by MH Law | November 08, 2024 | Case Study
Brief Facts
In the case of Peninsula Education (Setia Alam) Sdn Bhd v Biaxis (M) Sdn Bhd (In Liquidation) (Civil Appeal No.: B-02(IM)(C)-1834-11/2023) ("Peninsula Education"), the Court of Appeal underscored the robustness of an arbitration agreement, affirming its continued validity and enforceability even in the event of one party entering liquidation.
In the Peninsula Education case, the Appellant selected the Respondent as the contractor for a construction project under a standard PAM contract containing an arbitration clause. Upon the Respondent's liquidation during the project, the employment was terminated automatically in accordance with the PAM contract terms. Subsequently, the Respondent initiated legal action against the Appellant to recover alleged outstanding payments from several interim payment certificates. The Appellant then sought to suspend the legal proceedings in favor of arbitration pursuant to section 10 of the Arbitration Act 2005 ("AA 2005").
The Respondent contended that the arbitration agreement had lost its effectiveness due to the liquidation, while the Appellant argued that the arbitration agreement remained valid and unaffected by the liquidation, stressing the importance of upholding the agreed method of resolving disputes through arbitration.
High Court
Having examined cases from various jurisdictions, the High Court determined that the arbitration agreement was no longer valid and dismissed the Appellant’s request for a stay under section 10 of the AA 2005. The High Court's decision was influenced by a judgment from the Canadian Supreme Court in Peace River Hydro Partners v Petrowest Corp [2022] SCJ No. 41 (“Peace River”), which highlighted that arbitration could impede the efficient resolution of a receivership, thereby nullifying the arbitration agreement. Furthermore, the High Court observed that insolvency laws safeguard a company in liquidation, making the arbitration agreement ineffective in preventing harm to the creditors and shareholders of the liquidated company. The High Court also considered the significant costs associated with arbitration for a company in liquidation.
Unhappy with the High Court's decision, the Appellant opted to appeal to the Court of Appeal.
Court of Appeal
The issues to be determined by the Court of Appeal were as follows:
Question 1: Does the liquidation of the Respondent invalidate the arbitration agreement?
The Court of Appeal responded negatively to this question, referencing sections 18(1) and (2) of the AA 2005, which establish the concept of separability of an arbitration agreement. This principle dictates that an arbitration clause in a contract is viewed as a separate and autonomous agreement, distinct from the remaining terms of the contract. Consequently, in the event of a company's liquidation and the liquidator opting not to honor specific agreements, the arbitration agreement remains valid and unaffected.
The Court of Appeal held a different view from the High Court regarding the interpretation of the Peace River case. They emphasized that the decision was context-specific and based on policy considerations. In Peace River, the company and its affiliates had several subcontracting agreements with different arbitration clauses, some of which lacked arbitration provisions entirely. The Canadian Supreme Court considered this scenario to carry a notable risk of conflicting results. Furthermore, the Court of Appeal highlighted that all parties involved in the Peace River case had recognized that pursuing legal proceedings in court would be a more efficient choice.
The Court of Appeal emphasized that its decision aligned with the Peace River case, where the Canadian Supreme Court determined that mere insolvency, receivership, or financial challenges do not justify a court invalidating an arbitration agreement. The Canadian Supreme Court underscored that the specific circumstances in that case warranted departing from the typical legal and judicial practice of enforcing parties' arbitration agreements.
Question 2: Does the insolvency regime have priority over the arbitration agreement?
The Court of Appeal determined that the issue was not relevant and clarified that an insolvency or winding-up petition does not fall under the scope of an arbitration agreement as defined in section 10(1) of the AA 2005. The Court of Appeal elaborated that a winding-up petition addresses whether a claimed sum, such as by the Contractor, is genuinely disputed on substantial grounds or not. If there is no genuine dispute and the company is unable to pay debts, it will be wound up. If the debt is disputed on legitimate grounds, the winding-up Court does not proceed to determine the amount owed. This aspect is considered a "matter" under section 10 of the AA 2005, where arbitration takes precedence as the method of resolving disputes.
In response to the Respondent’s argument that there was no serious dispute on the debt owed to it, the Court of Appeal emphasized the obligatory nature of section 10 of the AA 2005, which requires a stay to be granted when the matter in dispute is covered by an arbitration agreement. The Court of Appeal underscored the consistent stance of the courts that they are not required to investigate the dispute itself to ascertain its genuineness for referral to arbitration, but only to determine if it falls within the scope of the arbitration agreement. The Court of Appeal noted that prior to 2011, the court would not stay proceedings in favor of arbitration if it found that there was no actual dispute between the parties regarding the matters to be referred under paragraph 10(1)(b) of the AA 2005. However, paragraph (b) was completely repealed when the Arbitration (Amendment) Act 2011 came into effect.
Question 3: Are there any unresolved matters that must be addressed by an Insolvency Court because they are not subject to arbitration?
The Court of Appeal responded negatively to this, stating that the current disagreement pertains to a pre-insolvency issue and is not considered an insolvency dispute that falls under the jurisdiction of the Court as per the Companies Act 2016. This is because Parliament has specifically excluded such matters from arbitration and deemed them non-arbitrable on grounds of public policy, as outlined in section 4 of the AA 2005.
Question 4: Can the Court consider the high costs of arbitration when determining a stay during an application if one party is in liquidation?
The Court of Appeal rejected the notion that the arbitration process would be too slow and costly, emphasizing that the parties had the option to conduct arbitration in a cost-effective manner. Merely citing concerns about the process being time-consuming and expensive, and causing delays in creditor distribution, is not sufficient for the Respondent to invalidate the arbitration agreement. The Court of Appeal underscored that parties generally opt for arbitration over litigation due to the benefits of party autonomy, confidentiality, speed, and finality. It was also stressed that the Courts prioritize upholding freedom of contract and tend to avoid interfering in arbitration matters.
Consequently, the Court of Appeal granted the appeal, determining that the arbitration agreement did not lose its validity when the Respondent entered liquidation. Since the debt in question was disputed, the dispute fell within the scope of arbitration as intended by the parties.
Conclusion
The Court of Appeal's decision clarifies that, under the doctrine of separability, an arbitration agreement remains valid even after a company has been liquidated. While the Court recognized that each situation must be considered individually, this ruling emphasizes that the insolvency or financial difficulties of a company alone do not invalidate an arbitration agreement.
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