What is a ‘court’ for a stay of court proceedings pending arbitration?

The Supreme Court of Victoria in Subway Systems v Ireland [2014] VSCA 142 interpreted the meaning of the term ‘court’ under the Australian Commercial Arbitration Act 2013 for the purposes of a stay of court proceedings pending arbitration. In line with the Model Law, the term ‘court’ was extended to cover an administrative tribunal. Therefore, those tribunal proceedings were stayed pending arbitration. This is also of significance to Malaysia on how the Arbitration Act 2005 may be interpreted for a stay of court proceedings pending arbitration.

Subway Decision

A dispute arose between the parties to a franchise agreement involving a Subway sandwich business. The agreement contained an arbitration clause. The franchisees sought to have the dispute heard in the Victorian Civil and Administrative Tribunal (VCAT) while Subway argued that VCAT was precluded from hearing the proceeding and must instead refer the parties to arbitration.

There is a useful summary of the principles from this decision in this Allens commentary. I quote a section from this commentary.

In interpreting the Act and the definition of the word ‘court’, the majority recognised the aims of the Model Law, of uniformity and harmonisation, given the Act’s genesis from the Model Law. The policy behind the Model Law was central to the majority’s analysis of whether VACT fell within the definition of a ‘court’ for the purposes of s8 of the Act. If VCAT was found to be a court in this instance, disputes to be heard in VCAT, where an arbitration agreement existed, would be referred to arbitration under the Act. Conversely, if VCAT was found not to be a court, parties would have a choice of forum in which to have their disputes heard: either at VCAT or under arbitration. The majority judges recognised the wholly unsatisfactory position of the latter option.

In analysing whether VCAT was a ‘court’, the Acting Appeal Justice Kyrou (in the minority) noted instances in legislation where the definition of court intentionally omitted VCAT, and observed that VCAT lacks the typical indicia of courts at common law, as it:

  • is not bound by the rules of evidence;
  • cannot enforce its own decisions;
  • is constituted by some members who are not legally trained;
  • can apply government policy; and
  • can provide advisory opinions.

Acting Appeal Justice Kyrou’s analysis focused on the text of the Act and other statutes where the word ‘court’ is applied and noted the intentional omission of VCAT in various definitions of court in legislation. This led his Honour to find that VCAT was not a ‘court’ for the purposes of s8 of the Act.

Conversely, Appeal Justice Beach (in the majority) held that VCAT possesses the six features typical of courts at common law and noted instances where the definition of courts in statutes has been held to include VCAT. President Maxwell focused on the international development, and aims, of the Model Law that were picked up in the Act and the effect of these on interpreting the definition of ‘court’ under the Act.

As a matter of statutory construction, the majority considered the text, context and purpose of the Act, and held that both the Model Law and the Act had application to ‘a body or organ of the judicial system,’ which extended to VCAT.

Malaysian Context

Section 10 of the Arbitration Act 2005 (“AA 2005″) provides that: “A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall … stay those proceedings and refer the parties to arbitration … (emphasis added)”

In the AA 2005, similar to the Subway decision, there is no definition of the term ‘court’. This is in contrast with the definition in Article 2(c) of the Model Law where ‘court’ means a body or organ of the judicial system of a State. The term ‘court’ in the AA 2005 does not appear to mean only a High Court (i.e. the High Court in Malaya and the High Court in Sabah and Sarawak) since other sections in the AA 2005 refer specifically to the term ‘High Court’ and ‘High Court’ is defined in section 2 of the AA 2005 (for example, section 11 of the AA 2005 states that “a party may … apply to a High Court for any interim measure and the High Court may make the following order …”).

Further, I would also argue that there is a difference between ‘court’ (with the small ‘c’) and ‘Court’ (with the capital ‘C’). ‘Court’ is defined in the Courts of Judicature Act 1964 as the Federal Court, the Court of Appeal or the High Court. So if there is a deliberate use of ‘court’ (with the small ‘c’) in the AA 2005, could it be argued that Malaysia can also draw on the Model Law definition of ‘court’ as being a body or organ of the judicial system?

In line with this wider definition, the term ‘court’ should encompass this broader definition in order to allow the Subordinate Courts (i.e. the Magistrate and Sessions Court) to also grant a stay of proceedings to refer parties to arbitration. The Subordinate Courts do not fall within the definition of ‘Court’ under the Courts of Judicature Act 1964, but  it has been largely assumed that the Subordinate Courts would have the power to grant a stay of proceedings under section 10 of the AA 2005 (for example, see Sundra Rajoo & WSW Davidson (2007) ‘The Arbitration Act 2005: UNCITRAL Model Law as applied in Malaysia’, para 10.3).

If we accept this broader definition of ‘court’ under the Model Law, could this then be extended to other forms of statutory tribunals, the Industrial Court or other regulatory bodies for the purposes of a ‘court’ ordering a stay of proceedings? It will be interesting to see how this will develop and be argued in the Malaysian courts.

Unwinding a Winding-Up, Revisited

I had earlier written about the ability of a Court to unwind, or set aside, its winding up Order. For a long while, the weight of authority suggested that a Court could not set aside a winding up Order. The Companies Act 1965 was silent on the possibility of such a setting aside and there was only a provision for a stay of winding up under section 243. I had suggested in my earlier post that there appeared to be a narrow exception of allowing for such a setting aside, and this was implicit in the Megah Teknik decision.

There is now an unreported High Court decision applying Megah Teknik and where Datuk Wong Kian Kheong JC allowed a setting aside of a winding up Order. The grounds of judgment of Panaron Sdn Bhd v Univac Switchgear Sdn Bhd can be downloaded from the KL High Court website (and it contains the watermark). In Panaron, the High Court had unknowingly granted two winding up Orders (one in the Shah Alam High Court and the second in the Kuala Lumpur High Court). Proofs of Debt (POD) were filed in the second winding up and the Official Receiver (OR) then realised there was the earlier first winding up Order. The OR filed an application in KL for a stay of the second winding up Order (under section 243) and to transfer the 5 PODs to the first winding up.

The Court (correctly, I think) rejected the reliance of section 243 for a stay of the second winding up. That section could not properly apply to these sort of facts. The Court instead relied on the decision of Megah Teknik to exercise its inherent jurisdiction to set aside the second winding up Order.

In my earlier article, I was of the view that: “… the Court ought to have jurisdiction to set aside a winding up Order. Echoing the words of Mohd. Azmi FCJ in Badiaddin, circumstances may exist where there is a “real need to set aside the defective order to enable the Court to do justice.”

This Panaron decision at least shows one instance where there is such a defective winding up Order falling within the Badiaddin principle. That allows the exceptional ability to set aside a winding up Order. Here, the Kuala Lumpur High Court had no jurisdiction to make the second winding up Order. I would also add that the second winding up proceedings should have been void for breaching section 226(3) where all legal actions are automatically stayed upon a winding up Order being made and cannot be commenced without leave of Court. This decision of Panaron appears to lay down a wider principle that if the winding up Court had no jurisdiction to grant the winding up Order in the first place, then that winding up Order can be set aside.

In future, this Panaron decision could possibly be extended, for example, to facts where there was defective service of the 218 Notice or the winding up Petition. The respondent company might not have known about the winding up proceedings and the Order is made in default of its appearance. Before Megah Teknik and this decision, such a company would have to convince the Court to apply section 243 for a stay of the winding up Order. Perhaps, Panaron and Megah Teknik now opens the door for the argument that the winding up Court had no jurisdiction to grant the winding up Order in the first place and therefore the Order can be set aside.

I would like to also add that the new Companies Bill (to amend the Companies Act 1965) will not specifically address the issue of whether the Court can set aside a winding up Order. The Bill will tweak the present section 243 stay provision to allow for two things. The first is that the stay of a winding up will take on a more natural meaning in that the stay is for a limited time only. Presumably, this is to allow for a stay of a winding up pending appeal for instance or for a short stay to give time for the company to settle the debts. There will be a new termination provision which allows for the winding up to be terminated (i.e. permanently). This suggests that the termination will also be prospective and takes effect from the date of the termination. It does not have the same effect of a setting aside. Therefore, the Court’s exercise of an inherent jurisdiction to set aside a winding up Order will still play a significant role in the future.

Speaking at the Regional Insolvency Conference 2014 in Singapore

On 25 August 2014, I will be speaking at the Regional Insolvency Conference 2014 organised by the Law Society of Singapore. I will be a speaker at the first Plenary Session focusing on a regional update and trends in insolvency in India, Malaysia and Vietnam. I will be speaking on the Malaysian perspective.

insolvency

The main areas I will briefly touch on will be on an introduction to Malaysia’s insolvency laws, in particular, on any cross-border insolvency provisions. And then I will introduce the upcoming changes to insolvency with the new Companies Bill. Malaysia will be introducing the Corporate Voluntary Arrangement (borrowing it from the UK) and judicial management (borrowing it from Singapore).

The Uncertainty on the Law Governing the Arbitration Clause

The law governing the arbitration agreement (i.e. the arbitration clause in a contract) potentially covers matters such as the existence, legality, interpretation, termination, and the identities of the parties to the arbitration clause. It is very common to not see any express provision on the law governing the arbitration clause. Contracting parties commonly make the assumption that the governing law of the contract will be the same law governing the arbitration clause.

(1) Governing law of the contract could be a strong indication of the governing law of the arbitration clause

The English Court of Appeal decision in Sulamérica CIA Nacional de Suguros SA and others v Enesa Engenharia SA and others [2012] 1 Lloyd’s Rep 671. In essence, the English Court of Appeal set out a three-stage enquiry in determining the law governing an arbitration agreement. (1) The express choice; (2) The implied choice in the absence of such an express choice; and (3) Where the parties had not made any choice, the proper law would be the law which the arbitration agreement has its closest and most real connection with. In particular for stage (2), the English Court of Appeal held that an express choice of law governing the substantive contract is a “strong indication of the parties’ intention in relation to the agreement to arbitrate.” On the specific facts of SulAmerica, the Court of Appeal agreed that the arbitration clause should be governed by the law of the seat (English law) and not the governing law of the contract (Brazil law). Nonetheless, the SulAmerica approach creates a rebuttable presumption that an express choice of law to govern the substantive contract would also apply to the arbitration clause. There have been English decisions that have since followed the SulAmerica approach.

(2) Or should the law of the seat of the arbitration be the governing law of the arbitration clause?

FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12 departs from the SulAmerica approach in treating substantive law in the main contract being a strong indication of the parties’ intention to have that same substantive law be the law governing the arbitration clause. The case of Firstlink instead argues that, the natural inference ought to be that the law of the seat of arbitration should be the law governing the arbitration clause. This is because when commercial relationships break down and there is dispute resolution, the parties’ desire for neutrality comes to the fore. The law governing the performance of contractual obligations prior to the breakdown takes a backseat and primacy should be accorded to the neutral law selected by parties to govern the proceedings of dispute resolution.

In Malaysia, the High Court in Government of the Lao People’s Democratic Republic v Thai-Lao Lignite Co Ltd [2013] 3 MLJ 409, it was held that the law governing the arbitration clause should be the law of the seat of the arbitration (see [98] to [100]). On appeal, the Court of Appeal upheld the High Court decision but the Grounds of Judgment did not delve into the issue on the law governing the arbitration clause. This case is now pending an application for leave to appeal to the Federal Court.

The case of Thai-Lao Lignite demonstrates the significance of the law applicable to the arbitration clause. One of the contentions in the High Court for the setting aside of the award (as seen in the reported decision) was that Malaysian law should apply to the arbitration clause (as that is where the seat of arbitration is stipulated). From that, it would follow that the ‘party’ to the arbitration clause must be a signatory to the main agreement itself in order to be a party to the arbitration agreement. However, if the governing law of the main agreement (New York law) were to apply to the arbitration clause, under New York law, the concept of an “intended third party beneficiary” would be deemed to be a party to the arbitration agreement. Hence, a non-signatory to the main agreement but one which is an intended third party beneficiary, could rely on the arbitration clause and could be one of the claimants to initiate arbitral proceedings (just like in the facts of Thai-Lao Lignite. However, by applying Malaysian law to the arbitration clause, the High Court held that this was one of the grounds for setting aside the award. The Judicial Commissioner held that the arbitral tribunal had exceeded its jurisdiction by allowing a non-signatory and essentially, a non-party to claim in the arbitral proceedings.

(3) Takeaway Point: Expressly Provide for the Law Governing the Arbitration Clause

It is therefore best to expressly provide for the law governing the arbitration clause to negate any uncertainty. It will just require the simple provision such as “The law of this arbitration clause shall be [state the law e.g. the law of Malaysia]“

 

Delivering a Talk on Enforcing Arbitral Awards and Foreign Judgments

I have been invited by the Singapore Management University School of Law to deliver a lunchtime seminar on Enforcing Arbitral Awards and Foreign Judgments in Malaysia. This will be held on Tuesday 12 August 2014.

As part of my talk, I will set out some of the statistics for the successful (or unsuccessful) applications for the enforcement of arbitral awards under the Arbitration Act 2005.

 

SMU

 

Substituting two Petitioners into a Winding Up Petition

The High Court in Allied Empire Plantations Sdn Bhd v Chip Lam Seng Berhad [2014] 6 CLJ 81 (“Allied Empire”) touched on some of the principles on the substitution of a Petitioner in a winding up Petition and where two parties were allowed to be substituted in as co-Petitioners.

The law governing the substitution of a party as Petitioner in a winding up Petition is contained in rule 33 of the Companies (Winding-up) Rules 1972 (“Rules”). Rule 33 provides that:

“… the Court may upon such terms as it thinks just substitute as petitioner any person who, in the opinion of the Court, would have a right to present the petition and who is desirous of proceeding with the petition.”

The case of Allied Empire involved two parties applying to be substituted as a petitioner. The first was Jadeline and the second was AmBank.

Jadeline

After the presentation of the Petition in August 2012, Jadeline had entered into an assignment with the Petitioner for the absolute assignment of the chose in action to claim the underlying debt giving rise to the Petition. The question of law that then arose was whether Jadeline could be deemed to be a creditor at the time of the presentation of the petition (and therefore “would have a right to present the petition) or whether Jadeline’s status as the creditor only crystallised after the entering of the assignment. In essence, the Court found that with the debt having been absolutely assigned to Jadeline by the Petitioner, the effect under the law is that all rights to present the Petition would also now be with Jadeline.

Procedurally though, here are cases that have found that not only must the intended substituting party be a creditor, that party must have also had issued the statutory notice (under section 218(2)(a) of the Companies Act 1965) (“218 Notice”) in order to fall within the definition of “would have a right to present the petition” (see for example, the High Court decision of Teoh Vin Sen v True Creation Sdn Bhd [2008] 4 CLJ 393). Presumably, the High Court in Allied Empire would have considered that the effect of the absolute assignment was that the complete chose in action of presenting the Petition had been absolutely assigned by the Petitioner over to Jadeline. Therefore, even the procedural issuance of the statutory notice would have been deemed to have been “assigned” to Jadeline.

AmBank

Where AmBank was applying for it to be substituted as a petitioner as well, AmBank had issued its statutory notice in December 2012 and applied for the substitution in September 2013. While AmBank had issued its 218 Notice, Jadeline had raised the objection that AmBank had not issued the 218 Notice prior to August 2012 (i.e. the time of the presentation of the Petition). Therefore, in short, AmBank did not fall within the definition of “would have a right to present the petition.” The Judge made short shrift of this argument by finding that the debt owing to AmBank was not seriously disputed. Section 218(2)(c) would also allow for a presumption of insolvency and there i snothing to prevent a creditor from presenting a petition to wind up a debtor without relying on the presumption in the statutory notice if the evidence is so clear that the debtor is in any event insolvent.

Substitution of Both Parties as Co-Petitioners

The Court then had to consider whether to allow only one of the parties to be substituted in as a Petitioner. Jadeline had made its application first while AmBank had the larger debt. The Court ordered that both parties be made Petitioners while AmBank was allowed to be the first Petitioner and which had the responsibility to ensure the necessary advertisement, gazetting and other getting up were complied with (but with costs to be born equally by the two Petitioners).

While it is true that there is nothing to prevent there being two or more Petitioners, there appears to be a general rule that Plaintiffs (or in this case, the two Petitioners) must be represented by the same set of solicitors. Allowing AmBank and Jadeline to be substituted in as Petitioners and yet, being represented by two different solicitors, may not have been possible.

The rationale of having plaintiffs, claimants or petitioners  to have a common set of solicitors appears to be in order to ensure consistency in the prosecution of a claim. The rule can be seen as far back as in Wedderburn v Wedderburn (1853) 17 Beav 158, where Sir John Romilly M.R. held that:

“Mr. and Mrs. Hawkins may, in concurrence with the other four co-plaintiffs, remove their solicitor, and the other four may allow him to conduct the proceedings for all. But if the plaintiffs do not all concur, Mr. Hawkins cannot take a course of proceeding different and apart from the other plaintiffs, for the consequence would be, that their proceedings might be totally inconsistent. When persons undertake the prosecution of a suit, they must make up their minds whether they will become co-plaintiffs; for if they do, they must act together. I cannot allow one of several plaintiffs to act separately from and inconsistently with the others.”

In the English Court of Appeal case of Lewis And Another v Daily Telegraph Ltd. (No. 2) [1964] 2 QB 601, it was held that:

“In my view, it was not regular, and not in accordance with the proper practice, that two firms of solicitors should be placed on the record as representing the plaintiff Lewis and the plaintiff company separately.”

Similarly, in the Supreme Court of Victoria decision of Goold and Porter Proprietary Limited v Housing Commission [1974] VR 102, it was held that:

“There seems to be a long line of authority to the effect that plaintiffs, where there is more than one plaintiff in an action, must appear by the same counsel. The cases seem very largely to be equity cases but the matter is stated categorically in the authorities Wedderburn v Wedderburn (1853) 17 Beav 158; Davey v Watt (1902) 28 VLR 24; Lewis v Daily Telegraph [1964] 2 QB 622 [*4]; [1964] 1 All ER 705; Odgers on Pleading and Practice, 18th ed., p. 16; Halsbury, 3rd ed., vol. 3, p. 72; Newton v Ricketts (1848) 2 Phil 624; Ballard v White (1843) 2 Hare 158 at p. 159; Swift v Glazebrook (1842) 13 Sim 185; Re Norwoods Patents (1895) 11 RPC 214, at p. 221; Re Wright, [1895] 2 Ch 747 at p. 748) to which I have been referred, including one in this Court which was decided by Holroyd, J, Davey v Watt (1902) 28 VLR 24; 8 ALR 90.

In Lewis v Daily Telegraph (No. 2) [1964] 2 QB 601 at p. 623, [1964] 1 All ER 705, there is a dictum of Russell, LJ, which does indicate his Lordship’s view that where there are a number of plaintiffs in an action, whether that action is a consolidated action or not, there is a discretion to allow separate representation to the plaintiffs. But that appears, on a review of the authorities by counsel, to be the only reference to the possibility in an action of this kind which is not a consolidated action, of plaintiffs appearing by separate counsel. The condition of the plaintiffs so doing is stated to be to avoid injustice, and his Lordship indicates that it must be rare.

In the absence of any other authority suggesting that there is a discretion, I am disposed to the view that there is no discretion in the case of an action which is not a consolidated action, and that, therefore, I should refuse the application which has been made by Mr. Marks and by Mr. Eames, for the plaintiffs, in this action, or some of them, to appear by separate counsel. I say ‘or some of them’ because some of the plaintiffs are not here at this moment, either in person or by solicitor or counsel, so I am told. However that may be, and assuming that I have a discretion, I am of the opinion that no injustice would be done to the plaintiffs by requiring them all to appear by the same counsel. I am satisfied that the only conflict that might arise between them is not related in any way to the relief sought in the action; it might well be that different considerations would actuate different plaintiffs in certain eventualities but those eventualities, which I do not more particularly refer to, seem to me to have nothing to do with the actual conduct of the action as it appears on the pleadings. And I think that the interests of the plaintiffs to the extent that they may differ, could be well looked after by solicitors or solicitors and counsel who are not appearing in the action, and they do not have anything to do with the conduct of the action.”

Therefore, allowing both AmBank and Jadeline to be co-Petitioners may not have been possible since both parties would have wanted their own solicitors. The Court would then have had to make the difficult choice on who to select from the two competing parties. I am not aware of what are the guiding principles on how to select between these two competing parties.

 

 

Indemnity Costs for Initiating Court Proceedings in Breach of Arbitration Clause

I had earlier written about the case for indemnity costs in opposing arbitral awards. This was in the context of costs being awarded on an indemnity basis where there was an unsuccessful attempt at setting aside an award or resisting an enforcement of an award.

In my earlier article, I had pointed out that the English courts may award indemnity costs where proceedings are brought in breach of a binding arbitration agreement. In the High Court decision of A v B (No 2) [2007] EWHC 54 (Comm), court proceedings were stayed as the proceedings were brought in breach of an arbitration agreement. It was held that as the breach had caused the innocent party to incur legal costs, those costs should normally be recoverable on an indemnity basis.

The approach in A v B has now been adopted in Australia in the Supreme Court of Western Australia decision of Pipelines Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10. The Court had ordered Pipeline to pay costs on an indemnity basis to ATCO when ATCO had successfully applied for a stay of proceedings under section 8 of the Commercial Arbitration Act 2012.

In making this order, the Court confirmed the application of the principle in the English case of A v B [2007] EWHC 54 that indemnity costs will generally be awarded where a party commences legal proceedings in breach of a contractual obligation to refer a dispute to arbitration.

I am not aware of the Malaysian Courts having determined whether costs on an indemnity basis should be allowed if there is a successful stay of Court proceedings under section 10 of the Arbitration Act 2005. Hopefully this case for indemnity costs can be canvassed before the Courts.