INTRODUCTION

Arbitration has long been recognized as a preferred mechanism of alternative dispute resolution (“ADR”) for commercial disputes, offering parties flexibility, confidentiality, and finality outside of the court system. It is now standard practice for commercial agreements to include dispute resolution clauses, which prescribe the method by which disputes between contracting parties are to be settled. While some clauses stipulate arbitration as the exclusive forum, others provide parties with the option of resorting either to arbitration or to litigation in court.

The Court of Appeal’s decision in Setia Awan Management Sdn Bhd v SPNB Aspirasi Sdn Bhd[1] sheds important light on the enforceability of such optional arbitration clauses. The central issues before the Court were whether granting parties the discretion to choose between court proceedings and arbitration renders the arbitration agreement void, inoperative, or incapable of performance, and whether an arbitration agreement remains enforceable once one party has already commenced litigation. This judgment provides valuable guidance on the interpretation of arbitration clauses and reinforces Malaysia’s pro-arbitration stance.

BACKGROUND OF THE CASE

On 17 May 2018, the Respondent, SPNB Aspirasi Sdn Bhd entered into a Development and Contra Transaction (“DACT”) Agreement with the Appellant, Setia Awan Management Sdn Bhd, for a residential development project in Sitiawan, Perak (“the project”). Under the DACT, the Appellant was to develop the project, and the Respondent was to purchase 20 plots of land and transfer 1,169 units valued at RM248,035,014 as part of the financing. Disputes arose between the parties with the Appellant alleging that the lands identified were not transferred to it. The Appellant soon terminated the DACT agreement in July 2021 and demanded compensation of RM311,897,723.

In response, the Respondent filed a suit to claim damages for the Appellant’s breach of the DACT agreement. Meanwhile the Appellant, before taking any further steps in the proceedings, applied for a stay of the court proceedings pending reference to arbitration pursuant to Section 10 of the Arbitration Act 2005 (“AA 2005”).

The DACT agreement contains the following arbitration provision:

“In the event that any dispute or difference whatsoever shall arise between parties touching or concerning this Agreement or its construction or effect or as to the rights, duties or liabilities of either party or of parties hereto under this Agreement in connection with the subject matter of this Agreement the same maybe (sic) referred to any court in Malaysia or to arbitration in accordance with the provisions of the Arbitration Act 2005 or any statutory modification or re-enactment thereof.”

HIGH COURT DECISION

The High Court dismissed the stay of proceedings application and held that the arbitration clause was null and void, inoperative and incapable of performance under Section 10(1) of the AA 2005 as it lacks key components of an arbitration agreement, such as the seat of arbitration, the number of arbitrators and the mode of their appointment.

The High Court viewed that the permissive word “may”, which offers the parties the option to refer the disputes either to arbitration or to the court, indicates a discretion vested in the parties. It was held that an arbitration agreement that gives the parties an option to proceed with litigation or arbitration is not a binding arbitration agreement which clearly and unequivocally requires the dispute to be resolved exclusively through arbitration. Furthermore, such an arbitration agreement is null and void for failing to meet the requirements of the AA 2005 and is unenforceable as it lacks certainty.

The High Court further noted that whilst the plaintiff had commenced a legal suit in the High Court, the defendant had not served a notice of arbitration to trigger arbitration proceedings. The Respondent had effectively exercised the option for litigation thereby excluding the possibility of arbitration for the dispute.

COURT OF APPEAL FINDINGS

The Court of Appeal allowed the appeal and set aside the High Court’s decision, granting an order to stay the court proceedings pending reference to arbitration. In reaching its decision, the Court of Appeal addressed the matter through the following key issues:

1. Whether there is an arbitration agreement between the parties requiring the Court to grant a stay of its proceedings in favour of arbitration.

The Court of Appeal held that the AA 2005 does not require parties to an arbitration agreement to expressly agree on the seat of arbitration, the number of arbitrators or the mode of appointment. The absence of such details would not invalidate the agreement or prejudice the parties, since the AA 2005 contains default provisions that govern these matters. In this case, the arbitration clause expressly referred to arbitration “in accordance with the provisions of the Arbitration Act 2005”, which meant any missing procedural components of arbitration which are not expressly mentioned in the arbitration clause would fall back and rely on the default provisions of the AA 2005. The Court also noted that considering both parties were Malaysian domestic parties and the project is in Malaysia, other matters such as the governing law of the arbitration and that of the arbitration agreement were non-issues.

The Court of Appeal further highlighted that in a stand-alone arbitration agreement, when the permissive word “may” be used, it means that it is not mandatory that one must proceed with arbitration the moment there is a dispute. However, should they wish to proceed further to resolve the dispute, then the only available route under such a clause is arbitration.

The Court of Appeal found the arbitration clause in this case to be both simple and succinct, in that both parties may elect to proceed with either going to court or arbitration in the event of a dispute. It was further held that there is an arbitration agreement once either one of the two parties exercised the option to arbitrate. Citing Federal Court authority, the Court reiterated that once a valid arbitration agreement exists, the courts are under a mandatory duty to stay proceedings under Section 10 of the AA 2005. Accordingly, the court would hold the parties to the bargain struck and grant a stay of the court proceedings so that the party electing arbitration can enforce its contractual right to arbitrate.

2. Whether the giving of an option to the parties to proceed to court or to arbitration renders the arbitration agreement null and void, inoperative or incapable of being performed.

In dissecting the second issue, the Court of Appeal stresses that the question or test is the same, which is whether there is a valid arbitration agreement which is not null and void or inoperative or not capable of performance? Once the question is answered in positive, the court would gravitate towards a stay of the court proceedings and grant the stay order. The fundamental authorities involved are ss 8 and 10(1) of the AA 2005.

Section 10(1) of the AA enumerated as follows: –

Arbitration agreement and substantive claim before court

10. (1) A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

While section 8 of the AA states as follows: –

Extent of court intervention

8. No court shall intervene in matters governed by this Act, except where so provided in this Act.

Both sections constrain the Court to take a hands-off approach when dealing with matters where the subject of an arbitration agreement under the AA 2005 specifically permits interference. The Court also elucidated that:

[58] The intervention under s. 10 as provided for is to ensure no further intervention in the matter the subject of an arbitration agreement. It is an intervention to stop all interventions unless expressly provided otherwise in the AA 2005.

The Court of Appeal also dealt with an issue when confronted with two equally valid options to go to Court or to go to arbitration, the Court would have applyapplied the test in section 10 of the AA 2005. The Court further mentioned that (quoted in seriatim):

[66] The court does not have to choose between which of the two valid options by each of the parties it should uphold because even the questions that the court has to ask itself and with that the test to be applied is skewed in favour of arbitration. It is a case where when confronted with two valid options because the parties could not agree with each other to either together proceed to court or to arbitration, the court then would decide on the basis of whether there is a valid arbitration agreement or an exercise of an option to proceed to arbitration.

3. Whether the Doctrine of Kompetenze-kompetenze is such that the arbitral tribunal itself is tasked to rule on the validity of the arbitration agreement.

Section 18 of the AA 2005 empowers the arbitral tribunal to rule on whether it has jurisdiction to hear the matter raised before it. In the present case, the existence of the arbitration clause is not in dispute and the only dispute at this threshold stage is whether such an arbitration clause as worded is valid arbitration agreement.

The Court further stipulated that in making a finding that the agreement is not null and void, not inoperative or not incapable of being performed, it would have to do so after hearing both parties. Be that as it may, it has been argued that the decision is an interim decision made on a prima facie basis as the same issue is allowed to be raised before the arbitral tribunal as envisaged in s. 10(3) of the AA 2005. Section 10 of the AA 2005 covers a situation where a matter is before the court and an applicant under s. 10 applies for a stay on the grounds that there is an arbitration agreement governing the matter and the matter may well have commenced and continued in an arbitration.

The arbitral tribunal is empowered to deal with the jurisdictional issue arising from whether there is in existence an arbitration agreement which is, mentioned by the court, valid as a preliminary question. On top of that, it may also deal with it on an award on its merits. As Parliament has conferred this right on an arbitral tribunal to so decide on whether it has jurisdiction, the court cannot take that away from the arbitral tribunal.

Section 10 of the AA 2005 has an inherent preference towards upholding arbitration agreement once there is an agreement to arbitrate where the parties have agreed beforehand or as here in this case, one party has validly exercised its option to elect to proceed with arbitration. Some jurisdictions like Singapore and Hong Kong on a provision in pari materia with our section 10 of the AA 2005 have preferred the prima facie test in a stay application of a court proceeding on ground that there is an arbitration agreement governing the matter before the court while the UK courts seem to apply the full merits test in deciding a stay application in pursuant to section 9 of the Arbitration Act, 1996.

Our Court of Appeal kept the options open as to which approach to take and has coined the “just and convenient test” with respect to the approach to take in circumstances that may justify the court deciding for instance a forgery issue affecting the arbitration agreement itself.

CONCLUSION

This decision makes it clear that even where a dispute resolution clause employs the word “may”, in that it gives the option for parties to resolve the dispute either through litigation or arbitration, the court will nevertheless uphold the clause as a valid arbitration agreement. Once a party elects to arbitrate, the arbitration agreement is enforced, and the court is bound to grant a stay of court proceedings under Section 10 of the AA 2005. This approach prevents parties from evading their contractual commitments by relying on drafting ambiguities, thereby reinforcing the enforceability of arbitration clauses and promoting greater certainty in commercial dispute resolution.

Furthermore, our Court of Appeal is keen towards the just and convenient approach which is more flexible which and founded based on the overall circumstances of the parties involved. Even in cases that a party asserted that the DACT agreement was entered into through duress, fraud or fraudulent misrepresentation or forgery, our Court of Appeal has applied the “full merits test” or follow a “just and convenient” approach as enunciated by the Court of Appeal in Macsteel International Far East Ltd v. Lysaght Corrugated Pipe Sdn Bhd & Other Appeals[2] which clarified as follows (quoted in seriatim):

[33] Based on the available options in the guidelines prescribed in Peter Albon (supra), we acknowledge that the determination on whether there is a concluded arbitration agreement that is not null and void cannot be meaningfully made based on the existing affidavit evidence before us to invoke the 1st option or 4th option. There is the necessity for further investigation here. This may be made by the High Court pursuant to the 2nd option premised upon s. 10(1) AA or by the arbitral tribunal pursuant to the 3rd option premised upon s. 18 (1) and (2) AA. In other words, both the High Court and the arbitral tribunal are forums that have jurisdiction and power to investigate and conclude on the validity of the arbitration agreement.

[34] In such instance of concurrent jurisdiction and power, we proffer a flexible approach that the appropriate forum to investigate and determine the validity of the arbitration agreement must be the forum that is on balance more just and convenient having regard to the facts and circumstances in issue.

(Emphasis added)

[1] [2025] 7 CLJ 580

[2] [2023] CLJU 1078; [2023] 1 LNS 1078