Resolving a dispute in arbitration is by consent of parties, and this consent is reflected in an arbitration agreement embedded in the main contract between them.
As such, if one party decides to ignore the arbitration agreement and instead commence an action in the civil court, the civil court is required to uphold the arbitration agreement and put the civil suit on hold in favour of arbitration (this is called a “stay”). Parties are then expected to commence arbitration to resolve that dispute.
However, there can be situations where the time limit (limitation period) to bring a claim has expired by the time arbitration starts, even though it hadn’t expired when the lawsuit was first filed in the civil court. Is a party time barred from pursuing their claim?
The Court of Appeal in the case of Bongsor Bina Sdn Bhd v SH Builders & Marketing Sdn Bhd [2024] MLJU 1049 explored this conundrum.
Background Facts
- The Defendant/Appellant, Bongsor Bina Sdn Bhd (“Bongsor Bina”), as the main contractor, appointed the Plaintiff/Respondent, SH Builders & Marketing Sdn Bhd (“SH Builders”) as the sub-contractor for a housing project in Shah Alam.
- The agreement between Bongsor Bina and SH Builders had an arbitration clause.
- A dispute arose between the parties in respect of SH Builders’ final progress claim, and their termination of the contract.
- SH Builders then proceeded to commence a civil suit at the Kuala Lumpur Sessions Court on 6 August 2019 to claim for their unpaid final progress claim.
- Bongsor Bina then applied to stay the proceedings pending arbitration which it succeeded.
- As a result, SH Builders proceeded to commence arbitration by serving its Notice of Arbitration to Bongsor Bina on 1 July 2020.
- Bongsor Bina then raised a preliminary issue before the arbitrator stating that limitation has set in when SH Builders served its Notice on Arbitration on Bongsor Bina.
- With the consent of the arbitrator, SH Builders made an application to the High Court pursuant to section 41 of the Arbitration Act 2005 to determine essentially whether SH Builders’ claim was time-barred when it commenced arbitration against Bongsor Bina.
Decision of the High Court
- The High Court held that the limitation period stops when the civil suit was commenced on 6 August 2019, notwithstanding that the dispute was later referred to arbitration as a result of a stay application.
- Section 30 of the Limitation Act 1953 (which relates to the applicability of limitation in arbitration) and section 23 of the Arbitration Act 2005 (which states when an arbitration commences) were considered by the High Court. The High Court found that these provisions are only applicable to arbitrations that were commenced at the outset, without a civil suit being stayed.
- In this regard, SH Builders’ claim against Bongsor Bina was not time-barred as it was still well within the 6 years limitation period when SH Builders commenced the civil suit in August 2019.
- Bongsor Bina then proceeded to appeal against the High Court’s decision.
Decision of the Court of Appeal
- The Court of Appeal acknowledged that when SH Builders filed its claim in the Sessions Court in August 2019, it was still within the limitation period. However, the limitation period had lapsed when SH Builders then subsequently commenced arbitration in July 2020.
- Considering that the defence of limitation is taking away one’s right to claim against another, the Court of Appeal viewed that a liberal or reasonable approach is favoured over a strict one.
- In this regard, the Court of Appeal found that neither the Arbitration Act 2005 nor the Limitation Act 1953 oust the jurisdiction of the Courts, even though the claim is based on the arbitration agreement. As such, SH Builders’ claim at the civil court is a valid action, although it has been stayed pursuant to section 10 of the Arbitration Act 2005.
- Moreover, SH Builders’ Notice of Arbitration stems from the stay order issued by the Sessions Court. This means that arbitration is a “continuation” from SH Builders’ action at the civil court.
- The Court of Appeal also noted that it will be absurd to allow Bongsor Bina’s contention that limitation has set in. This would mean that SH Builders cannot pursue its claim through arbitration because of limitation, but at the same time, there is a valid suit at the Sessions Court that is being stayed pending arbitration. Accordingly, it is unreasonable, unjust and unfair for Bongsor Bina to raise the defence of limitation in the arbitration proceedings.
- In this regard, the Court of Appeal dismissed Bongsor Bina’s appeal and affirmed the High Court’s decision.
Key Takeaways
The Court of Appeal’s judgment shows that a tactical manoeuvre to raise the defence of limitation to defeat an arbitration that was commenced as a result of a stay, is not so easily accepted. The courts will take a more liberal approach, and is likely to be in line with the parties’ agreement to arbitrate.
For contracting parties, it is crucial to be aware of how arbitration clauses can affect the resolution of disputes, especially when sensitive time periods are involved. Parties should be fully aware of the dispute resolution clauses in their contracts and not take it merely as boilerplate. Filing a civil claim when there is an arbitration agreement would subject the civil claim to being stayed, and where claims are filed late, limitation issues could arise as the matter transitions from litigation to arbitration.
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This article was written by Sean Ferdinand Ng (Senior Associate) from Donovan & Ho’s dispute resolution practice.
Donovan & Ho is a law firm in Malaysia. Our dispute resolution provides advice and legal representation in the civil and industrial courts. We also represent clients in both domestic and international arbitration, as well as other forms of alternative dispute resolution. Our experienced lawyers are also able to assist in commercial and civil disputes (such as debt recovery, shareholders’ or directors’ disputes, breach of contract and claims for injunctive relief), constructive disputes (arbitration and/or adjudication proceedings, disputes relating to delays, liquidated damages, defects and rectification work) and employment disputes (unfair dismissal claims, judicial review proceedings, and employment-related civil claims). Have a question? Please contact us.
