of Court 2012 in a disjunctive manner, contrary to the Court of Appeal's observation of a cumulative approach (as seen at paragraphs 3, 14, 18 and 100 of the judgment). It remains uncertain whether the Court of Appeal's inaccurate observation regarding the cumulative nature of the application influenced its final decision. Consequently, comments on this point will be reserved.
Nevertheless, it is apparent that presenting an application for striking out in a disjunctive manner does not prohibit the applicant from relying on a single ground or on multiple grounds. The determination of this possibility depends entirely on the affidavit evidence submitted[12].
While Anas presented their striking out on the four limbs of O 18 r 19(1) of the Rules of Court 2012 in a disjunctive manner, a closer examination of the affidavit is absolutely necessary to identify the specific limb Anas relied upon[13]. This scrutiny was of course conducted in the High Court.
Was this the right approach?
The approach certainly aligns with the viewpoints expressed in the Comos[14] case, where an application centered on procedural grounds rather than the merits would not be considered as taking steps in the proceedings;
“Whether an action amounts to a step in the proceedings is determined by the nature of the action and whether it indicates an unequivocal intention to proceed with the suit and to abandon the right to refer the dispute to arbitration. An application is not a step in the proceedings, if it does not express the willingness of the defendant to go along with the determination of the courts instead of arbitration. A defendant who has specifically stated in the application or supporting affidavit that he intends to seek a stay is not estopped from asserting his right to invoke arbitration. An application, which is made in the event that the specific application for a stay is unsuccessful, is not a step in the proceeding.”
[emphasis added]
If one were to scrutinize the nuances of the Comos[15] decision, it becomes apparent that the Court did not delineate the specific type of application nor identify those that were deemed non-applicable. The Court simply referred to the term "application." Consequently, the crucial aspect to bear in mind is that, as long as there exists a clear and explicit reservation signifying the applicant's intent not to submit to the court's jurisdiction or relinquish their right to have the claim resolved through arbitration, such an application will not be considered a procedural step in any capacity within the proceedings.
Neither court referenced the following cases; nevertheless, the principles articulated in them offer some clarity on addressing issues related to taking steps in the proceedings.
In the case of Felcra Properties[16], the Plaintiff filed claims against the Defendant, subject to an arbitration agreement, in the Sessions Court. The Defendant, after obtaining an extension to file a defence, submitted a defence asserting the right to seek a stay pending arbitration. Additionally, the Defendant applied to strike out the suit, arguing it should be resolved through arbitration, and simultaneously filed an application for a stay of proceedings pending arbitration. The Sessions Court Judge dismissed the application for a stay, stating that the Defendant, by its prior actions, had waived the right to seek a stay under section 10(1) of the Arbitration Act.
On appeal, the High Court allowed the Defendant’s appeal and overturned the Sessions Court’s judgment. Applying the principles enunciated in the case of Comos[17], Justice Nantha Balan (as His Lordship then was) stated;
“In my view, the proper approach in determining the question as to whether the defendant has taken a "step in the proceeding" is to ask whether the defendant had by its conduct, evinced an intention to unequivocally abandon its right to pursue arbitration. Put in another way, the relevant question is whether the defendant expressed its willingness to go along with the determination by the courts and to abandon arbitration.”
[emphasis added]
His Lordship went on to make the following critical observations;
“[21] What is critical for purposes of s 10(1) of the Arbitration Act 2005 is to determine whether the defendant had abandoned the right to proceed to arbitration or whether the defendant was desirous of having the matter determined by the court.
[22] In my view, although the earlier cases seem to set a low threshold for declining a stay on the basis that a mere request for extension of time to file defence is enough to deprive a defendant of the right to apply for a stay under s 10(1) of the Arbitration Act 2005, the correct approach in my view is to ask whether in all the circumstances, the defendant has evinced an intention to abandon the right to have the dispute determined via arbitration.
[23] On that analysis, it is clear in the present case that the defendant had no intention whatsoever to abandon arbitration and it had clearly and unambiguously reserved its position to refer the matter to arbitration as per para 1 of the defence filed on 26 December 2017 and as per para (f)(i) of encl 7 (the striking out application).
[24] Plainly, the defendant was at all times desirous of taking the dispute to arbitration and it cannot be said that the defendant had in any way or manner, "abandoned" its contractual right under cl 25 of the underlying contract, to refer the dispute to arbitration.
[25] Although it is rather odd that the defendant should be filing a striking out application, here the peculiarity is that in the striking out application itself, the defendant has taken (albeit as an alternative ground) the stand that the suit was an abuse of process, as the dispute between the parties should be determined via arbitration."
[emphasis added]
In the Hong Kong case of Sam Yu[18], the Court considered the issue of what constituted a step in the proceedings. Although the plaintiff tried to mount the argument that any action on the part of the defendant, aside from acknowledging service and applying for a stay would constitute a step in the proceedings, the Judge therein was not persuaded, and recognised this would lead to severe practical consequences. The rationale of the court in reasoning what a “step” in an action held;
“It is now settled law that the court cannot reopen an architect’s certificate. If the application to stay fails because, perhaps inadvertently, a defendant has done something which constitutes a step in the proceedings, he would be deprived of the opportunity to ventilate in court a matter which might well merit close scrutiny.
Alternatively, if an architect’s certificate is at the centre of the dispute between the parties, there appears to me to be nothing to prevent the parties proceeding to arbitration anyway to resolve issues over which the arbitrator has jurisdiction but over which the courts have not. Accordingly, there would be the inconvenience and expense of judicial and arbitral proceedings running in tandem.
It is clearly undesirable that such consequences should depend upon what is essentially a fine procedural point. I am confident that this is not the meaning to be attributed to the word ‘step’. In my view, the acid test is whether a defendant has done something in the proceedings which shows he is submitting to the court’s jurisdiction rather than an arbitrator’s to try the real issue between the parties. Whether the act is offensive or defensive is irrelevant.”
[emphasis added]
In another Hong Kong case of China Trade Omni[19] the plaintiffs sued the defendants for breach of a management agreement. After acknowledging service of the writ and indicating their intention to defend, the first defendant applied for a stay. Before making the stay application, the first defendant took out two summonses: first, to strike out the endorsement on the writ; and second, to strike out two of the plaintiffs for want of authority. Affidavits in support were filed, stating that these two applications were made without prejudice to the stay application. The plaintiffs argued, inter alia, that the first defendant had taken a step in the proceedings prior to making the stay application and ought to be barred from applying for a stay.
In the High Court, the judge agreed with the “acid test” put forth in Sam Yu[20] and was of the view that the crux of the issue was whether there was “a willingness to go to law” and an affirmation of the institution of proceedings. In the Court’s judgment, the following observation was made;
“[N]either of those two applications of the defendants was such that it could possibly be said to amount to an ‘affirmation of the correctness’ of these proceedings and neither is, in my view, a ‘step in the proceedings’.”
The above cases serve to illustrate how courts might reach slightly different outcomes based on the specific facts presented in each case. The decisive factor in determining whether the parties had taken steps in the proceedings proved to be the reservation of rights, the nature of the application itself, as well as the parties' clear and unequivocal intention not to abandon their rights to refer the dispute to arbitration.
Reverting to the current proceedings, it is observed that the Court of Appeal based its entire rationale on the applicant's entreaty for the courts to assess the merits, relying solely on a single paragraph in the striking-out application even though a substantial portion of the applicant’s statements pertained to the objection of the court’s jurisdictional authority to adjudicate on the matter. With all due respect, it appears that the Court of Appeal was primarily focused on the issue of technicality rather than other considerations.
Nevertheless, there is no unequivocal right or wrong approach in this matter. To achieve a balance, the central question revolves around whether to adopt a conservative stance, handling the matter with undue technicality and formalism, or to embrace a holistic approach by applying the principles of Sanwell[21] and Comos[22].
Depending on one's perspective, it may be better to lean towards adopting the holistic approach, as it appears to better capture the true intention of the parties regarding whether there is an unequivocal intention not to abandon the right to refer the dispute to arbitration. The views presented in the Singapore Court of Appeal case of Carona Holdings[23] effectively convey this position;
“A pragmatic approach is warranted when assessing the procedural act in question. We are not impressed by some of the older English cases that appear to place an undue premium on procedural subtleties rather than on the substance of the issue at hand. In our view, it would be a mistake to place too much emphasis on the means adopted rather than on the ends of an application to stay which is to challenge the appropriateness of the court’s jurisdiction and to bring an immediate closure to the pending court proceedings. We should add that citing isolated decisions from other jurisdictions will usually not be helpful in resolving the competing tensions that are almost invariably present in assessing this issue. Each case should be approached and resolved on the basis of principle rather than merely precedent.”
[emphasis added]
To conclude, while it is accurate that the term 'taking any other steps in the proceedings' may cover the submission of diverse applications, such as requesting an extension to file a defence or initiating a setting-aside application based on jurisdictional issues, there is no clear-cut answer regarding whether these actions inherently qualify as steps in the proceedings. It is worth reiterating that the evaluation largely depends on factors such as the explicit reservation of rights, the particular nature of the applications, the unmistakable intention not to forsake the right to arbitrate the dispute, and the unique circumstances of each case.
Issue B: Did the arbitration agreement become inoperative as a result of the parties’ respective conduct?
Another main issues for contention between the parties was whether the arbitration agreement had become inoperative due to Anas’s failure and/or refusal to pay its portion of the 2nd Provisional Advance Deposit to AIAC? According to JKP, it did.
Brief summary of the High Court’s findings
The High Court however held that the arbitration agreement had not become inoperative based on the following brief reasons;
a) Based on the peculiar facts of the case, the Court held that JKP could have continued with the arbitration with or without paying Anas’s portion of the 2nd Provisional Advance Deposit;
b) There is nothing in Arbitration Act and the Arbitration Rules which renders the arbitration agreement inoperative due to non-payment of fees;
c) Anas’s overall conduct did not indicate that it intended to abandon its intention to proceed with the arbitration.
Brief summary of the Court of Appeal’s findings
In contrast, the Court of Appeal held that the arbitration agreement had become inoperative which can be summarized as follow;
a) Anas’s refusal to pay the further deposit would amount to a breach of the Arbitration Rules;
b) Anas’s refusal to pays its share of the Provisional Advance Deposit for no other reason than it does not want to show a clear and unequivocal intention not to abide by the arbitration process of resolving the disputes and indeed to abandon it altogether;
c) JKP’s opportunity to exercise the option to pay Anas’s portion does not convert such option into an obligation. As an option, it is given to JKP to decide whether or not it wants to affirm the arbitration agreement in spite of its breach by Anas.
Analysis & Opinion
According to the Cambridge Dictionary, the word ‘inoperative’ is defined as not having effect or power, or not working or not able to work as usual.
The term "inoperative" in the context of an arbitration agreement however lacks a straightforward definition. Parties have attempted to define it to encompass a broad range of interpretations, including parties' financial constraints, their explicit or implicit conduct, the interpretation of the agreement and its rules, the existence of multiple proceedings, misrepresentation, and various other factors. While some attempts have failed, others have succeeded. To further complicate matters, the line between what constitutes “null and void”, "inoperative" and "incapable of being performed" can sometimes become blurred.
The book Recognition and Conferment of Foreign Arbitral Awards: A Global Commentary on the New York Convention by Kronke, Nacimiento (2010) aptly conveys this concern:
“Most authorities hold that the same schools of thought and approaches regarding the term null and void also apply to terms inoperative and incapable of being performed. Consequently, the majority of authorities do not interpret these terms uniformly, resulting in an unfortunate lack of uniformity.”
Fortunately, the English case of BDMS[24] has offered valuable guidance on the question of whether a party's non-deposit of their share of arbitration fees can lead to the arbitration agreement being considered inoperative.
In the case of BDMS, Rafael Advanced Defence Systems (Rafael) refused to pay its portion of the arbitration deposit until security of costs was in place, citing allegations of BDMS Limited's (BDMS) financial capability. Despite BDMS fulfilling its share of the advanced costs, Rafael refused to pay its portion of the deposit and formally applied for security of costs against BDMS. The tribunal repeatedly urged Rafael to fulfil its payment obligation and invited BDMS to substitute for Rafael, warning of withdrawal if payments were not received. BDMS opted not to substitute, asserting that the arbitration agreement had become inoperative as Rafael's non-payment constituted a fundamental breach of the arbitration rules.
At the High Court, the Judge held that although Rafael had breached the arbitration rules by failing to pay its portion of the deposit, the appropriate test involves questioning whether Rafael’s breach substantially undermined the arbitration agreement to the extent that it significantly deprived the BDMS of the entire benefit of the agreement. As there were mechanisms under the rules allowing the proceedings to continue, the Court held that such breach was not repudiatory which would render the arbitration agreement inoperative.
The Court in BDMS however observed that, although a party’s failure to pay its portion of the advanced deposit constitute a breach of arbitration rules, to hold the same to be repudiatory would warrant a full investigation of the facts of the matter in question.
With that said, based on the critical evaluation of the present case facts alone, and with all due respect, it is challenging to be persuaded by JKP’s claim that Anas’s non-payment of its share of the 2nd Provisional Advanced Deposit has rendered the arbitration agreement inoperative.
This is the reason why.
Firstly, Anas paid its portion of its portion of the 1st Provisional Advance Deposit and had actively participated in the arbitration proceedings which include filing application to include SMC as a third party to the proceedings. After its application to include a third party was allowed by the tribunal, it subsequently filed it Defence and Counterclaim against JKP and an indemnity claim against SMC. These actions suggest Anas's active involvement in the arbitration proceedings.
In light of Anas’s Counterclaim and indemnity claim against SMC, the tribunal then issued further directions for parties the pay the 2nd Provisional Advance Deposit in equal amounts. JKP paid its portion soon thereafter. Anas however refused to pay its portion of the 2nd Provisional Advance Deposit and sought JKP to pay the same.
JKP subsequently stated that it would not be paying Anas’s portion of the 2nd Provisional Advance Deposit and sought to terminate the arbitration proceedings in its letter dated 25.6.2021.
Considering the positions taken by the parties, Rules 14(7) of the Arbitration Rules provide some clarity on how the tribunal could address and resolve the issue;
"Rule 14(7)
If the required deposits are not paid in full, the Director shall give the other Party an opportunity to make the required payment within a specified period of time. If such payment is not made, the arbitral tribunal may, after consultation with the Director, order the suspension or termination of the arbitral proceedings or any part thereof."
In other words, the tribunal could, after consultation with the Director, exercise any of the following options;
a) Suspend the arbitral proceedings;
b) Suspend part of the arbitral proceedings;
c) Terminate the arbitral proceedings; or
d) Terminate part of the arbitral proceedings.
In response to JKP’s stance outlined in its letter dated 25.6.2021, the tribunal wrote to the parties on 23.8.2021, providing Anas with a final opportunity to pay its portion of the 2nd Provisional Advance Deposit. Failing compliance, the arbitration proceedings would proceed without allowing Anas to pursue its Counterclaim against JKP or its third-party indemnity claim against SMC. Essentially, the tribunal is exercising its authority to terminate a part of the arbitral proceedings under Rule 14(7) of the Arbitration Rules, impacting solely Anas’s ability to pursue its Counterclaim against JKP and third-party indemnity claims against SMC.
Notwithstanding the tribunal’s letter dated 23.8.2021, JKP wrote to the tribunal on 8.9.2021 seeking for the arbitration proceedings to be terminated taking the position that the arbitration agreement had become inoperative.
On 25.10.2021, the tribunal terminated the arbitration proceedings.
Upon thorough consideration of all the facts, it is challenging to conclude that the arbitration agreement has been rendered inoperative in the present case. In this context, it is worth reiterating that;
a) There is substantial evidence demonstrating Anas's active participation in the arbitration proceedings, setting it apart from the facts in the Kebabangan Petroleum[25] case. In that case, the respondent didn't make the first deposit, displayed complete unresponsiveness, and signalled disinterest, effectively abandoning its intention to proceed with arbitration;
b) Although Anas's non-payment or refusal to contribute its portion of the 2nd Provisional Advance Deposit breached the Arbitration Rules, it had no adverse effect on JKP's claim against Anas in the arbitration proceedings; in fact, it could have been advantageous for JKP;
c) Anas's breach of the AIAC Arbitration Rules and non-payment of the 2nd Provisional Advance Deposit did not strip JKP of its right to arbitrate nor bring the arbitration proceedings to a grinding halt;
d) Even though JKP had the option to cover Anas's portion of the 2nd Provisional Advance Deposit, the non-payment of it would have actually benefited JKP, as it would prevent Anas from pursuing a counterclaim against JKP and third-party proceedings against SMC;
e) The tribunal effectively waived the obligation to pay Anas's 2nd Provisional Advance Deposit, contingent upon disallowing Anas's counterclaim against JKP and its indemnity claim against SMC. Therefore, the arbitration agreement remains operative.
Unlike in the case of BDMS[26], the non-payment of the required deposit in the present case did not bring the arbitration proceedings to a standstill. Quite the opposite, these proceedings could have proceeded with or without the 2nd Provisional Advance Deposit. Thus, although Anas's refusal/failure to pay the 2nd Provisional Advance Deposit constituted a breach of the arbitration agreement, with the utmost respect, it did not result in JKP being significantly deprived of the overall benefits of the agreement. Instead, in light of the tribunal's direction dated 23.8.2021, JKP stood to gain advantages from Anas’s breach of the arbitration rules. Hence, one might argue that this breach does not qualify as a substantial repudiation sufficient to render the arbitration agreement inoperative. These perspectives, of course, are based on the unique circumstances of the present case, which one may view as extraordinary.
As to why JKP decided to terminate the arbitration agreement despite being in a more favourable position than before, it’s a mystery wrapped in an enigma.
Comment
From a general standpoint, pursuing a striking-out application in the presence of an arbitration agreement is unquestionably an incorrect approach, even if the grounds for striking out are solely procedural and not based on merits. It is obvious that the courts have consistently expressed reservations concerning the sequential presentation of striking-out applications, wherein they are presented as the primary relief before an application for a stay (Hybrid Application). This procedural approach specifically instructs the court to initially evaluate the merits of the case, and only if that proves unsuccessful, to contemplate the court's jurisdictional authority to decide the matter in the first place. This bears a resemblance to putting the cart before the horse, a sentiment with which many would agree.
As far as this issue is concerned, there are no legal precedents where a case was struck off instead of granting a stay when an arbitration agreement was in place. On the contrary, courts generally grant a stay, even if not explicitly requested under the court’s inherent jurisdiction. Consequently, it is a reasonable to align with the Court of Appeal's viewpoint that, when an arbitration agreement is evident, the parties should exclusively pursue a stay application under section 10(1) of the Arbitration Act and refrain from initiating any additional legal proceedings.
After all, section 10(1) of the Arbitration Act is expressed in mandatory terms, using the term 'shall’. As per this provision, upon the confirmation of an arbitration agreement, the court is compelled to stay court proceedings and refer the parties to arbitration, unless the court finds the agreement to be null and void, inoperative, or incapable of being performed.
The Court's jurisdiction in arbitration and arbitration related matters is never ousted, even by the presence of any clear agreement to arbitrate. This was made abundantly clear by in the case of Sanwell[27] and CLLS Power Systems[28].
Even upon reviewing the Arbitration Act itself, it becomes evident that the Court retains certain jurisdiction to assist parties in an arbitration dispute, as evidenced by the powers granted under sections 11, 15(3), 16(2), 41, among others.
Consider a scenario where a case is struck out by the Court based on the lack of jurisdiction, and subsequently, the parties encounter a situation similar to Kebabangan Petroleum[29], where the arbitration agreement has become inoperative. In such a situation, where do the parties proceed from that point? It is in such instances that the purpose and intent of section 10(1) of the Arbitration Act become evident.
However, when considering whether an application qualifies as a step in the proceedings, would the scenario differ if the request for a stay is presented as the main remedy, followed by an alternative application?
A notable issue raised in the Comos[30] case was the inclusion of a prayer in the applicant's setting aside application, seeking leave to file a defence in the event the application for setting aside was disallowed. Similarly, in both the cases of Patel v Patel[31] and Capital Trust Investment[32], there was a request made to file a further application if the main application failed. It is crucial to underscore that in all three cases, the focus was not on the literal submission of an application but rather on a formally expressed intent or desire in writing to file an application in the event the primary application was unsuccessful.
Despite these observations, the Court in Comos[33] expressly stated this at paragraph 14 of its judgment;
“An application, which is made in the event that the specific application for a stay is unsuccessful, is not a step in the proceedings.”
It is noteworthy that the Court in Comos[34] expressly used the term "application" and not the term “prayer”, indicating that any application filed subsequent to an application for stay would not constitute steps in the proceedings. Perhaps in the court's perspective, once an application for stay is granted, any subsequent application, regardless of whether it seeks the determination of merits or not, would be rendered moot.
Curiously, this approach was replicated by a party in the Kebabangan Petroleum[35] case. In this instance, the party submitted an application for a stay on 6th December 2017, followed by an application to strike out on 15th February 2018. Initially, it may appear that the sequence of filing these applications aligns with the observations outlined in the Comos[36] case.
However, in the Kebabangan Petroleum[37] case, the Court of Appeal observed that the party, within its application for a stay dated 6th December 2017, initially sought the striking out of the suit first, proposing only as an alternative that the proceedings should be stayed pending arbitration. The inclusion of a request for striking out as the primary relief in a formal application for stay raises questions about strategic choices, as such sequencing ultimately had detrimental effects on the party's intent to secure a stay for the matter.
Returning to the facts of JKP v Anas, despite the highly inappropriate nature of filing a striking-out application in such instances, it can be argued that, with due respect, the act of filing in this case does not, for the reasons elucidated earlier, constitute as taking steps in the proceedings. These perspectives are, of course, based on the unique circumstances of the case. Right or wrong, if the matter proceeds to further appeal, the distinctive circumstances of the case might, just might, present enough grounds to extricate parties from the legal intricacies into which they inadvertently ventured.
For those contemplating the cautious yet perilous course of filing a striking-out application alongside an application for stay, a word of caution is warranted: proceed with utmost care, as the journey may lead you into the labyrinth of undue technicalities and formalities. The landscape of these principles is notoriously sensitive to the nuances of each case, making the associated risks far from negligible. Hence, one might question the rationale behind pursuing such applications at all, given their apparent futility once the existence of an arbitration agreement has been established. Don't muddy the waters when the way forward is crystal clear.
Suren Rajah
Messrs Rajah Chambers
The legal article provided above is intended for informational purposes only. The content represents the personal opinions of the author and should not be considered as legal advice. Readers are strongly encouraged to seek the advice of qualified legal professionals regarding their specific legal concerns or issues. No solicitor-client relationship is established by the consumption of this information, and the author disclaims any responsibility for any actions taken based on the contents of the article.
[1] Sanwell Corp v Trans Resources Corp Sdn Bhd & Anor [2002] 2 MLJ 625
[2] see Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573, Cheah Wai Poh v. Chin Brothers & Co Ltd [1958] 1 MLRH 315, Patel v Patel [1999] 3 WLR 322, Capital Trust Investments Ltd v Radio Design TJ AB and Ors [2002] EWCA Civ 135, Hamidah Fazilah Sdn Bhd v Universiti Tun Hussein Onn Malaysia (UTHM) [2016] MLRHU 1244, CLLS Power System Sdn Bhd v. Sara-Timur Sdn Bhd [2015] 11 MLJ 485, Seloga Jaya Sdn Bhd v Pembenaan Keng Ting (Sabah) Sdn Bhd [1994] 1 MLRA, Agibs Engineering & Construction Sdn Bhd V. Paragon Advance Solutions Sdn Bhd [2011] 2 MLRA 587, Felcra Properties Sdn Bhd v Pakatan Reka Arkitek Sdn Bhd [2018] 6 MLRH 426], Press Metal Sarawak Sdn Bhd v Etiqa Takaful [2016] 5 MLJ 417
[3] Sanwell Corp v Trans Resources Corp Sdn Bhd & Anor [2002] 2 MLJ 625
[4] Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573
[5] Sanwell Corp v Trans Resources Corp Sdn Bhd & Anor [2002] 2 MLJ 625
[6] Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573
[7] L Capital Jones Ltd and another v Maniach Pte Ltd [2017] SGCA 63
[8] Kebabangan Petroleum Operating Co Sdn Bhd v Mikuni (M) Sdn Bhd & Ors 1 MLJ 693
[9] Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573
[10] Kebabangan Petroleum Operating Co Sdn Bhd v Mikuni (M) Sdn Bhd & Ors 1 MLJ 693
[11] L Capital Jones Ltd and another v Maniach Pte Ltd [2017] SGCA 63
[12] See Thong & Anor v. Saw Beng Chong [2013] 4 MLRA 259
[13] please see Malayan United Finance Bhd Lwn Cheung Kong Plantation Sdn Bhd Dan Lain-Lain [2000] 2 MLJ 38 & Doretti Resources Sdn Bhd V. Fitters Marketing Sdn Bhd & Ors [2016] 6 MLRH 117
[14] Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573
[15] Ibid
[16] Felcra Properties Sdn Bhd v Pakatan Reka Arkitek Sdn Bhd [2018] 6 MLRH 426
[17] Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573
[18] Winning Godown Ltd v Sam Yu Construction Co [1987] 1 HKC 366
[19] China Trade Omni Development Centre Ltd v Ramada International Inc [1989] 1 HKC 417
[20] Winning Godown Ltd v Sam Yu Construction Co [1987] 1 HKC 366
[21] Sanwell Corp v Trans Resources Corp Sdn Bhd & Anor [2002] 2 MLJ 625
[22] Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573
[23] Carona Holdings Pte Ltd and Ors v Go Go Delicacy Pte Ltd [2008] SGCA 34
[24] BDMS Ltd v Rafael Advanced Defence Systems [2014] EWHC 451 (Comm)
[25] Kebabangan Petroleum Operating Co Sdn Bhd v Mikuni (M) Sdn Bhd & Ors 1 MLJ 693
[26] BDMS Ltd v Rafael Advanced Defence Systems [2014] EWHC 451 (Comm)
[27] Sanwell Corp v Trans Resources Corp Sdn Bhd & Anor [2002] 2 MLJ 625
[28] CLLS Power System Sdn Bhd v. Sara-Timur Sdn Bhd [2015] 11 MLJ 485
[29] Kebabangan Petroleum Operating Co Sdn Bhd v Mikuni (M) Sdn Bhd & Ors 1 MLJ 693
[30] Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573
[31] Patel v Patel [1999] 3 WLR 322
[32] Capital Trust Investments Ltd v Radio Design TJ AB and Ors [2002] EWCA Civ 135
[33] Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573
[34] Ibid
[35] Kebabangan Petroleum Operating Co Sdn Bhd v Mikuni (M) Sdn Bhd & Ors 1 MLJ 693
[36] Comos Industry Solution GmbH v. Jacob And Toralf Consulting Letrikon Sdn Bhd & Ors [2012] 4 MLJ 573
[37] Ibid
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