30^th July 2018

What can you do if your Co-Defendant obtained a Stay pending Arbitration?

If one of the Defendants in the Suit obtained a stay of legal proceedings pending arbitration pursuant to section 10 of Arbitration Act 2005 (“AA 2005”), can the other Co-Defendant also apply for a stay notwithstanding that there is no arbitration agreement between the Plaintiff and D2?

What if the Plaintiff’s claim against D1 and D2 involves similar facts / issues or requires the same witnesses to give evidence? What if the causes of action against D1 and D2 are also dependent on similar facts or findings?

If so, how does one avoid multiplicity of proceedings and the risk of the 2 separate tribunals (Court and Arbitration) making different findings on the same issues / facts?

Stay pending Arbitration for Non-Parties to Arbitration Agreement?

Earlier this year, the Court of Appeal addressed these issues in the case of Protasco Bhd v Tey Por Yee and Another Appeal [2018] MYCA 47.

The facts of the case in a nutshell are as follows:-

1. An individual named Tey, brought a proposal for investment to Protasco relating to the acquisition of 76% of a company known as PT Asi from the proposed vendor, PT Asu;

2. The proposal envisaged that the acquisition of PT Asi will enable Protasco to control one of PT Asi’s subsidiary, who in turn has the rights to develop and produce oil & gas in an oil field in Aceh, Indonesia.

3. Tey subsequently became a substantial shareholder of Protasco by acquisition of shares and nominated an individual named Ooi as his representative on Protasco’s Board of Directors;

4. Thereafter, Tey proposed for Ooi to represent Protasco in all negotiations relating to the purchase of PT Asi from PT Asu;

5. Protasco and PT Asu entered into the 1^st Sale & Purchase Agreement (“SPA 1”) and Protasco paid the initial deposit. A due diligence was conducted thereafter. Several conditions precedent in SPA 1 could not be met in time and this led parties to signing the 2^nd Sale & Purchase Agreement (“SPA 2”). The salient point about SPA 2 is that the entire purchase price is payable upon execution of SPA 2;

6. However, PT Asu failed to comply with the terms of SPA 2, which include the extension of the rights to the oil production for a period of 10 years. Protasco was informed for the 1^st time after the payment of the purchase consideration that a term of only 3 years at best, could be obtained;

7. Arising thereof, SPA 2 was terminated and Protasco’s Board conducted an investigation into SPA 2;

8. The Investing Committee found, amongst others, that PT Asu, PT Asi and 2 other companies involved in the proposed investment are owned, related or alter-ego of Tey and Ooi;

9. Arising thereof, Protasco initiated a High Court Suit against Tey, Ooi and PT Asu to recover, amongst others, the purchase price of PT Asi;

10. Protasco’s cause of action against Tey and Ooi is premised on deceit, fraud, conspiracy to defraud / injure, contravention of sections 132 and 131 of Companies Act 1965 and breach of fiduciary duties;

11. Whereas the claim against PT Asu is premised on conspiracy to injure / defraud and the relief claimed includes damages for breaches of contract.

There was an arbitration agreement in the Sale & Purchase Agreements between Protasco and PT Asu and consequently, a stay was granted upon the application of one PT Asu pursuant to section 10 of AA 2005.

A month after the aforesaid stay order, the remaining Defendants in the suit, i.e. Tey and Ooi also applied for a stay of legal proceedings pending the arbitration between Protasco and PT Asu.

Tey and/or Ooi are not parties to the arbitration agreement between Protasco and PT Asu. There is also no arbitration agreement between Protasco and Tey or Ooi. In other words, Tey and Ooi are non-parties as far as the arbitration between Protasco and PT Asu is concerned.

In relation to Tey & Ooi’s stay application; the Court of Appeal observed that section 10 of AA 2005 has no application. Instead, the Court will need to consider the factual matrix of the case and balance the relevant factors and interests of parties involved in order to achieve “a result which is manifestly just in all the circumstances of the case”:-

“[6] The crux of these appeals turns on the law governing a stay of proceedings in relation to non-parties to an arbitration agreement. In the instant case only Protasco and PT ASU are bound by the arbitration agreement. The other two defendants are not so bound. They fall outside the scope of the agreement. Section 10 of the AA is inapplicable in their context. So, should the court proceedings in relation to the claims made against them be stayed pending the arbitration between Protasco and PT ASU or should Protasco be allowed to proceed with the claim against the parties notwithstanding the arbitration proceedings?

[7] The answer to this question turns primarily on the factual matrix of the case coupled with a balancing of the relevant factors and interests of the parties, so as to achieve a result which is manifestly just in all the circumstances of the case. The latter aspect is governed by a consideration of the law in relation to this issue. To that end, we shall first consider the factual premise of the case in relation to the defendants prior to the law…”

“Manifestly Just” in the circumstances – The Options

Having examined the factual matrix of the case and the applicable laws around the Commonwealth, the Court of Appeal outlined several options open to the Court in deciding such stay applications by non-parties:-

“(a)  to stay the whole of the court proceedings, including those against the non-parties or third parties to the arbitration proceedings, pending the determination of the arbitration. In other words, that the arbitration proceeds first, followed by the court proceedings…;

(b)   to stay the court proceedings to the extent required by section 10 of the AA, but on condition that the arbitration proceed only after the resolution of the remaining court proceedings. This means in effect that the court proceedings against the third parties or non-parties not caught by the arbitration agreement would be heard and determined first, followed by the arbitration proceedings…;

(c)   To stay the court proceedings under section 10 in relation to the parties to the arbitration agreement, namely Protasco and PT ASU, and allow the remaining court proceedings against Tey and Ooi to proceed concurrently or in parallel. This means in effect that the arbitration and court proceedings would occur concurrently;

(d)   To allow a stay of the court proceedings on certain issues, while allowing other issues to be concurrently determined by the court and in arbitration…”

Balancing the relevant facts and interest of the parties

Having outlined the options available, the Court of Appeal proceeded to consider the competing factors relating to both the arbitration and court proceedings. These competing factors include:-

– The overlap in parties;

– The overlap of the issues;

– The overlap in the factual matrix;

– The fact that the principal witness in the arbitration may be the Defendants in the Court Proceedings as the evidence of these people may be necessary to establish the factual matrix in order to determine whether the cause of action is made out or otherwise;

– Similarity in relief claimed against Protasco in Arbtiration and Tey & Ooi in the Court Proceedings;

– Any finding of a breach of contract by the PT ASU in the Arbitration does not bind Tey and Ooi in the Court Proceedings and thus require the matter to be adjudicated a 2^nd time in Court in order to make Tey and Ooi personally liable.

The Outcome

Having considered all the factual matrix and balancing the relevant competing factors and interest of the parties, the Court of Appeal decided to adopt option (b) above, i.e.:-

“…stay the court proceedings only to the extent required under section 10 of the AA, as per the order of this Court in relation to PT ASU, but on condition that the proposed arbitration proceed only after the resolution of the remaining court proceedings, i.e. resolve that part of the court proceedings which falls outside the Section 10 first”

Effect of Decision

An interesting point to note in this case is that the stay application by the non-parties (Tey & Ooi) was made on 25.03.2017 whereas the Stay Order pursuant to the section 10 AA (as between Protasco and PT Asu) was already granted on 25.02.2016, i.e. one month before the Stay Application by Tey & Ooi.

Notwithstanding that there are 2 separate stay proceedings, the Court of Appeal’s decision clearly demonstrates that these 2 applications are intrinsically linked where the outcome of one application may affect the other.

In this case, although the stay of legal proceedings pending arbitration between Protasco and PT Asu is mandated by section 10 of the AA, the resulting arbitration will be deferred until the completion of the civil suit between Protasco and Tey & Ooi as a result of the outcome of Tey and Ooi’s Stay Application.

The net effect of which is that the arbitration is now “stayed” pending the disposal of the civil suit between Protasco and Tey & Ooi.

However, such stay applications involving both parties to the arbitration agreement as well as non-parties will not necessarily always result in the arbitration being deferred or “stayed” pending the disposal of the civil suit.

In this regard, the Court of Appeal made it clear that each case will differ based on the facts and factors to be considered in the individual case and the court proceedings with the remaining defendants (who are non-parties to the arbitration agreement) can be stayed to enable the arbitration to proceed first, if it is suitable to do so.

“[75] In this context it is important to stress that each case will differ in terms of the factors to be considered and the weight to be accorded to these matters. It is not in every case that court proceedings of the non-parties should proceed first. In point of fact court proceedings are often stayed vis a vis non-parties to enable the arbitration to proceed first, particularly where there is one plaintiff who has specifically contracted to arbitrate with one of the defendants. The factors weighing against such a course of action in the instant case, as outlined above is the potential waste of resources and the duplicity of evidence, and possibly conflicting findings by each of the fora. Although it has been said that such duplicity may well arise in cases involving non-parties to the arbitration, and that no undue weight should be accorded to this factor, the factual matrix in the instant case would appear be otherwise…”

If you have any questions or comments on this article, please contact:-