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Refusal of a Party to Pay Its Share of AIAC’s Deposit Could Render the Arbitration Agreement Inoperative?

posted 5 months ago

The recent decision by the Court of Appeal in the case of JSB v ACSB (Case No: P-02(IM)(NCVC)-2008-10/2022 has highlighted the importance for parties in an arbitration proceeding to comply with their respective obligations to make payment for the  deposit of fees in a proceeding, in order to avoid rendering an arbitration agreement to be inoperative, which could provide the opportunity for the opposing party to refer the disputes to the jurisdiction of the courts.

The Facts

High Court Stage
The Plaintiff filed a writ and statement of claim against the Defendant after the arbitration proceeding that it has commenced at the onset was terminated by the arbitrator, after consultation with the Director of the Asian International Arbitration Centre (“AIAC”), as the Defendant had refused to pay its portion of the AIAC’s deposit which covers the arbitrator’s fees and AIAC’s administrative fees.

The Defendant filed an application to strike out the writ and statement of claim under Order 18 Rule 19 of the Rules of Court 2012 (“ROC 2012”) and in the alternative, for a stay of the court proceeding pursuant to Section 10 of the Arbitration Act 2005 (“AA 2005”).

The Defendant contends that the arbitration agreement between both parties still subsisted and is not inoperative due to the non-payment of its portion of the AIAC’s deposit.

The Plaintiff, on the other hand, contends that the non-payment of the AIAC’s deposit would amount to a breach of the arbitration agreement and therefore due to the termination of the proceeding, the Plaintiff is entitled to refer the disputes between both parties to the court.

The Penang High Court held: –

a. The non-payment of the AIAC’s deposit does not render the arbitration agreement inoperative or incapable of being performed;

b. The Plaintiff can pay the Defendant’s share of the AIAC’s deposit and recover the same from the Defendant when the arbitration award is delivered;

c. Therefore, as the arbitration agreement is not inoperative, a stay of the High Court proceeding was granted under Section 10 of AA 2005.

Court of Appeal Stage
The Plaintiff in dissatisfaction of the High Court decision appealed to the Court of Appeal.

The Plaintiff argued the following: –

a. According to the principles in Kebabangan Petroleum Operating Co Sdn Bhd v Mikuni (M) Sdn Bhd [2021] 1 MLJ 693, when an arbitration agreement becomes inoperative, the High Court should refer the matter to arbitration again;

b. Further, premised on the principles propounded in the Singapore Court of Appeal’s decision in L Capital Jones Ltd and Another v Maniach Pte Ltd [2017] SGCA 63, the High Court ought to have dismissed the Defendant’s application for a stay of the court’s proceeding; and

c. The High Court had erred in failing to appreciate Rule 14(7) of the AIAC Arbitration Rules as the Learned High Court Judge has failed to appreciate that the learned arbitrator’s first order was made without consulting the Director of the AIAC.

The following issues were determined by the Court of Appeal: –

a. Does applying to strike out the court proceeding amount to invoking the court’s jurisdiction and amounted to taking fresh steps in the proceeding?

Yes – Section 10(1) of AA 2005 provides that a court would have no discretion but to make an order to stay the court proceeding if the matter is a subject of an arbitration agreement unless the party applying for the stay has taken further steps in the proceeding or the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed.

An application under Section 10 of AA 2005 cannot be a hybrid application i.e., to combine it with other provisions under the ROC 2012.

The action by the Defendant in applying to strike out the Plaintiff’s writ and statement of claim tantamounts to “taking any other steps in the proceedings” and thus the Defendant cannot apply for a stay of the court proceedings.

For the court to strike out a claim would invite the court to dwell into the merits of the matter and therefore an applicant cannot now exit from the same and pray for a stay of the court proceeding.

b. Would the arbitration agreement be inoperative within the meaning of Section 10 of AA 2005?

If the Defendant had not taken a further step in the proceeding i.e., to file the application to strike out – would the arbitration agreement be inoperative by way of the Defendant’s action in refusing to pay its share of the AIAC’s deposit?

The Court of Appeal held that the Defendant’s refusal in making payment for the AIAC’s deposit would amount to a breach of the AIAC arbitration rules.

By virtue of the parties’ agreement to refer any disputes and/or differences arising from the contract to arbitrate would also mean complying with any applicable arbitration rules and a breach of the same would result in taking the consequences that would ensue.

The Court of Appeal took a serious stance against parties who refuse to abide by the arbitration rules as it would show inconsistences to stand by its agreement to refer the disputes to arbitration.

The refusal to pay the share of the AIAC’s deposit for no reason other than the party’s unwillingness to pay would show a clear and unequivocal intention not to abide by the arbitration process, which is akin to stultifying the arbitration proceeding.

Despite the arbitration rules providing the opportunity of another party to make payment for the defaulting party, this opportunity cannot be seen as being converted to an obligation.

c. Whether a stay of the court’s proceeding would be a futile exercise as the Defendant has taken a hard stand in not paying the AIAC’s deposits?

The Court of Appeal saw no reason to grant an order for stay of the proceeding as granting a stay would frustrate the Plaintiffs attempt to have the dispute to be heard and resolved without further delay.

Premised on the foregoing, the Court of Appeal found that the Penang High Court had erred in granting a stay of the court proceeding when the Defendant has taken further step in the proceeding in applying to striking out the Plaintiff’s claim.

The arbitration agreement entered between both parties would have been inoperative due to the refusal of the Defendant in paying its share of the AIAC’s deposit.

The dispute between both parties was therefore ordered to proceed to trial in the High Court.

How does this decision impact you?

Firstly, it must be emphasised again that one should not take any steps in the court proceedings, such as a striking out application, as that would indicate one’s intention to have the dispute resolved by the Malaysian courts.

Secondly, as the law stands, it is crucial for parties to comply strictly with the provisions of the arbitration rules governing the proceedings to avoid a potential breach of the arbitration agreement, which could result in the termination of the arbitration proceedings. This could be disastrous for a defaulting party who still intends for the legal disputes to be resolved by way of arbitration proceedings, as the non-defaulting party may then proceed to submit the disputes to be determined by the courts.

About the authors

Lim Ren Wei
Construction, Energy & Engineering Dispute Resolution (Arbitration & Adjudication)
Harold & Lam Partnership
[email protected]

Yip Xiaoheng
Senior Legal Executive
Construction, Energy & Engineering Dispute Resolution (Arbitration & Adjudication)
Harold & Lam Partnership


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