Abandoned!

A report by Shannon Rajan on a case on Section 10(1)(a) of the Arbitration Act 2005

 

 

INTRODUCTION

In the recent case of Port Kelang Authority v Kuala Dimensi Sdn Bhd (an unreported decision), the Court of Appeal had the occasion to consider the limits of Section 10(1)(a) of the Arbitration Act 2005 (“the Act”).

 

In essence, Section 10(1)(a) of the Act provides that where the parties have agreed to submit disputes to arbitration, the courts must stay court proceedings pending such arbitration, unless the Court finds that the arbitration agreement is null and void, inoperative or incapable of being performed.

 

 

BACKGROUND FACTS

Port Kelang Authority ("PKA") filed 2 actions in the High Court against Kuala Dimensi Sdn Bhd ("KDSB") in respect of the disputes arising out of a Development Agreement ("the Principal Agreement") and various Supplemental Agreements entered into between PKA and KDSB for the development of Port Kelang Free Zone Project.

 

After the commencement of the High Court suits, KDSB informed PKA of its intention to refer the disputes to arbitration. Thereafter, KDSB applied to the High Court to stay the High Court suits pending reference to arbitration under Section 10 of the Act. The High Court allowed KDSB’s stay applications. PKA appealed against the High Court’s decision.

 

 

ISSUE

The main issue to be determined by the Court of Appeal was whether the parties had intended to abandon arbitration and instead, resort to litigation, thereby rendering the arbitration clause contained in the Principal Agreement to be null and void, inoperative or incapable of being performed within the scope of Section 10(1)(a) of the Act.

 

The decision of the Court of Appeal on this issue turned on the construction of Clause 11.1 of the Principal Agreement and Clauses 2.3 and 2.4 and Clauses 4.3 and 4.4 respectively of two of the Supplemental Agreements entered into between PKA and KDSB.

 

 

THE CONSTRUCTION OF THE RELEVANT CLAUSES

 

Clause 11.1 of the Principal Agreement, i.e. the “arbitration clause”, provides as follows:

"If any dispute or difference of any kind whatsoever shall arise between the Parties herein arising out of or in connection with this Agreement (either during the progress or after the completion or abandonment of the Development Works) it shall if possible be resolved amicably between Parties. Any such dispute or difference which cannot be resolved amicably may be referred to arbitration in accordance with this Agreement.” (Emphasis added)

 

Clause 2.3 and Clause 4.3 of two of the Supplemental Agreements provide as follows:

"Subject only to the variations and modification herein contained and such alterations if any, as may be necessary to make the Principal Agreement consistent with this Supplemental Agreement, the Principal Agreement remains in full force and effect and shall be read and construed and be enforceable as if the terms of this Supplemental Agreement were incorporated therein. In the event there is any conflict in the interpretation of the terms of the Principal Agreement and this Agreement, the interpretation of the terms of this Agreement shall prevail." (Emphasis added)

 

Clause 2.4 and Clause 4.4 of the said Supplemental Agreements, i.e. the “submission to court jurisdiction clauses” provide as follows:

“This Supplemental Agreement shall be governed and construed in all respects in accordance with the laws of Malaysia and the parties hereto hereby submit to the jurisdiction of the Courts of Malaysia in all matters connected with the obligation and liabilities of the parties under this Supplemental Agreement.” (Emphasis added)

 

 

The Court of Appeal construed the relevant clauses in the following manner:

 

(1) The “arbitration clause” provides that the parties had agreed, first, to amicably resolve any dispute or difference arising out of or in connection with the Principal Agreement. If the parties’ attempts failed, they may then refer the dispute or difference to arbitration;

(2) The “arbitration clause” is subject to variations and modifications in the Supplemental Agreements. Clause 2.3 and Clause 4.3 respectively of the two Supplemental Agreements provide that in the event of any conflict in the interpretation of the terms of the Principal Agreement and the Supplemental Agreements, the latter shall prevail;

(3) Under the second limb of the “submission to court jurisdiction clause”, the parties had expressly agreed to “submit to the jurisdiction of the Courts of Malaysia all matters connected with the obligations and liabilities of the parties” under the Supplemental Agreements;

 

The Court of Appeal held that the “arbitration clause” had been rendered null and void, inoperative or incapable of being performed under Section 10 of the Act for the following reasons:

 

(1) There was a conflict in the interpretation of the “arbitration clause” and the “submission to the court jurisdiction clauses” and no effect could be given to enable these clauses to function harmoniously;

(2) The permissive word “may” used in the “arbitration clause” was capable of readily abandoning the discretion to refer to arbitration and opting for litigation as expressed and contractually agreed by parties in the Supplemental Agreements vide the “submission to court jurisdiction clauses”; and

(3) Although the parties had originally intended to have the discretion to refer their disputes to arbitration, that discretion had been subsequently abandoned by reason of the "submission to court jurisdiction clauses". Therefore, it was unfair or unjust for KDSB to go back on its agreement to litigate any dispute or difference arising from the Principal Agreement and the Supplemental Agreements.

 

Accordingly, the Court of Appeal unanimously set aside the High Court’s decision and substituted the same with an order that the High Court actions be litigated.

 

 

CONCLUSION

The case serves to give a concrete example of how the exceptions to the otherwise mandatory requirements of Section 10 of the Act will be construed, and the limited circumstances in which the courts will refuse a stay pending arbitration. It also exemplifies the need for clarity when drafting contractual provisions which stipulate the mode of resolving disputes.

 

 

SHANNON RAJAN ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

Shannon holds a Bachelor of Laws Degree from the University of London (external) and a Masters of Law from the National University of Singapore. He is an Associate in the Alternative Dispute Resolution Practice Group of SKRINE. He is also a Panel Mediator in the Malaysian Mediation Centre.

 
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