Court of Appeal rules that non-payment of arbitration deposits renders the arbitration agreement inoperative
Arbitration proceedings are generally consensual in nature. However, despite agreeing to refer the disputes and differences to arbitration, it is not uncommon for one of the parties (usually the respondent) to attempt to stifle the arbitration process.
In JSB v ACSB [2024] 1 MLJ 195, the Court of Appeal held that an arbitration agreement can be rendered inoperative by non-payment of arbitration deposits as required by the applicable arbitral rules.
- Background Facts
JSB v ACSB involved a dispute that was initially referred to the Asian International Arbitration Centre (AIAC). However, the arbitration was terminated by the arbitrator after consultation with the Director of the AIAC under the AIAC Arbitration Rules 2018, when the respondent (in the arbitration) refused to pay its share of the further deposit of the arbitrator’s fees and AIAC’s administrative costs (arbitration deposits).
The plaintiff (the claimant in the arbitration) then filed a claim in the High Court, but the defendant contended that the arbitration agreement was still valid. The defendant applied to strike out the plaintiff’s writ and statement of claim under the Rules of Court 2012 or alternatively, prayed for a stay of court proceedings pursuant to Section 10 of the Arbitration Act 2005 (“Section 10 Stay”).
- Decision of the High Court
The High Court ordered a Section 10 Stay. The High Court took the view that the non-payment of arbitration deposits did not render the arbitration agreement inoperative or incapable of being performed. The plaintiff (as the claimant in the arbitration) had the option of advancing the defendant’s shares of the arbitration deposit and recovering these costs should it be successful in the arbitration.
- Decision of the Court of Appeal
The Court of Appeal reversed the decision of the High Court and made two critical findings.
First, the Court of Appeal found that as the defendant’s main prayer was an application to strike out the plaintiff’s claims, this amounted to taking a step in the court proceedings which is fatal to the defendant’s Section 10 Stay application as the defendant had submitted to the court’s jurisdiction and waived its right to arbitration.
Secondly, the Court of Appeal found that the non-payment of arbitration deposits as directed by the arbitrator leading to the termination of the arbitration agreement, constitutes a “waiver of its rights to arbitration”. The Court of Appeal decided that non-payment of the arbitration deposits is a clear and unequivocal intention not to abide by the arbitration process, and amounted to a waiver of the defendant’s right to arbitration. To hold otherwise would be allowing the defendant to take advantage of its own breach of the arbitral rules and insist on continuing with the arbitration.
The Court of Appeal held that while under Rule 14(7) of the AIAC Arbitration Rules 2018, the arbitrator may offer the other party the opportunity to make the required payment on behalf of the non-paying party, this is only an option and not an obligation.
From a practical point of view, the Court of Appeal also found that if a Section 10 Stay was granted, it would lead to the plaintiff having to commence a fresh arbitration only to be faced with the defendant’s non-payment of arbitration deposits and potential termination of the arbitration.
The principle of estoppel would also apply to this instance where the conduct of one party in not complying with the requirements of the arbitral rules, may operate against the same party’s insistence of proceeding with arbitration. Perhaps the Court of Appeal intended to mean that by refusing to pay the arbitration deposits, the defendant had elected to waive its rights to refer the disputes and differences to arbitration.
- Comments
It is hoped that the Court of Appeal’s decision in JSB v ACSB will encourage parties to comply with the directions of the arbitral tribunal, and deter recalcitrant parties who aim to stifle the resolution of disputes by refusing to comply with procedural arbitral directions.
This would, however, mean that when faced with a recalcitrant respondent, the claimant in the arbitration proceedings would likely then have the disputes and differences determined in court unless it is willing to pay the full deposit with a view to claiming it back at the conclusion of the arbitration proceedings.
** The information provided in this article is for general informational purposes only and is not intended as legal advice.