Background
The appellant was placed in judicial management and then in compulsory liquidation. The respondent company was the appellant’s external auditor from a least 2003 to September 2020. The respondent audited the appellant’s financial statements for the financial years 31 October 2014 to 31 October 2019.
The respondent’s auditing engagement was set out in separate engagement letters for each financial year (FY). The engagement letters between the appellant and respondent contained varying dispute resolution provisions: (i) the engagement letters for FY2008 to FY2015 did not contain express dispute resolution provisions; (ii) the engagement letters for FY2016 and FY2017 contained an exclusive jurisdiction clause in favour of the Singapore courts (Exclusive Jurisdiction Clause); (iii) the engagement letter for FY2018 contained the Exclusive Jurisdiction Clause and also a tiered dispute resolution clause culminating in a Singapore-seated SIAC arbitration (Tiered Arbitration Clause); and (iv) the last engagement letter, for FY2019, only contained the Tiered Arbitration Clause.
In April 2020, the appellant’s former managing director admitted to various irregularities in the appellant’s affairs including material misstatements in its financial statements, and the respondent withdrew its audit report for FY2019.
Prior to the commencement of the court proceedings, the respondent proposed that all claims relating to the audits for FY2014 to FY2019 be referred to arbitration. The appellant disagreed and commenced proceedings in the Singapore High Court. The appellant alleged that by failing to detect material misstatements in the audited financial statements for FY2014 to FY2019, the respondent had breached its contractual duties to audit the financial statements with reasonable care and skill and, further or alternatively, breached its tortious duty of care.
High Court decision
The respondent applied to stay the court proceedings relating to the dispute over the audits for FY2018 and FY2019 (FY2018 and FY2019 Dispute) in favour of arbitration, and an order that the dispute over the audits for FY2014 to FY2017 (FY2014 to FY2017 Dispute) be stayed pending the completion of steps in the Tiered Arbitration Clause.
The High Court judge ordered (i) a stay of the FY2018 and FY2019 Dispute in favour of arbitration, and (ii) for the FY2014 to FY2017 Dispute to be stayed, but on case management grounds pending the resolution of the putative arbitration.
Court of Appeal decision
The appellant appealed against the decision of the High Court. It argued that the multiplicity of proceedings and attendant risks resulting from a stay constituted sufficient reason to refuse the stay. The respondent argued that multiplicity of proceedings would not itself amount to an exceptional circumstance allowing the parties’ arbitration agreement to be overridden.
The issues identified on appeal were (i) whether the FY2018 and FY2019 Dispute should be stayed in favour of arbitration under the AA, and (ii) if so, whether the FY2014 to FY2017 Dispute should be subject to a case management stay.
The Court of Appeal held that as a “starting position”, a court will naturally seek to hold parties to their arbitration agreement. The party seeking to persuade the court to exercise its discretion is required to “show sufficient reason why the matter should not be referred to arbitration” and assuming that the counterparty is ready and willing to arbitrate, the court will only refuse a stay in exceptional circumstances.
The Court of Appeal found that this was an exceptional case and was satisfied that there was sufficient reason not to stay the court proceedings.
In arriving at its findings, the Court of Appeal set out relevant guidance on refusing a stay in the context of the management of overlapping court and arbitral proceedings.It restated its earlier observation that the court, as the final arbiter, should take the lead in ensuring the efficient and fair resolution of the dispute as a whole. In doing so, three higher-order concerns must be balanced: (i) the plaintiff’s right to choose whom he wants to sue and where; (ii) the court’s desire to prevent a plaintiff from circumventing the operation of an arbitration clause; and (iii) the court’s inherent power to manage its processes to prevent an abuse of process and ensure the efficient and fair resolution of disputes. The three higher-order concerns are equally applicable to guide the court’s exercise of discretion.
It was held that the term “sufficient reason” captures a broad range of factors which include: (i) the existence of related actions and disputes, some of which are governed by an arbitration agreement and others which are not; (ii) the overlap between the issues in dispute such that there is a real prospect of inconsistent findings; (iii) the likely shape of the process for the resolution of the entire dispute; (iv) the likelihood of injustice in having the same witnesses deal with the same factual issues before two fora; (v) the likelihood of disrepute to the administration of justice ensuing from the fact that overlapping issues may be differently determined in different actions; (vi) the relative prejudice to the parties; and (vii) the possibility of an abuse of process. Ultimately, these factors must be weighed against the consideration that parties have voluntarily bound themselves to arbitrate.
The Court of Appeal found that the FY2018 and FY2019 Dispute should not be stayed in favour of arbitration on the basis of significant overlap with the FY2014 to FY2017 Dispute. While the multiplicity of actions (of which some are governed by arbitration agreements and others not) did not constitute sufficient reason to refuse a stay, it was found that the present circumstances went beyond that. The Court of Appeal reasoned that this was a singular dispute concerning a continuous relationship between the parties from FY2014 to FY2019 and that the FY2018 and FY2019 Dispute and the FY2014 to FY2017 Dispute were nearly identical, with evidence factually sequential and covering the same ground. Similar questions would arise requiring consideration of what happened throughout the course of the parties’ audit relationship. The significant overlap in the factual issues would give rise to a real prospect of inconsistent findings on the same evidence, which could not be addressed by a case management stay. This is because the factual disputes over the respondent’s conduct in FY2014 to FY2017 and conceivably even in the subsequent years, would likely be litigated twice before two different fora, possibly giving rise to issues of issue estoppel and res judicata.
Comment
This decision reaffirms that the threshold for the court’s exercise of discretion to refuse a stay under the AA is a high one, and it is generally exercised sparingly. It also sets out useful guidance for a court’s exercise of discretion to refuse a stay of proceedings in favour of a domestic arbitration.
While the issue of significant overlap was an exceptional circumstance in this case, the factual matrix of the dispute is not uncommon. Long-term arrangements often involve new agreements for each period of engagement. In such circumstances, parties should carefully consider dispute resolution clauses in their agreements and the chosen forum to minimise the risk of the same issues being litigated in different fora in the event of a dispute.
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Client Alert 2022-149
