Significance of “may” and “shall” in arbitration clauses

The Privy Council in the Anzen Limited case emphasised the importance of careful drafting of the arbitration clause (Grounds of Judgment dated 18 January 2016). Here, the Privy Council had to decide on the phrase “may submit the dispute to binding arbitration”. The Privy Council interpreted this phrase to mean that either party to the contract could insist on arbitration. Even where one party had initiated litigation, it was open to the other party to make an unequivocal request that the dispute should be submitted to arbitration and/or to then apply for a stay of the litigation.

 

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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.

Satellite Wars: A Commentary on the Astro v Lippo Arbitration Dispute

[Originally published in Skrine’s Legal Insights Issue 4/2012]

In the Singapore High Court decision of Astro Nusantara International BV and others v PT Ayunda Prima Mitra and others [2012] SGHC 212, the Plaintiffs from the Astro group of companies (“the Astro Claimants”) succeeded in enforcing five arbitral awards totalling more than US$250 million against the Defendants from the Lippo group of companies (“the Lippo Respondents”).

Although the case was decided under the provisions of the Singapore International Arbitration Act (“IAA”), the decision is also useful in the Malaysian context for the interpretation of the Arbitration Act 2005 (“Malaysian Arbitration Act”).

This article will first set out a brief overview of the relevant provisions of the IAA before going on to discuss the facts and the legal issues of the case.

SINGAPORE INTERNATIONAL ARBITRATION ACT

The IAA follows closely the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). Section 3 of the IAA states that, subject to the IAA, “the Model Law, with the exception of Chapter VIII thereof, shall have the force of law in Singapore.” The excluded Chapter VIII of the Model Law deals with the enforcement, and opposition to the enforcement of arbitral awards. There are a number of Articles of the Model Law (incorporated by IAA) and Singapore procedure which are relevant to the facts and disputes of the case.

First, Article 16 of the Model Law provides that the arbitral tribunal may rule on its own jurisdiction either as a preliminary determination or as a determination within the award on the merits. Where the arbitral tribunal makes such a preliminary determination on jurisdiction, the dissatisfied party may, under Article 16(3) of the Model Law (equivalent to section 18(8) of the Malaysian Arbitration Act), appeal to the Singapore High Court within 30 days.

Secondly, Article 34 of the Model Law (similar to section 37 of the Malaysian Arbitration Act) sets a time limit of 90 days for a dissatisfied party to apply to the Singapore High Court to set aside an arbitral award.

Lastly, in terms of enforcing an arbitral award and recognising such award as a Singapore Court Judgment, the Singapore procedure allows the Court to grant leave to enforce the award on an ex parte basis (i.e. without the presence of a respondent). The Order must be served on the respondent who may then apply to set aside the Order within a prescribed time frame.

FACTUAL BACKGROUND

In 2008, the Astro Claimants (consisting eight companies) initiated arbitration proceedings against the Lippo Respondents (being three companies) under the auspices of the Singapore International Arbitration Centre. The dispute concerned a failed joint venture relating to the supply of satellite-delivered direct-to-home pay television services in Indonesia.

The Astro Claimants succeeded in obtaining five arbitral awards against the Lippo Respondents, totalling more than US$250 million. The Astro Claimants then obtained leave from the Singapore High Court to enforce the five awards against the Lippo Respondents (“Enforcement Orders”) and attempted to serve the Enforcement Orders on the Lippo Respondents in Indonesia.

In this dispute, there were two important time limits that had passed. Firstly, in the course of the arbitration, the Lippo Respondents had challenged the jurisdiction of the arbitral tribunal on the ground that three of the Astro Claimants were not parties to the arbitration agreement. The tribunal ruled by way of a preliminary determination that it had the jurisdiction to adjudicate the disputes in the arbitration. The Lippo Respondents did not to appeal to the Singapore Court against this decision within the 30 days period prescribed under Article 16(3) of the Model Law. Instead, the Lippo Respondents chose to continue with the arbitration proceeding under protest, and filed a counterclaim against the Astro Claimants in the arbitration. The time limit for appeal against this determination of jurisdiction had long passed.

Secondly, after the five arbitral awards were issued in favour of the Astro Claimants, the Lippo Respondents did not to apply to the Singapore High Court to set aside the awards within the 90 days period prescribed under Article 34 of the Model Law. As such, the time limit for doing so had also expired.

The Enforcement Orders were then purportedly served on the Lippo Respondents in Indonesia. After the expiry of the period to set aside the Enforcement Orders, the Astro Claimants entered judgment against the Lippo Respondents. The Lippo Respondents subsequently applied to challenge the service of the Enforcement Orders and to challenge the enforcement of the awards on the ground that the tribunal had no jurisdiction to join three of the Astro Claimants in the arbitration.

THE LEGAL ISSUES

The Lippo Respondents challenged the validity of service of the Enforcement Orders. The High Court ruled that there was no proper service of the Enforcement Orders and gave leave to the Lippo Respondents to challenge the enforcement of the awards.

Of greater significance, however, were the issues concerning the challenge to the enforcement of the awards. These issues gave rise to certain novel questions of law and which led to the Singapore Court having earlier allowed the ad hoc admissions of foreign counsel, namely David Joseph QC for the Astro Claimants and Toby Landau QC for the Lippo Respondents, to argue the matters in the Court.

There were two significant issues concerning the challenge to the enforcement of the awards, viz:

1. Whether the Lippo Respondents were entitled to resist the enforcement of the awards in the country in which the awards were made when they did not take any steps to set aside those awards within the prescribed time frame; and

2. Whether the Lippo Respondents had a right to revive a challenge based on the alleged lack of an arbitration agreement and a misjoinder of some of the Astro Group companies to the arbitration well after the award had been made.

Issue 1: Failure to Apply to Set Aside and Ability to Resist Enforcement

Under the Model Law, it is generally accepted that there are two forms of challenging an award. The first is an ‘active’ remedy under Article 34 (equivalent to section 37 of the Malaysian Arbitration Act) to apply to set aside the award. The second is a ‘passive’ remedy under Article 36 (equivalent to section 39 of the Malaysian Arbitration Act) where the resisting party can wait until an application is made to enforce the award under Article 35 (equivalent to section 38 of the Malaysian Arbitration Act) and at that point in time, raise the grounds under Article 36 to oppose the enforcement.

As explained by the Singapore High Court, the IAA makes a distinction between an international arbitral award rendered in Singapore (i.e. a domestic international arbitral award) and an international arbitral award rendered in a foreign New York Convention country (i.e. a foreign international arbitral award).

For an international arbitral award (whether domestic or foreign), the IAA specifically excludes the mechanism of opposing the enforcement provided in Chapter VIII of the Model Law i.e. Articles 35 and 36. However, in respect of a domestic international arbitral award, an award is deemed “final and binding” under section 19B of the IAA, but subject to the express right of the dissatisfied party to resort to the sole and exclusive challenge through the setting aside mechanism.

Although Chapter VIII of the Model Law is excluded by the IAA, in the case of a foreign international arbitral award, the dissatisfied party may still oppose the enforcement of the award under the prescribed grounds set out in section 31 of the IAA (which reproduces Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards concluded in New York on 10 June 1958).

The Court pointed out that this difference in approach to domestic and foreign international arbitral awards is not unique to Singapore as several civil law jurisdictions, such as Germany and Quebec also adopt a similar difference in the treatment of domestic and foreign international arbitral awards.

The Court further emphasised that the Model Law more properly resembles civil law rather than common law drafting. Hence, any discussion on the Model Law should draw from arbitration law in civil law jurisdictions.

The Lippo Respondents’ sole avenue of challenge in the Singapore Courts in relation to the arbitral awards was through an application to set aside those domestic international arbitral awards. The Lippo Respondents had failed to do so within the statutorily prescribed time limits. Therefore, the Lippo Respondents could not avail itself of the remedy of opposing the enforcement of those awards.

Issue 2: Failure to Appeal on Jurisdiction Challenge

In relation to the issue of the tribunal’s preliminary determination on jurisdiction, an aggrieved party in such a situation would have three options in attempting to challenge this preliminary determination:

1. Appeal to the Court under Article 16(3) of the Model Law;

2. Choose to leave the arbitral regime in protest and not to appeal under Article 16(3), and boycott the proceedings. Arguably, the boycotting party would then be able to apply to set aside the award under Article 34(2)(a)(i) on jurisdictional grounds; and

3. As arose in the present facts, the aggrieved party could choose not to appeal under Article 16(3) but continue with the arbitral regime by fully participating in the hearing with an express reservation of its rights.

The High Court held that in relation to the third option, it would not be open to a party to hold off bringing a jurisdictional challenge (i.e. by failing to appeal to the Court within the set time limit) and, at the same time, participate in the arbitration on the merits in the expectation that it could revive its jurisdictional challenge at a later stage should it prove to be unsuccessful in the arbitration. Such conduct would make a mockery of the finality and effectiveness of arbitral awards on jurisdiction.

Challenging such an award on jurisdictional grounds is thus excluded from the grounds which a party may invoke at the setting-aside or the enforcement stage if the party has chosen not to bring an appeal under Article 16(3).

It was held there are no passive remedies when it comes to challenging jurisdiction under the IAA – a party wishing to oppose a jurisdictional award must act within the prescribed time frame.

The Singapore High Court cautioned that if a party decides to hedge its bets as the Lippo Respondents had done, the disadvantages and risks of this tactic are dire under the IAA if the outcome is an adverse award on the merits.

COMMENTARY

Failure to Set Aside and Ability to Resist Enforcement

Unlike the IAA, the Malaysian Arbitration Act permits the dissatisfied party under either a domestic or a foreign international arbitral award to oppose the enforcement of the arbitral award in the enforcement proceeding.

One interpretation of the Malaysian Arbitration Act (and one which is in line with jurisprudence from many other Model Law countries) is that, a party can always opt for either the ‘active’ remedy by applying to set aside an award under section 37 of the Malaysian Arbitration Act or for the ‘passive remedy’ by opposing the enforcement of the award in the enforcement proceeding under section 39 of the Malaysian Arbitration Act.

However, there are High Court authorities that suggest that the failure to set aside an award within the prescribed time limit may be fatal to the party’s subsequent attempt to oppose enforcement (Ngo Chew Hong Oils & Fats (M) Sdn Bhd v Karya Rumpun Sdn Bhd [2009] 1 LNS 1321 and Bauer (M) Sdn Bhd v Embassy Court Sdn Bhd [2010] 1 LNS 1260).

It remains to be seen whether this will be the approach that will be confirmed by the appellate courts.

Failure to Appeal on Jurisdictional Challenge

This Singapore High Court decision on the interpretation of Article 16(3) of the Model Law does provide a useful guide on the interpretation of section 18(8) of the Malaysian Arbitration Act.

Applying the principles of the Singapore High Court decision, if a party fails to appeal to the High Court pursuant to Section 18(8) of the Malaysian Arbitration Act against the arbitral tribunal’s preliminary determination that it has jurisdiction, then the party could possibly be precluded from raising a challenge on jurisdiction in either the subsequent setting aside application of the final award under section 37 of the Malaysian Arbitration Act or in enforcement proceeding under section 39 of the Malaysian Arbitration Act.

The Singapore High Court decision referred to authorities from Germany and Quebec on this point which the Malaysian courts can also draw reference from in the future.