CSY v CSZ

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 19 May 2022
• Neutral Citation: [2022] SGCA 43
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 67 of 2021
• Published date: 24 May 2022
• Year: 2022
• Hearing Date: 11 April 2022
• Plaintiff Counsel: Cavinder Bull SC, Chia Voon Jiet, Sim Bing Wen, Tan Shihao Sean and Benjamin Tan Zhi Xiong (Drew & Napier LLC)
• Defendant Counsel: Lin Weiqi Wendy, Monica Chong Wan Yee, Leow Jiamin and Wong Chun Mun (WongPartnership LLP)
• Citation: [2022] SGCA 43

Sundaresh Menon CJ (delivering the judgment of the court):Introduction

There is an important difference in the legislative schemes governing domestic and international arbitration with regard to a stay of court proceedings brought in breach of an arbitration agreement. In the case of international arbitration, the court is mandated to stay court proceedings in favour of an international arbitration unless the arbitration agreement is “null and void, inoperative or incapable of being performed” under s 6(2) of the International Arbitration Act 1994 (2020 Rev Ed) (“IAA”). But in the case of domestic arbitration, the court retains some discretion to refuse to stay court proceedings in favour of a domestic arbitration under s 6(2) of the Arbitration Act (Cap 10, 2002 Rev Ed) (“AA”). Specifically, it may do so when it is satisfied that there is sufficient reason why the matter should not be referred to arbitration in accordance with the arbitration agreement or if the applicant seeking a stay was not ready and willing to do all things necessary for the proper conduct of the arbitration.

CA/CA 67/2021 (“CA 67”) is an appeal by the appellant, CSY, against the decision of the High Court judge (“the Judge”) granting the application of the respondent, CSZ, in HC/SUM 2888/2021 (“SUM 2888”) to stay part of HC/S 237/2021 (“S 237”) in favour of a domestic arbitration and to stay the remaining part of S 237 on case management grounds pending the resolution of the putative arbitration.

We heard the parties on 11 April 2022 and reserved judgment. As we explain below, this is an exceptional case and we are satisfied that there is sufficient reason not to stay the court proceeding and refer the matter to arbitration in accordance with the arbitration agreement. We therefore allow CA 67. We also take this opportunity to set out some guidance for the court’s exercise of discretion to refuse a stay of proceedings in favour of a domestic arbitration under s 6 of the AA.

Facts

The appellant is an exempt private company limited by shares. It was placed first under interim judicial management and then under judicial management in 2020 and a winding up order was made against it in 2021. It is presently in compulsory liquidation. The interim judicial managers, judicial managers and the liquidators of the appellant will be referred to as the JMs hereafter.

The respondent is a limited liability partnership incorporated in Singapore and was engaged as the appellant’s external auditor since at least 2003 until it resigned on 17 September 2020. The respondent audited the appellant’s financial statements and issued opinions for each of the financial years (“FYs”) ending 31 October 2014 through to 31 October 2019. After the former managing director of the appellant admitted in April 2020 that there were various irregularities in the appellant’s affairs, including material misstatements in its financial statements, the respondent withdrew its audit report for FY2019.

The investigations conducted by the JMs revealed several serious irregularities in the appellant’s affairs since at least 2010. These appeared not to have been reflected or captured in the appellant’s audited financial statements and consequently also in the respondent’s audit opinions. As a result of these irregularities, the appellant’s audited financial statements from FY2014 to FY2019 were materially misstated and/or did not give a true and fair view of the financial position and/or performance of the appellant. It also appeared in the audited financial statements that the value of the appellant’s total assets had been overstated from as early as FY2010 and as a result, the audited financial statements grossly misrepresented the financial position and performance of the appellant. The JMs set out their findings in two reports dated 22 June 2020 (predominantly on FY2019) (“JMs’ First Report”) and 6 November 2020 (predominantly on FY2018 and FY2017) (“JMs’ Second Report”).

On 5 March 2021, the appellant filed its Statement of Claim (later amended on 13 October 2021) in S 237 claiming that the respondent had failed to detect material misstatements in its audited financial statements for FY2014 to FY2019 and that this was in breach of the respondent’s contractual duties to audit the financial statements with reasonable care and skill; and further and alternatively, that the respondent had breached its tortious duty of care.

The respondent’s engagement with the appellant was set out in separate engagement letters. An engagement letter was issued for each FY and executed at the beginning of the audit for each FY. The engagement letters varied in its provision for dispute resolution as follows:The engagement letters for FY2008 to FY2015 did not contain any dispute resolution clause.The engagement letters for FY2016 and FY2017 contained an exclusive jurisdiction clause in favour of the Singapore courts which states “This letter agreement shall be governed by and construed in accordance with Singapore law and under the exclusive jurisdiction of the Singapore courts” (“the Exclusive Jurisdiction Clause”).The engagement letter for FY2018 contained the Exclusive Jurisdiction Clause and a revised dispute resolution clause containing a tiered dispute resolution procedure which culminates in arbitration in Singapore in accordance with the arbitration rules of the Singapore International Arbitration Centre (“the Tiered Arbitration Agreement”).The engagement letter for FY2019 contained only the Tiered Arbitration Agreement.

The Tiered Arbitration Agreement states as follows:

Dispute Resolution

In the event of any difference or dispute arising between the parties relating to the validity, interpretation, construction or performance of this engagement letter, the parties shall use their best endeavours to settle amicably such difference or dispute by consultation and negotiation.

If the matter is not resolved through negotiation, then the parties shall refer the matter to mediation in accordance with the rules and procedures of the Singapore Mediation Centre.

If, and to the extent that, any dispute has not been settled through negotiation and mediation, then the dispute shall be referred to and finally resolved by arbitration in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (‘SIAC’) for the time being in force, which rules are deemed to be incorporated herein. The Tribunal shall consist of three (3) arbitrators. The seat and venue of the arbitration shall be Singapore and the language of the arbitration shall be English. Any award made hereunder shall be final and binding upon the parties hereto and judgment on such award may be entered into any court or tribunal having jurisdiction thereof.

Before the filing of S 237, the respondent proposed that all the claims relating to the audits for FY2014 to FY2019 be referred to arbitration. However, the appellant did not agree to this.

On 18 June 2021, the respondent filed SUM 2888 seeking an order to stay the dispute pertaining to the audits for FY2018 and FY2019 (“FY2018 and FY2019 Dispute”) in favour of arbitration pursuant to s 6 of the AA and/or the court’s inherent jurisdiction and an order that the dispute pertaining to the audits for FY2014 to FY2017 (“FY2014 to FY2017 Dispute”) be stayed pending the completion of the steps in the Tiered Arbitration Agreement. On 3 November 2021, the Judge allowed SUM 2888.

On 30 November 2021, the appellant appealed against the decision of the Judge staying that part of S 237 concerning the FY2018 and FY2019 Dispute in favour of arbitration, imposing a case management stay on the remainder of S 237, specifically concerning the FY2014 to FY2017 Dispute and ordering costs of $15,000 plus reasonable disbursements in favour of respondent.

Decision below

In her brief grounds of decision given on 3 November 2021 (“GD”), the Judge considered that where some of the matters in S 237 fell within the Tiered Arbitration Agreement, the burden was on the party who wished to proceed in court to show sufficient reason why those matters should not be referred to arbitration: GD at [4].

The Judge was satisfied that the FY2018 and FY2019 Dispute should be stayed in favour of arbitration and the FY2014 to FY2017 Dispute should also be stayed but on case management grounds pending the resolution of the putative arbitration: GD at [5].

In relation to the FY2018 and FY2019 Dispute, the Judge ordered a stay in favour of arbitration for the following reasons:Parties should respect their arbitration agreement and the policy of upholding arbitration agreements should ordinarily be upheld and applied: GD at [6].The fact that the parties included the Tiered Arbitration Agreement from FY2018 onwards pointed to a deliberate intent to move away from the previous arrangement that was in place for disputes to be resolved in court, to a tiered dispute resolution framework that culminated in arbitration if they were unable to resolve the disputes amicably: GD at [7].The appellant should not be allowed to circumvent the Tiered Arbitration Agreement, which encapsulates the latest agreement of the parties, by choosing to commence a single court action that also encompassed matters that fell outside the scope of the Tiered Arbitration Agreement. The fact that there are related actions, some governed by arbitration agreements and others not, was not in itself sufficient reason to sanction a breach of an arbitration clause and depart from the policy in favour of arbitration: GD at [8].The appellant had not shown evidence of any impediment to the liquidators obtaining authorisation to commence arbitration nor that the respondent would object to such an application if it was made: GD at [9].

In relation to the FY2014 to FY2017 Dispute, the Judge ordered a case management stay for the following...