In Jaks Island Circle Sdn Bhd v Star Media Group Bhd and Another (Originating Summons No. WA-24C(ARB)-11-02/2018), the Malaysian High Court considered whether an inquiry of damages arising out of an undertaking by an applicant to pay damages for an injunction wrongly granted by a court in support of arbitration proceedings should await the outcome of a pending arbitration between the parties.

Background

In February 2018, the plaintiff (“Jaks Island“) commenced two separate actions against Star Media Group Bhd (“Star Media“) to restrain the latter from receiving payments under two bank guarantees in the sum of RM25 million each (“Bank Guarantees“). To obtain the injunctions, Jaks Island undertook to pay damages to Star Media arising in the event the injunctions were wrongly granted. The High Court granted Jaks Island temporary injunctions pending the resolution of the actions in the High Court.

On 6 March 2018, Jaks Island submitted its Notice of Arbitration alleging that Star Media breached a sale and purchase agreement between the parties. Although Star Media responded two days later, it was reported that the arbitration had not progressed beyond Jaks Island’s proposed nomination of an arbitrator due to Star Media’s lack of response.

In July 2018, both of Jaks Island’s actions in the High Court were dismissed. Dissatisfied with the decision, Jaks Island appealed to the Court of Appeal, whilst simultaneously applying to the High Court for injunctions to restrain Star Media from receiving the payments under the Bank Guarantees pending the disposal of the appeals. The High Court granted temporary injunctions pending resolution of the applications, but dismissed them a week later. Undeterred, Jaks Island continued to seek temporary and final injunctions through appeals and fresh applications from the Court of Appeal through to the Federal Court. All but one of these applications were unsuccessful; the Federal Court granted a temporary injunction against Star Media pending the hearing of permission to appeal to the Federal Court, although appeal was subsequently denied.

Following Jaks Island’s unsuccessful attempts to restrain Star Media from receiving the payments under the Bank Guarantees, Star Media applied for an inquiry of damages that Jaks Island had undertaken to pay in order to obtain the injunctions. Jaks Island argued, amongst others, that the inquiry of damages was premature, given the pending arbitration between the parties.

Decision

The High Court decided that a party may apply for an inquiry of damages pursuant to an undertaking as to damages in the event an injunction is wrongly granted by a court in support of arbitration proceedings, without awaiting the outcome of the arbitration.

The court found no justification for postponing the inquiry of damages until the conclusion of the arbitration “for to do so would set a dangerous precedent that there is no pain in providing an undertaking to make good losses suffered by the defendant until the final outcome is realised“. The possibility that Star Media may be required to repay the sums it received under the Bank Guarantees if so decided in the arbitration was not a special circumstance justifying the postponement of the inquiry. According to the High Court, to delay the inquiry until the disposal of the arbitration “would not engender confidence of the business community in relying on bank guarantees as an instrument to allocate risks in the event of a dispute“.

Apart from the policy justification, the High Court drew a distinction between the issues underlying the applications for injunctions, and the underlying dispute to be resolved in the arbitration. The issue underlying the applications for injunctions (i.e. whether there was unconscionable conduct by Star Media in calling on the Bank Guarantees), was unconnected to the underlying dispute in the arbitration (i.e. whether Star Media had allegedly breached the sale and purchase agreement).

Comment

Prior to legislative amendments in 2018, Malaysia’s Arbitration Act 2005 did not provide default recognition to interim relief from an emergency arbitrator. This made it necessary for parties to apply to Malaysian courts for interim relief prior to a tribunal’s constitution. Pursuant to the Arbitration (Amendment) (No. 2) Act 2018, however, the definition of “arbitral tribunal” has been expanded to include “emergency arbitrator” through an amendment to section 2. Additionally, an arbitral tribunal’s powers to order interim measures have also been expanded via an amendment to section 19. This now includes, amongst others, the power to order a party (1) to maintain or restore the status quo pending the determination of the dispute and (2) to take action that would prevent or refrain from taking action that is likely to cause current or imminent harm or prejudice to the arbitral process itself.

Since these amendments, Kuala Lumpur-based Asian International Arbitration Centre has seen an increase in applications for emergency arbitrator relief. The amendments demonstrate Malaysia’s pro-arbitration affirmation of the concurrent remedial jurisdiction of courts and arbitrators to grant interim relief at all stages of the dispute. This is welcome as it facilitates the resolution of disputes in Malaysia, which aligns with the commercial expectations of parties when using arbitration.

Interestingly, the High Court admonished the slow progress of the arbitration, noting that the respondent’s seeming lack of participation “cannot be a good reason for not proceeding [with] all due diligence with the arbitration“. This serves as a timely reminder to parties of the importance of institutional arbitration and in selecting appropriate institutions to ensure efficiency in the arbitration. For more information regarding institutional efficiency, please see our other blog posts on this topic available here and here.

The judgment of the High Court is available in English here.

For further information, please contact Peter Godwin, Regional Head of Practice – Dispute Resolution, Asia and Managing Partner, Kuala Lumpur, Nicholas Hoh, Senior Associate, Daniel Chua, Associate, Lim Tse Wei, Associate, Rebecca Pang, Associate or your usual Herbert Smith Freehills contact.

 

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

 

Peter Godwin
Peter Godwin
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Nicholas Hoh
Nicholas Hoh
Senior Associate (Malaysia)
+60 3-2777 5106
Daniel Chua
Daniel Chua
Associate (Malaysia)
+60 3-2777 5101
Tse Wei Lim
Tse Wei Lim
Associate (Malaysia)
+60 3-2777 5135
Rebecca Pang
Rebecca Pang
Associate (Malaysia)
+60 3-2777 5111