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:

(i)         whether Lion Pacific’s claim, which was founded on fraud committed in the adjudication proceedings, fell within the scope of the arbitration agreement;

(ii)        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;

(iii)       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, Daniel Chua, Michele Yee 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
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3-2777 5101
Michele Yee
Michele Yee
Associate, Kuala Lumpur
+60 3-2777 5159