Arbitration Clause in Settlement Agreement Triggers a Stay of Court Proceedings on Case Management Grounds

This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC.

In the case of PUBG Corp v Garena International I Pte Ltd and others [2020] SGCA 51 (“PUBG”), the Singapore Court of Appeal had to decide whether or not to grant a stay of the parties’ ongoing court proceedings (“Court Proceedings”) in favour of a subsequent arbitration arising out of a settlement agreement that was entered into between the parties in the midst of the Court Proceedings (“Settlement Agreement”). In the arbitration proceedings, the validity of the Settlement Agreement was the main issue to be determined by the tribunal.

In particular, the Court of Appeal had to decide whether or not to stay the Court Proceedings on “case management” grounds – a ground that was first recognised and developed in Singapore by Tomolugen Holdings Ltd and anor v Silica Investors Ltd and or appeals [2016] 1 SLR 373 (the “Tomolugen”). In essence, a “case management stay” was developed under case law whereas a “mandatory stay” is based on statute at Section 6(1) of the International Arbitration Act. A “mandatory stay” is granted where an arbitration is the proper forum to resolve the parties dispute and not the court (i.e. where the same issue that has been brought under court proceedings is in fact subject to an arbitration). In contrast, a “case management stay” is applicable to the situation where the particular issue to be resolved under the arbitration proceedings is different from that raised in the court proceedings. If the court is of the view that determination of the arbitrable issue would supersede or compromise the existing issues under the court proceedings, the court can grant a stay of the court proceedings albeit there being no overlapping issue between the arbitration and the court proceedings.

The Court of Appeal in PUBG found that the validity issue of the Settlement Agreement had to be resolved first by way of arbitration proceedings before proceeding with the Court Proceedings because a valid settlement between the parties would have the effect of dispensing the existing Court Proceedings – i.e. the arbitral tribunal’s ruling on the Settlement Agreement would have the effect of superseding or compromising the parties’ original claims under the Court Proceedings. Accordingly, in PUBG, a stay of the Court Proceedings was granted on case management grounds in favour of the arbitration proceedings arising from the Settlement Agreement. We discuss the Court of Appeal’s reasoning in detail and the implications of the decision in PUBG below.

Factual Background of PUBG

The Appellant initially commenced the Court Proceedings against the five Respondents alleging copyright infringement. Subsequently, the Court Proceedings were suspended in light of the Appellant’s proposal for the Settlement Agreement. After delaying the execution of the Settlement Agreement for a considerable amount of time, the Respondents finally accepted the settlement terms. However, the Claimant protested that it could no longer accept the Settlement Agreement, and argued that the Settlement Agreement was no longer valid.

The Settlement Agreement contained an arbitration clause which provided for “any dispute, controversy, claim or difference of any kind” arising in connection with the Settlement Agreement to be resolved by arbitration (the “Arbitration Clause”). The Respondents commenced an arbitration proceeding against the Appellant (the “Arbitration”), contending that the Appellant had acted in breach of the terms of the Settlement Agreement by alleging that the Settlement Agreement was not valid. The Respondents also applied for a stay of the Court Proceedings on case management grounds, pending the resolution of the Arbitration.

The High Court Judge granted a stay of the Court Proceedings on case management grounds in favour of the Arbitration. When the Appellant appealed against the decision, the Court of Appeal upheld the High Court’s decision and held that the Court Proceedings had to be stayed until the issue relating to the validity of the Settlement Agreement was resolved by the Arbitration.

Court of Appeal’s Decision in PUBG

In reaching its decision, the Court of Appeal recognised that there essentially existed two seemingly distinct disputes, (i) the dispute on infringement of intellectual property rights (i.e. the “primary” dispute under the Court Proceedings), and (ii) the dispute on the validity of the Settlement Agreement (i.e. a “secondary” dispute under the Arbitration). However, the Court of Appeal ultimately took the view that such analysis of the parties’ dispute would not capture the “real essence” of the situation. The Court of Appeal was of the opinion that if there was a valid settlement that would effectively compromise the underlying claims of the parties, then the Court Proceedings could not proceed. Accordingly, the Court of Appeal held that the validity of the Settlement Agreement had to be resolved first. The Court of Appeal noted that, if the Settlement Agreement were held to be valid, this would supersede the original cause of action altogether. Hence, the question of whether the settlement exists between the parties had to be tried as a preliminary issue.

The Court of Appeal also held that the correct forum to determine the validity of the Settlement Agreement would be the Arbitration pursuant to the Arbitration Clause contained in the Settlement Agreement. The Court of Appeal stated that as long as the court is presented with what appears on its face to be a valid arbitration agreement, the court should allow any dispute that falls within such arbitration agreement to be determined by the arbitral tribunal.

In coming to its decision, the Court of Appeal also considered the following points relating to granting a stay of court proceedings on case management grounds.

First, the Court of Appeal cautioned that the Appellant could not seek to improve its own position by disregarding the Settlement Agreement and seeking to continue with the Court Proceedings on the ground that the issues that were being dealt with under the Court Proceedings and the Arbitration did not overlap. Even in such a case, the court could still exercise its inherent discretion to stay the court proceedings on case management grounds, as long as the issues that are being dealt with under the arbitration proceedings have a superseding effect on the issues of the original court proceedings. In this case, since a finding that the Settlement Agreement was valid under the Arbitration would have the effect of dispensing with the need to continue with the Court Proceedings, the Court of Appeal granted the stay.

Second, the Court of Appeal noted that the validity of the Settlement Agreement was not raised by the Appellant in the Court Proceedings. If the Appellant had raised the validity issue of the Settlement Agreement in the Court Proceedings, the Respondents could have applied for a mandatory stay under s 6 of the International Arbitration Act (rather than a case management stay). This is because in such a scenario, the issue to be determined under the Arbitration and the Court Proceedings would be identical, and resolution of that issue pursuant to the Arbitration would be mandatory pursuant to the parties’ Arbitration Clause. As discussed above, a mandatory stay is granted when the parties’ dispute, which was supposed to be subjected to the arbitration agreement, has instead been brought under court proceedings. On the other hand, a case management stay could be granted even when the issues that are being determined by the court do not overlap with the issues that are being handled by the arbitration tribunal. The purpose of a mandatory stay is to uphold the parties’ agreement to arbitrate their dispute, while the purpose of a case management stay is to ensure that the fair and efficient resolution of the parties’ dispute as a whole is achieved. However, as the subject matter of the Arbitration Clause (i.e. the validity of the Settlement Agreement) was only raised in the Arbitration and not in the Court Proceedings, the more appropriate stay that the Respondents could apply for was a stay on case management grounds.

Third, where the court is tasked with exercising its inherent power to grant a stay on case management grounds, the Court of Appeal found that the principles laid out in Tomolugen were relevant. In Tomolugen, it was held that the court should “take the lead in facilitating the fair and efficient resolution of the dispute as a whole”. Therefore, when granting a stay on case management grounds, the courts would have to balance three “higher-order concerns”: (1) preserving the plaintiff’s right to choose whom to sue and where, (2) upholding agreements to arbitrate, and (3) preventing an abuse of process. However, the Court of Appeal cautioned against applying the principles laid out in Tomolugen in a “mechanical” way. Instead, the court’s inherent power to grant a case management stay of court proceedings should be “exercised with due sensitivity and regard to the facts and in particular, the nature of the overlapping issues”.

Implications

The decision in PUBG has implications that parties must consider carefully. Namely, if two parties are engaged in a Singapore court proceedings but later execute a settlement agreement midway through the court proceedings, one party may invoke the arbitration clause contained in the settlement agreement and seek a stay of the original court proceedings on case management grounds.

Therefore, the parties should be wary of the effect that their settlement agreement (in particular, the arbitration clause contained therein) might have on their original court proceedings. If the arbitral tribunal’s ruling on the settlement agreement has the effect of superseding or compromising the parties’ original claims, then the Singapore courts are likely to grant a stay of the original court proceedings in favour of the pending arbitration for case management grounds. Hence, parties should be alert to the fact that their rights to resolve their original dispute under the court proceedings can be held in abeyance pursuant to a “case management stay” until their dispute on the settlement agreement (reached midway through the court proceedings) is resolved by way of an arbitration, even if the issue to be arbitrated was never raised in the court proceedings.