Conditional Stay Pending Arbitration: Barred from Raising the Defence of Limitation

A. Introduction

In this article, I dissect the High Court case of Lineclear Motion Pictures Sdn Bhd v Measat Broadcast Network Systems Sdn Bhd, where Liza Chan JC granted a stay of all proceedings pending reference to arbitration with the condition that the First Defendant (“D1“) is barred from raising the defence of limitation in the arbitration proceedings.

B. Background Facts

The Plaintiff filed a suit in the Sessions Court against D1 for breach of a Film Co-Investment Agreement. The Second Defendant was sued as a guarantor.

D1 failed to respond to the Plaintiff’s letter of demand. D1 also failed to enter appearance. Judgment in Default (“JID“) was entered against D1. A month later, D1 applied to set aside the JID and sought permission to apply for a stay under section 10 of the Arbitration Act 2005. The Plaintiff did not object to the order sought by D1.

However, instead of applying for a stay, D1 asked the Plaintiff to discontinue its suit against D1. Shortly thereafter, the Plaintiff offered to enter into a consent order for a stay pending arbitration in respect of its claim against D1. D1 disagreed.

D1 then filed for a stay application. D1 also sought for indemnity costs. The Sessions Court Judge dismissed both D1’s stay application and application for indemnity costs.

D1 appealed. The High Court allowed D1’s appeal in part. Stay of proceedings was granted with the condition that D1 is precluded from raising the defence of limitation. However, the High Court did not grant D1 indemnity costs.

C. The High Court’s Decision

This part will only cover the High Court’s decision on the granting of the stay with the condition that D1 is barred from raising the defence of limitation. This part will not cover the issue of indemnity costs.

The Plaintiff issued a letter of demand to D1. D1 did not respond. The High Court held that under such circumstances, the Plaintiff was entitled to take the position that the debt was not disputed. The Plaintiff was then entitled to file the suit. It is trite that failure of a party to register any protest or deny the opposing party’s assertion or demand amounts to an implied admission. This was upheld by the Federal Court in Dream Property Sdn Bhd v Atlas Housing Sdn Bhd [2015] 2 MLJ 441.

The Plaintiff’s suit was filed well within the limitation period. However, D1 took time to set aside the JID and applied for a stay. By sheer effluxion of time, the Plaintiff’s cause of action became time-barred. The High Court held that this situation was by no fault of the Plaintiff.

The High Court then referred to the express wordings of section 10 of the Arbitration Act 2005 which allows the Court to “impose any conditions as it deems fit” in granting a stay of proceedings. The High Court also referred to a spectrum of cases where the court had granted a conditional stay.

For example, in FAMG Idaman Resources v Jasmadu Sdn Bhd [2018] 1 LNS 1108, a stay was granted on the condition that the arbitration is commenced within 30 days. Another example can be seen in Apex Marble Sdn Bhd v Leong Tat Yan [2018] MLJU 39 where Nantha Balan J (as his Lordship then was) imposed a condition to preclude the defence of limitation when granting a stay. Although the stay was overruled on a different point by the Court of Appeal, the question of a stay of proceedings pending arbitration did not arise during the appeal.

The High Court then set out the following factors in assessing whether to impose the condition when granting the stay:

• First, the length of the delay. Here, has only been a few months since the limitation period expires.

• Second, whether the delay was due to the fault of the Plaintiff or to circumstances beyond the Plaintiff’s control. Here, the Plaintiff’s suit was filed well within the limitation period.

• Third, if the delay was due to the fault of the Plaintiff, the degree of such fault. Here, the delay was not due to the Plaintiff’s fault.

• Fourth, whether the Plaintiff was misled by D1 through circumstances beyond the Plaintiff’s control. Here, D1 failed to respond to the Plaintiff’s Letter of Demand, Writ and Statement of Claim. D1 chose to remain silent until after JID was entered.

• Fifth, whether D1 would be prejudiced by the delay and if so, the degree of such prejudice. Here, D1 cannot claim that it is prejudiced as it chose to remain silent until after the JID was entered.

• Sixth, the amount at stake. Here, the Plaintiff’s claim is close to RM1 million. If the Plaintiff is time-barred in arbitration, it will be deprived of the opportunity to arbitrate its claim.

Critically, the High Court found that D1’s own inaction from the issuance of the Plaintiff’s letter of demand has contributed to the time lapse. While limitation has set in, the Court is entitled to impose the condition to preclude D1 from raising the defence of limitation pursuant to section 10(2) of the Arbitration Act 2005.