ARTICLES OF LAW By BHAG SINGH | Jun 2, 2009

Debt collection

The existence of an arbitration clause does not prevent the court from entertaining a claim before it.

WHEN a person seeks payment from another for money owed, goods sold or services rendered, he will usually endeavour to personally collect the amount due.

When such efforts fail, he may turn to a debt collection organisation. The personnel of such an organisation may adopt a soft approach or aggressive techniques. However, most people may choose to go to the courts.

Aggressive tactics by loan sharks such as splashing red paint on the premises of family members of a debtor, are often used to intimidate. File Photo.

When an action is filed in court by such a person (the plaintiff) against the party regarded as the debtor (the defendant), various obstacles may surface. One such obstacle could be an arbitration clause.

In such a situation, the defendant may apply to stay the proceedings. If he is successful, this would mean that further progress of the action would be suspended. In such a case, the claimant would have to commence arbitration proceedings.

A reader wants to know why he cannot go to the courts or having gone there, continue with the proceedings?

Right to courts

Of course, making a claim in the courts is a right of every individual within the jurisdiction of the courts. No doubt there are on exceptions, but these are not relevant here.

When a person enters into a contract and agrees to one of the terms that he will refer any dispute to arbitration, he voluntarily gives up or qualifies his right to go to the court.

I say “qualify” because agreeing to a clause to refer differences to arbitration is a voluntary waiver by the individual concerned. However, this never takes away the power of the court to deal with any matter that is placed before it for deliberation.

Thus there are situations where even though there is an arbitration clause, a party that files its claim in the ordinary courts cannot be prevented from proceeding in that forum. The eventual decision is in the hands of the court which may not stay the proceedings to allow the matter to be referred to arbitration.

No absolute restraint

There is no absolute rule that just because there is a pre-agreed arbitration clause, every claim can only be made through arbitration. This is because the basis for referring the matter to arbitration is not based purely on the arbitration clause alone but has to be viewed in the light of section 4(1) of the Arbitration Act 2005 which reads:

“Any dispute which the parties have agreed to submit to arbitration under an arbitration agreement may be determined by arbitration unless the arbitration agreement is contrary to public policy.”

Thus it will be seen that the basis for reference arises only when there is a “dispute” between the parties. And even then it does not take away the power of the courts to deal with the claim if the court so decides. Public policy is clearly one such reason.

Is there a dispute?

It is necessary to consider whether there is indeed a dispute as opposed to just one party making a claim. If the action is to make a claim when there is no dispute, the proceedings will not be stayed by the court to be referred to arbitration, an arbitration clause notwithstanding.

In ELF Petroleum S.E. Asia Pte Ltd vs Winelf Petroleum Sdn Bhd, a Singapore company had business dealings with a Malaysian company which they supplied petroleum products to.

The Singapore company had submitted a statement of account of the amount outstanding with a further statement in the accompanying letter to the effect that “if we do not hear from you within seven (7) days from the date of this letter, we shall assume that the outstanding figures are in order and correct”.

In a further letter, the Singapore company terminated the agreement and reiterated the amount owing. The Malaysian company merely stated in response that “the two most outstanding issues” between the parties were the current debts of the defendants to the plaintiffs, and the prices of petroleum products to be supplied in future by the plaintiffs to the defendants.

The judge understood the contents of the letter to amount to proposals to renew and restart relations between the parties which called for the settlement of the aforesaid two issues. The defendants submitted a proposal – a new price list for supplies in future.

However, the proposal was rejected by the Singapore company which commenced proceedings in court. The defendant responded by applying for a stay of proceedings because the arbitration clause provided for any claim or controversy to be settled by arbitration.

The court took the view that the correspondence available amounted to an admission of a debt. As such the claim had been not disputed and there was no reason to stay the proceedings and have them referred to arbitration.

In so doing the judge referred to the editors of Russel On Arbitration which, in support of their contention, stated that “mere refusal to pay upon a claim which is not really disputed does not necessarily give rise to a ‘dispute’ calling an arbitration clause into operation”.

It is important to decide when discussing the subject whether there is any controversy. In this connection, it is relevant to refer to a statement by Rowlatt J. in London and North-Western Railway vs Jones.

His lordship said that whilst there was a need to refer a dispute for arbitration, it does not 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.

Conclusion

Sometimes people may wonder why such an application is made because it does not always expedite proceedings. Of course, this becomes more understandable when it is appreciated that sometimes one of the parties may not be in favour of speedy disposal.

In other cases, the matter may be more appropriately proceeded with in court. One good example is where there are two defendants. One of the defendants has earlier agreed to arbitration but the other is not subject to the arbitration agreement.

In such a case, having the matter against one defendant referred to arbitration would split the proceedings and cause a duplication. This would not be in everyone’s interest. Despite an arbitration clause, whether a matter in court is allowed to continue would depend on different factors.