STAY OF LITIGATION PENDING ARBITRATION

• Author: M. SORNARAJAH
• Date: 01 December 1994
• Citation: (1994) 6 SAcLJ 61
• Published date: 01 December 1994

One early rule to emerge from the acceptance of arbitration by the common law courts was that they will withhold jurisdiction over a dispute which is subject to an arbitration clause. The recognition of such a rule by the courts was indispensable to the growth of a system of commercial arbitration. Though the idea that the courts will not lightly permit the ouster of their jurisdiction remains alive in a general context even in modern times,1 the view has become established that commercial men have the freedom to choose the forum in which they could settle their disputes. The courts ensure that such a choice is kept because they recognize and enforce the “general principle that the courts make people abide by their contracts”.2 This principle applies to domestic as well as international commercial contracts. As much as the parties to an international contract could choose the judicial forum in which they would litigate their dispute, they could also choose arbitration as the method of settling their dispute.3 The agreement to arbitrate disputes is enforced indirectly. The refusal to entertain litigation is the method by which the courts enforce the agreement to arbitrate. The rationale behind such refusal was stated by Lord Selbourne in the following terms:4

“If parties chose to determine for themselves that they will have a domestic forum instead of resorting to the ordinary courts, then a prima facie duty is cast upon the courts to act upon such an agreement. The parties here have made that agreement. They probably knew what were the reasons in favour of determining these questions by arbitration, and what were the reasons against it, and they made it part of their mutual contract that these questions should be so determined. The plaintiffs cannot, therefore, be now heard to complain if that part of their contract is carried into effect.”

In the area of both domestic and international arbitration, there are statutes which state that courts may stay their jurisdiction and give primacy to arbitration in situations where there is a valid arbitration clause. In the case of disputes arising from international contracts containing arbitration clauses, the stay is mandatory.5 In the case of domestic contracts, the stay

is discretionary. This article explores nature of this requirement to stay litigation in disputes arising from domestic contracts.6 There is a good treatment of the subject in Mustill and Boyd on Arbitration.7 This article does not duplicate the points made in that work. It looks at the law through the decisions made on the subject by courts in Malaysia and Singapore and takes into consideration the case law in other common law jurisdictions after the last edition of that work.8

S. 7 of the Arbitration Act provides for the stay of litigation in Singapore.9 The corresponding section in Malaysia is s.6.10 Both legislation are in the exact terms as s.4 of the English Arbitration Act. The section reads as follows:

“(1) If any party to an arbitration agreement, or any person claiming through or under him, commences any legal proceedings against any other party to the arbitration agreement, or any person claiming through or under him, in respect of any matter agreed to be referred, any party to the legal proceedings may at any time after appearance, and before delivering any pleadings or taking any other steps in the proceedings, apply to the court to stay the proceedings.

(2) The court or a judge thereof, if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement, and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration, may make an order staying the proceedings”

The interpretation of the section may be considered by looking at the elements that have to be satisfied before the courts will grant stay. It is relevant to note again that the stay in domestic arbitration is discretionary, for the section uses the word “may” and not must “make an order staying the proceedings”.

1. There must be an arbitration agreement.

The party asking for a stay must establish that there is a valid arbitration agreement and that this arbitration agreement covers the dispute in respect

of which the litigation has been commenced.11 The agreement must be a written agreement for a stay to be made under the provision in the Arbitration Act.12 The arbitration statutes uniformly apply only to written agreements to arbitrate and remedies under them are dependent on the existence of such written agreements.

In a Brunei decision,13 where litigation was brought to recover money for work done by the plaintiff on the basis of the contract or on a quantum meruit basis, the defendant sought a stay on the basis of a clause in the contract which enabled the architect to make variations to the contract and fix the sums due for the work done according to the variations. The architect had fixed a sum in respect of the variations he had made but the defendant refused to pay the whole sum and disputed some of the assessments that had been made by the architect. The plaintiff brought an action to recover the sum. The defendant sought a stay on the ground that the clause in the contract which stated that the architect should determine any disputes as to the cost of the variations made on his orders amounted to an arbitration clause and that the litigation should be stayed so that the architect could decide the dispute. Rhind J. concluded that the role of the architect was not that of an arbitrator. He was merely a certifier and a valuer. He did not have to perform the functions of an arbitrator like conducting judicial hearings before making his determinations. Hence, the clause which dealt with disputes being decided by the architect was not an arbitration clause and cannot be the basis on which a stay order could be made. The decision is supportable and rests on good authority. It is well recognized that the function of an architect or engineer in making valuations of work done does not involve an arbitration and that the clause which empowers such valuation is not an arbitration clause. That being so, such a clause in a building agreement cannot be the basis on which a stay order can be made.14

2. The agreement to arbitrate must be a valid agreement.

It is obvious that if the agreement containing the arbitration clause or the agreement to arbitrate was void, the court cannot make an order to stay litigation on the basis of the invalid agreement. The section on the making of the stay contemplates the existence of a valid arbitration agreement. A

request for a stay order can be met with the defence that the agreement to arbitrate is not valid. If the plaintiff can show that the agreement was affected by any circumstance which makes the agreement a nullity due to illegality or because it was obtained by fraud, duress or undue influence, no stay can be made. The burden of showing that a valid agreement exists is always on the defendant who asks for the stay. But this does not mean that the plaintiff can sit back after merely raising the issue of the existence of an invalidating circumstance. He must furnish some proof of the existence of the such a circumstance. Otherwise, it would be easy for the defendant to merely raise the issue and thus avoid arbitration. Where there is a claim to set aside the contract on such grounds as fraud, duress or essential error, such a claim is not covered by the arbitration clause and the claim must be decided by the court.15

3. There must be a dispute between the parties.

Litigation will seldom be brought unless there is a dispute between the parties.16 However, it may be brought with the purpose of enforcing a claim or recovering a debt the existence of which both parties accept.17 Such litigation cannot be stayed even in situations where the claim is covered by an arbitration clause, for it is pointless going to the arbitrator with such a claim as he does not have the power of ensuring that relief is granted the party making the undisputed claim.18 Only the courts can make effective enforcement orders in respect of indisputable claims and staying litigation in such instances may only postpone the inevitable and add to the costs. The section states that “there must in fact be a dispute between the parties with respect to the matters agreed to be referred”. Where there is an admission of a claim, there cannot be a dispute between the parties. However, the admission must be unequivocal.19 Several decisions have emphasized the need for the existence of a dispute.20

Where the plaintiff is entitled to a summary judgment under RSC Order 14, the stay will be refused.21 The purpose of Order 14 is to enable a plaintiff to obtain a quick judgment where there is no defence to the claim or where the defence suggested is clearly misconceived.22 Where there is an arbitration clause, it would appear that the likelihood of a judgment under Order 14 would be less. In clear cases, a judgment will be given despite the presence of an arbitration clause but where there is even a possibility of a triable issue, courts will prefer to grant a stay. Parker LJ explained the position as follows:23

“In clear cases a plaintiff is no doubt entitled to his summary judgment notwithstanding the clause, but, when a plaintiff seeks immediate judgment in other than a clear case and resists the submission of the dispute to the tribunal on which he has agreed, one is bound to wonder whether the course which he has taken is prompted by the knowledge that the chosen tribunal with its more intimate knowledge of the trade may reach a conclusion adverse to him in respect of which he might either fail to obtain leave to appeal or if he did obtain leave fail to demonstrate any error.”

Such a view is reflective of the modern trend...