In our previous post, we discussed the Malaysian position in Kebabangan which decided that a failure or delay by a respondent to pay its portion of the arbitration security deposit amounted to a repudiatory breach that rendered the arbitration agreement inoperative. On the same topic, we will now explore the Singapore position in Heartronics Corporation v EPI Life Pte Ltd and others [2017] SGHCR 17 (“Heartronics”) which also referred to the English position in BDMS Ltd v Rafael Advanced Defence System [2014] All ER (D) 244 (“BDMS”).
I. Background In Heartronics
The Plaintiff (“P”) commenced a suit against the 1st Defendant (“D1”) for disputes relating to 2 agreements between them (the “Agreements”). Also included in the suit were 3 other defendants who were not parties to the Agreements.
The suit was filed following P’s unsuccessful attempts to initiate a mediation-arbitration against D1 pursuant to the alternative dispute resolution clauses (the “ADR Clauses”) in the Agreements.
The ADR Clauses provide that all disputes in connection with the Agreements shall be submitted to the Singapore Mediation Centre (“SMC”) and the Singapore International Arbitration Centre (“SIAC”) for resolution by mediation-arbitration in accordance with the SMC-SIAC Med-Arb procedure (the “Med-Arb Procedure”).
The Med-Arb Procedure envisioned the following:
(a) the commencement of both mediation and arbitration at the same time, with arbitration being deemed to commence in accordance with the applicable SIAC Arbitration Rules, but stayed pending the outcome of the mediation.
(b) A mediator would thereafter be appointed by the SMC and concurrently appointed by the parties as an arbitrator so that any settlement reached in the mediation can be recorded as an arbitral or consent award.
(c) The arbitration commenced shall resume if and when the mediation has ended unsuccessfully.
Relying on the ADR Clauses, D1 applied to stay the suit pursuant to section 6 of the International Arbitration Act 1994.
II. Main Issue & Decision
The issue was whether, on the facts, the arbitration agreements in the ADR Clauses were null and void, inoperative or incapable of being performed.
The Court dismissed D1’s stay application and held that D1’s conduct in response to P’s attempts to commence mediation-arbitration were repudiatory breaches of the ADR Clauses. Consequently, the ADR Clauses were null and void.
The Court set out 3 situations whereby an arbitration agreement can be treated as having been discharged.
Situation A
Where a party renounces the said agreement by conveying to the other party that the former will NOT perform its obligations thereunder at all, the latter is entitled to terminate the said agreement.
Situation B
Where a breach of the said agreement will deprive the innocent party of substantially the whole benefit of the said agreement.
Situation C
Breach of a condition of the said agreement, entitling the innocent party to treat the said arbitration as discharged.
The Court found the ADR Clauses had been discharged by breach, falling within Situations A and B.
III. Discussion on Situation B
The Court discussed Situation B first, followed by Situation A.
The Court found that D1’s actions amounted to breaches of the ADR Clauses and deprived P of substantially the whole benefit therefrom. Thus, P was entitled to terminate the ADR Clauses.
D1’s Breach of Good faith Obligation
Under the Med-Arb Procedure, the parties were required to, amongst others, participate in mediation in good faith.
D1’s conduct were found to be fell short of the good faith requirements in participating in mediation based on the following reasons:
(a) D1 failed to pay the necessary fees to the SMC for the mediation to proceed, despite many reminders; and
(b) over a sustained period (from June 2014 to July 2015), D1 continually sought to postpone the commencement of the mediation.
Failure to pay fees required for arbitration to commence was in repudiatory breach of the agreement
The Court followed the United States case of Tahisa Roach which held that a refusal to pay fees required for an arbitration to commence is a repudiatory breach of the arbitration agreement. In Tahisa Roach, a failure to pay the said fees for 2 months was regarded as a breach of the arbitration agreement so as to preclude the defaulting party from further seeking to enforce the same.
The Court applied Tahisa Roach to mediation and found that D1’s failure to pay the fees and continually postponing the start of the mediation had prevented P from being able to proceed at all in the manner contemplated under the ADR Clauses.
English Position in BDMS
D1 sought to rely on BDMS whereby the English Court found that a respondent’s failure to pay its share of the advance on costs for the arbitration may not amount to a repudiatory breach.
In BDMS, the plaintiff referred a dispute with the defendant to arbitration under the arbitration rules of the International Chamber of Commerce (the “ICC Rules”). Article 30 of the ICC Rules required the advance on costs to be paid in equal shares by the claimant and the respondent. However, any party shall be free to pay the whole of such advance , should the other fail to pay its share.
The defendant refused to pay its share of the said advance because of concerns about the plaintiff’s ability to meet any adverse costs order, and wished to make the payment only after the outcome of its application for security of costs.
The plaintiff treated this failure as a repudiatory breach of the arbitration agreement and withdrew the arbitration proceedings. It then commenced court proceedings and the defendant retaliated by applying a stay of those proceedings in favour of arbitration.
The English Court recognised that:
(a) the requirement to pay an advance on costs in arbitration proceedings was a contractual obligation under the arbitration agreement; and
(b) a failure to pay such advance was a breach of the said agreement.
Although, the defendant’s failure to pay the said advance was a breach, it was not a repudiatory breach because:
(a) the defendant did not refuse to participate, but was instead actively participating in the arbitration proceedings;
(b) the defendant’s refusal was limited to payment of the said advance, a matter which was due to be addressed at the forthcoming preliminary issue hearing;
(c) such refusal was not absolute but qualified – i.e. refusal to pay unless security for costs was provided by the plaintiff; and
(d) the defendant’s breach did not deprive the plaintiff of its rights to arbitrate, as it was open for the plaintiff under the ICC Rules to pay the said advance on behalf of the defendant and then seek an interim award that the said advance be paid by the defendant.
Distinguishing BDMS
However, the Court did not apply BDMS because of the following distinguishing features in Heartronics:
a) Neither the ADR Clauses nor the Med-Arb Rules expressly dealt with the issue of fees. In particular, there was no express provision for P to pay on D1’s behalf in the event D1 failed to pay its share.
b) Unlike the defendant in BDMS, D1’s actions (failure to pay fees and continual postponement of mediation) were at odds with the Med-Arb Rules which D1 had agreed would administer the mediation.
Conclusion
The Court accordingly found that D1’s conduct was in breach of its obligation to participate in mediation in good faith and it had the ultimate effect of depriving P of substantially the whole benefit under the ADR Clauses, i.e. recourse to the mediation-arbitration procedure. P was therefore entitled to terminate the contract in question, i.e. the ADR Clauses.
IV. Discussion on Situation A
The Court also found that D1 by conduct clearly conveyed to P that it had no interest in performing its obligations under the ADR Clauses at all.
While D1 did not expressly state that it would not or did not wish to proceed to mediation-arbitration, its actions were inconsistent with its obligation under the ADR Clauses.
The Court highlighted the following in justifying its findings:
(a) over a sustained period of about 1 year, D1 consistently refused to agree on a date for mediation to take place or make any payment of the requisite fees.
(b) instead, D1 variously suggested methods of dispute resolution which had not been agreed upon, indicated that mediation could not take place until some later date and eventually stopped responding to letters from P’s solicitors altogether.
(c) it was especially telling when D1 did not attempt to contact P after P expressly stated that D1’s actions were repudiatory breaches of the ADR Clauses.
(d) accordingly, the Court gave no weight to D1’s assertion that it was still interested in pursuing mediation-arbitration after the suit was initiated.
V. Comment
The 3 cases – Kebabangan, Heartronics and BDMS – are on common ground that a refusal to pay the arbitration deposit / advance is a breach of the arbitration agreement.
However, those cases diverge on the question whether such breach is repudiatory or not. The breach was found to be repudiatory in Kebabangan and Heartronics, but not in BDMS. One key factor leading to the different outcomes in Heartronics and BDMS is the existence of arbitration rules permitting one party to pay the other’s share of the deposit to allow the arbitration to progress. The existence of such a provision may preclude a breach from being repudiatory (per BDMS).
In Kebabangan, the applicable arbitration rules were the then Rules of the Kuala Lumpur Regional Centre for Arbitration (the “KLRCA Rules”). The KLRCA Rules did allow one party to pay the defaulting party’s share of the deposit. However, this factor does not appear to have been raised or considered in Kebabangan. In fact, both Heartronics and BDMS were not referred to and/or considered in Kebabangan.
Lastly, being evasive in complying with the agreed arbitration/mediation procedure may be treated as renouncing a party’s contractual right to arbitrate/mediate and the other party may elect to terminate the alternative dispute resolution agreement and pursue litigation.
The contents of this article are published for the purpose of general information only; they are not to be regarded, used or relied on as legal advice for any matter. Please contact us if you require legal advice specific to your case.