Arbitrate – yay or nay?

Our Foo Joon Liang and Carissa How explain why it is important to make a firm choice – whether or not to arbitrate.

Introduction

Whether or not to arbitrate is a common question. Those in favour of arbitration find that there is less rigidity to the overall process of dispute resolution, where party autonomy reigns, or at least remains far from obscurity.(1) On this basis, the courts should have minimal intervention in arbitral proceedings, save where is necessary. Arguably, this is what the United Nations Commission on International Trade Law Model Law was enacted for, and Malaysia has recognised this segregation with the enactment of the Arbitration Act 2005.(2)

While parties that find themselves in the less than enviable position of going through arbitration would undoubtedly have to face a flurry of issues and concerns, this article seeks to focus on the need to make a firm choice: whether or not to arbitrate. This article seeks to highlight why sitting on the fence should never be a choice.

IFCI Ltd v Archipelago Insurance Ltd

Facts
In the case of IFCI Ltd v Archipelago Insurance Ltd,(3) a dispute arose between the appellant, Bishopgate Capital Ltd (Bishopgate) (the first defendant in the High Court), and the respondent, following a loan granted by the appellant. The appellant and the respondent subsequently executed an amicable settlement agreement that Bishopgate failed to fulfill. The dispute was eventually referred to the courts, wherein the appellant filed a writ and statement of claim against Bishopgate and the respondent.

The respondent sought two extensions of time to file its defence and thereafter the appellant filed its reply to the statement of defence. Subsequently, the respondent applied for a stay of proceedings to refer the dispute to arbitration pursuant to section 10(1) of the Arbitration Act 2005.

Section 10(1) of the Act is reproduced as follows:


A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

Dissatisfied with the High Court’s decision in allowing the respondent’s application for stay of proceedings, the appellant filed an appeal and succeeded.

Decision
In allowing the appeal, the Court held that there were two requirements that had to be fulfilled in order for a stay to be allowed. Firstly, there must be an arbitration agreement between the parties involved. Secondly, the application for stay of proceedings must be made before taking any other steps in the proceedings. The Court particularly noted the mandatory language of section 10(1) of the Act, wherein the word “shall” is used.

In the present case, there was a valid arbitration agreement between the parties. However, the Court agreed with the appellant that the respondent had already taken active steps in the court proceedings by filing its statement of defence. As such, the respondent was deemed to have waived its rights to refer the dispute to arbitration.

The respondent argued that it had included an express reservation of its rights to arbitration in its statement of defence and its filing of the statement was merely to avoid judgment in default being entered against it. However, the Court found that when the respondent sought the two extensions of time to file its statement of defence, the respondent did not make any mention of its intention to refer the dispute to arbitration pursuant to the arbitration clause contained in the agreement. Further, the respondent’s application was somewhat belated as it was filed six days after the plaintiff had filed its reply to the statement of defence.

All facts considered, and in light of a mandatory obligation on parties to bring a stay application before taking any other steps in other proceedings pursuant to section 10(1) of the Act, the Court held that the respondent was not entitled to a stay of proceedings.

MISC Bhd v Cockett Marine Oil (Asia) Pte Ltd

Facts
A similar approach was also observed in MISC Bhd v Cockett Marine Oil (Asia) Pte Ltd.(4) Here, the Court held that a step taken towards court proceedings would mean that the applicant would be deemed to have abandoned its rights to refer the dispute to arbitration for the purposes of bringing a stay application under section 10 of the Arbitration Act 2005. This case concerned an alleged breach of a bunker supply contract between a buyer (the plaintiff) and seller (the defendant). The defendant made an application for a stay of proceedings pending arbitration, while the plaintiff filed an application for an anti-arbitration injunction to prevent the defendant from taking further steps in the same arbitration proceedings.

Decision
The Court held that a stay should not be granted as the defendant had already taken a step in the court proceedings and had also failed to give any indication from the outset that it intended to refer the dispute to arbitration. The defendant’s step of requesting an extension of time to file its defence at case management was held to be sufficiently regarded as a step taken in the Court proceedings. This formed sufficient basis for the Court to dismiss the defendant’s application for a stay of proceedings.

Comment

It should be noted that the Court in IFCI Ltd also considered that Bishopgate was not a party to the arbitration agreement between the appellant and respondent. The Court took Bishopgate’s presence into consideration and held that, given the respondent’s active steps taken in the Court proceedings, it was preferable that the dispute be dealt with by the Court to avoid split litigation.

In any case, it is a settled position that a non-party to an arbitration agreement cannot seek to refer a dispute to arbitration and apply for a stay of proceedings under section 10(1) of the Act pending this. This is notwithstanding that their rights may be affected.(5) Doubt as to whether non-parties to an arbitration agreement can rely on section 10(1) of the Act for a stay of proceedings has been removed with the Federal Court’s decision in Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & Ors.(6)

On the other hand, what if no prior steps had been taken toward court proceedings? Or, what if Bishopgate was not involved in the dispute? Quite clearly, the Court would have granted a stay of proceedings given the mandatory wording of section 10.(7) Party autonomy is of key importance and so the courts would generally give effect to parties’ intentions in a contract where there is a valid arbitration agreement, so long as such intentions are not unlawful.

Overall, these cases serve to emphasise that no prior steps at all can be taken in any other proceedings if parties intend to arbitrate. It is trite that a party which intends to refer any dispute to arbitration must do so quickly without taking any active steps in other proceedings, even a seemingly innocuous step such as requesting an extension of time.

For further information on this topic please contact Foo Joon Liang or Carissa How at Gan Partnership by telephone (+603 7931 7060) or email (joonliang@ganlaw.my or carissa@ganlaw.my). The Gan Partnership website can be accessed at www.ganlaw.my.

Endnotes

(1) Tridant Engineering (M) Sdn Bhd v Ssangyong Engineering and Construction Co Ltd [2016] MLJU 599 (COA), para 23.

(2) Id, para 22.

(3) [2022] 2 MLJ 971.

(4) [2022] 8 MLJ 786.

(5) [2019] 5 MLJ 1, para 82 (FC).

(6) See also Protasco Bhd v Tey Por Yee and another appeal [2018] 5 CLJ 299 (COA).

(7) Press Metal Sarawak Sdn Bhd v Etika Takaful Bhd [2016] 5 MLJ 417 (FC).

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