The Implications Of Commencing Court Proceedings When There Is An Arbitration Agreement

JTJB Legal Update November 2018

When disputes arise between parties to a contract that contains an arbitration clause, it is certainly not uncommon for one party to commence court proceedings. The Singapore Court of Appeal (“CA”) recently warned in Marty Ltd v Hualon Corp (Malaysia) Sdn Bhd [2018] SGCA 63, that the commencement of court proceedings per se is itself a prima facie repudiation of the arbitration agreement.

Background

This case is factually complicated as it involved numerous companies and share transfers. The key complaint, filed by the Receiver of Hualon Corp (Malaysia) Sdn Bhd (“Hualon”), is that Marty Ltd (“Marty”) had wrongfully deprived Hualon of its shareholdings in Hualon’s subsidiary (the “Vietnam Subsidiary”).

The relevant facts are as follows:

• At all relevant times, the Oung brothers were the directors and shareholders of both Hualon and Marty.
• In 1999, the Vietnam Subsidiary issued shares to 2 related companies of Hualon – Hualon Chemical & E-Hsin.
• In 2006, Marty was incorporated in the British Virgin Island (“BVI”), shortly after that, Hualon was placed into receivership.
• In 2008, one of the Oung brothers re-registered the Vietnam Subsidiary’s company charter for the purpose of obtaining an investment certificate from the Vietnamese authorities (the “Revised Charter”). The Revised Charter now contained an arbitration clause for disputes between members of the company to be referred to the Singapore International Arbitration Centre (the “SIAC”).

Hualon alleged that in 2007-2008 (after it was in receivership), the Oung brothers caused Hualon Chemical and E-Hisn to transfer its Vietnam Subsidiary shares to Marty and another BVI company (“Cubic”). The net result was that the shareholdings of the Vietnam Subsidiary were Marty owning 99.7%, Cubic owning 0.11% and Hualon owning 0.19%. In 2014, Hualon commenced actions in the BVI Courts against the Oung brothers and Marty for wrongfully depriving it of its shareholdings in the Vietnam Subsidiary, claiming inter alia that Marty had been unjustly enriched (the “BVI Action”).

In 2015, Hualon claimed that they discovered the existence of the arbitration clause. Hualon then filed a notice of arbitration with the SIAC, taking similar positions in the BVI Action. During this time, Marty applied for summary judgment in the BVI Action and Hualon applied for a stay of proceedings in favour of arbitration.

In the SIAC, Marty challenged the jurisdiction of the arbitral tribunal, but the tribunal ruled it had jurisdiction. Marty commenced proceedings in the Singapore High Court challenging the tribunal’s decision arguing that the Hualon had repudiated the arbitration agreement. The High Court dismissed the application and held that the tribunal had jurisdiction. Marty appealed to the Court of Appeal.

Decision by the CA

The CA allowed the appeal and held that Hualon demonstrated the repudiatory intent by commencing the BVI Action and arguing in its statement of claim that once the Receiver was appointed, “the powers and authority of the Oung Brothers to act on behalf and bind [Hualon] as its directors ceased” – in effect, Hualon disavowed the contract containing the arbitration clause and thus did not intend to arbitrate. This breach was accepted by Marty when they applied for summary judgment and served it on the Hualon. It therefore follows that the arbitral tribunal did not have jurisdiction over the arbitration proceedings.

The CA made the following key points:

• It is strongly arguable that a party that commences court proceedings (the claimant) has prima facie repudiated the arbitration agreement as it indicates that he no longer intends to abide by the arbitration clause.
• The CA doubted whether previous authorities, which indicated that the commencement of court proceedings per se is not repudiatory, was correct and indicated they were not inclined to adopt it.
• The non-breaching party should be entitled to expect that the claimant either commences arbitration proceedings or commences court proceedings but makes clear its position in relation to the arbitration.
• The CA clarified that it is open to the claimant to displace this prima facie conclusion by furnishing an explanation which showed objectively that it had no repudiatory intent.

Conclusion

The irony of this matter is that the Hualon was the injured party but may have to pay costs for having breached the arbitration agreement. It is thus a salutary reminder that a party to a contract containing an arbitration clause should tread carefully before commencing any court action, whether in Singapore or not, so as not to be inadvertently in repudiatory breach of the arbitration agreement.