Should multi-tier dispute resolution clauses be treated as a series of discrete dispute resolution agreements, or regarded as a unitary dispute resolution mechanism?
When will the court find an arbitration agreement to be “inoperative” or “incapable of being performed” in an application to stay court proceedings in favour of arbitration?
The Singapore High Court (the “Court”) had the opportunity to address these and other questions in Heartronics Corporation v EPI Life Pte Ltd and Others  SGHCR 17, a decision concerning a mediation-arbitration (“med-arb”) dispute resolution procedure jointly introduced by the Singapore Mediation Centre (“SMC”) and the Singapore International Arbitration Centre (“SIAC”).
We take a critical look at four main issues canvassed by the Court and their practical implications on dispute resolution clauses in contracts.
The Plaintiff is a Malaysia-incorporated entity engaged in the distribution of medical devices.
The 1st Defendant is a Singapore-incorporated company carrying on business as a wholesaler and distributor of medical devices.
The 2nd Defendant is the sole shareholder of the 1st Defendant. The 3rd Defendant was a director of the 1st and 2nd Defendants, whilst the 4th Defendant was a director of the 2nd Defendant.
In Suit 192/2017 (the “Suit”), the Plaintiff seeks damages and the rescission of, respectively, a License Agreement and a Distribution Agreement (collectively, the “Agreements”) entered into by the Plaintiff and the 1st Defendant sometime in late 2010.
The Plaintiff had alleged that one or more of the Defendants had made false representations regarding (amongst other things):
- the launch of a 3G-enabled medical device (the “Product”) by the 1st Defendant by end-2010;
- the Product having obtained CE Certification to be sold in France; and
- a data server and call centre having been set up in India to market the Product.
Relying on the Defendants’ purported representations, the Plaintiff entered into various downstream distribution agreements with third parties to distribute the Product in France and India. However, the Plaintiff subsequently discovered that no CE Certification for the Product had been obtained in France, nor was the relevant infrastructure set up in India to facilitate the sale of the Product. The Plaintiff suffered loss and expense as a result.
The Defendants took out two applications against the Plaintiff:
- The IAA Stay Application: By way of SUM 1372, the 1st Defendant sought a stay of the Suit pursuant to s 6 of the International Arbitration Act (Cap. 143A) (“IAA”).
- The Case Management Stay Application: By way of the other prayers in SUM 1372 and SUM 1396, and subject to the Suit being stayed against the 1st Defendant, the 2nd to 4th Defendants sought a stay of the proceedings pursuant to the court’s inherent powers of case management as set out in Order 92, rule 4 of the Rules of Court.
Both Agreements contain dispute resolution clauses (the “ADR Clauses”) requiring the parties to proceed to med-arb under “the SMC-SIAC Med-Arb Procedure for the time being in force” (the “SMC-SIAC Procedure”) in the event of a dispute.
Before commencing the Suit, the Plaintiff triggered the ADR Clauses under the Agreements:
- On 13 June 2014, the Plaintiff initiated its claim against the 1st Defendant, inviting the 1st Defendant to submit the dispute to med-arb in accordance with the ADR Clauses.
- On 8 September 2014, the Plaintiff issued a further letter initiating its claim against the 2nd Defendant and similarly inviting the 2nd Defendant to submit to med-arb.
- The Plaintiff’s solicitors submitted a Request for Mediation with SMC on 13 October 2014.
- The parties’ solicitors exchanged letters between November 2014 to June 2015 but the 1st Defendant failed to commit to any firm mediation date(s) after several delays. The 1st Defendant also did not pay the SMC’s fees, citing “cash flow problems”.
- On 13 July 2015, the Plaintiff’s solicitors issued a final ultimatum to the 1st Defendant to provide suitable dates for mediation, failing which, the 1st Defendant will be regarded as having repudiated the ADR Clauses. The 1st Defendant did not respond.
The IAA Stay Application
The Court found that the ADR Clauses contained valid arbitration agreements and that the dispute in the Suit arose “in connection with” the arbitration agreements.
In deciding whether to grant a stay, the Court had to determine whether the arbitration agreements found in the ADR Clauses were “null and void, inoperative or incapable of being performed” pursuant to s 6(2) of the IAA.
The Plaintiff submitted that:
- the arbitration agreements were either “inoperative” or “incapable of being performed” as the 1st Defendant had committed a repudiatory breach of the arbitration agreements by its conduct in response to the Plaintiff’s attempts to commence med-arb.
- (in the alternative) the financial circumstances of the 1st Defendant have made it impossible for the med-arb proceedings to be set in motion.
The 1st Defendant submitted that:
- each ADR Clause in fact contained two separate and distinct agreements – one to mediate and the other to arbitrate – and that the 1st Defendant had only breached the agreement to mediate but not the arbitration agreement.
- the Plaintiff had not adduced sufficient evidence to show that the arbitration agreements were “incapable of being performed”.
Issue 1: Whether the ADR Clauses are a unitary dispute resolution mechanism or separate and distinct dispute resolution agreements
AR Teo Guan Kee (“AR Teo”) held that the ADR Clauses were a unitary dispute resolution mechanism, the entirety of which formed an “arbitration agreement” under s 6, IAA.
The Court found that the obligations to mediate and arbitrate under the SMC-SIAC Procedure were “closely intertwined” and therefore not severable:
- As parties had expressly agreed to this hybridized dispute resolution mechanism, it would be inconsistent with the parties’ commercial intentions to separate the processes within the med-arb framework.
- Further, if the processes were severed and a stay granted, the Plaintiff would in effect be compelled to proceed directly to arbitration as if the ADR Clauses did not provide for mediation at all.
- In various other judicial decisions (i.e. from Hong Kong, Malaysia, England and Canada), courts had found that multi-tier dispute resolution clauses were to be regarded as a unitary dispute resolution mechanism rather than multiple discrete dispute resolution agreements – even where there were no clear links between each tier.
Issue 2: Whether the arbitration agreements were “inoperative” due to the 1st Defendant’s repudiatory breach
AR Teo held that the 1st Defendant’s actions amounted to repudiatory breaches of the ADR Clauses and deprived the Plaintiff of “substantially the whole benefit” of the arbitration agreements.
In particular the 1st Defendant was found to have failed to act in good faith by (1) failing to make payment of the SMC fees; and (2) continually postponing the commencement of mediation.
The Court also found that the 1st Defendant had renounced the arbitration agreements by clearly conveying no interest in performing its obligations under the ADR Clauses. Apart from not paying the SMC fees and failing to agree on a mediation date, the 1st Defendant also stopped responding to the Plaintiff’s solicitors’ letters altogether.
The 1st Defendant’s repudiatory breach meant that the arbitration agreements were “inoperative” within the meaning of s 6(2), IAA. This on its own justified dismissing the IAA Stay Application.
Issue 3: Whether the arbitration agreements were “incapable of being performed”
The Court held that the arbitration agreements were not “incapable of being performed” as there was insufficient evidence to show that the 1st Defendant would be unable to take the necessary steps to set the med-arb proceedings in motion.
In Dyna-Jet Pte Ltd v Wilson Taylor Pte Ltd  SGHC 238, Vinodh Coomaraswamy J opined that an arbitration agreement is only “incapable of being performed” if there is a contingency that prevents the arbitration from being set in motion. The Court found that the 1st Defendant’s financial circumstances did not amount to such a permanent contingency. As such, it cannot be said that the arbitration agreement was “incapable of being performed”.
Issue 4: When will the courts grant a case management stay?
The Case Management Stay Application was moot in that it could only succeed if the IAA Stay Application was granted. Nevertheless, the Court went on to consider when a case management stay might be granted:
- Existence of common issues to be tried: Where there are common issues to be tried in relation to each and every defendant, the courts will be more inclined to grant a case management stay so that the broader dispute could be decided after the arbitration (involving the narrower dispute) has been heard.
- Step in the proceedings no impediment: The fact that the defendants might have taken a step in the proceedings will not preclude the court from granting a case management stay. A party applying for a case management stay does not in fact dispute the court’s jurisdiction to hear the case.
The Plaintiff had argued that the 3rd and 4th Defendants were precluded from applying for a case management stay as they had taken a step in the proceedings by filing a Notice to Produce Documents Referred to in Pleadings. The Court disagreed, citing an earlier High Court decision in which Quentin Loh J held that:
“A case management stay only affects the plaintiff’s choice of the sequence in which he pursues proceedings against different defendants, and involves no more on the part of the court in which the proceedings are brought than declining to hear the proceedings before it until some other time.” [emphasis added in bold]
(BC Andaman Co Ltd & Ors v Xie Ning Yun & Anor  SGHC 64)
Comment / Practical Implications
This landmark decision addresses many practical implications in dispute resolution clauses which drafters and end-users ought to be mindful of:
- Multi-tier dispute resolution clauses: This case is (further) support for the general principle that multi-tier dispute resolution clauses are, in effect, a unitary dispute resolution mechanism and not to be treated as severable or consisting of multiple discrete dispute resolution agreements. This would be the case even if the multi-tier dispute resolution clauses “do not provide a level of inter-relatedness between their various tiers”.
- Applicability to SIAC-SIMC Arb-Med-Arb Protocol (“AMA Protocol”): Proponents of the AMA Protocol will be pleased to learn that the same principles applied to the SMC-SIAC Procedure are likely to apply to the AMA Protocol, i.e. the AMA Protocol is likely to be regarded as a unitary dispute resolution mechanism rather than several distinct dispute resolution agreements. This is particularly so given that, under the AMA Protocol, SIMC mediation is commenced within the framework of the arbitration proceedings after the arbitral tribunal has been constituted. For more about the AMA Protocol, read our earlier blog post here.
- Different bases of IAA stay and case management stay applications: The Court’s analysis of the distinction between the basis of an IAA stay application and a case management stay is instructive. Whilst an IAA stay is premised on the ground that the parties have not submitted to the court’s jurisdiction, the case management stay is the exact opposite – it is premised on the basis that the parties do submit to the court’s jurisdiction.
- Failure to pay fees: A failure to pay the requisite fees related to the dispute resolution procedure may or may not be construed as a repudiatory breach, depending on the dispute resolution mechanism governing the arbitration agreement.
- In an English decision concerning the ICC Rules of Arbitration (“ICC Rules”), the judge found that the defendant was not in repudiatory breach by not paying the advance on costs of the arbitration. This is because the ICC Rules specifically contemplates such a scenario and provides that the claimant may pay the advance on behalf of the respondent first. The issue of the advance was in any event due to be addressed in a preliminary hearing for security for costs and the defendant had evidenced a clear intention to participate in the arbitration. (per Hamblen J in BDMS Ltd v Rafael Advanced Defence Systems  All ER (D) 244)
- By contrast, the SMC-SIAC Procedure had expressly contemplated the payment of the SMC fees by each party. More importantly, the 1st Defendant in this case had demonstrated no real intention to participate in the SMC mediation – as evidenced by its repeatedly stalling for time and subsequently, failing to even respond to the Plaintiff’s solicitors’ letters.