One of the common frustrations faced by a claimant in arbitration proceedings is having to deal with a recalcitrant respondent who refuses to pay the deposit required by the arbitral institution or tribunal. More often than not, in the interests of time, the claimant would have to fork out the money to pay the respondent’s portion of the deposit in order not to delay the proceedings.
Can the claimant refuse to pay the respondent’s portion and proceed to litigate in court instead of continuing with the arbitration? If it does so, can the respondent obtain a stay of the court proceedings on the basis that the dispute should be arbitrated despite previously refusing to pay the arbitration deposit? These issues were recently dealt with in a seminal judgment given by the Court of Appeal in JSB v ACSB [2023] 1 LNS 2176. Unless otherwise stated, the paras referred to below shall mean paras in this Court of Appeal judgment.
BRIEF FACTS
JSB (“Claimant”) appointed the ACSB (“Respondent”) as the main contractor of a project to construct a medium-cost apartment block in Penang. A dispute arose in relation to the cement used by the Respondent which allegedly compromised the safety of the project. On 1 July 2019, the Claimant commenced a court action against the Respondent in the Penang High Court (“1st Court Action”). The Respondent objected to the commencement of the 1st Court Action due to the existence of an arbitration clause in its contract with the Claimant, to which the Claimant acknowledged and subsequently discontinued the said suit.
The Claimant then referred the dispute to arbitration whereby the proceedings were registered with the Asian International Arbitration Centre (“AIAC”). Both parties paid their respective share of the 1st provisional advance deposit (“Deposit”) to AIAC. When AIAC later requested for a further deposit, the Claimant paid its share but the Respondent refused to do so.
After consulting the Director of AIAC, the arbitrator terminated the arbitration and the Claimant thereafter filed a second court action (“2nd Court Action”) against the Respondent in the Penang High Court on 16 February 2021.
The Respondent then applied to strike out, or alternative to stay, the 2nd Court Action. The stay was sought on the ground that the dispute ought to be referred to arbitration due to the arbitration clause in the contract.
BEFORE THE HIGH COURT (“HC”)
The HC allowed the Respondent’s application for a stay, on the basis that (i) the arbitration agreement between the parties had not been rendered inoperative by the mere non-payment of the deposit by the Respondent; and (ii) the application for striking out did not amount to the Respondent taking “any other steps in the proceedings” (which if it did, would disqualify the Respondent from obtaining a stay).
BEFORE THE COURT OF APPEAL (“COA”)
The following three questions were dealt with by the COA: –
a) Whether in applying to strike out the 2nd Court Action, the Respondent by so doing has invoked the jurisdiction of the Court and has taken fresh steps in the proceedings” (“1st Question”);
b) Whether the arbitration agreement has become inoperative within the meaning of s 10 of the Arbitration Act 2005; (“2nd Question”); and
c) Whether a stay of the court proceedings would be an exercise in futility as the Respondent had resolutely resolved not to pay its share of the arbitration deposit (“3rd Question”).
As regards the 1st Question, the law is well-settled that a striking out application would constitute a step in the proceedings. As a result, the applicant would be regarded as having invited the court to look into the merits of the dispute and thereby disqualify itself from obtaining a stay. This is notwithstanding the fact that the Respondent had sought for the stay and striking out (as alternative reliefs) in the same application.
With respect to the 2nd Question, the COA held that the stubborn refusal by the Respondent to pay without any cogent reasons rendered the arbitration agreement inoperative, this being one of the grounds where a stay would not be granted despite the parties having an arbitration clause in their contract.
The COA did not find it necessary to decide whether there was a repudiation of the arbitration agreement; if it had to decide however, the Respondent’s refusal – described as akin to “stultifying the arbitration, if not to suffocate and even sabotage it” – would clearly be such a repudiation. The foregoing approach indicates that it is not necessary for there to be a repudiation before an arbitration agreement can be rendered inoperative.
The COA answered the 3rd Question in the affirmative. To stay the 2nd Court Action would be an exercise in futility and frustrating further the Claimant’s attempt to have the dispute heard and resolved quickly. Given the Respondent’s stand of refusing to pay the deposit, a stay will likely lead to a repeat of the previous cycle of events – appointment of arbitrator, refusal to pay deposit, termination of arbitration – and the regime of arbitration being ridiculed.
In the end, a stay was refused and the 2nd Court Action was to proceed to trial before the HC.
COMMENT
It is worth mentioning that the HC below found that the non-payment by the Respondent did not render the arbitration agreement inoperative. The HC emphasized that the Claimant had two viable options to move forward with the arbitration: (i) paying the Respondent’s share, or (ii) continuing with its claim and requesting the termination of the Respondent’s counterclaim proceedings (para 26 of JKP Sdn Bhd v Anas Construction Sdn Bhd [2022] MLJU 3058).
A similar judicial approach is observed in Lion Pacific Sdn Bhd v Pestech Technology Sdn Bhd [2022] 1 LNS 135 whereby the HC appeared to have placed the onus of paying the respondent’s deposit on the claimant in the event of the respondent failing to pay. Despite the arbitration being terminated due to the respondent’s default in paying the security deposit, the HC still granted a stay of the court proceedings and suggested that the claimant could advance the respondent’s deposit and recover the same as part of the final award, thereby avoiding the “conundrum” arising from the risk of the arbitration being stalled by the respondent’s non-payment (Lion Pacific at paras 13, 42).
In contrast, the COA in JKP found that the Respondent’s non-payment did render the arbitration agreement inoperative, having the effect of scuttling the arbitration (paras 68, 69). The Claimant is not obligated to pay the Respondent’s share but is merely given an option to do so (para 62). On a party not paying its share, the arbitrator is not obliged to continue and may terminate the arbitration, in which case the parties are then free to pursue litigation in court as the arbitration agreement has been rendered inoperative (para 72). Perhaps key in the mind of the COA is that the grant of a stay would facilitate the Respondent’s wrongful attempt to inflict suffering on the Claimant by taxing the latter’s financial resources:
“[44] The party refusing to pay its share of the arbitrator fees knows fully well that there is no more effective way to tax the financial resources of the other party than by compelling it to pay the refusing party’s share of the AIAC’s Deposit if the other party is keen to have the arbitrator continue with the hearing until an award is handed down.”
[45] For as long as the arbitration proceedings continue under the financing of the paying party, the refusing party would just have to ride on the goodwill of the paying party. We can think of no more belligerent action on the part of the refusing party to inflict suffering and punishment on the paying party and to expose it to greater risk of inability to recover the fees paid on its behalf in the award of costs.”
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