The Court of Appeal recently considered the law governing a stay of proceedings in relation to non-parties to an arbitration agreement pending the outcome of arbitration proceedings.(1) The court determined that the facts of the case supported the conclusion that the court proceedings involving the non-parties to the arbitration agreement should proceed ahead of the arbitration proceedings between the parties to the arbitration.

Facts

Protasco and PT Asu entered into a sale and purchase agreement (SPA), which was governed by an arbitration clause. When PT Asu failed to comply with the terms of the SPA, the SPA was terminated. It was subsequently discovered that Protacso's substantial shareholder, Tey Por Yee, had made the proposal for the transaction to Protasco through his vehicle Global Capital Limited. Unbeknownst to Protasco, Tey and his nominee director in Protasco, Ooi Kock Aun, remained the effective beneficial owners of PT Asu, and the president director of PT Asu had taken instructions from Tey and Ooi in respect of matters pertaining to the SPA. Tey and Ooi also authored and forged the signatures of PT ASU's president director on letters issued in response to Protasco's letters.

Protasco brought an action against PT Asu, Tey and Ooi in the high court. The causes of action against Tey and Ooi were, among others, deceit, fraud and conspiracy to defraud. Protasco's claim against PT Asu was premised on a conspiracy to injure and defraud and breach of contract. PT Asu obtained a stay of the court proceedings between Protasco and itself pursuant to Section 10 of the Arbitration Act 2005.

Subsequently, Tey and Ooi filed a stay of the court proceedings in the high court pending disposal of the arbitration proceedings between Protasco and PT Asu. This was granted in Tey's and Ooi's favour, as the issues between PT Asu, Tey and Ooi were held to be "connected and intertwined". Protasco appealed against the stay granted to Tey and Ooi on the basis that they were not parties to the arbitration agreement and a stay of proceedings in relation to non-parties pending the outcome of arbitration proceedings should be granted only in rare and compelling circumstances.

Court of Appeal decision

With respect to Tey and Ooi, the Court of Appeal held that they were not parties to the arbitration agreement. Hence, Section 10 of the Arbitration Act did not apply to them. As such, the Court of Appeal had the discretion to exercise its inherent power to grant or refuse a stay as sought by Tey and Ooi.

The Court of Appeal considered the various permutations as to what would take place if the arbitration preceded the court proceedings and vice versa. The Court of Appeal had concerns that if the arbitration were to proceed, the arbitrator was likely to make findings of fact against Tey and Ooi (as witnesses) in respect of the allegations of conspiracy to defraud and injure. The Court of Appeal considered the fact that Tey and Ooi would be able to challenge these findings in court, leading to a re-litigation of matters determined by the arbitral tribunal.

If the court proceedings were to be heard and adjudicated on before the arbitration proceedings, it was felt that the high court trial and findings made against Tey and Ooi would not interfere with nor impinge on the arbitration, as the SPA related solely to Protasco and PT Asu. The Court of Appeal also observed that if the court proceedings were to proceed on appeal, it would be unlikely that an appellate court would lightly reverse findings of fact made by the trial court; hence, the arbitrator's reliance on findings of fact made by the court would not be subject to doubt.

The Court of Appeal also considered Protasco, which had a legitimate basis to call the conspirators to answer the allegations of conspiracy at the earliest opportunity. Based on this premise, the Court of Appeal reversed the high court's decision. The proceedings against Tey and Ooi were directed to proceed to trial in the high court. The arbitration proceedings between Protasco and PT Asu were directed to be held after the disposal of the high court proceedings.

Comment

The Court of Appeal stressed that each case may differ in terms of the factors to be considered and the weight to be accorded to matters, such as the potential waste of resources, duplicity of evidence and possible conflicting findings in different fora.

This decision takes a different approach to that taken in earlier Court of Appeal decisions, such as Renault SA v Inokom Corporation Sdn Bhd and Renault SA ([2010] 5 CLJ 32). In Renault SA, the Court of Appeal decided that the action concerning the non-parties/co-conspirators could be stayed pending the outcome of arbitration. The Court of Appeal held that the fact that the non-parties had been named as alleged co-conspirators in the court action did not change the fact that a mechanism for resolving disputes by way of arbitration had been agreed on and should be rightly invoked. The Court of Appeal held that it would not encourage a "devious attempt" to circumvent the arbitration agreement by instituting an action against parties to the arbitration agreement jointly with parties not subject to the arbitration agreement. It remains to be seen which approach will be adopted moving forward.

For further information on this topic please contact K Shanti Mogan at Shearn Delamore & Co by telephone (+60 320 272 727) or email (shanti@shearndelamore.com). The Shearn Delamore & Co website can be accessed at www.shearndelamore.com.

Endnotes

(1) Protasco Bhd v Tey Por Yee, [2018] 1 LNS 128.

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