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Nature of Matter

Stay of Court Proceedings; Court’s Discretion Under the Arbitration Act

Case Summary

1. CA/CA 67/2021 is an appeal by the appellant, CSY, against the decision of the High Court judge (“the Judge”) granting an application of the respondent, CSZ to stay part of a High Court Suit (the “Suit”) in favour of a domestic arbitration and to stay the remaining part of the Suit on case management grounds pending the resolution of the putative arbitration. 
2. CSY is an exempt private company limited by shares. It was placed under judicial management in 2020 and a winding up order was made against it in 2021. It is presently in compulsory liquidation. The interim judicial managers, judicial managers and the liquidators of the appellant are referred to as the JMs hereafter.
3. CSZ is a limited liability partnership incorporated in Singapore and was engaged as the appellant’s external auditor from 2003 until it resigned on 17 September 2020. The respondent audited the appellant’s financial statements for each of the financial years (“FYs”) ending 31 October 2014 through to 31 October 2019.
4. The investigations conducted by the JMs revealed several serious irregularities in the appellant’s affairs since at least 2010. These appeared not to have been reflected or captured in the appellant’s audited financial statements. As a result of these irregularities, the appellant’s audited financial statements from FY2014 to FY2019 were materially misstated and/or did not give a true and fair view of the financial position and/or performance of the appellant. It also appeared in the audited financial statements that the value of the appellant’s total assets had been overstated from as early as FY2010 and as a result, the audited financial statements grossly misrepresented the financial position and performance of the appellant. The JMs set out their findings in two reports dated 22 June 2020 (predominantly on FY2019) and 6 November 2020 (predominantly on FY2018 and FY2017).
5. CSZ’s engagement was set out in separate engagement letters. Those for FY2008 to FY2015 were silent on dispute resolution, those for FY2016 and 2017 had an exclusive Singapore courts jurisdiction provision, the FY 2018 letter had an additional revised dispute resolution clause containing a tiered dispute resolution procedure culminating in arbitration in Singapore under the Singapore International Arbitration Centre rules (“the Tiered Arbitration Agreement”).  The FY2019 letter contained only the Tiered Arbitration Agreement.
6. The Tiered Arbitration Agreement provided for the following:

“In the event of any difference or dispute arising between the parties relating to the validity, interpretation, construction or performance of this engagement letter, the parties shall use their best endeavours to settle amicably such difference or dispute by consultation and negotiation.

If the matter is not resolved through negotiation, then the parties shall refer the matter to mediation in accordance with the rules and procedures of the Singapore Mediation Centre.

If, and to the extent that, any dispute has not been settled through negotiation and mediation, then the dispute shall be referred to and finally resolved by arbitration in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (‘SIAC’) for the time being in force, which rules are deemed to be incorporated herein. The Tribunal shall consist of three (3) arbitrators. The seat and venue of the arbitration shall be Singapore and the language of the arbitration shall be English. Any award made hereunder shall be final and binding upon the parties hereto and judgment on such award may be entered into any court or tribunal having jurisdiction thereof.”

7. On 5 March 2021, the appellant commenced the Suit claiming that the respondent had failed to detect material misstatements in its audited financial statements for FY2014 to FY2019 and that this was in breach of the respondent’s contractual duties to audit the financial statements with reasonable care and skill; and further and alternatively, that the respondent had breached its tortious duty of care.
8. On 18 June 2021, the respondent filed an application seeking an order to stay the dispute pertaining to the audits for FY2018 and FY2019 (“FY2018 and FY2019 Dispute”) in favour of arbitration pursuant to s 6 of the Arbitration Act (“AA”) and/or the court’s inherent jurisdiction and an order that the dispute pertaining to the audits for FY2014 to FY2017 (“FY2014 to FY2017 Dispute”) be stayed pending the completion of the steps in the Tiered Arbitration Agreement. On 3 November 2021, the Judge allowed the application. On 30 November 2021, the appellant filed an appeal against the decision. 

Appellant’s case

9. The appellant’s case was that there was sufficient reason to decline to stay the FY2018 and FY2019 Dispute in favour of arbitration. The appellant contended that the multiplicity of proceedings that would result from staying the FY2018 and FY2019 Dispute would be a strong and important factor against ordering a stay. The parties’ longstanding intention to resolve disputes pertaining to the appellant’s conduct in court as envisaged by the majority of engagement letters ought to have been given greater weight by the Judge. Further, the appellant also argued that the additional costs associated with resolving the dispute in multiple forums, the potentially limited scope of discovery in arbitration and the advantage of having the court manage this dispute  amounted to sufficient reason to decline to stay the FY2018 and FY2019 Dispute in favour of arbitration.
10. If the court were to refuse to stay the Suit in respect of the FY2018 and FY2019 Dispute in favour of arbitration, the appellant took the position that there would in any event, be no basis to stay the FY2014 to FY2017 Dispute on case management grounds as it ought to be allowed to proceed concurrently in court. The appellant contended that it would not follow that the FY2018 and FY2019 Dispute should be determined before the FY2014 to FY2017 Dispute just because the JMs’ investigation started with FY2019. Further, any findings made by an arbitrator on the FY2018 and FY2019 Dispute would not affect or resolve the examination of the audits performed in FY2014 to FY2017. Thus, there was no basis to hold the resolution of the FY2014 to FY2017 Dispute in abeyance pending the resolution of the FY2018 and FY2019 Dispute. Finally, the appellant argued that it would suffer serious prejudice because the resolution of the entire dispute could well be delayed by a matter of years resulting in inefficiency, higher costs and duplication.

Respondent’s case

11. The respondent’s case was that there was no sufficient reason for the FY2018 and FY2019 Dispute to be stayed in favour of arbitration. Given the undisputed position that the FY2018 and FY2019 Dispute fell squarely within the Tiered Arbitration Agreement and the respondent has been and remains willing to arbitrate, the burden would be on the appellant to establish sufficient reason that would exceptionally allow it to disregard the parties’ express agreement to arbitrate. Any multiplicity of proceedings would not itself amount to such an exceptional circumstance. The ancillary reasons of additional costs, less extensive discovery in arbitration and court oversight would at best be neutral factors. 
12. Further, if the FY2018 and FY2019 Dispute was stayed in favour of arbitration, the FY2014 to FY2017 Dispute ought to be stayed on case management grounds. It would be sensible for the FY2018 and FY2019 Dispute to be resolved prior to the FY2014 to FY2017 Dispute in order to allow the proper ventilation of the issues in the latter dispute. The respondent also pointed out that there were significant and substantial overlaps between the FY2018 and FY2019 Dispute and the FY2014 to FY2017 Dispute which would give rise to the real prospect of a wasteful duplication of resources and of inconsistent findings being reached if both proceedings were to run in parallel. This was because the appellant’s claims were based on the investigations by the JMs in respect of the FY2019 and FY2018 audits with such findings extrapolated to the earlier FYs. Any failure by the appellant to prove its claim in respect of the FY2018 and FY2019 audits would seriously undermine its claim concerning the prior FYs.

Issues on appeal

13. Two principal issues arise for consideration in the appeal:
    (a) whether the FY2018 and FY2019 Dispute should be stayed in favour of arbitration under s 6 of the AA; and
    (b) if so, whether the FY2014 to FY2017 Dispute should be subject to a case management stay.

14. The Court of Appeal allowed the appeal as it found sufficient reason, under s 6 of the AA, not to stay the court proceedings and refer the matter to arbitration in accordance with the Tiered Arbitration Agreement. As such, the Judge erred in staying the FY2018 and FY2019 Dispute in favour of arbitration.

Whether the FY2018 and FY2019 Dispute should be stayed in favour of arbitration

15. The Court of Appeal held that there was a significant overlap between the factual issues in dispute such that the FY2014 to FY2017 dispute and the FY2018 and FY2019 Dispute would be nearly identical. The inquiry into whether the respondent had breached its duties in each FY would likely be similar notwithstanding possible differences from year to year. The evidence to be considered would likely be interconnected running across the audit for each FY.
16. Whether it is the putative arbitration or the action in court that would be heard first, the factual disputes over the respondent’s conduct in FY 2014 to FY2017 and possibly thereafter would likely be litigated twice before two different fora thereby giving rise to possible issues of issue estoppel and res judicata.
17. Even if the court and arbitration tribunal happened to come to the same findings and one of the parties to the court proceedings then brought an appeal, the Court of Appeal might come to a different conclusion. In such an event, this could result in the parties being bound by the arbitral tribunal’s decision in relation to the FY2018 and FY2019 Dispute even if the decision rested on factual findings or legal principles that have been held to be incorrect by the Court of Appeal in relation to the FY2014 to FY2017 dispute. This gives rise to an additional complication that the parties would have the right to appeal against the court’s findings but not the arbitral tribunal’s findings.
18. The parties only included the Tiered Arbitration Agreement in FY2018 and FY2019. There was nothing to specifically suggest that they intended this change in policy to apply even to a dispute spanning multiple years engaging substantially similar issues. The fact that they had chosen to structure the Tiered Arbitration Agreement under the AA instead of the International Arbitration Act (“IAA”) would suggest that they did not harbour a specific intention that the Tiered Arbitration Agreement they entered into for FY 2018 and FY 2019 was to have mandatory force regardless of the circumstances.
19. In the case of international arbitration, the court is mandated to stay court proceedings in favour of an international arbitration unless the arbitration agreement is “null and void, inoperative or incapable of being performed” under s 6(2) of the IAA. In the case of domestic arbitration, the court retains some discretion to refuse to stay court proceedings in favour of a domestic arbitration under s 6(2) of the AA. It may do so when it is satisfied that there is sufficient reason why the matter should not be referred to arbitration in accordance with the arbitration agreement or if the applicant seeking a stay was not ready and willing to do all things necessary for the proper conduct of the arbitration.
20. For all of the above considerations, the Court of Appeal concluded that it would be in the best interest of the parties for their entire dispute to be resolved in one forum. This would also avoid the prejudice of ending up with inconsistent findings. Therefore, there exists sufficient reason to refuse a stay of the FY2018 and FY2019 Dispute in favour of arbitration under s 6 of the AA. 

Whether the FY2014 to FY2017 dispute should be subject to a case management stay.

21. The Court of Appeal held that as the appellant’s prayer for an order that the FY2014 to FY2017 dispute be stayed pending the completion of the steps in the Tiered Arbitration Agreement is predicated on the stay of the FY2018 and FY 2019 dispute in favour of arbitration, the issue of imposing a case management stay for the FY2014 to FY2017 dispute is moot given the ruling not to stay the FY2018 and FY2019 Dispute in favour of arbitration.