Can I still go to court, when my contract contains an arbitration clause? (Part 1 - When the “dispute” is not a dispute )

A contractual dispute is a dispute arising out of, among others, a breach of a contract. In a contract, there will be terms governing the contractual relationship between parties. One of the common clauses in a contract would be a dispute resolution clause. A dispute resolution clause is an agreement within a contract that sets out the mechanism for the resolution of disputes between the contractual parties.

Among the common dispute resolution mechanisms are (i) court litigation and (ii) arbitration. 

Examples of the clauses are as follow:

(a) For court litigation

This Agreement shall be governed by the laws of Malaysia and the parties hereto agree to submit to the exclusive jurisdiction of the Court of Malaysia. 

(b) For arbitration

“If any dispute or difference shall arise between the Parties arising from or in connection with the Contract, either during the period of, or after the expiry thereof or after the termination of the Contract, or any breach of the Contract, then such dispute shall be referred to arbitration and final decision of a person to be agreed between the parties to act as arbitrator, or, failing agreement to be nominated on the application of either party by the Director for the time being of the Asian International Arbitration Centre and any such reference shall be deemed to be a submission to arbitration within the meaning of the Arbitration Act 2005 (“Act”) or any other law amending or replacing such Act."

The issue now is that, when an agreement provides for dispute resolution via arbitration, can one of the parties then now try to resolve their dispute via court litigation? 

The short answer to that is YES. The existence of an arbitration clause between the parties does not stop a party from filing a claim in court. However, there are risks to this (i.e. the opposing party might file for a stay of proceedings pursuant to Section 10 of the Arbitration Act 2005). 

At the outset, it is understood that an arbitration agreement entered between the parties means that the parties have agreed to resolve their disputes via arbitration. 

Therefore, the approach that the Court should take is to give effect to the intention of the parties by referring their disputes to arbitration. This is due to the trite principle that there should be minimum interference on the contractual choices of the parties (see the Johor Bahru High Court case of TWIN H ENGINEERING SDN BHD v. HONG YEH SENG ENTERPRISES SDN BHD [2020] 1 LNS 1765, Evrol Mariette Peters JC)

In the landmark case of PRESS METAL SARAWAK SDN BHD v. ETIQA TAKAFUL BHD [2016] 9 CLJ 1, the Federal Court held that an arbitration agreement or clause is a written submission, agreed to by the parties, and like other written submissions, must be construed according to its language and in the light of the circumstances in which it is made. 

The Federal Court went on to further emphasise that parties must be held to what they have agreed to in an agreement.

Thus, when there is a dispute arising out of a breach of a contract, and that the contract provides for a dispute resolution via arbitration, parties by right should resolve their disputes via arbitration. 

However, even in the presence of an arbitration agreement, it does not stop a plaintiff from pursuing a claim via court litigation. 

In the words of the Singapore Court of Appeal case of TOMOLUGEN HOLDINGS LTD AND ANOTHER V. SILICA INVESTORS LTD AND OTHER APPEALS [2015] SGCA 57: the Plaintiff has a right to choose whom it wants to sue  and where. 

So, the question now is – in what situation can a Plaintiff pursue a claim via court litigation even when there exists an arbitration clause between Plaintiff and Defendant. 

When a Plaintiff files a suit in court, even when there is an arbitration agreement between the parties, Defendant can file for a stay of proceedings pending arbitration pursuant to section 10 of the Arbitration Act 2005. 

Section 10 of the Arbitration Act 2005 states that:

(1) A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

On the meaning of 'arbitration agreement' the relevant provision is section 9 of the Arbitration Act, which reads: 

Section 9(1) of the Arbitration Act 2005 states that "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

Therefore based on section 9 and section 10 of the Arbitration Act 2005 (above), there are a few elements that the defendant / the applicant needs to prove before a court can grant a stay of proceedings pending arbitration (which are also outlined in the Kota Bharu High Court case of MESRA BUDI SDN BHD lwn. LEMBAGA KEMAJUAN TANAH PERSEKUTUAN (FELDA) [2017] 1 LNS 1920):

a. There was an arbitration agreement between the parties (and that the agreement is not null and not void, not inoperative or not incapable of being performed);

b. There was a dispute between the parties that calls for arbitration; and

c. That the Defendant had not taken any other steps in the proceedings.

When the “dispute” is not a dispute

In the Johor Bahru High Court case of CHE GROUP BERHAD v. DATO KWEH TEAM AIK [2019] 1 LNS 1292, Evrol Mariette Peters JC refused to grant a stay pending arbitration because the facts of the case reveal that the issue between the Plaintiff and Defendant is not a dispute, but instead is a debt due from the Defendant to the Plaintiff, which the Defendant now refuses to honour. In fact, Defendant had admitted to the debt and the accrued interest, and had agreed to return the monies due.

Such position was also adopted in the following cases.

In LONDON AND NORTH WESTERN RAILWAY V. JONES [1915] 2 KB 35, in the words of Rowlatt J:

It does not, however, follow that the Courts cannot be resorted to without previous recourse to arbitration to enforce a claim which is not disputed but which the trader merely persists in not paying...

The case LONDON AND NORTH WESTERN RAILWAY V. JONES [1915] 2 KB 35 was also referred to in the Kuala Lumpur High Court case of KSM INSURAN BHD v. ONG AH BA & ANOR [1984] 1 LNS 147 where the Plaintiff, an insurance company caused a writ to be issued against the defendants claiming the sum of $40,251.89 alleged to be the balance due by the 1st Defendant to the Plaintiff in respect of insurance business transacted by or through the 1st Defendant on behalf of the Plaintiff. The 1st Defendant failed to enter an appearance in time. In an application to set aside the judgment in default entered against him, the 1st Defendant referred to, among others, the arbitration clause in the agency agreement which provides that where any dispute or difference shall arise between the parties, the condition precedent to bringing any action or suit would be the obtaining of an award by an arbitrator. George J in dismissing the 1st Defendant’s application held as follows:

No explanation has been given by the 1st defendant as to why he had not entered an appearance in time. That omission alone was sufficient for me to decide to dismiss the application. In any event the 1st defendant has not shown that he has any defence on merits. Invoking the arbitration clause does not provide the 1st defendant with a defence in that he has not shown that there has been any dispute or difference between the plaintiff and him. He has not contended that the amount claimed against him is in fact not owing.

George J also took a similar position in the Kuala Lumpur High Court case of ELF PETROLEUM SE ASIA PTE LTD V. WINELF PETROLEUM SDN BHD [1984] 1 LNS 166: 

In my judgment what we have is a mere refusal to pay upon a claim which had been admitted as being owing to the Defendants. There is nothing to be settled by arbitration.

... Where a claim is admitted it does not call for a settlement by arbitration. All that is called for is for payment of the admitted amount which can be by an action in the Courts as has been done in the instant case.

The case of ELF PETROLEUM was cited in CELCOM (MALAYSIA) SDN BHD V. SARAWAK ELECTRICITY SUPPLY CORPORATION [2003] 1 CLJ 6 wherein the Court Appeal emphasised the significance of this qualification in the words of Gopal Sri Ram JCA:

The important qualification to which this principle is subject is housed within it. It is that there must be a dispute falling within the scope of the arbitration clause or agreement. If there be no dispute, then it follows that there is nothing to refer to arbitration.

With that being said, it is to be concluded that a Plaintiff can pursue a claim via court litigation despite the existence of an arbitration clause between Plaintiff and Defendant when the “dispute” is not a true dispute. Whether or not a “dispute” is a true dispute depends on the facts of the case. The case laws above had established that A MERE REFUSAL TO PAY UPON A CLAIM WHICH IS NOT DISPUTED DOES NOT GIVE RISE TO A DISPUTE CALLING AN ARBITRATION CLAUSE INTO OPERATION.