The Court of Appeal has, in quick-fire, delivered 2 decisions dealing with arbitral clauses and their applicability.
They are:
The facts of Swissray v V Medical
Swissray and V Medical executed a Distributorship Agreement. The agreement contained an arbitration clause.
Swissray then delivered 2 pieces of medical equipment to V Medical. V Medical failed to make payment.
Due to non-payment, Swissray terminated the Distributorship Agreement. The parties then negotiated and V Medical made a part-payment of USD20,000. No further payments were made.
Swissray delivered a s. 466 Notice (previously, a s. 218 Notice) to V Medical. A 466 is a prelude to the presentation of a winding-up petition. V Medical then filed for a Fortuna Injunction (link to a previous article of mine discussing Fortuna Injunctions), to restrain the presentation of a petition.
V Medical alleged that the presence of the arbitration agreement precluded any petition and that the purported dispute would have to be arbitrated.
The HC decision in Swissray
The HC applied the principles of Salford Estates and allowed the Fortuna Injunction.
The HC took the position that in the face of the arbitration clause, all that V Medical would need to show would be that there exists a dispute. There need not be a bona fide or genuine dispute for the matter to be referred to arbitration.
The CA reverses the HC
The CA reversed the HC.
The CA held that Salford Estates was no longer good law. In a situation where V Medical sought the equitable remedy of a Fortuna Injunction, it (V Medical) would also need to do equity. The CA held V Medical, by alleging the existence of a dispute in the face of a partial-payment, would fall far below this maxim:
[47] Granted that the inherent jurisdiction referred to in the judgement refers to a situation where the party petitioning for a winding up may be using it as an instrument of oppression (and hence abuse of process) and where in the final analysis the act of presenting the winding up petition itself may result in irreparable harm to the debtor.
[48] Having said all of that, ought not the principle to work both ways?
[49] So, for example, ought not a debtor who has made unequivocal admissions to a debt, be held equally guilty of abusing the courts process when he raises as a mere mantra the war cry that he disputes the debt when in fact there is no dispute or no substantial dispute to the debt?
[72] The mere assertion of the existence of an arbitration clause cannot simply be recited as if it is some mechanical mantra in order to evade what would otherwise be a legitimate claim to a debt due and owing.
[73] In as much as parties are to be held bound to an arbitration clause as a chosen mechanism for the resolution of their disputes, the parties must equally be held to the terms of the agreement that they have chosen to enter.
[74] It also axiomatic that matters such as the one under consideration, are fact sensitive. The facts reveal that there were repeated acknowledgments of the debts after the email of 9.09.2016 and also the arrangement reached between the parties during the meeting at Cititel, Midvalley.
Having unequivocally admitted the debt by making a part-payment, V Medical could not then turn around and allege a prima facie dispute (by utilising the arbitration clause). Swissray would be obligated to demonstrate that a bona fide dispute exists (as opposed to a prima facie dispute) to avail itself of arbitration:
[66] This can only translate into the position that the party applying for a Fortuna Injunction must show the existence of a bona fide dispute and not merely a prima facie dispute even in the face of an arbitration clause.
[67] We are constrained therefore to hold that it is the bona fide dispute test which is the applicable test to be applied when dealing with the question of whether to grant a Fortuna Injunction in such circumstances.
The appeal was allowed with costs.
The facts of Peninsula v Biaxis
Peninsula involved a slight twist on the facts. Peninsula was the employer for a construction project. Biaxis was its contractor. Both parties executed a PAM (Pertubuhan Akitek Malaysia/Malaysian Institute of Architects) Contract which contained an arbitration clause.
Peninsula issued several interim payment certificates (IPCs) to Biaxis for work done, amounting to ~RM13.1m. An IPC is generally assessed by the Architect/Consultant to assess the stage of works completed. The employer is then obligated to make payment for the work milestone completed (see this excellent PAM primer).
Biaxis was not paid for the IPCs. Biaxis then went into liquidation.
As a result of its liquidation, Peninsula terminated Biaxis’s appointment as Contractor.
The civil suit and the application to stay at the HC
The liquidator, upon assessing the facts, initiated a civil suit to recover the sums due and owing to Biaxis. The claim was premised upon the IPCs issued to Biaxis.
Peninsula applied to stay the civil suit and to have the matter referred to arbitration. Peninsula’s stance was that the PAM Contract contained an arbitration clause and as such, any dispute pertaining to the IPCs must be referred-to arbitration.
The HCJ was of the view that the arbitration clause was inoperable due to Biaxis’s liquidation. As a result, the stay was refused. Dissatisfied, Peninsula appealed.
The CA’s decision
The CA allowed Peninsula’s appeal. The CA held that the mere fact that Biaxis has entered into liquidation does not render the arbitration clause inoperable. The arbitration clause would survive and serve to bind the parties.
Crucially, the CA construed Section 10 of the Arbitration Act 2005 (Revised 2011). The CA noted that when an application for stay is filed, the Courts are not to inquire into whether there is a bona fide dispute as to the debt owing. The Court must only look at whether the arbitration agreement is inoperable. If it is not, the Courts are obligated to grant a stay and refer the matter to arbitration. As put by Lee Swee Seng JCA (see paras. 41-64):
[47] It is thus no different from a case where the Contractor in liquidation brings a claim against its Employer and where there is no arbitration agreement, no one would bat an eyelid that the liquidator is at liberty to pursue such a claim if it is in the interest of the Contractor and its creditors to so do. All that we are saying is that if there is an arbitration agreement, then we cannot ignore its terms and that would include the terms of the arbitration agreement which survives the termination of the PAM Contract.
[48] It is thus not a question of whether because of the liquidation of a party to an arbitration agreement, a new paradigm has set in to render “inoperative” the arbitration agreement. The mandatory language of our s 10 AA 2005 is such that the Court cannot disregard the terms of the arbitration agreement just because one of the parties to it is in liquidation. The fact that the debt is not admitted is sufficient for it to come within the meaning of a “matter which is the subject of an arbitration agreement” for reference to arbitration.
The CA specifically noted that revised Arbitration Act negates the need for the Court to consider whether there is a genuine dispute.
Key takeaways
A crucial difference between both decisions would be that in Peninsula, the unpaid party (Biaxis) was the Plaintiff. In Swissray, the non-paying party (V Medical) acts as Plaintiff.
It is apparent that if one has an undisputed debt and has to deal with a thorny arbitration clause, one should opt to deliver a S. 466 Notice.
If the recipient of the notice opts to move the Court for a Fortuna Injunction, the burden will then be on them to satisfy the Court that they are acting bona fide. They will also have to satisfy the higher threshold determined by Swissray.
When one has unequivocal admissions and an arbitration clause, a party ought to avoid a civil suit, ala Peninsula. When one files a civil suit, an application for stay under S. 10 AA 2005 would inevitably follow from the Defendant. The burden would then be on the Plaintiff (who is already out-of-pocket) to demonstrate that the agreement (which underpins the arbitration clause) is inoperable.
The Swissray approach shifts the burden from the unpaid party to the non-paying party. Whilst the unpaid party will be named as a Defendant in the Fortuna OS, it is a small price to pay to enjoy the benefits of a burden-shift.
GAVIN JAYAPAL
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