No U-Turns Ahead: Singapore Court of Appeal holds that commencement of court proceedings may lose you the right to later rely on arbitration agreements

In the recent landmark decision of Marty Ltd v Hualon Corp (Malaysia) Sdn Bhd [2018] SGCA 63, the Singapore Court of Appeal held that the commencement of court proceedings notwithstanding the existence of a binding arbitration agreement and without any explanation or qualification is in and of itself sufficient to constitute a prima facie repudiation of the arbitration agreement. Counterparties who have accepted the court's jurisdiction would correspondingly be deemed to have accepted the repudiatory breach, and will also no longer be entitled to insist on adherence with the arbitration agreement.

The Singapore Court of Appeal's decision is noteworthy as it departs from longstanding authority that the mere commencement of litigation proceedings would not constitute repudiation of the arbitration agreement. The Court also provides important guidance to parties to Singapore seated arbitrations on whether (and when) it is appropriate to commence litigation in circumstances where an arbitration agreement exists, and how to react if a counterparty does so.  We analyse the decision below.

BACKGROUND

Hualon Corp (Malaysia) Sdn Bhd ("Hualon") had been in receivership since November 2006. In July 2014, Hualon's receiver commenced proceedings in the courts of the British Virgin Islands (the "BVI") against Marty Ltd and its two shareholders, Mr Oung Da Ming and Mr Oung Yu Ming. The Oung brothers had been substantial shareholders and directors of Hualon before incorporating Marty Ltd in the BVI.

In the BVI court proceedings, Hualon sought to invalidate the transfer of its shares in a Vietnamese subsidiary company to Marty Ltd on the ground that the transfer had been wrongfully procured by the Oung brothers and Marty Ltd. The share transfer had reduced Hualon's shareholding in the subsidiary from 100% to 0.19%. The parties' respective shareholdings following the transfer had been recorded in the subsidiary's constitution, revised in 2008 (the "Revised Charter") i.e. in the course of Hualon's receivership.

In March 2015, Hualon filed a notice of arbitration with the Singapore International Arbitration Centre against Marty Ltd and the Oung brothers alleging the same breaches as it did in the BVI court proceedings. Hualon's case was that it was only in end February 2015 – seven months after the commencement of the BVI proceedings – that it came to know that the Revised Charter had an arbitration agreement for the settlement of disputes between shareholders of the subsidiary. Upon filing its notice of arbitration, Hualon also proposed to its counterparties that the BVI proceedings be stayed in favour of arbitration, but took no further steps to obtain such a stay until April 2015, by way of an application to the BVI courts.

The arbitration proceedings therefore progressed in parallel with the BVI proceedings. A sole-arbitrator tribunal had been constituted, Marty Ltd challenged the jurisdiction of the tribunal, and by April 2016, the tribunal ruled that it had jurisdiction over the dispute. In May 2016, Marty Ltd commenced proceedings in the Singapore High Court to challenge the arbitral tribunal's decision, arguing that Hualon's commencement and conduct in the litigation in the BVI rendered it in repudiatory breach of the arbitration agreement, such that it was no longer entitled to continue with the arbitration proceedings.

In May 2017, the Singapore High Court dismissed Marty Ltd's jurisdictional challenge. Marty Ltd appealed to the Singapore Court of Appeal.

THE COURT OF APPEAL'S DECISION

The Court of Appeal allowed the appeal. It held that by commencing the BVI court proceedings without any explanation as to why it did so in the face of the arbitration agreement, Hualon was no longer entitled to rely on the arbitration agreement, and therefore could not proceed with the arbitration proceedings.

In strongly stated obiter remarks, the Court indicated that the mere commencement of court proceedings by a party bound by an arbitration agreement would constitute a prima facie repudiatory breach of the arbitration agreement. The Court expressly doubted longstanding English authority that (i) a party can only be found to have repudiated an arbitration agreement if it evidences unequivocal repudiatory intent; and (ii) on that analysis, that the mere commencement of court proceedings alone would not constitute unequivocal repudiatory intention.

The Court reasoned as follows:- parties who enter into a contract containing an arbitration clause are entitled to expect (and have a contractual obligation) to refer disputes to arbitration. Thus, the commencement of court proceedings notwithstanding that obligation, without any qualification, strongly indicates that the party no longer intends to be bound by the arbitration agreement i.e. repudiatory intention. To avoid such a conclusion, a party must qualify the scope of the court proceedings or the relief sought thereunder in order to explain its actions and to reserve its right to subsequently refer the matter to arbitration.

In this case, Hualon had commenced and maintained the BVI court proceedings without any reservation or explanation. Its conduct therefore evidenced that it did not intend to be bound by the arbitration agreement. The Court also found repudiatory intention in the fact that Hualon's position in the BVI proceedings was that the Oung brothers had ceased to have the authority to act on behalf of and bind Hualon in the course of receivership. Objectively, this meant that all documents and transactions entered into by the Oung brothers, including the Revised Charter containing the arbitration agreement, were invalid and not binding. On its own argument, Hualon could not insist that it had the option of relying on the arbitration agreement.

The Court also did not accept Hualon's argument that it could not have intended to repudiate the arbitration agreement by commencing court proceedings because it had only became aware of the arbitration agreement belatedly. A party's ignorance of an arbitration agreement was subjective – an objective counterparty remained entitled to infer that the party who commenced court proceedings does so because it no longer intends to be bound by the arbitration clause. In any case, the Court was satisfied that Hualon had, on the facts, possessed actual knowledge of the arbitration agreement.

Finally, as a matter of contract law, following repudiation of a contractual obligation, the counterparty to the contract must accept the repudiation in order for the breach to crystallise. Here, the Court held that Marty Ltd had accepted Hualon's repudiation of the arbitration agreement when it accepted the BVI court's jurisdiction over the merits of the dispute, as evidenced by its application to the court for summary judgment. Interestingly, Marty Ltd's application (and in that regard, acceptance of the repudiation of the arbitration agreement) came after Hualon had filed its notice of arbitration and proposed that parties stay litigation in favour of arbitration. The Court held that a repudiatory breach can be accepted at any time until the 'innocent' party itself affirms the contract or otherwise acts inconsistently with the continuing existence of a right to accept the repudiation.

COMMENT: CONSIDERATIONS FOR PARTIES INVOLVED IN SINGAPORE SEATED ARBITRATIONS

A number of practical considerations follow from this decision of the Singapore Court of Appeal for parties involved in Singapore seated arbitrations.

As a default position, parties to a valid arbitration agreement should consider themselves bound to resolve their disputes by arbitration. Where there are nevertheless reasons for a party to commence court proceedings (such as to pursue a claim that falls outside the scope of the arbitration agreement) a party who chooses to do so should carefully consider whether and how it wishes to explain and qualify its litigation in order to effectively reserve its right to arbitration. Further, steps taken and arguments raised in the course of litigation should not be inconsistent with the reserved right to later rely on the arbitration agreement.

A party at the receiving end of such litigation should also give thought to how it wishes to respond, and what may be deemed to be acceptance by it of the repudiatory breach of the arbitration agreement so as to disentitle all parties from relying on the arbitration agreement. In this case, Marty Ltd was taken to have accepted the repudiation by agreeing to the jurisdiction of the BVI court by applying for summary judgment of the dispute i.e. agreeing to the BVI court's jurisdiction over the merits of their dispute. Arguably, mere participation in the court proceedings through its ordinary course (e.g. the filing of pleadings and attendance at interlocutory applications) alone will also suffice to evidence a party's acceptance of the repudiation. Conversely, the Court found that Marty Ltd's initial challenge to the litigation on forum non conveniens grounds was not an acceptance of repudiation as it did not amount to an unequivocal acceptance of the court's jurisdiction.

For those with a Singapore-seated arbitration agreement, the decision provides greater clarity on how parties may choose their dispute resolution forum, and how they should proceed where there appear to be inconsistencies with the existing arbitration agreement. The issue is not uncommon, in particular, when dealing with parties from developing jurisdictions who commence satellite litigation in the face of a binding arbitration agreement. Whether the decision will have any wider ramifications for other common law jurisdictions remains to be seen.

For further information, please contact Alastair Henderson, Partner, Emmanuel Chua, Senior Associate, Reshma Nair, Associate, or your usual Herbert Smith Freehills contact.