How Useful is an Arbitration Agreement in Setting Aside a Judgment in Default?

A. Introduction

If a Judgment in Default (“JID“) is entered against you, can you set it aside on the ground that there exists an arbitration agreement between both parties? You can.

The High Court in its recent decision of Finbond Heavy Machinery Sdn Bhd v CREC Geotechnical Engineering (M) Sdn Bhd (“Finbond“) held that the existence of an arbitration agreement between both parties is a valid ground for a defendant to set aside a JID. This is because irrespective of a JID being entered against a defendant, section 10 of the Arbitration Act 2005 (“Arbitration Act“) still applies, in that proceedings before the High Court must be stayed in light of an arbitration clause.

B. Background Facts and Issues in Finbond

In Finbond, the Plaintiff served the Statement of Claim on the Defendant. The Defendant failed to enter appearance. JID was then entered against the Defendant. The Defendant applied to set aside the JID. Given that the service of the Statement of Claim was regular, the question that arose was whether the Defendant has a defence on the merits to set aside the JID.

Two issues arose in Finbond.

First, can a JID be set aside on the ground that there exists an arbitration clause between parties?

Second, is the failure of filing a draft defence fatal to the Defendant’s application to set aside the JID?

C. First Issue: Can a JID be set aside on the ground that there exists an arbitration clause between parties?

The High Court in Finbond referred to the Federal Court case of Tindak Murni Sdn Bhd v Juang Setia Sdn Bhd [2020] 4 CLJ 301 (“Tindak Murni“) and held that the existence of an arbitration agreement affords the Defendant a defence on the merits, thereby warranting the setting aside of the JID.

The Federal Court case of Tindak Murni bears a striking resemblance with the case of Finbond. In Tindak Murni, the Defendant was seeking to set aside a JID on the basis of the existence of an arbitration clause. In setting aside the JID, the Federal Court found as follows:

(i) Unless an arbitration agreement is null, void, inoperable or incapable of being performed, all disputes arising under the governing contract are to be referred to arbitration.

(ii) Even when a JID is obtained in court proceedings, section 10 of the Arbitration Act still applies. This is especially so if there are active efforts made to set aside the JID so that the dispute could be ventilated fully by way of an arbitration.

(iii) The fact of the existence of the arbitration agreement amounted to a matter warranting further investigation. In other words, it afforded a defence on the merits.

Applying the principles in Tindak Murni above, the High Court in Finbond set aside the JID given that there exists an arbitration agreement and the Defendant has not taken any steps in the Court proceedings.

D. Second Issue: Is the failure of filing a draft defence fatal to the Defendant’s application to set aside the JID?

The Plaintiff in Finbond contends that the Defendant has failed to attach a draft defence and that this is fatal to the Defendant’s application to set aside the JID.

However, the High Court in Finbond held that the Defendant should not and cannot file any draft defence as that would amount to a step in the proceedings which would defeat any subsequent application made pursuant to section 10 of the Arbitration Act.

Further, the High Court referred to Sensini Marketing Sdn Bhd v Hong Da Fesyen Sdn Bhd [2020] 1 LNS 257, where the High Court held that the non-filing of a draft defence is not fatal to an application set aside a JID. This is because the Court is entitled to examine the affidavits filed by parties when determining whether there is a prima facie defence on the merits.

E. Conclusion

The existence of an arbitration agreement itself, unless declared null and void, could mean that there is a prima facie defence on the merits of the case, thereby warranting the setting aside of a JID. If a defendant is to rely on the existence of an arbitration agreement to set aside a JID, the defendant must bear in mind not to file a draft defence as that might defeat its subsequent application for stay of proceedings pending arbitration.

Photo credit: Boyes Turner