Category Archives: arbitration

Step by Step: Comply with Multi-tiered Dispute Resolution Clauses

A recent High Court decision of Usahasama SPNB-LTAT Sdn Bhd emphasised the importance of complying with all the pre-conditions / conditions precedent of a dispute resolution clause before initiating arbitration.

Multi-tiered dispute resolution clauses are very common. They usually incorporate language referring to the need to hold “good faith negotiations”, to hold a meeting between certain higher management personnel first, or to attempt mediation or negotiation before parties can initiate arbitration.

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Significance of “may” and “shall” in arbitration clauses

The Privy Council in the Anzen Limited case emphasised the importance of careful drafting of the arbitration clause (Grounds of Judgment dated 18 January 2016). Here, the Privy Council had to decide on the phrase “may submit the dispute to binding arbitration”. The Privy Council interpreted this phrase to mean that either party to the contract could insist on arbitration. Even where one party had initiated litigation, it was open to the other party to make an unequivocal request that the dispute should be submitted to arbitration and/or to then apply for a stay of the litigation.

 

AA PIc

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Every Step You Take – Stay pending arbitration

This recent High Court decision in CLLS Power System [2015] 11 MLJ 485 emphasised that the mere filing of an appearance would amount to a step in the proceedings. This would be fatal to applying for a stay under section 10 of the Arbitration Act. This is the importance of preserving the right to apply to stay the court proceedings pending arbitration. An application to stay court proceedings could only be made before that applicant had taken a step in the proceedings. Once the applicant took such a step, the Court would treat it as having waived its right to arbitrate and had instead opted for court litigation.

Justice Mary Lim referred to her earlier decision in Winsin Enterprise [2010] 3 CLJ 634 as well as to the Federal Court decision in Sanwell Corp [2002] 2 MLJ 625.

 

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Arbitration and Liquidation: Never the Twain Shall Meet?

[This article was originally published in the Chartered Institute of Arbitrators, Malaysia branch newsletter Issue 1/2015].

Lee Shih analyses the tension between the contractual bargain to arbitrate and the statutory right to bring winding up proceedings based on a debt. Would an arbitration agreement trump the winding up process?

fighting

Introduction: Statutory Right vs Contractual Bargain

Liquidation, or winding up, is a statutory process which leads to the end of the life of a company. It allows for an equitable realisation and distribution of the assets of a company to discharge its debts. It is a procedure of an inherently collective nature, and each creditor forfeits its individual right to take action to enforce any debt owed and must depend on the result of the collective procedure.

By contrast, arbitration arises from the bargain that has been struck between the contracting parties. Disputes arising from the contract between the parties are to be resolved through the private dispute resolution mechanism of arbitration.

This article covers the possible conflict between the statutory right to wind up a company and the contractual bargain to arbitrate disputes with that company. For example, can a creditor, who alleges that a debt is due, bypass the arbitration clause and instead, bring a winding up action? This article will set out how different jurisdictions have attempted to resolve this tension.

Singapore: Larsen Oil

The Singapore Court of Appeal decision in Larsen Oil and Gas Pte Ltd v Petropod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) [2011] 3 SLR 414 (“Larsen Oil”) dealt with limits of the arbitrability of disputes relating to an insolvent company.

The respondent, Petropod Ltd (“Petropod”), entered into an agreement with the appellant, Larsen Oil and Gas Ltd (“Larsen Oil”). Certain payments were made by Petropod and its subsidiaries to Larsen Oil, which Larsen Oil claimed were payments due under the agreement.

Petropod was subsequently placed under liquidation. Petropod’s liquidators commenced proceedings for the avoidance of a number of the payments made to Larsen Oil on, among others, the ground that these payments were unfair preferences or transactions at an undervalue under the relevant winding up provisions. Larsen Oil applied for a stay of these proceedings in favour of arbitration, relying on an arbitration clause in the agreement.

The Court of Appeal set out the difference in approach for two situations relating to an insolvent company and when these disputes may be non-arbitrable.

Firstly, there may be a dispute involving an insolvent company due to the operation of the insolvency regime. This insolvency regime would trigger statutory provisions to recoup assets for the benefit of the company’s creditors caused by the misfeasance and/or malfeasance of its former management. This is especially true of the avoidance and wrongful/fraudulent trading provisions. A further consideration is that some of these remedies may include claims against former management who would not be parties to any arbitration agreement. Therefore, the insolvency regime’s objective of facilitating claims by a company’s creditors against the company and its former management overrides the freedom of the company’s former management to choose the forum where such disputes are to be heard. Disputes arising from the operation of the statutory provisions of the insolvency regime per se are non-arbitrable.

Secondly, there may be a dispute involving an insolvent company that stem from its pre-insolvency rights and obligations. In instances where the agreement was only to resolve the prior private inter se disputes between the company and another party, the Court would usually observe the terms of the arbitration agreement. The proof of debt process was merely a substituted means of enforcing debts against the company, and did not create new rights in the creditors or destroy old ones. Allowing a creditor to arbitrate his claim against a wound up company in such circumstances would not undermine the insolvency regime’s underlying policy aims.

Based on the above principles, the Singapore Court of Appeal affirmed the Singapore High Court’s decision to dismiss the stay of proceedings since the subject matter of the claim, being inter alia claims of unfair preference, was non-arbitrable.

However, if there was merely a dispute of a debt between the company and an alleged creditor, this may fall within the Larsen Oil formulation of a prior private inter se dispute between the company and alleged creditor. Such a dispute may be allowed to go for arbitration instead of being resolved within the winding up proof of debt process.

Hong Kong: Jade Union

In the Hong Kong Court of First Instance case of Re Jade Union Investment Limited [2004] HKCFI 21 (“Jade Union”), the petitioner presented a winding up petition against the company, Jade Union, based on a debt arising from four interim payment certificates. There was an arbitration clause in the underlying contract. Shortly after the presentation of the petition, the petitioner also commenced arbitration proceedings against Jade Union for outstanding payments under the contract, including the claims under those interim payment certificates. Jade Union applied to stay the winding up petition and one of the grounds was based on the arbitration clause.

The Court dismissed the stay application. It was held that a winding up petition is different from an action between the parties, in which the parties seek the court’s determination as to their respective rights and liabilities. In a winding up petition, a creditor invokes the court’s jurisdiction under the Companies Ordinance to wind up a company on one or more of the grounds set out in the Ordinance. In doing so, the creditor exercises a class right available to all of the company’s creditors.

Even if a winding up order is made, the creditor is still obliged to submit a proof of debt, along with other creditors of the company, and the liquidator will then decide how much the creditor is entitled to receive from the assets of the company. It follows that by making a winding up order the court does not thereby adjudicate the petitioner’s rights to recover any particular amount from the company.

Therefore, the existence of an arbitration agreement did not affect the Court’s jurisdiction under the Companies Ordinance and it appeared that the winding up regime took precedence over the arbitration agreement.

England: Salford Estates

The legal position in England on this area has been evolving and now it appears that a Court would not automatically apply the stay provision in the arbitration legislation to stay a winding up petition.

Initially, the English High Court decision of Rusant Ltd v Traxys Far East Ltd [2013] EWHC 4083 (Ch) (“Rusant”) held that if a petition is based on a disputed debt identified in a statutory demand and that dispute is the subject of an arbitration agreement, it must be referred to arbitration first. The High Court therefore granted an injunction to restrain the presentation of the winding up petition.

However, the English Court of Appeal in Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 1575 Civ (“Salford Estates”) has now disagreed with the decision in Rusant. In Salford Estates, a winding up petition was presented against the company based on the ground of its inability to pay its debts. The company applied under the English Arbitration Act 1996 for a stay of the winding up petition as the debt on which the petition was based arose out of a contract containing an arbitration agreement.

The English Court of Appeal held that the stay provision under the English Arbitration Act 1996 would have no application to the winding up petition. Firstly, if the petition proceeded, there could be no reference to arbitration of any of the debts because the making of the winding up order bring into effect the statutory scheme for proof of debts which supersedes any arbitration agreement. Secondly, it would be highly improbable that Parliament, without any express provision to that effect, intended the stay provision to confer on a debtor such a right to a non-discretionary order. That would strike at the heart of the jurisdiction and discretionary power of the Court to wind up companies in the public interest where companies are not able to pay their debts.

However, the Court proceeded to consider the winding up provision under the English Insolvency Act 1986 which confers a discretionary power to wind up a company. It was held that this discretion should be exercised in a manner consistent with the legislative policy embodied in the English Arbitration Act 1996. Therefore, the Court exercised its discretion under the Insolvency Act 1986 to stay the petition so as to compel the parties to resolve the dispute on the debt through arbitration.

So while the English position is that the statutory jurisdiction for winding up is unaffected by the statutory stay provision under the arbitration framework, the English Courts can still exercise its discretion as to whether to compel parties to adhere to their contractual bargain to arbitrate.

One Approach in Malaysia: Company Court would not adjudicate on the disputes subject to arbitration

In Malaysia, a winding up petition may be presented on the ground of the company’s inability to pay its debts (section 218(1)(e) of the Companies Act 1965 (“CA 1965”)). A creditor may issue a statutory demand under section 218(2)(a) of the CA 1965 to seek payment of any debt of more than RM500 and thereafter, present a winding up petition. The underlying debt may however be disputed by the company and the company may want to rely on the arbitration agreement in the contract.

The Malaysian Courts have addressed the issue on whether to proceed with a winding up petition where the underlying dispute between the parties is subject to arbitration.

In both the High Court decisions of Syarikat Lian Ping Enterprise Sdn Bhd v Cygal Bhd [2000] 2 CLJ 814 (“Syarikat Lian Ping”) and Liew Yin Yin Construction Sdn Bhd v Yata Enterprise Sdn Bhd [1989] 3 MLJ 249 (“Liew Yin Yin”), a winding up petition was presented against the respondent companies based on a debt due to the petitioner. The debt arose from a contract which contained an arbitration agreement. The High Court in both cases ordered that the petitions be struck out. The underlying reasoning was that the Court, sitting as a Companies Court, would not be used to resolve the disputes between the parties and that the disputes should be resolved by arbitration. The Court would not inquire into the disputes as that would have amounted to the Court adjudicating on the disputes, thereby frustrating the arbitration agreement with a Court should normally act on.

In both the cases, the respondent did not rely on the stay provision under the old Arbitration Act 1952 to attempt to stay the winding up petition. Nonetheless, the decisions appeared to foreshadow the English approach in Salford Estates in demonstrating the Court’s exercise of discretion to effectively put a stop to the winding up petition in order to uphold the parties’ bargain to arbitrate.

Another Approach: Party to an arbitration can still present a winding up petition

A winding up petition may also be founded on another ground to establish a company’s inability to pay its debts. Under section 218(2)(c) of the CA 1965, the Court can take into account the contingent and prospective liabilities of the company.

This was the route taken by the petitioning creditor in the High Court case of KNM Process Systems Sdn Bhd v Mission Biofuels Sdn Bhd [2014] 8 MLJ 434 (“KNM Process Systems”). The petitioning creditor had claims against the respondent for outstanding payments arising from a construction project. The petitioner’s initial suits against the respondent for these payments were stayed pending arbitration.

Despite the ongoing arbitration, the petitioner presented a winding up petition against the respondent based on section 218(2)(c) of the CA 1965.

The respondent applied to strike out the petition and the Court ordered that the striking out be heard together with the petition. The Court found that the petitioner had the locus standi to present the petition. The petitioner was held to be a contingent creditor of the respondent due to the possibility of succeeding in its arbitration against the respondent. The Court then proceeded to determine whether the respondent was unable to pay its debts. After examining the respondent’s financial reports, the Court found that there was insufficient evidence to justify a finding that the respondent was insolvent. Therefore, the Court dismissed the petition.

Although not raised in KNM Process Systems, it may have been open to the respondent to apply for a stay of the winding up petition based on section 10 of the Arbitration Act 2005 (“AA 2005”). What would have been the competing arguments in such an application?

On the one hand, the respondent could have argued that it is mandatory to stay the petition under section 10 of the AA 2005 unless the Court finds that the arbitration agreement was null and void, inoperative or incapable of being performed. The argument would be that the petitioner’s status as a creditor hinged on the ongoing arbitration between the parties. In echoing the Singapore Court of Appeal decision of Larsen Oil, it may be argued that the disputes on the debts were essentially private inter se disputes between the petitioner and the respondent. The legislative policy embodied in the AA 2005 should mandate the staying of Court proceedings in support of arbitration.

On the other side of the divide, the petitioner would have several strong arguments to resist such a stay application. In applying both the Hong Kong decision of Jade Union and the English decision of Salford Estates, the petitioner may argue that the presentation of the winding up petition is essentially a class right available to all the company’s creditors. More so in the case of KNM Process Systems where the winding up petition was not based on any particular debt but based on a company’s overall liabilities. It may have been argued that a stay under the AA 2005 cannot oust the jurisdiction and the discretionary power of the Court, as a Companies Court, to wind up in the public interest when a company is unable to pay its debts.

Conclusion

Arbitration practitioners would generally welcome the approach set out in Syarikat Lian Ping and Liew Yin Yin in that a Companies Court should not be called on to adjudicate on disputes where parties had agreed to arbitrate. A Court, whether exercising its powers under section 10 of the AA 2005 or its discretion under the winding up provisions, may put a stop to the winding up petition.

However, the approach in KNM Process Systems would effectively allow a party to an arbitration agreement to bypass the arbitral process by filing a winding up petition. This is particularly in a case where the petition is based on section 218(2)(c) of the CA 1965. This route would not require any statutory demand giving the 21-day notice and where the respondent company would have no notice until the petition was served. Even if the winding up petition is eventually dismissed, the company may have still suffered from the prejudicial effects of the presentation of the petition, through the advertisement and the possible freezing of its bank accounts.

The Court may also find it more difficult to stay or strike out any winding up petition in favour of arbitration if other parties are involved in the petition. For instance, creditors and contributories can file a Notice of Intention to Appear and are effectively treated as parties to the winding up proceedings, or the Court may have appointed a Provisional Liquidator pending the hearing of the petition.

This tension between the private dispute resolution process of arbitration and the public statutory winding up process is not easy to resolve. The Court would have to carefully examine the different considerations in play to balance these two different processes.

Successfully Obtained Indemnity Costs: Stay under Arbitration Act

I had written before on the approach by other jurisdictions to grant indemnity costs if Court proceedings were initiated in breach of an arbitration agreement.

Yesterday afternoon, I successfully obtained an order for costs on an indemnity basis as I had succeeded in applying for a stay of the Court proceedings pending arbitral proceedings. This was for four stay applications we had filed and all four was allowed with costs on an indemnity basis. I am not aware of any reported Malaysian decision on this point.

The argument was that the suit had been filed in breach of the arbitration agreement. Therefore, the successful applicant should be entitled to be compensated dollar-for-dollar for the legal costs incurred in applying for a stay.

Such an approach by the Malaysian Courts would throw support for arbitration and ensure that parties largely follow their contractual bargain to arbitrate.

A summary of the legal authorities from England, Australia and Singapore is set out below.

England

In A v B (No 2) [2007] EWHC 54, Court proceedings were stayed as the proceedings were brought in breach of an arbitration agreement. It was held that as the breach had caused the innocent party to incur legal costs, those costs should normally be recoverable on an indemnity basis.

The English High Court held that where a party has successfully obtained an anti-suit injunction or a stay of court proceedings as a remedy for a breach of an arbitration agreement, and provided that that party demonstrates that the breach caused it to reasonably incur legal costs, such costs should normally be recoverable on an indemnity basis. The alternative, if those costs were assessed on a standard basis, would mean that the successful party would be unable to recover part of the losses resulting from the breach. That unrecoverable portion of costs would either be lost or would have to be recovered through separate proceedings, a situation which the court considered would give rise to a fundamentally unjust situation:

(At pages 636-637)
“[9]    … (I)f a costs order in favour of a successful applicant for a stay or for an anti-suit injunction directed to giving effect to an arbitration agreement or an English jurisdiction clause must, save in exceptional cases be confined to costs on the standard basis, there would necessarily be a part of the successful applicant’s costs of the application which it had properly incurred but could not recover by such an order because of the restrictive process of assessment. This unindemnified portion of costs would then be loss which could only be recovered as damages for breach of the jurisdiction or arbitration agreement, if such a damages claim were permissible. Where the cause of action for relief enforcing the agreement by stay or injunction in the English court and the cause of action for damages for breach of that agreement are, as they normally will be, the same, the effect of those authorities such as Berry’s case, supra, referred to in the Union Discount case, supra, will be to prevent separate proceedings for damages by reference to unrecovered costs, notwithstanding the breach of the arbitration or jurisdiction agreement.

[10]    This would give rise to a fundamentally unjust situation. There can be no question but that the procedural consequence of conduct by a party to an arbitration or jurisdiction agreement which amounts to a breach of it and causes the opposite party reasonably to incur legal costs ought to be that the innocent party recovers by a costs order and/or by an award of damages the whole, and not merely part, of its reasonable legal costs.”

Australia

The approach in A v B was recently adopted in the Supreme Court of Western Australia decision of Pipelines Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10. The Court ordered Pipeline to pay costs on an indemnity basis to ATCO when ATCO had successfully applied for a stay of proceedings under section 8 of the Commercial Arbitration Act 2012.

In making the order, the Court confirmed the application of the principle in A v B that indemnity costs will generally be awarded where a party commences legal proceedings in breach of a contractual obligation to refer a dispute to arbitration; see pages 44-47 of the Austlii report.

Singapore

The English Court’s approach has also been adopted by the courts in Singapore. In the case of Tjong Very Sumito and Others v Antig Investments Pte Ltd [2009] 4 SLR (R) 732 (CA Sing), the Singapore Court of Appeal heard an appeal against an order granting a stay of proceedings arising out of a share purchase agreement containing an arbitration clause. The lower court had endorsed the English court’s decision in A v B and granted the stay with indemnity costs to be paid to the successful party. The Court of Appeal upheld that decision, found the appeal to be entirely unmeritorious and dismissed it, again with indemnity costs; see pages 741 and 768 of the report.

 

 

Watch the Clock: Limitation Period for Enforcement of Arbitral Award

The Federal Court in Christopher Martin Boyd v Deb Brata Das Gupta [2014] 9 CLJ 887 resolved the issue as to the limitation period for the enforcement of an arbitral award (whether under the old Arbitration Act 1952 or the present Arbitration Act 2005). The Federal Court Grounds of Judgment are found here.

Briefly summarising the grounds, for an arbitral award, there are two different limitation periods applicable. The first is the 6-year time limit (under section 6(1)(c) of the Limitation Act 1953 (“Act”)) from the date of the arbitral award for the award to be registered or enforced as a Court Judgment. The arbitral award would then be deemed to be a Judgment from that date.

Thereafter, the second period is the 12-year time limit (under section 6(3) of the Act) from the date of that Judgment for any action to be taken based on that Judgment (e.g. execution proceedings or bankruptcy proceedings). Therefore, there could potentially be close to a total of 18 years for an arbitral award to be eventually executed on. There is the first 6-year period to obtain the Court Order enforcing the award as a Judgment and thereafter, the second 12-year period for legal actions to be taken based on the Judgment.

 

 

Insolvency and Arbitration: Will a winding up petition be stayed in favour of arbitration?

I am just setting out my thoughts and where I will be planning to write a more extensive article on this area. I have always been fascinated on the interaction of the statutory process of winding up and the contractual bargain of arbitration. Will one process always necessarily trump the other?

There are now several cases which try to deal with whether there can be a form of a stay of the Court winding up proceedings in favour of arbitration. The winding up itself can arise from either a creditor petitioning on the grounds of insolvency or a shareholder petitioning on the just and equitable grounds. In the former scenario, the petition may be grounded on a debt arising from a contract containing an arbitration clause. In the latter, the shareholder’s complaints may be arising from a shareholders’ agreement with the other shareholders. I now just record down some cases in the scenario of a petition being presented by a creditor on the grounds of insolvency.

There is a recent English Court of Appeal decision in Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 1575 Civ  which held that the mandatory stay provisions in the English Arbitration Act would not apply to stay winding up proceedings. Instead, the Companies Court would exercise its usual discretion in whether to stay or dismiss a winding up petition, for example, if there was a bona fide dispute of the debt on substantial grounds.

This is a similar approach taken in Hong Kong, where its Arbitration Ordinance closely follows the Model Law (and therefore, may be more persuasive in Malaysia). The case of Jade Union Investment Limited [2004] HKCFI 21 also similarly held that the mere existence of an arbitration clause does not mean that the mandatory stay provisions under the Arbitration Ordinance would apply. The Court would still apply the test as to whether there was a bona fide dispute of debt when hearing the petition. Another case of Re Sinom (Hong Kong) Ltd [2009] HKCFI 2201 similarly followed Jade Union when deciding whether to grant an injunction to restrain the presentation of a petition.

It will be interesting to see how such a situation would play out in Malaysia. I am not aware of any such case involving a stay of a winding up petition or an injunction to restrain presentation based on the Arbitration Act 2005 (“AA”). I know of one or two cases under the old Arbitration Act 1952 where a stay of winding up proceedings was sometimes granted and sometimes not.

If there is an arbitration clause in a contract and a statutory demand is made for payment under the contract, would the other contracting party be able to apply under section 11 of the AA for an injunction to restrain the presentation of the petition? What would the test for such an injunction be? Would it still be the Tan Kok Tong Court of Appeal test of a bona fide dispute of debt on substantial grounds? Or would the mere existence of an arbitration clause be sufficient? Or would an application for an injunction have to be grounded outside of the AA and the Court would exercise its inherent jurisdiction to grant a Fortuna injunction to restrain the presentation?

If the Petition was filed, would a stay of those Court proceedings be allowed under section 10 of the AA? The test for a stay under section 10 of the AA will not require the Court to decide on whether there is a bona fide dispute (that original provision has been taken out) and it is almost mandatory for a stay unless the arbitration clause can be questioned (e.g. the clause is null and void or inoperative).

I will try to deal with these questions in my more extensive article and after I have done more research.

What is a ‘court’ for a stay of court proceedings pending arbitration?

The Supreme Court of Victoria in Subway Systems v Ireland [2014] VSCA 142 interpreted the meaning of the term ‘court’ under the Australian Commercial Arbitration Act 2013 for the purposes of a stay of court proceedings pending arbitration. In line with the Model Law, the term ‘court’ was extended to cover an administrative tribunal. Therefore, those tribunal proceedings were stayed pending arbitration. This is also of significance to Malaysia on how the Arbitration Act 2005 may be interpreted for a stay of court proceedings pending arbitration.

Subway Decision

A dispute arose between the parties to a franchise agreement involving a Subway sandwich business. The agreement contained an arbitration clause. The franchisees sought to have the dispute heard in the Victorian Civil and Administrative Tribunal (VCAT) while Subway argued that VCAT was precluded from hearing the proceeding and must instead refer the parties to arbitration.

There is a useful summary of the principles from this decision in this Allens commentary. I quote a section from this commentary.

In interpreting the Act and the definition of the word ‘court’, the majority recognised the aims of the Model Law, of uniformity and harmonisation, given the Act’s genesis from the Model Law. The policy behind the Model Law was central to the majority’s analysis of whether VACT fell within the definition of a ‘court’ for the purposes of s8 of the Act. If VCAT was found to be a court in this instance, disputes to be heard in VCAT, where an arbitration agreement existed, would be referred to arbitration under the Act. Conversely, if VCAT was found not to be a court, parties would have a choice of forum in which to have their disputes heard: either at VCAT or under arbitration. The majority judges recognised the wholly unsatisfactory position of the latter option.

In analysing whether VCAT was a ‘court’, the Acting Appeal Justice Kyrou (in the minority) noted instances in legislation where the definition of court intentionally omitted VCAT, and observed that VCAT lacks the typical indicia of courts at common law, as it:

  • is not bound by the rules of evidence;
  • cannot enforce its own decisions;
  • is constituted by some members who are not legally trained;
  • can apply government policy; and
  • can provide advisory opinions.

Acting Appeal Justice Kyrou’s analysis focused on the text of the Act and other statutes where the word ‘court’ is applied and noted the intentional omission of VCAT in various definitions of court in legislation. This led his Honour to find that VCAT was not a ‘court’ for the purposes of s8 of the Act.

Conversely, Appeal Justice Beach (in the majority) held that VCAT possesses the six features typical of courts at common law and noted instances where the definition of courts in statutes has been held to include VCAT. President Maxwell focused on the international development, and aims, of the Model Law that were picked up in the Act and the effect of these on interpreting the definition of ‘court’ under the Act.

As a matter of statutory construction, the majority considered the text, context and purpose of the Act, and held that both the Model Law and the Act had application to ‘a body or organ of the judicial system,’ which extended to VCAT.

Malaysian Context

Section 10 of the Arbitration Act 2005 (“AA 2005”) provides that: “A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall … stay those proceedings and refer the parties to arbitration … (emphasis added)”

In the AA 2005, similar to the Subway decision, there is no definition of the term ‘court’. This is in contrast with the definition in Article 2(c) of the Model Law where ‘court’ means a body or organ of the judicial system of a State. The term ‘court’ in the AA 2005 does not appear to mean only a High Court (i.e. the High Court in Malaya and the High Court in Sabah and Sarawak) since other sections in the AA 2005 refer specifically to the term ‘High Court’ and ‘High Court’ is defined in section 2 of the AA 2005 (for example, section 11 of the AA 2005 states that “a party may … apply to a High Court for any interim measure and the High Court may make the following order …”).

Further, I would also argue that there is a difference between ‘court’ (with the small ‘c’) and ‘Court’ (with the capital ‘C’). ‘Court’ is defined in the Courts of Judicature Act 1964 as the Federal Court, the Court of Appeal or the High Court. So if there is a deliberate use of ‘court’ (with the small ‘c’) in the AA 2005, could it be argued that Malaysia can also draw on the Model Law definition of ‘court’ as being a body or organ of the judicial system?

In line with this wider definition, the term ‘court’ should encompass this broader definition in order to allow the Subordinate Courts (i.e. the Magistrate and Sessions Court) to also grant a stay of proceedings to refer parties to arbitration. The Subordinate Courts do not fall within the definition of ‘Court’ under the Courts of Judicature Act 1964, but  it has been largely assumed that the Subordinate Courts would have the power to grant a stay of proceedings under section 10 of the AA 2005 (for example, see Sundra Rajoo & WSW Davidson (2007) ‘The Arbitration Act 2005: UNCITRAL Model Law as applied in Malaysia’, para 10.3).

If we accept this broader definition of ‘court’ under the Model Law, could this then be extended to other forms of statutory tribunals, the Industrial Court or other regulatory bodies for the purposes of a ‘court’ ordering a stay of proceedings? It will be interesting to see how this will develop and be argued in the Malaysian courts.

The Uncertainty on the Law Governing the Arbitration Clause

The law governing the arbitration agreement (i.e. the arbitration clause in a contract) potentially covers matters such as the existence, legality, interpretation, termination, and the identities of the parties to the arbitration clause. It is very common to not see any express provision on the law governing the arbitration clause. Contracting parties commonly make the assumption that the governing law of the contract will be the same law governing the arbitration clause.

(1) Governing law of the contract could be a strong indication of the governing law of the arbitration clause

The English Court of Appeal decision in Sulamérica CIA Nacional de Suguros SA and others v Enesa Engenharia SA and others [2012] 1 Lloyd’s Rep 671. In essence, the English Court of Appeal set out a three-stage enquiry in determining the law governing an arbitration agreement. (1) The express choice; (2) The implied choice in the absence of such an express choice; and (3) Where the parties had not made any choice, the proper law would be the law which the arbitration agreement has its closest and most real connection with. In particular for stage (2), the English Court of Appeal held that an express choice of law governing the substantive contract is a “strong indication of the parties’ intention in relation to the agreement to arbitrate.” On the specific facts of SulAmerica, the Court of Appeal agreed that the arbitration clause should be governed by the law of the seat (English law) and not the governing law of the contract (Brazil law). Nonetheless, the SulAmerica approach creates a rebuttable presumption that an express choice of law to govern the substantive contract would also apply to the arbitration clause. There have been English decisions that have since followed the SulAmerica approach.

(2) Or should the law of the seat of the arbitration be the governing law of the arbitration clause?

FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12 departs from the SulAmerica approach in treating substantive law in the main contract being a strong indication of the parties’ intention to have that same substantive law be the law governing the arbitration clause. The case of Firstlink instead argues that, the natural inference ought to be that the law of the seat of arbitration should be the law governing the arbitration clause. This is because when commercial relationships break down and there is dispute resolution, the parties’ desire for neutrality comes to the fore. The law governing the performance of contractual obligations prior to the breakdown takes a backseat and primacy should be accorded to the neutral law selected by parties to govern the proceedings of dispute resolution.

In Malaysia, the High Court in Government of the Lao People’s Democratic Republic v Thai-Lao Lignite Co Ltd [2013] 3 MLJ 409, it was held that the law governing the arbitration clause should be the law of the seat of the arbitration (see [98] to [100]). On appeal, the Court of Appeal upheld the High Court decision but the Grounds of Judgment did not delve into the issue on the law governing the arbitration clause. This case is now pending an application for leave to appeal to the Federal Court.

The case of Thai-Lao Lignite demonstrates the significance of the law applicable to the arbitration clause. One of the contentions in the High Court for the setting aside of the award (as seen in the reported decision) was that Malaysian law should apply to the arbitration clause (as that is where the seat of arbitration is stipulated). From that, it would follow that the ‘party’ to the arbitration clause must be a signatory to the main agreement itself in order to be a party to the arbitration agreement. However, if the governing law of the main agreement (New York law) were to apply to the arbitration clause, under New York law, the concept of an “intended third party beneficiary” would be deemed to be a party to the arbitration agreement. Hence, a non-signatory to the main agreement but one which is an intended third party beneficiary, could rely on the arbitration clause and could be one of the claimants to initiate arbitral proceedings (just like in the facts of Thai-Lao Lignite. However, by applying Malaysian law to the arbitration clause, the High Court held that this was one of the grounds for setting aside the award. The Judicial Commissioner held that the arbitral tribunal had exceeded its jurisdiction by allowing a non-signatory and essentially, a non-party to claim in the arbitral proceedings.

(3) Takeaway Point: Expressly Provide for the Law Governing the Arbitration Clause

It is therefore best to expressly provide for the law governing the arbitration clause to negate any uncertainty. It will just require the simple provision such as “The law of this arbitration clause shall be [state the law e.g. the law of Malaysia]”