Knowledge Highlights 18 June 2024
Court of Appeal finds party’s refusal to pay deposit required by AIAC Rules rendered arbitration agreement inoperative
The Court of Appeal in JSB v ACSB [2024] 1 CLJ 382 set aside an order to stay High Court proceedings in favour of arbitration finding the defendant’s refusal to pay its share of the deposit required by the Asian International Arbitration Centre (“AIAC”) had rendered the arbitration agreement inoperative.
This article provides an overview of the court’s decision.
Snapshot
AIAC gave notice to parties involved in an arbitration to pay a deposit towards administrative costs and the arbitrator’s fees (“Deposit”).
The defendant refused to pay its share of the Deposit. The arbitrator afforded the defendant opportunities to pay the Deposit and when payment was still not forthcoming the arbitrator, after consultation with the Director of AIAC, as required under Rule 14(7) the AIAC Rules 2018,[1] terminated the arbitration.
The plaintiff then filed its claim in the High Court. The defendant objected on the grounds that the arbitration agreement still subsisted as the non-payment of the Deposit was not a breach of the arbitration agreement. The defendant submitted that the plaintiff should pay the defendant’s portion of the Deposit with the amount included in the final arbitral award.
The plaintiff’s position was that non-payment of the Deposit amounted to a breach of the arbitration agreement as it left the arbitrator at liberty to terminate the arbitration which then entitled the plaintiff to commence proceedings in the courts.
The High Court found in favour of the defendant, stating that the non-payment did not render the arbitration agreement inoperative or incapable of being performed. The court then ordered a stay of the High Court proceedings under section 10 of the Arbitration Act 2005.
The plaintiff appealed the High Court’s decision.
Judgment
The Court of Appeal allowed the appeal, finding that the arbitration agreement had become inoperative.
The court held that the defendant’s refusal to make payment of the Deposit amounted to a breach of the AIAC Rules, which provides that further deposits must be paid by the parties within a stipulated time frame. The court stated that compliance with an arbitration agreement includes compliance with the applicable arbitration rules. The court also noted that compelling the plaintiff to pay the defendant’s share of the Deposit as put forward by the defendant would amount to “rewarding the uncooperative and unfair party and punishing the party” who pays the full deposit.
The court reasoned that the defendant’s action in refusing to pay its share of the fees for no reason other than not wanting to would be evincing a clear and unequivocal intention not to abide by the arbitration process and indeed to abandon it altogether. The court held that the plaintiff was perfectly entitled to proceed to court for the hearing of the dispute between the parties.
Comment
This decision is important as it emphasises the serious repercussions for non-compliance with arbitral rules. Parties are advised to be aware of the possible implications its actions may have over the course of arbitral proceedings, particularly where there is failure to comply with the applicable arbitral rules.
As illustrated in this decision, such non-compliance may be found to be a refusal to abide by the arbitration process which can have serious implications for the parties such as termination of arbitral proceedings. In addition, non-compliance could also prevent a party from later seeking a stay of court proceedings pending arbitration as the non-compliant acts could be found to be a repudiation of the parties’ arbitration agreement.
In view of this decision, a party in arbitration (“Party A”) facing non-payment of deposit by the other party (“Party B”) may elect to:
- affirm the arbitration agreement and continue with the arbitral proceedings by making payment on behalf of Party B. This would allow Party A the option to preserve the arbitral proceedings and any related benefits (e.g. confidentiality); or
- seek to have the arbitral proceedings discontinued by accepting the repudiation of the arbitration agreement by Party B. If Party A does not make payment of Party B’s deposit, this may lead to the termination of the arbitral proceedings by the arbitrator in accordance with the relevant arbitral rules.
This article was prepared with the assistance of Principal Abd Azim Bin Abd Razak and Associate Kimberly Lim Ming Ying.
[1] Rule 14(7) of the AIAC Arbitration Rules 2018 is similar to Rule 19(9) of the AIAC Arbitration Rules 2023.
