Court action is 'prima facie repudiation' of arbitration agreement, says Singapore court

“Parties who enter into a contract containing an arbitration clause can reasonably expect that disputes arising out of the underlying contract would be resolved by arbitration and indeed have a contractual obligation to do so," the Court said in the ruling. "Thus, where court proceedings are commenced without an accompanying explanation or qualification and the relief sought will resolve the dispute on the merits, the defending party in the court proceedings is entitled to take the view that the party who commenced those proceedings…no longer intends to abide by the arbitration clause"

The case concerned a dispute between two companies founded by brothers Oung Da Ming and Oung Yu-Ming. Marty Ltd was a British Virgin Islands company founded in 2006 and Hualon Corporation (Malaysia) Sdn Bhd, was founded in 1989, but subsequently experienced financial difficulties and was put into receivership in 2006. Hualon incorporated a Vietnamese subsidiary, of which both Hualon and Marty were substantial shareholders. The Vietnamese subsidiary's company charter said that disputes between company members were to be resolved by arbitration at the Singapore International Arbitration Centre (SIAC).

In July 2014 Hualon commenced an action in the BVI Courts against Marty and the Oung brothers for, among other things, breach of fiduciary duties and dishonest assistance, which had allegedly resulted in the unlawful dilution of Hualon's shareholding. Hualon also applied successfully for an interim injunction before the BVI courts, restraining Marty from disposing its interest in the Vietnamese subsidiary.

Hualon claimed that it only noticed the arbitration clause in the company charter in February 2015, despite having exhibited the company charter, including the arbitration clause, in its injunction application.

In early March 2015 Hualon began arbitration at the SIAC seeking the same reliefs already before the BVI courts. Despite commencing arbitration, Hualon continued to take further steps in the BVI court proceedings including the inspection of BVI court documents. At the end of March 2015 Marty applied to the BVI courts for summary determination of the merits of the case.

It was only at the end of April 2015 that Hualon applied to the BVI courts to stay its proceedings. And even then, in October 2015, Hualon applied to the BVI courts to extend the injunction for the primary purpose of supporting the BVI court proceedings.

The Singapore Court of Appeal held that Hualon's actions in commencing and maintaining the BVI court proceedings without qualification, and disavowing the arbitration clause in its BVI court papers, constituted repudiation of the arbitration clause.

"We have some doubt regarding the [lower court] judge’s finding that neither the BVI Counsel nor the Receiver had know ledge of [the arbitration clause]," the ruling said. "We are persuaded that [Hualon] repudiated the arbitration agreement when it commenced the BVI Action and took an unequivocal position in its [BVI court papers disavowing the arbitration clause] without reserving its right to arbitrate. Its conduct in simultaneously applying for the Interim Injunction to support the BVI Action, considered objectively, was a clear indication as to why it considered litigation rather than arbitration to be worth pursuing."

The Singapore Court of Appeal went one step further and said: "although [Marty] was content to accept that the commencement of the BVI Action alone was not sufficient to amount to repudiation…it is strongly arguable that the commencement of court proceedings is itself a prima facie repudiation of the arbitration agreement... It would, however, still be open to the claimant to displace this prima facie conclusion by furnishing an explanation for commencement of the court proceedings, either on the face of the proceedings themselves or by reference to events and correspondence occurring before the proceedings started which showed objectively that it had no repudiatory intent in doing so".

Upon the repudiation of the arbitration clause the other party can either choose to accept the repudiation, meaning the arbitration clause no longer has any effect, or reject the repudiation, meaning that the arbitration clause is affirmed.

“The relevant legal principles are not in dispute. The innocent party…may elect to accept the repudiation and bring the contract to an end, or it may choose to reject the repudiation and affirm the contract. The decision to accept the repudiation is irrevocable; consequently, an innocent party is only taken to have accepted the repudiation if its words or actions clearly and unequivocally demonstrate this," the court said.

The Singapore Court also clarified two points: One, that "these [legal] principles apply equally to arbitration agreements which, in relation to repudiation, are no different from other species of contract". Secondly, that taking a "step in the proceedings", such as an action in the court proceedings demonstrating an intention to participate in it in preference to arbitration, is not necessary to establish an unequivocal acceptance of the repudiation.

In this case the Singapore Court ruled that Marty's application to the BVI court for summary judgment constituted an unequivocal acceptance of Harlon's repudiation. In the Court's view, "the summary judgment application clearly engaged the jurisdiction of the BVI court because it requested the BVI court to determine the claim on the merits. By this application, the appellant had unequivocally indicated to the respondent that it was willing to accept the latter’s invitation to litigate rather than arbitrate"..

The Singapore Court also held that Haulon nonetheless demonstrated a repudiatory intent capable of being accepted by Marty, despite Haulon initiating arbitration before the summary judgment application had been filed.

"Once a repudiatory breach has been committed, it persists and is capable of acceptance until the breaching party resumes performance of the contract and thus ends any continuing right in the innocent party to accept the repudiation," it said. "In this case, the act of breach was the initiation of the BVI Action ... Thereafter, [Hualon] could only resume performance of the agreement to arbitrate by discontinuing the BVI Action or, at the very least, filing an application to stay the proceedings. In this case, the Notice of Arbitration was not accompanied by any such application. The stay application was only filed on 20 April 2015, by which time the repudiation had already been accepted."

Ultimately, the Singapore Court "found that [Hualon] had committed a repudiatory breach of the arbitration clause which was accepted by [Marty]”.

According to international arbitration expert Wee Jian Ang of Pinsent Masons MPillay, the Singapore joint law venture between MPillay and Pinsent Masons, the law firm behind Out-Law.com, this judgment provides three points of practical guidance.

"First, the Court's reasoning that commencing court proceedings is itself a prima facie repudiation of the arbitration agreement appears to now place the burden of justifying any court proceedings on the party commencing it. So, a party commencing court proceedings for any reason in the face of an arbitration agreement, for instance for ancillary or interim relief in support of arbitration, should out of an abundance of caution make clear its position in relation to the arbitration right from the outset. This allows it to objectively show that it had no repudiatory intent in commencing the court proceedings."

"Secondly, the fact that a party commences arbitration after court proceedings had already begun may still constitute a repudiatory breach of the arbitration agreement. It is thus critical that the court litigation be stayed or discontinued as soon as possible. Otherwise, the repudiatory breach, by reason of the ongoing court proceedings, still operates and is capable of being accepted by the other party," he said.

"Third, a 'step in the proceedings' is not necessary to establish an unequivocal acceptance of the repudiation. As the Singapore Court illustrated, a clearly-worded letter to the breaching party stating that the latter had repudiated the arbitration agreement and purporting to accept the breach, sufficiently communicates the innocent party’s acceptance, even if no steps in the proceedings had been taken," said Ang.