Knowledge Highlights 14 April 2022

On 10 January 2022, the High Court of Malaya at Shah Alam delivered its judgment in respect of Lion Pacific Sdn Bhd v Pestech Technology Sdn Bhd [2021] MLJU 1404. The grounds of judgment make clear the boundaries of a conditional stay granted pursuant to section 10 of the Arbitration Act 2005 (“AA 2005”).

Background

The dispute involved a claim brought by the main contractor (“Lion”) against its sub-contractor (“Pestech”) alleging, among other things, fraudulent claims made by Pestech in its previous adjudication claim against Lion. The adjudication claim was commenced under the Construction Industry Payment and Adjudication Act 2012 and Pestech prevailed. The sub-contract between Lion and Pestech incorporated terms of the main contract between Lion and the Government of Malaysia, which was based on the Standard Form of Design and Build Contract (PWD Form DB Rev. 1/2010). Prior to these proceedings, Lion attempted to commence arbitration proceedings against Pestech but those proceedings were discontinued as Pestech did not pay its portion of the provisional advance deposit (“deposit”) required by rule 14, paragraph 1 of the Asian International Arbitration Centre (“AIAC”) 2018 Rules (“Rules”).

Contending that any dispute arising out of the sub-contract ought to be referred to arbitration, Pestech applied for a stay pending arbitration under section 10 of the AA 2005. Lion resisted the application on three grounds, namely (i) the cause of action did not fall within the scope of the arbitration clause as the claim was premised on fraudulent conduct which was unrelated to the sub-contract, (ii) Pestech’s refusal to pay its portion of the deposit had rendered the arbitration clause inoperative, and (iii) if the court was minded to grant a stay, it ought to impose a conditional stay requiring Pestech to pay its portion of the deposit to avoid a repeat of the previously discontinued arbitration.

Decision of the High Court

In respect of the scope of the arbitration agreement, the High Court reaffirmed the approach laid down by the Federal Court in Press Metal Sarawak Sdn Bhd v Etiqa Takaful [2016] 5 MLJ 417, such that a court should “lean more towards granting a stay pending arbitration … even in cases where … it is arguable whether the subject matter of the claim fails within or outside the ambit of the arbitration clause”. On that basis, the High Court found no difficulty in holding that [t]he mere fact the cause of action is in fraud does not make take [sic] the dispute out of the scope of the arbitration agreement. This would be taking a very restrictive view of the import of the arbitration agreement.”

With regard to the issues raised on the effect of non-payment of the deposit, the High Court found that there was no reason to consider the arbitration agreement as inoperative, void or incapable of being performed. In particular, the High Court refused to impose Lion’s proposed condition on Pestech’s stay application i.e. for Pestech to pay its portion of the deposit. The High Court reasoned that issues pertaining to costs of the arbitration are within the jurisdiction of the arbitral tribunal pursuant to sections 8 and 44 of the AA 2005. Further, to impose such a condition would amount to the High Court impinging upon the discretion of the Director of the AIAC under rule 14 of the Rules. 

Comment

This decision demonstrates the strict approach adopted by Malaysian courts in the spirit of the AA 2005 in deferring disputes to arbitration where an arbitration agreement exists.

The High Court also observed that the plaintiff could have avoided the problem of the arbitral proceedings being terminated by reason of non-payment of the deposit by the defendant by advancing such sums first and subsequently recouping it in the arbitral award (assuming that the plaintiff was successful in the arbitral proceedings). Indeed, such an approach is envisaged by rule 14 paragraphs 3 and 7 of the Rules,1 which gives a party an opportunity to advance the deposits in the event that the other party has not paid their share in full. Further, “costs” are defined under the Rules2 as including the fees and expenses of the arbitral tribunal.3 In principle, such costs shall be borne by the unsuccessful party.4

 

1 See also rules 41.3 and 41.9 of the Rules.

2 In the Rules, “costs” is defined by reference to Article 40 of the UNCITRAL Arbitration Rules (as revised

3 See also rule 40.1 of the Rules.

4 The Rules apply Article 42 of the UNCITRAL Arbitration Rules. See also Article 13.5, paragraph (l) of the Rules.

 

This article has been prepared with the assistance of Associates Bryan Wang Yung and Prabjit Dev Singh.

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