The “Stayed Proceedings” Dilemma – When Does the “Limitation Clock” Stop in a Court Action Stayed Pending Arbitration?

The Limitation Act 1953 (“Act”) is often discussed regarding the time limit imposed for civil claims to commence. In our previous article, we discussed the Federal Court decision of Julian Chong Sook Keok & Anor v Lee Kim Noor & Anor [Civil Appeal] (No. 02(f)-63-10/2021(P)). 

Recently, the Court of Appeal had occasion to consider a different aspect of the computation of the limitation period in Bongsor Bina Sdn Bhd v SH Builders & Marketing Sdn Bhd [Civil Appeal] (No. W-02(C)(A)-2315-12/2022). This article shall discuss the decision of the Court of Appeal in determining whether the computation of the limitation period is stopped at the point when an action is first filed at Court but is stayed under Section 10 of the Arbitration Act 2005 (“AA 2005”) or shall the limitation clock only be stopped when the required arbitration proceedings are subsequently commenced.

What Are the Facts?

• The Plaintiff, SH Builders & Marketing Sdn Bhd (“Plaintiff“), was appointed as a sub-contractor by the Defendant, Bongsor Bina Sdn Bhd (“Defendant“) for a construction project pursuant to a Letter of Award (“LOA”) dated 26 June 2012 which contained an arbitration agreement (“Arbitration Agreement”).  
• There were delays in the construction and completion of the project, and Defendant did not respond to Plaintiff’s request for an extension of time. Plaintiff issued its final progress claim amounting to RM430,030.78 on 26 August 2013 and, thereafter, on 22 October 2013, notified Defendant of its intention to terminate the LOA. The Defendant rejected the Plaintiff’s unilateral termination of the contract. 
• The Plaintiff commenced an action against the Defendant in the Kuala Lumpur Sessions Court on 6 August 2019 to recover the unpaid sum of RM430,030.78 (“KLSC Suit”). The KLSC Suit was filed within the limitation period applicable for claims on breach of contract. 
• The Defendant filed an application to stay the KLSC Suit given the Arbitration Agreement between parties, and the stay application was allowed by the Sessions Court (“Stay Order”). The Plaintiff did not appeal against the Stay Order.  
• The Plaintiff then commenced arbitration proceedings by service of its Notice of Arbitration on the Defendant on 1 July 2020. Apart from other responses to the Notice of Arbitration, Defendant asserted that the 6-year limitation for Plaintiff to bring an action has been set pursuant to Section 6 of the Act. Given the preliminary issue raised by the Defendant on the question of limitation, the Arbitrator consented to the issue being referred to the High Court pursuant to Section 41 of the AA 2005. 

• The Plaintiff filed an application to the High Court to determine whether the computation of the limitation period was stopped when the KLSC Suit was filed on 6 August 2019 or when the Notice of Arbitration was served on 1 July 2020.

What Did the Courts Decide?

• The High Court and the Court of Appeal Decided That the Computation of the Limitation Period Under the Act Was Halted When the KLSC Suit Was Commenced by the Plaintiff.  
• Liberal Interpretation of the Act Prevails over a Strict InterpretationThe Court of Appeal was of the considered view that since the Act is one that takes away a plaintiff’s right to act against a defendant when in doubt, the more favourable views towards a plaintiff and liberal interpretations of the Act should be preferred and applied.

   

• Arbitration Clause Did Not Prohibit Contracting Parties from Instituting Proceedings in CourtsThe Court of Appeal found that neither the AA 2005 nor the Act would effectively limit or oust the jurisdiction of the Courts for the purpose of determining the stoppage of the limitation clock. While Section 8 of the Act provides that “no court shall intervene in matters governed by this Act, except where so provided”, such provision does not bar contracting parties from filing a civil action in courts even if the resolution of such claims is governed by an arbitration agreement. 

   

• The Notice of Arbitration Is a Continuity of ActionThe Court of Appeal also found that the Notice of Arbitration is a continuation of the legal action taken out by the Plaintiff, which commenced with the KLSC Suit. The issuance of the Notice of Arbitration arising out of the Stay Order was not to be treated in isolation, particularly when the Notice of Arbitration expressly referred to the Stay Order. 

   

• “Action” Within Section 2 of the Act Includes a Suit or Any Other Proceedings in a Court of LawThe Court of Appeal ruled that the Plaintiff cannot be said to have sat on its right, nor can it be blamed for not taking action on a stale claim since the KLSC Suit had been commenced. It would, therefore, be unreasonable, unjust and tactical for Defendant to raise the defence of limitation against Plaintiff when Plaintiff had initiated the Notice of Arbitration in compliance with the Stay Order. 

   

• Acknowledging the Interconnecting Dynamics Between the Courts and ArbitrationThe Court of Appeal stressed that it must be recognised that the arbitration regime is an alternative dispute resolution developed to complement and facilitate the Court’s ethos and should not be viewed as a bifurcating regime. For this reason, the Court is directly empowered to stay a suit pending arbitration, where the Court would maintain a supervisory role over the arbitral process. 

   

• Section 30 of the Act Applies When a Claim Is Directly Referred for ArbitrationDefendant relied upon Section 30 of the Act, which, in essence, provides that arbitration shall be deemed to be commenced when a notice of arbitration is served. Defendant argued that Plaintiff’s “action” within the meaning of the Act had only commenced with the issuance of the Notice of Arbitration, and the limitation period had lapsed by then. However, the Court of Appeal found that such an argument would lead to absurdity as the Plaintiff is time-barred in pursuing its claim in arbitration and yet, on the other hand, has a validly initiated KLSC Suit, which was stayed pending arbitration proceedings. Therefore, Section 30 of the Act would apply to matters referred directly to arbitration, not matters referred to arbitration pursuant to a stay order granted by the Courts.

   

Practical Consideration

• Consider the Dispute Resolution Provision in an AgreementBefore initiating any claims on an agreement, the first step would be to consider the dispute resolution provision to assess the appropriate forum within which such claims should be pursued. In this instance, Plaintiff was able to deflect the conundrum brought by the setting of the limitation period for its contractual claim between the KLSC Suit and the issuance of the Notice of Arbitration on the same action. However, as a measure of prudence, parties would be relieved of having to address preliminary objections on these issues if the appropriate dispute resolution forum is used at the earliest instance. 

   

• Act with Promptitude to Arbitrate After the Grant of a Stay OrderDespite the favourable decision for the Plaintiff, the Court of Appeal did observe that the Notice of Arbitration must be issued promptly or within a reasonable time once the Stay Order was granted, failing which the Plaintiff could be caught by laches. The Plaintiff, in this case, took 9 months since the Stay Order to serve the Notice of Arbitration. While the Court of Appeal found that this period was too long, the delay was accepted due to the Movement Control Order at the time.

   

• Consider Potential Issues if Additional Claims Are Pleaded in Subsequent ArbitrationIn the instant case, the findings of the Courts did not reveal any material differences between the scope of the Plaintiff’s claim in the KLSC Suit and its Notice of Arbitration. That said, would this case have been determined differently if the Notice of Arbitration, prepared after the Stay Order, contained additional facts or causes of action from those contained in the KLSC Suit, which may have been caught by the limitation period? Prudently, this calls importance to effective and holistic pleadings being filed to cover all known aspects of a claim at the earliest instance.

Kindly note that this article was written at the time when the Court of Appeal’s grounds of judgment were published and pending any case reports on an appeal to the Federal Court (if any).