MALAYSIA: COURT OF APPEAL REFUSES STAY OF PROCEEDINGS WHERE PARTY ACTS INCONSISTENTLY WITH AN EXPRESS RESERVATION OF RIGHT TO REFER DISPUTE TO ARBITRATION

On 10 June 2020, the Court of Appeal in Yeo Eng Lam v Infinity Vantage Sdn Bhd (Civil Appeal No. N-02(IM)(NCvC)-507-03/2018, Court of Appeal considered whether an express reservation of a right to refer a dispute to arbitration in a defence and counterclaim pleading was effective to preserve a right to elect to arbitrate a dispute wrongly commenced in court. The court also considered whether an application to disqualify solicitors in the disputed court proceedings amounts to a step in the proceedings which would preclude a party from staying the court proceedings in favour of arbitration.

Background

On 25 August 2017, the plaintiff, Infinity Vantage Sdn Bhd, commenced court proceedings against the defendant, Yeo Eng Lam, alleging that the defendant breached a joint venture agreement (“JVA”) between them. On 25 September 2017, a case management conference was held at the High Court, where the deputy registrar directed, amongst others, that the Defendant is to file her statement of defence on or before 13 October 2017.

On 3 October 2017, the defendant formally entered her appearance in the proceedings by filing a memorandum of appearance. On 9 October 2017, the defendant applied to the High Court to disqualify the plaintiff’s solicitors on the basis that the plaintiff’s solicitors had acted as common solicitors of the parties in the preparation of the JVA (“Disqualification Application”). Then, on 13 October 2017, the defendant filed her Statement of Defence and Counterclaim (“Defence and Counterclaim”).

Four days later, the defendant filed an application to stay the court proceedings under section 10(1) of the Arbitration Act 2005 (“Act”), on the basis that the subject matter of the dispute fell within the arbitration clause contained in clause 29.3 of the JVA (“Stay Application”). Section 10(1) reads:

“10. Arbitration agreement and substantive claim before court

(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.”

The plaintiff opposed the Stay Application on the basis that the defendant had taken two steps in the proceedings prior to the filing of the Stay Application which disentitled it from now relying on the arbitration clause. In response, the defendant argued that first, its Disqualification Application was a step to address a potential conflict of interest and to protect the defendant’s position from being compromised, and was not a sufficiently substantial step in defending the proceedings. Second, its filing of the Defence and Counterclaim was done to comply with the deputy registrar’s direction, and contained an express reservation that the defendant reserves her right to refer the matter to arbitration. In the opening paragraphs of the Defence and Counterclaim, the defendant expressly stated that (i) the plaintiff’s action is properly the subject of an arbitration agreement; (ii) the Statement of Defence and Counterclaim is filed without prejudice to the defendant’s right to stay the proceedings and refer the dispute to arbitration; and (iii) the filing of that the Defence and Counterclaim purported to file the Defence and Counterclaim.

The High Court dismissed the Stay Application, and the defendant appealed to the Court of Appeal.

Decision of the Court of Appeal

The Court of Appeal referred to the guidelines of the Federal Court in Sanwell Corp v Trans Resources Corp Sdn Bhd & Anor [2002] 2 MLJ 625 on what amounts to ‘any other step in the proceedings’ which disentitles a party from staying court proceedings:

• The procedural step of entering a formal appearance in the proceedings will not amount to a ‘step in the proceedings’.
• The filing of pleadings is an election to proceed with the court proceedings.
• Where any other application is filed in the proceedings, the court will have to consider the nature of the action and whether that indicates an unequivocal intention to proceed with the suit and to abandon the right to have the dispute resolved by arbitration.

Guided by the above, the Court of Appeal considered that the defendant’s filing of the Disqualification Application and the Defence and Counterclaim were both steps in the proceedings which precluded her from now staying the court proceedings in favour of arbitration. In particular, statements made by the defendant in both the Disqualification Application and Defence and Counterclaim was found to have evinced an unequivocal intention by the defendant to defend herself in the court proceedings:

• Although the Disqualification Application was not a formal pleading in the proceedings, the Court of Appeal considered that this had to be examined in both form and substance. In support of the Disqualification Application, the defendant deposed in her affidavit that the plaintiff’s solicitors should be disqualified as they may be called to testify as witnesses of any material and disputed questions of fact in the court action itself. This appeared to be made in anticipation of a trial in court, and did not contain any express reservation of the defendant’s right to refer the dispute to arbitration.
• The Defence and Counterclaim sought declaratory reliefs for the defendant’s counterclaim and an alternative relief for the dispute be referred to arbitration. As a result, the defendant’s express reservation of her right to have the dispute arbitrated was not sufficiently unequivocal.
• At the case management conference, the defendant should have requested for directions to file an application to stay the proceedings, as opposed to accepting the direction to file a statement of defence.
• Notwithstanding that the deputy registrar of the High Court had directed that the defendant file her statement of defence, the defendant should have made the Stay Application in advance of the Disqualification Application and Defence and Counterclaim.

Comment

During case management conferences, Malaysian court officials may routinely provide directions for the expeditious disposal of the case, including setting timelines for procedural steps to be taken (as required by various practice directions of Malaysian courts). However, such administrative steps should not be seen as an indication to deprive a party from applying to stay the proceedings in favour of arbitration where there is a valid arbitration agreement. Instead, parties to a dispute which has been brought to court in breach of an arbitration agreement must act expeditiously to stay the court proceedings. Express reservations of the right to refer the matter to arbitration must be raised consistently, but these will not be sufficient to preserve a party’s right if it takes steps in the proceedings which are inconsistent with an intention to refer the dispute by arbitration.

More importantly, the Disqualification Application underscores an evolving issue on whether a tribunal has the power to disqualify a party representative on the ground of some conflict of interest with another party to the arbitral proceedings, through (1) an inherent power and duty to preserve the fairness and integrity of the proceedings, (2) soft law such as the IBA Guidelines on Party Representation, or (3) national law. As the debate over a tribunal’s powers continue, a party seeking to disqualify an opposing party’s counsel or solicitors may be inclined to resort to a national court (either of the seat or the court having jurisdiction over the legal profession of the party representative) for a more directly binding remedy. This case serves as a timely reminder that actions to disqualify a party representative are not necessarily straightforward, and must be approached with methodical precision. An action which is too late – or too early, as in this case – may potentially jeopardise a party’s right to arbitration.

The judgment of the Court of Appeal is available in English here.

For further information, please contact Peter Godwin, Partner, Head of Disputes Asia, Daniel Chua, Associate or your usual Herbert Smith Freehills contact.

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.