FUNDAMENTALS OF STAY OF PROCEEDINGS UNDER SECTION 10 OF THE ARBITRATION ACT 2005

FUNDAMENTALS OF STAY OF PROCEEDINGS UNDER SECTION 10 OF THE ARBITRATION ACT 2005

In this article we will discuss a few fundamentals on the stay of proceeding for arbitration. We will also discuss the case of Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd and answer the question whether a subordinate court may grant the stay of proceeding for arbitration.

Section 10(1) Arbitration Act 2005 (“the Act”)

Section 10(1) of the Act provide that a stay of proceedings must be granted in respect of a matter which is the subject matter of an arbitration agreement. However, Section 10 works within a scope as follows[1]: –

  1. The existence of binding arbitration agreement wherein the dispute falls within the scope of the said agreement;
  2. a party makes an application before taking any other steps in the proceeding; and
  3. the arbitration agreement was not null, void, inoperative or incapable of being performed.

If these requirements are fulfilled, then it is mandatory for a stay of proceeding to be granted as held by the Federal Court in Press Metal Sarawak Sdn Bhd v Etiqa Takaful Berhad[2].

1. Existence of a binding arbitration agreement

Section 9(1) of the Act defined the meaning of an “arbitration agreement”. An arbitration agreement “means an agreement by the parties to submit to arbitration all or certain disputes which have arisen, or which may arise between them in respect of a defined legal relationship, whether contractual or not”. It also may be in form of an arbitration clause in an agreement or in the form of a separate agreement[3] and it shall be in writing[4].

Pursuant to Section 9(4) of the Act, an arbitration agreement is in writing where it contained in: –

  1. a document signed by the parties;
  2. an exchange of letters, telex, fax or other means of communication; or
  3. an exchange of claim and defence in which the existence of an arbitration agreement is alleged by one party and not denied by the other.

An arbitration clause is binding where there is a reference in an agreement to a document containing an arbitration clause. However, the reference to the agreement must be with the purpose to incorporate the arbitration clause or agreement and the reference must be clear on the intention of the parties to incorporate such arbitration clause[5].

2. Application before taken any other steps in the proceeding

On this issue, the Federal Court in Sanwell Corporation v Transresources Corporation Sdn Bhd[6] held that: –

“Therefore, the legal position in Malaysia may be neatly summarised as follows:

  • The entry of appearance is the mandatory procedural step to be taken by an applicant in a proceeding in the High Court. It is a step in the proceedings as required by the RHC. However, it is a permitted, excluded or an exempted step in the proceedings that does not amount to a step in the proceedings within the meaning of the  6of the Act which would prejudice the applicant’s right to apply for a stay of the proceedings.
  • If the applicant has served any pleadings, then he has clearly taken a step in the proceedings within the meaning of  6of the Act. He has thereby elected to proceed with the proceedings in the High Court and would be barred from applying for a stay of proceedings to refer the dispute to arbitration.
  • If he has taken any other action in the proceedings (other than step (a) or (b) abovementioned), the court will then have to consider whether such action amounts to a step in the proceedings by determining the nature of the action and whether or not it indicates an unequivocal intention to proceed with the suit and to abandon the right to have the dispute disposed off by arbitration.”

The position held in Sanwell is quite clear on the meaning of “take steps in the proceeding” involving filing of entry of appearance and service of any pleadings. However, the Court also leave a non-exhaustive determination of any other action in proceedings of whether the said action tantamount to unequivocal intention to proceed with the suit and to abandon the right to have the dispute be arbitrated.

In the case of Airbus Helicopters Malaysia Sdn Bhd v Aerial Power Lines Sdn Bhd[7], the Court of Appeal determined on whether a request for an extension of time to file defence amounts to “taking a step in the proceedings” and held that a mere request for an extension of time to file defence could not be taken an unequivocal intention to proceed with the court proceeding and the matter is fact-sensitive and rely of the facts of the case as laid down in Sanwell. Despite the request for an extension of time to file defence, the Court held that the appellant is entitled for the stay of proceeding as the application for stay was filed before the deadline to file the defence.

On the contrary, the High Court in the case of Mun Seng Fook v AIG Malaysia Insurance Bhd was decided on the fact that the respondent did not attend the first case management instead requested the appellant’s solicitors to mention on its behalf for an extension of time to file defence[8]. The respondent’s solicitors also did not attend personally to inform their intention to file a stay nor the request for extension of time was on without prejudice basis. Therefore, the Court held that the court’s process pursuant to the Rules of Court 2012 has been utilised and the respondent has submitted to the jurisdiction of the court.

3. The arbitration agreement was not null, void, inoperative or incapable of being performed

This third limb of the Section 10 of the Act is reflected from the New York Convention and UNCITRAL Model Law.

Article II(3) of the New York Convention requires courts to refer disputes to arbitration unless the agreement is “null and void, inoperative, or incapable of being performed.” Similarly, Article 8(1) of the UNCITRAL Model Law provides that courts must refer parties to arbitration unless the agreement is defective.

In the case of Biaxis (M) Sdn Bhd (in liquidation) v. Peninsula Education (Setia Alam) Sdn Bhd[9], the High Court dismissed the defendant’s application for a stay of proceedings under section 10 of the Act. Central to the court’s decision was the finding that the arbitration agreement between the parties had become inoperative, particularly due to the contractor’s winding-up. Referring to the Peace River Hydro Partners v. Petrowest Corp[10] case, the court adopted the interpretation that an arbitration agreement may be deemed inoperative if it ceases to have future effect, especially in insolvency scenarios where the primary focus shifts to managing the wound-up company’s assets and liabilities. The court further noted that an increase in cost and delay due to arbitration would be detrimental to the interests of creditors and shareholders in such cases. Additionally, the absence of any genuine dispute regarding the final certified sum payable by the defendant made the invocation of the arbitration clause unnecessary, supporting the liquidator’s right to pursue the claim in court under insolvency law.

In Asia Pacific Higher Learning Sdn Bhd v. Stamford College (Malacca) Sdn Bhd[11], the Court of Appeal addressed the approaches to determining a stay of proceedings under section 10 of the Act, focusing on the just and convenient approach. The court clarified that while the prima facie approach applies when the existence of an arbitration agreement is in dispute and the full merits approach involves a detailed examination of the agreement’s validity, the just and convenient approach is used when there is ambiguity or uncertainty in the arbitration clause itself. In this case, the arbitration clause was ambiguous, offering the parties the option to choose between arbitration or litigation, which lacked a clear and binding obligation to arbitrate. The court held that due to this ambiguity, it was more just and convenient to allow the litigation to proceed, emphasizing the need for arbitration clauses to be clear and unequivocal to be enforceable under the Act.

Stay of Proceedings For Arbitration In The Common Law

It was held in the landmark case of Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd[12] that courts possess an inherent jurisdiction to stay proceedings in favour of arbitration, even when such cases do not squarely fall under the UK’s Section 1 of the Arbitration Act 1975 (which is in pari materia with Malaysia’s Section 10).

 

The case involves a dispute over the construction of a tunnel. The parties could not agree on the price for an additional work, leading to disagreements on payments. Channel Tunnel Group sought an injunction to prevent Balfour Beatty from ceasing work on the cooling system.

The plaintiffs opposed the stay of court proceedings mainly because the purported “arbitration agreement”, which is clause 67, does not fall within Section 1 of the Arbitration Act 1975. The arguments are as follows:

  • First, they contended that the two-stage dispute resolution process meant the arbitration agreement was not yet engaged because the expert determination stage had not been completed. Therefore, Section 1 of the Arbitration Act 1975, which deals with arbitration agreements, was not applicable at this juncture.
  • Second, they argued that the dispute had not reached the stage where it was agreed to be referred to arbitration, as the expert panel had not concluded its process.
  • Third, the foreign arbitration clause, which stipulated arbitration under ICC rules in Brussels, raised questions about whether the Arbitration Act 1975, which primarily governs domestic arbitration agreements, applied to a foreign arbitration clause.

Lords Mustill held that “irrespective of whether clause 67 falls within section 1 of the Act of 1975, the court has jurisdiction to stay the present action.”

The House of Lords reasoned that courts have a natural and inherent authority to manage their proceedings, which includes staying proceedings to uphold the parties’ agreement to arbitrate disputes, ensuring that parties are held to their contractual commitments.

Can the Subordinate Courts Allow Stay for Arbitration?

Subordinate courts in Malaysia have the jurisdiction to grant a stay of proceedings in favour of arbitration. This position is affirmed in the case of Malaysian European Production System Sdn Bhd v Zurich Insurance (M) Bhd[13].

In this case, the court held that subordinate courts do have such jurisdiction. The reasoning was based on the specific wording of Section 6 of the Arbitration Act 1952 (the predecessor to Section 10), which states: “any party to the legal proceedings may… apply to the court.”

The court interpreted “the court” to logically mean the court in which the proceedings had been commenced. This interpretation is supported by the observation that, while other sections of the Act refer to the High Court, Section 6 does not; it merely refers to “the court.” The absence of the term “High Court” implies that any court where proceedings are initiated has the authority to grant a stay.

This interpretation aligns with Section 10, which similarly states that a court before which proceedings are brought shall stay those proceedings and refer the parties to arbitration.

Additionally, Order 69 Rule 10 of the Rules of Court 2012 which provides procedural guidance for such applications, the word “Court” was used, in contrast to “High Court” in other parts of the Rules of Court.

Authors:

  1. Azrul Haziq Khirullah
  2. Aireen Natasha Ab Wahab
  3. Alif Mustaqim

References:

[1] Para 33 of Press Metal Sarawak Sdn Bhd v Etiqa Takaful Berhad [2016] 9 CLJ 1

[2] [2016] 9 CLJ 1

[3] See Section 9(2) of the Act

[4] See Section 9(3) of the Act

[5] See Best Re (L) Ltd v Ace Jerneh Insurance Bhd (formerly known as Jerneh Insurance Bhd) [2015] 5 MLJ 513 at 524

[6] [2002] 2 MLJ 625

[7] [2024] 2 MLJ 471

[8] [2019] 7 MLJ 59

[9] [2023] MLJU 2938.

[10] [2022] SCJ No. 41.

[11] [2024] MLJU 1712.

[12] [1993] 1 All ER 664

[13] [2003] 1 MLJ 304