Enforcement of Security: Effectiveness of Arbitral Awards
June 2012 | Finance | Business Bulletin
Until recently, banks and financial institutions have rarely used arbitration to resolve disputes with debtors. It has since gained popularity mainly due to the advantages offered at the stage of enforcing the award. For example, pursuant to the New York Convention, an arbitral award granted in a contracting state could in theory be enforced in any other contracting states with the mere presentation of the arbitration agreement and the award. This ease of enforcement may of course differ in practice, depending on the formalities prescribed by a contracting state. Some states may require registration of the award although this is not a requirement of the New York Convention.
Given the growing popularity of arbitration, there are some imperatives to bear in mind when considering the arbitration agreement. The first is that the arbitration agreement must sufficiently address the creditor's concerns, particularly in relation to parties providing security. The second is that the resolution of the dispute will result in the successful enforcement of security.
The case of PT Jaya Sumpiles Indonesia v Kristle Trading Ltd 3 SLR(R) 689 ("PT Jaya") demonstrates that, in the absence of an arbitration agreement between a creditor and a third party security provider, the creditor will not be able to rely on an arbitral award made against a principal debtor as evidence of its claim against that third party security provider. In PT Jaya, the creditor, succeeding in an arbitration against the principal debtor, sought to claim from various guarantors the sums awarded to it in that arbitration. The court held that the creditor could not rely upon the arbitral award in the absence of express wordings in the guarantee that it could do so. In order for the creditor to successfully claim against the guarantors, the creditor must first provide evidence to establish the guarantors' liability for the sums in question, in the same way that the creditor would be required to prove the principal debtor's liability in the creditor’s action against the principal debtor for those sums.
PT Jaya reinforces the general principle that "a contract of guarantee is a separate and independent contract from the principal contract and thus [the guarantor] may have defences that might not be available or applicable to the principal [debtor]". This principle is accepted locally in Oversea-Chinese Banking Corp Ltd v Ang Thian Soo  4 SLR(R) 156. PT Jaya also affirms the principle laid down in Ex Parte Young; In re Kitchin  17 ChD 668: where a third party security provider (such as a guarantor) had not consented to the arbitration and was not made a party to the arbitration proceedings, an arbitral award made against the principal debtor will not bind that third party security provider and cannot be used as evidence of the creditor’s claim against that third party security provider.
It is clear that careful consideration must be given when drafting the arbitration agreement. In particular, given that arbitration is based on the parties’ consent, it is critical that the arbitration agreement clearly provides that the third party security providers have consented to the arbitration and can be joined as parties to the arbitration proceedings and that the arbitration proceedings can be consolidated. This provision will reduce the risk of an arbitral award being challenged on the basis that the award cannot be relied upon as conclusive evidence against the third party security providers.