Under section 6 of both the Arbitration Act (Cap. 10) and the International Arbitration Act (Cap. 143A), the Singapore courts have the power to stay court proceedings when a party to an arbitration agreement commences court proceedings against any other party to the agreement. The exercise of such a power is premised on the fact that an arbitration agreement exists between the two parties.

However, what happens when a party to an arbitration agreement sues a third party in court and the third party wishes to stay the court proceedings in view of intended arbitration proceedings between the parties to the arbitration agreement? Will the court stay proceedings, perhaps on the basis that the resolution of certain issues in the arbitration will have the effect of determining the court proceedings?

This was the situation faced by the Singapore High Court in the recent case of Shanghai Construction (Group) General Co. Singapore Branch v Tan Poo Seng [2012] SGHCR 10. The court was called upon by the defendant to exercise its inherent jurisdiction to stay the proceedings until an “intended arbitration” between Shanghai Construction and Top Zone (a related third party) was heard. The court agreed.

The Facts

The defendant was the director and shareholder of a company called Top Zone Construction & Engineering Pte Ltd (“Top Zone“). The plaintiff, Shanghai Construction, had subcontracted certain construction works to Top Zone under a subcontract agreement. That subcontract agreement contained an arbitration clause. Top Zone requested the plaintiff to make certain payments directly to one of its (Top Zone’s) sub-contractors. The plaintiff did so and paid out a sum of $454,451.60. In return, the defendant issued a cheque for $450,000.00 in favour of the plaintiff. Subsequently, disputes arose between the plaintiff and Top Zone following which Top Zone stopped its works and withdrew from the site. There was no repayment of the sum of $454,451.60 and the plaintiff subsequently sought to present the defendant’s cheque for payment. However, the cheque was dishonoured as payments had been stopped.

The defendant did not dispute the facts but advanced the following defences.

1. First, that there was an agreement between the parties that the plaintiff would recoup its direct payments to Top Zone’s subcontractors in the form of two deductions from progress payments made by the Housing and Development Board.
2. There was a settlement between Top Zone and the plaintiff.
3. The plaintiff was not entitled to present the defendant’s cheque for payment.
4. The plaintiff’s conduct in presenting the cheque was unconscionable because it had delayed the building works and had failed to properly value payments to Top Zone.

During the course of these court proceedings, Top Zone separately commenced court proceedings and successfully injuncted the plaintiff from calling on a performance bond pending the final determination of an “intended arbitration” between itself and the plaintiff.

In this respect, it was common ground between the parties that certain issues raised by the defendant would be determined in the intended arbitration between the plaintiff and Top Zone i.e. whether there was a settlement between the plaintiff and Top Zone, whether the plaintiff had under-certified Top Zone’s claims etc (see paragraph [9]).

The law on the court’s inherent jurisdiction to stay proceedings

The defendant sought the stay of proceedings, not on the basis of the Arbitration Act, but on the inherent jurisdiction that a court had “to manage its own business with due regard to the resources available to it and the interests of other litigants, as well as the interests of the immediate parties themselves“, citing Reichhold Norway ASA & Anor v Goldman Sachs International [1999] CLC 486 at (see paragraph [13]).

While the plaintiff did not dispute that proposition, nevertheless, it maintained that “this jurisdiction is a residual one and should only be exercised rarely and exceptionally, for example in situations where it was necessary to prevent the abuse of the court’s process” relying on the Singapore Court of Appeal decision Four Pillars Enterprises Co Ltd v Beiersdorf Aktiengesellschaft [1991] 1 SLR(R) 382 (“Four Pillars”) as well as the High Court decision of Lanna Resources Public Co Ltd v Tan Beng Phiau Dick [2011] 1 SLR 543 (“Lanna Resources”) (see paragraph [14]).

In this respect the defendant pointed out that Reichhold was upheld by the English Court of Appeal in Reichhold Norway ASA and another v Goldman Sachs International (2000) 1 WLR 173 which was in turn followed and applied by subsequent cases in England and Canada. It was submitted that this represented a departure from the older English Court of Appeal case of Etri Fans Ltd v NMB (UK) Ltd [1987] 1 WLR 1110 (“Etri Fans”) which had been relied upon by the Singapore cases. Specifically, the defendant argued that whilst Etri Fans was not considered by either the English High Court or Court of Appeal in the Reichhold cases, it should be considered “as being overtaken by those cases and their progeny” (see paragraph [15]).

The Singapore High Court agreed with the plaintiff noting that it was “worth emphasising that even after [the Reichhold cases] it remains the position [in Singapore] that it will only be in rare and exceptional circumstances that a court would exercise its inherent jurisdiction to grant a stay of proceedings pending the resolution of arbitral proceedings“. However, the Singapore High Court also considered that the Reichhold cases stood for the proposition that the “justification for granting a stay pending arbitration pursuant to the inherent jurisdiction of the court has been extended beyond preventing the abuse of the court’s process…to include the efficient resolution of disputes and management of cases” (see paragraph [18]).

The High Court considered that the court would carefully consider all the facts as well as what would be in the interest of justice before it exercised its inherent jurisdiction to stay proceedings (see paragraph [20]). In this respect, it would be important to “examine the circumstances in which the proceedings were commenced as well as what was sought in the proceedings in order to determine if they were frivolous, vexatious, oppressive or otherwise an abuse of process” (see paragraph [21]). Previous cases had certain precedent value insofar as they would “shed light on the factors that a court should take into account in deciding whether or not to exercise its jurisdiction” (see paragraph [20]). Ultimately, a stay would be only be ordered “where there are ‘strong reasons‘ for doing so and where the resulting benefits ‘clearly outweigh any disadvantage to the plaintiff’” (see paragraph [26]).

The High Court ultimately agreed with the arguments advanced by the defendant and granted the stay. First, the High Court considered that there was some basis to believe that there was an agreement between the parties as to when the plaintiff was entitled to present the cheque and that was dependent on, inter alia, Top Zone performing its obligations under the subcontract agreement. This was an issue that was within the scope of the “intended arbitration” between the plaintiff and Top Zone. In this respect, the High Court rejected the plaintiff’s characterisation of the claim as being founded upon a dishonoured cheque pursuant to the Bills of Exchange Act (Cap. 23) (see paragraph [30]).

Second, unlike the case of Lanna Resources, it was unclear that parties had intended for separate dispute resolution regimes to govern the subcontract agreement and the provision of the security by way of the cheque (see paragraph [31]).

Third, the disposal of the arbitration before the court proceedings would result in savings of costs and expenses and avoid the “significant and undesirable risk of inconsistent outcomes” since the arbitration would determine the outcome of the court proceedings, avoid the duplicative efforts of having to add Top Zone as a party to the court proceedings and resolve disputes that were properly within the domain of arbitration (see paragraph [32] and [33]). 

Finally, the factors militating against a stay of proceedings were insufficient to outweigh the benefits: (a) while the “intended arbitration” had not commenced, there was no indication that the plaintiff was not willing and ready to commence arbitration proceedings but in fact recognised that a binding arbitration agreement subsisted between itself and Top Zone; and (b) the delay in applying for the stay did not evince any lack of bona fides on the part of the defendant (see paragraphs [36] and [37]).

Conclusion

In the English House of Lords decision in the Fiona Trust case, also known as Premium Nafta Products Ltd (20th Defendant) & Ors v. Fili Shipping Company Ltd & Ors [2007] UKHL 40 the learned law lords held that “the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal” per Lord Hoffman at paragraph [13].

The decision and approach of the Singapore High Court in this respect is helpful in promoting arbitration and ensuring that in appropriate cases, closely related third parties can take advantage of intended arbitration proceedings to stay court proceedings that have been commenced against them.