WHEN COURT PROCEEDINGS ARE NOT STAYED IN FAVOUR OF ARBITRATION UNDER THE ARBITRATION ACT
Under the domestic arbitration regime established by the Arbitration Act (Cap. 10, 2002 Rev. Ed.) (the “AA”), the court has a discretion to refuse to stay court proceedings in favour of arbitration. And in CSY v CSZ [2022] SGCA 43, the Court of Appeal reversed the first instance decision and found that there was sufficient reason not to stay the court proceeding and refer the matter to arbitration.
Brief facts. In brief, the Appellant is an exempt private company limited by shares which was (at the time of the hearing) in compulsory liquidation ([4]). The Respondent is a limited liability partnership that was engaged as the Appellant’s external auditor since at least 2003 till 17 September 2020 ([5]).
The Appellant commenced HC/S 237/2021 (“S 237”) against the Respondent claiming that the Respondent had failed to detect material misstatements in its audited financial statements for FY2014 to FY2019 and that this was a breach of the Respondent’s contractual duties. Further and in alternative, the Appellant claimed that this was a breach of the Respondent’s tortious duty of care ([7]).
The Respondent’s engagement by the Appellant was set out in separate engagement letters, with one engagement letter for each financial year (“FY”).
It suffices to state that some engagement letters did not contain any dispute resolution clause ([8(a)]), some contain an exclusive jurisdiction clause in favour of the Singapore courts ([8(b)], the engagement letter for FY2018 contained both an exclusive jurisdiction clause and a tiered arbitration clause which culminated in arbitration under the arbitration rules of the Singapore International Arbitration Centre (the “Tiered Arbitration Agreement”) ([8(c)]), and the last engagement letter for FY2019 only contained the Tiered Arbitration Agreement.
The Respondent filed HC/SUM 2888/2021 (“SUM 2888”) to stay the dispute pertaining to the audits for FY2018 and FY2019 in favour of arbitration and for the disputes pertaining to the audits for FY2014 to FY2017 to be stayed pending completion of the steps in the Tiered Arbitration Agreement ([11]).
SUM 2888 was allowed, and the Appellant appealed against the Judge’s decision ([11] – [12]).
The issues. The Court of Appeal identified two principal issues as arising for consideration:
Should the FY2018 and FY2019 dispute be stayed in favour of arbitration ([21(a)])?
If so, should the FY2014 to FY2017 disputes be subject to a case management stay ([21(b)])?
Starting Point. The Court of Appeal held at [24] that as a starting point, the court will hold the parties to their agreement. Hence, if there is an applicable arbitration agreement, it would be for the party seeking to persuade the court to exercise its discretion under s. 6 AA to show that there is “sufficient reason” for the matter not to be referred to arbitration. As the Court of Appeal stated, if the other party is willing and ready to arbitrate, the court would be slow to exercise its discretion and a stay will only be granted in exceptional circumstances.
Sufficient reason. What, then, amounts to “sufficient reason”? At [25], the Court of Appeal stated that there is a broad range of factors that must be weighed against the consideration that the parties have voluntarily bound themselves to arbitrate, and set out the following factors as being “instructive in the inquiry”:
“(a) the existence of related actions and disputes, some of which are governed by an arbitration agreement and others which are not;
(b) the overlap between the issues in dispute such that there is a real prospect of inconsistent findings;
(c) the likely shape of the process for the resolution of the entire dispute;
(d) the likelihood of injustice in having the same witnesses deal with the same factual issues before two different fora;
(e) the likelihood of disrepute to the administration of justice ensuing from the fact that overlapping issues may be differently determined in different actions;
(f) the relative prejudice to the parties; and
(g) the possibility of an abuse of process.”
Significant overlap. The Court of Appeal then held that the disputes for FY2018 and FY2019 should not be stayed in favour of arbitration. The key reason is because there was significant overlap between the disputed issues in FY2014 to FY2017 with those in FY2018 and FY2019 (which was ultimately not disputed by the parties) ([27]).
While the Respondent argued that multiplicity of actions is not, in and of itself, sufficient ground to refuse a stay, referring to the case of Maybank Kim Eng Securities Pte Ltd v Lim Ken Yong and another [2016] 3 SLR 431, the Court of Appeal distinguished the case (at [29]) and found that on the facts of the case:
The “… significant overlap between the factual issues in dispute is such that the FY2014 to FY2017 Dispute and the FY2018 and FY2019 Dispute can be described in broad terms as nearly identical … in essence, S 237 is a singular dispute concerning a continuous relationship between the parties that spanned the period covering FY2014 to FY2019. … the evidence to be considered would tend to be factually sequential and more importantly, it would likely be interconnected running across the various audits. The witnesses who are to give evidence are also likely to cover the same ground for the FY2014 to FY2017 Dispute and the FY2018 and FY2019 Dispute.” (at [30]; our emphasis added).
This gave rise to a “real prospect of inconsistent findings between the two fora … it seems unrealistic to imagine that the analysis of the respondent’s conduct in the subsequent years could take place in isolation from what it had done in the previous years or vice versa… we respectfully disagree with the Judge’s exclusion of the possibility that it would be necessary to determine matters pertaining to the earlier years before determining matters pertaining to the later years in order to find out whether the respondent had breached its duties or obligations or was liable for any tortious acts…” (at [31]; our emphasis added).
Accordingly, it may prove necessary for the tribunal hearing the disputes on FY2018 and FY2019 to consider and give its views on what happened before FY2018, even though it does not have jurisdiction to decide on matters before FY2018. Similarly, the court determining the disputes on FY2014 to FY2017 would likely have to go through the same evidence and may even have to consider and express views on what happened after FY2017, as it “… would be difficult for the court to come to a conclusion on such issues as damages without looking into precisely what transpired in the subsequent years.” (at [32]; our emphasis added).
Case management stay? The Court of Appeal also disagreed that the risk of inconsistent findings may be addressed by case management stay. This is because even if the court have the benefit of the tribunal’s decision on the disputes for FY2018 and FY2019, “… those findings are not binding on the court. It therefore would not address the material risk of inconsistent findings in that the two for a would be assessing the same evidence and may well come to different conclusions on that evidence. Further, the question of damages flowing from the FY2014 to FY2017 Dispute would, as we have noted, very likely depend on how matters transpire in the FY2018 and FY2019 audits and what the company did at that time. Yet those matters would either fall outside the purview of the court or have to be tried a second time. …” (at [33]; our emphasis added).
There is also the risk of bringing disrepute to the administration of justice due to the risk of inconsistent findings (at [34]), as well as other issues such as, among others, possible issues of issue estoppel and res judicata (at [35]).
Parties’ intention determinative? In this regard, the Court of Appeal also found that the parties’ intention was not determinative on the facts of the case, as the parties had agreed for any disputes arising from the parties’ engagement from 2003 to 2017 to be resolved by the courts, and only included the Tiered Arbitration Agreement for FY2018 and FY2019 (at [36]).
The Court found that there was nothing to specifically suggest that the Parties intended the change in policy to apply to a dispute spanning multiple years engaging substantially similar issues and accepted the Appellant’s submission that the Parties likely did not contemplate such a multi-year dispute when agreeing to the Tiered Arbitration Agreement (at [36]).
Conclusion. As the Court of Appeal stated at [24], a stay in favour of arbitration would only be refused in exceptional circumstances under the domestic arbitration regime established under the AA. CSY v CSZ [2022] SGCA 43 is one such case.
It must be borne in mind that mere multiplicity of actions was not the key factor in establishing such exceptional circumstances. What was crucial was the significant overlaps present, leading to, effectively, the same issues arising for consideration before the court and the tribunal. This in turn would likely necessitate both the court and the tribunal considering the same evidence, thereby giving rise to a real prospect of inconsistent findings that could not be addressed by a case management stay. This combination of factors will not be readily established in many disputes.
On the other hand, for certain types of work / engagements, parties are engaged on a periodic basis, with each fresh engagement being the subject of a fresh agreement.
In such situations, if the parties have entered into multiple agreements over the years, with only some agreements incorporating arbitration agreements, and if the parties are now involved in what is effectively a single continuous dispute over the work done spanning those multiple agreements and involving similar issues, CSY v CSZ [2022] SGCA 43 may be applicable. If so, serious thought must be given as to which forum should the dispute be commenced in.
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