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A worrying trend in arbitration

Sanjay Mohanasundram

With the increasing number of complex legal disputes, arbitration has now emerged as a popular alternative to litigation. In Malaysia, the Arbitration Act 2005, which follows the Uncitral Model Law, governs this form of alternative dispute resolution. With the introduction of the Arbitration Act 2005, it was commonly accepted that the Malaysian Courts when having to deal with an application for a stay pending arbitration would have little alternative but to stay the proceedings filed in court and refer the dispute to arbitration. Indeed, section 10 of the Arbitration Act 2005 makes it mandatory for the court to grant a stay save in three instances, which are when:

(i) the party applying for the stay of proceedings has by its conduct submitted to the jurisdiction of the court;
(ii) there is no dispute capable of being arbitrated; and
(iii) the arbitration agreement is for some reason inoperable.

In fact the early decisions on section 10 made it quite clear that it was mandatory for the court to grant a stay of the court proceedings in favour of arbitration unless any one of the three exceptions stated above have been proven. In Albilt Resources Sdn Bhd v Casaria Construction Sdn Bhd [2010] 7 CLJ 785, the Court of Appeal reached the following view when addressing the issue of whether to stay the proceedings filed in court and to refer the dispute to arbitration:

The parties, who made a contract to arbitrate their disputes, should be held to their bargain. It is the prima facie duty of the court to act upon such an arbitration agreement, especially the word 'shall' contained in s.10(1) made it mandatory for the court proceedings to be stayed.

However, despite this decision, the Court of Appeal (in Lembaga Pelabuhan Klang (PKA) v Kuala Dimensi Sdn Bhd) recently seemed to take the view that the reasons for refusing a stay pending arbitration are not limited to those as stated in section 10. This decision, although it appears to have been correctly decided on the facts, is a matter of some concern as it gives rise to further exceptions that are not prescribed in section 10.

The first of these further exceptions could arise where the proceedings filed in court name parties that are not a party to the arbitration agreement. If this exception were to be recognised, it would result in parties quite easily circumventing the need to refer a dispute to arbitration by including parties that are not party to the arbitration agreement.

The second further exception arises when the arbitration clause uses the word "may" as opposed to "shall". For example: "if any dispute or difference shall arise between the parties... the dispute or difference may be adjudicated ..." It is suggested in the PKA case that if additionally there is a clause stating that the parties had agreed to submit to the jurisdiction of the courts this would mean that parties have a right to choose whether to refer the dispute to court or arbitration.

It is suggested that while the first further exception can be said to have merits, the second cannot be accepted as good law. There are many instances where, when dealing with arbitration clauses, the courts have interpreted the word "may" to be read as "shall", which is to say that the obligation to refer the dispute to arbitration is mandatory. Given that parties have agreed to refer the matter to arbitration, this should be the appropriate interpretation and construction of the arbitration clause.

Sanjay Mohanasundram

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