Peter Godwin, Craig Shepherd, Arnold Hoong and Charlene Kong
Refusing to pay arbitration deposits is a common strategy employed by parties to delay or make proceedings difficult for the counterparty.
Previously, the Malaysian Court of Appeal in Kebabangan Petroleum  1 MLJ 693 had, found an arbitration agreement to be inoperable due to the non-payment of arbitration fees, sheer unresponsiveness and complete abandonment of the arbitration agreement by one party. However, the recent case of JKP Sdn Bhd v Anas Construction Sdn Bhd  MLJU 3058 clarifies that the effects of non-payment of arbitration fees are fact sensitive, and finds that non-payment alone will not always result in the arbitration agreement becoming inoperable.
The plaintiff, JKP Sdn Bhd (JKP) had engaged the defendant, Anas Construction Sdn Bhd (Anas), as the main contractor to construct a number of low-cost apartment units in Malaysia. Disagreements arose between the parties on the quality of concrete used which led to a saga of legal proceedings.
JKP commenced a civil suit against Anas in the High Court (1st Civil Suit). Anas objected to the 1st Civil Suit on the ground that the contract had an arbitration clause. This resulted in JKP discontinuing the 1st Civil Suit and, in its place, referred the matter to arbitration. Subsequently, and during the course of the arbitration proceedings, Anas refused to make payment for the 2nd provisional advance deposit which created a situation where JKP was required to make the payment on its behalf.
Unhappy with the outcome, JKP terminated the arbitration proceedings and proceeded to file a second civil suit in the High Court (2nd Civil Suit). In the 2nd Civil Suit, Anas reiterated its position that arbitration is the proper forum for the dispute and filed an application to strike out or to stay the 2nd Civil Suit pending arbitration.
The High Court sided with Anas and allowed its application for a stay pending arbitration on the basis that, despite the non-payment of deposits by Anas, (i) the arbitration agreement was still operative and (ii) Anas had not taken a step in the Court proceedings.
The Court distinguished the earlier Court of Appeal case, Kebabangan Petroleum  1 MLJ 693 which was relied on by JKP. Whilst the Court in Kebabangan Petroleum previously decided that the non-payment of arbitration deposits by one of the parties can amount to inoperability of an arbitration clause, the High Court distinguished the case on several grounds:
- Firstly, the extent of participation in arbitration. The parties’ conduct and treatment of the arbitration were drastically different. Anas actively participated in the arbitration proceedings with the exception of refusing to make payment for the 2nd deposit. In contrast, the respondent in Kebabangan Petroleum did not participate or pay the arbitration fees despite reminders until the civil suit was filed, which led to the Court of Appeal ‘s conclusion that the arbitration clause was inoperable as the respondent was disinterested and had abandoned the arbitration.
- Secondly, the tribunal’s directions on the non-payment. Unlike in Kebabangan Petroleum, the arbitrator in the present case had expressly notified the parties that the arbitration could still proceed despite the non-payment by Anas. Pursuant to rule 14(7) of the AIAC Arbitration Rules 2018, JKP had the option to proceed with the arbitration by (i) paying Anas’ portion of the 2nd deposit or (ii) proceeding only with JKP’s claim against Anas without Anas’ intended counterclaim or indemnity against any third party. Despite being presented with options to validly proceed, JKP opted to terminate the arbitration proceedings on its own accord.
- Thirdly, parties’ submission to Court proceedings. The Court in Kebabangan Petroleum and the present case took a different view as to whether the parties have submitted to the Court’s jurisdiction. Anas was not deemed to have submitted to the jurisdiction of the Court as Anas’ application was made on the basis that the Court lacked jurisdiction and did not require any consideration of the merits. In contrast, the respondent in Kebabangan Petroleum gave submissions and invited the Court to consider merits in its application and were therefore deemed to have submitted to the jurisdiction of the Court.
- Finally, the specific circumstances of the case. The present Court commented that what likely swayed the Court of Appeal’s decision in Kebabangan Petroleum was the involvement of Respondent’s directors in the suit who were not party to the arbitration agreement and would not be able to participate in the arbitration.
The Malaysian Court presents an insightful view on whether it will find an arbitration clause inoperable due to the non-payment of arbitration fees. Whilst non-payment can result in a finding that an arbitration agreement is inoperable, the present case suggests that this is dependent on whether a party’s conduct shows an intention to abandon the arbitration in favour of litigation.
This is interesting when compared to the English position. Specifically, in some English cases like Downing v Al Tameer Establishment  EWCA Civ 721 and Delta Reclamation Limited v Premier Waste Management Limited  EWHC B16 (QB), it has been found that like any other contract, an arbitration agreement can be repudiated – and where such repudiation is accepted, the arbitration agreement becomes inoperative. This, in practical effect, does not seem too far off from the Malaysian position.
Moving forward, the four factors mentioned above are certainly considerations for parties with arbitration agreements, for example, (i) the level of participation of parties within the arbitration, (ii) the directions by the tribunal, (iii) the nature and substance of parties’ submission in Court proceedings, and (iv) specific circumstances of the case. Parties should be wary of these factors lest they might find their arbitration agreements rendered unenforceable.
Looking at the bigger picture however, there are certainly many uncooperative parties in arbitrations when it comes to payment of fees. The High Court acknowledges the reality that finding arbitration agreements inoperative by virtue of non-payment of fees acts contrary to the arbitration framework and parties’ agreement to arbitrate. In practice, parties often use such methods to delay proceedings, frustrate the other party, or simply to force the other party to fork out payments first. The claimant in these circumstances will often opt to render payment on behalf of the counterparty to progress proceedings and improve their perception towards the tribunal. This is generally a wise tactical move as, if the claimant wins the case, it will likely be able to recoup the costs in the award.
Having said that, there is a possibility for a claimant to make an arbitration agreement inoperable due to non-participation and non-payment of arbitration costs by the other party, though Malaysian Courts will not readily allow it. A prudent claimant should therefore, prior to initiating the arbitration, factor in the possibility of having to bear such additional costs in advance so as not to potentially hinder its own claims.
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.