MALAYSIA: HIGH COURT CLARIFIES LIMITS ON STAY CONDITIONS

The Malaysian High Court has refused to impose a condition on a party seeking a stay of proceedings under section 10 of the Arbitration Act 2005 to pay its share of the deposit in the arbitration, on the basis that the issue of costs and expenses of an arbitration are within the exclusive jurisdiction of the arbitral tribunal. This decision highlights that the Malaysian court’s power to impose conditions on a stay under section 10 of the Act does not extend to matters that are governed by the Act and within the exclusive jurisdiction of the arbitral tribunal.

Lion Pacific Sdn Bhd v Pestech Technology Sdn Bhd (High Court Suit No: BA-22NCvC-85-02/2021),

Background

Pestech Technology Sdn Bhd was appointed by Lion Pacific Sdn Bhd as the sub-contractor for a project concerning the design, construction, equipping and maintenance of a railway. Pestech was contracted to complete certain works for an agreed sum of approximately RM42 million. A dispute arose over payment, and Pestech commenced adjudication to claim the sum owed. The adjudicator found in favour of Pestech and Lion Pacific was held liable for the outstanding sum.

Dissatisfied with the adjudication decision, Lion Pacific applied to the High Court to set it aside. Lion Pacific also commenced an arbitration against Pestech under the arbitration clause in the agreement. However, the arbitration proceedings were terminated as Pestech refused to pay its share of the deposit. Instead, Pestech applied to enforce the adjudication decision in the High Court. The applications to set aside and to enforce the adjudication decision were heard together. The High Court granted enforcement and dismissed Lion Pacific’s application. Lion Pacific appealed.

While the appeal was pending, Lion Pacific issued new proceedings in the High Court to set aside the adjudication and enforcement decisions, on grounds that they were tainted with fraud. Lion Pacific alleged that in the adjudication proceedings, the amount Pestech had claimed for loss and expense was higher than the amount certified by the Ministry of Transport. Lion also alleged that Pestech had not obtained prior approval from the Ministry of Transport for the sum claimed, as required under the agreement.

Pestech applied to stay the new proceedings under section 10 of the Arbitration Act, on grounds that the dispute should be referred to arbitration. Lion Pacific opposed the stay application.

The main issues before the High Court were:

  1. whether Lion Pacific’s claim, which was founded on fraud committed in the adjudication proceedings, fell within the scope of the arbitration agreement;
  2. whether Pestech’s refusal to pay its share of the deposit, which resulted in the termination of the original arbitration proceedings, rendered the arbitration agreement inoperative or incapable of being performed;
  3. whether, if a stay was allowed, Lion Pacific was entitled to seek a condition on the stay, in the form of an order requiring Pestech to pay its share of the deposit to avoid the arbitration proceedings being stifled.

First, the High Court judge held that the mere fact that Lion Pacific’s cause of action was founded on fraud did not detract from the fact that it was a dispute arising out of or in connection with the agreement, and therefore it fell within the scope of the arbitration agreement. This is consistent with the Federal Court’s decision in Press Metal Sarawak Sdn Bhd v Etiqa Takaful [2016] 5 MLJ 417, which clearly states that the arbitral tribunal has jurisdiction to decide a claim based on fraud.

Second, the High Court did not find any merit in Lion Pacific’s argument that the arbitration agreement was inoperative or incapable of being performed.

Third, the High Court judge found that it was mandatory for him to grant a stay as the requirements under section 10 of the Act had been satisfied. However, the court refused to impose the requested condition, because section 44 of the Act expressly provides that costs and expenses are to be decided by the arbitral tribunal and section 8 expressly precludes the court’s intervention in matters governed by the Act. Given this, the costs and expenses of the arbitration were within the exclusive jurisdiction of the arbitral tribunal and the court had no jurisdiction to impose a condition that would impinge on the tribunal’s discretion. The judge also held that to impose such a condition would impinge on the discretion of the Director of the Asian International Arbitration Centre (AIAC). Rule 14 of the AIAC Rules 2018 provides that the Director can impose an amount as deposit to cover the costs of the arbitration.

Comment

This decision confirms that the court’s power to impose conditions on a stay under section 10(2) must be read together with section 8 of the Act and does not extend to matters that are governed by the Act and within the exclusive jurisdiction of the arbitral tribunal. The decision also serves as a useful reminder that the party seeking a stay of proceedings under section 10 should avoid including conditions that would interfere with the power and jurisdiction of the arbitral tribunal.

For further information, please contact Peter Godwin, Partner, Daniel Chua, Associate, Michele Yee, Associate or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Partner
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate
+60 3-2777 5101
Michele Yee
Michele Yee
Associate
+60 3-2777 5159

MALAYSIA: HIGH COURT REFUSES INDEMNITY COSTS ON SUCCESSFUL APPLICATION FOR REFERRAL TO ARBITRATION AND DETERMINES THE EFFECT OF TIME BARS ON A TRIBUNAL’S JURISDICTION

In Lineclear Motion Pictures Sdn Bhd v Measat Broadcast Network Systems Sdn Bhd (High Court Civil Appeal No.: WA-12ANCC-45-04/2021), the High Court refused to award indemnity costs to a party who successfully obtained a stay of court proceedings under section 10 of the Arbitration Act 2005 (“Act“), on the basis of the conduct of the successful party and the party acting in breach of the arbitration agreement. Following this decision, a party seeking indemnity costs upon successfully obtaining a stay bears the burden to demonstrate unreasonable conduct by the breaching party, and reasonable conduct on its own part, to obtain indemnity costs.

Background

Measat Broadcast Network Systems Sdn Bhd (“Measat“) commenced proceedings against Lineclear Motion Pictures Sdn Bhd (“Lineclear) in the Sessions Court for breach of contract. Prior to the commencement of the proceedings, Measat issued a pre-action letter to Lineclear but was met with no response. As Lineclear did not formally enter its appearance under the rules of the court, nor respond to the claim, Measat obtained a default judgment against Lineclear. Subsequently, Lineclear applied to set aside the default judgment and to stay the proceedings in the Sessions Court pursuant to section 10 of the Act in light of a valid arbitration agreement between the parties. Measat did not object to the application, instead offering to record a consent order to stay the court proceedings pending arbitration. Lineclear rejected this offer and insisted Measat discontinue its claim.  The Sessions Court judge refused to stay the proceedings and refused to grant indemnity costs to Lineclear.

On appeal to the High Court, the key issues were:

  • in the event a stay is allowed, whether Measat is entitled to seek an order to preclude Lineclear from pleading the defence of limitation at arbitration; and
  • whether Measat is liable to pay indemnity costs to Lineclear given that (a) the proceedings were in breach of the arbitration agreement and (b) Measat unreasonably declined Lineclear’s offer to discontinue the claim.

First, the High Court judge granted a stay on the condition that Lineclear be precluded from raising the defence of limitation at arbitration, in accordance with established precedent for imposing similar conditions. The judge reasoned that the stay would be rendered futile without the condition, as Measat’s claim – while within the limitation period when first commenced in the Sessions Court – would be time-barred when referred to arbitration.

Second, the High Court judge refused to award Lineclear’s costs on an indemnity basis. The established test requires “some conduct or some circumstance which takes the case out of the norm“. In particular, a judge is required to review the unreasonableness of unsuccessful party’s conduct during the proceedings, including: (i) whether it was reasonable for the party to raise and pursue particular allegations and the manner in which the party pursued its case and allegations; and (ii) whether a claim was speculative, weak, opportunistic or thin. Examples of such unreasonable conduct are where a case was brought with an ulterior motive or an improper agenda, or where a party had conducted its case in “bad faith, or as a personal vendetta, or in an improper or oppressive manner, or who caused costs to be incurred irrationally or out of all proportion as to what is at stake”. However, these examples are not meant to be exhaustive. In this regard, the High Court found that Lineclear’s conduct throughout the proceedings, including its indifference to the pre-action letter and the proceedings leading to the default judgment, as well as its refusal to accept Measat’s offer to record a consent order, was unreasonable and did not justify an award of indemnity costs. The High Court judge also found it unreasonable for Lineclear to insist that Measat discontinue the proceedings, given that a successful application under section 10 of the Act would only stay – and not discontinue – an action.

Lineclear relied on  the Western Australian Supreme Court’s decision in Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10 (see our blog post here) and the English court’s decision in A v B and others (No. 2) [2007] EWHC 54 (Comm) for the proposition that as a general rule, costs should be recoverable on an indemnity basis upon a successful application for a stay as a remedy for breach of an arbitration clause. The High Court did not appear to accept this proposition, and distinguished these cases on the basis that Measat had acted reasonably throughout the proceedings, whereas Lineclear’s conduct justified it being deprived of an order for indemnity costs.

Comment

In practice, Malaysian courts have on rare occasions awarded costs on an indemnity basis upon a successful application to stay court proceedings in favour of arbitration. However, this is the first known written judgment from the Malaysian courts which addressed the principles of awarding costs on an indemnity basis in the context of a breach of an arbitration agreement.

An award of indemnity costs is attractive to parties seeking to uphold an arbitration agreement which has been breached by its counterparty. The advantages include a presumption of reasonableness on the part of the receiving party, and a shift in burden to the paying party to establish that the costs were not reasonably incurred. This achieves indirect compensation for most – if not all – of the legal costs incurred by the innocent party following a breach of an arbitration agreement.

Jurisdictions such as England, Hong Kong (see our blog post here), Singapore and Western Australia take the position that as a general rule, a party who unsuccessfully challenges an arbitration agreement before the court should expect to pay costs on an indemnity basis, unless there was unreasonable conduct by the successful party or special circumstances. By contrast, the current Malaysian position is that a party seeking indemnity costs upon successfully obtaining a stay bears the burden to demonstrate unreasonable conduct by the breaching party, and reasonable conduct on its own part, to obtain indemnity costs. The fact of a breach of an arbitration agreement alone is not necessarily sufficient to justify indemnity costs. Where indemnity costs are not awarded, parties should consider seeking damages for breach of an arbitration agreement which, though untested in Malaysia, is an accepted cause of action in various common law jurisdictions.

Further, in precluding Lineclear from raising the defence of limitation in the arbitration, the court did not appear to give any consideration as to whether limitation was an issue of admissibility or jurisdiction. The distinction holds practical importance: an issue of admissibility is a matter for the arbitral tribunal to decide, and not a question of jurisdiction to be reviewed by the courts. As described by the English courts, “[i]ssues of jurisdiction go to the existence or otherwise of a tribunal’s power to judge the merits of a dispute; issues of admissibility go to whether the tribunal will exercise that power in relation to the claims submitted to it.” (see our blog posts here and here). It should also be noted that the Singapore Court of Appeal in BBA v BAZ [2020] 2 SLR 453, recognising the distinction between jurisdiction and admissibility, held that whether a claim was time barred was a question of admissibility, not a question of jurisdiction.

Although the Malaysian court did not characterise the limitation defence as an issue of admissibility or jurisdiction, its upholding of the arbitration agreement may imply that limitation is a question of admissibility as it does not affect the Tribunal’s jurisdiction. The net result of the decision provides some measure of welcome certainty that arbitration agreements will be upheld by the Malaysian courts, even where there are questions regarding the limitation period for commencing claims. However, this approach appears to remove a tribunal’s ability to determine issues of admissibility for itself where a Malaysian court is first seised of the matter.

For further information, please contact Peter Godwin, Partner, Daniel Chua, Associate, Michele Yee, Associate or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Partner
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate
+60 3-2777 5101
Michele Yee
Michele Yee
Associate
+60 3-2777 5159

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LAUNCH OF AIAC ARBITRATION RULES 2021

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MALAYSIA: HIGH COURT ISSUES ANTI-ARBITRATION INJUNCTION AGAINST LONDON ARBITRATION AND REJECTS PARALLEL APPLICATION TO STAY COURT PROCEEDINGS

In MISC Berhad v Cockett Marine Oil (Asia) Pte Ltd (Admiralty in Personam No. WA-27NCC-46-05/2020), the Malaysian High Court issued an anti-arbitration injunction to halt a London-seated arbitration on the grounds that the arbitration proceedings were in breach of an exclusive jurisdiction clause in favour of the Malaysian courts. The decision confirms the power of Malaysian courts to restrain a foreign-seated arbitration where the court takes the view that it has jurisdiction over the dispute, and provides guidance on the circumstances in which a Malaysian court will exercise this power.

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