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Test to Challenge Arbitration Agreements

Test to Challenge Arbitration Agreements

The cornerstone of arbitration is party autonomy i.e., the freedom of parties to agree to submit disputes to arbitration. This consensus will be embodied in the form of an arbitration agreement which Section 9(3) of the Arbitration Act 2005 (‘AA 2005’) prescribes must be in written form.

The power of consensus in arbitration can be seen in Section 10(1) of the AA 2005 where even court proceedings may be stayed pending disposal of arbitration proceedings “…unless it (the court) finds that the agreement is null and void, inoperative or incapable of being performed.” Essentially, this means that the first requirement to refer disputes to arbitration is to establish that a valid arbitration agreement exists.

So, what happens when one party attempts to submit disputes to arbitration and the existence of a valid arbitration agreement is challenged? This has been dealt with by the High Court in Lysaght Corrugated Pipe Sdn Bhd and Anor v Popeye Resources Sdn Bhd and Anor [2022] 1 LNS 191.

The Facts

The first and second Plaintiffs were in a contractual relationship with the first Defendant to purchase hot rolled coils where all payment and delivery obligations had been duly fulfilled. The second Defendant later alleged that several contracts for purchase of hot rolled coils entered between the Plaintiffs and the second Defendant (the ‘Impugned Contracts’) were not paid and claimed from both Plaintiffs for the same.

The Plaintiffs later discovered that the Impugned Contracts were forged and diligently lodged police reports. The second Defendant, on the other hand, opted to commence arbitration proceedings in Hong Kong to claim for the overdue payments. The Plaintiffs, claiming that there was no arbitration agreement, refused to participate in the said arbitration proceedings.

The Plaintiffs then filed a civil suit in the Kuala Lumpur High Court and consequently made applications for an anti-arbitration injunction while the second Defendant applied to stay proceedings pending disposal of the arbitration in Hong Kong.

The Decision

The second Defendant submitted that the applicable test in deciding whether to grant a stay of proceedings pending arbitration is the prima facie test which was laid down by the Singapore High Court in Malini Ventura v Knight Capital Pte Ltd and others [2015] SGHC 225. This test, however, has never been applied in any Malaysian case.

The Court noted that in Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd [2016] 9 CLJ 1, the Federal Court had dealt with the issue of whether a valid and binding arbitration agreement existed and applied a threshold different from that of the prima facie test.

The threshold in Press Metal Sarawak was consistent with the full merits test laid down in the English Court of Appeal decision of Albon (trading as NA Carriage Co) v Naza Motor Trading Sdn Bhd and another (No. 3) [2007] All ER 1075 which was submitted by the Plaintiffs. The full merits test essentially formulates four options where the existence of a valid arbitration agreement is in issue which are to (1) decide that there is a valid arbitraton agreement based on the available evidence and grant the stay, (2) give directions for trial to determine the validity of the arbitration agreement, (3) stay the proceedings to allow the arbitrators to decide on the issue, or (4) decide that there is no valid arbitration agreement based on the available evidence and dismiss the application for stay.

The High Court, applying the full merits test went on to consider the evidence adduced before the Court and made the decision to dismiss the second Defendant’s stay application and allow the Plaintiffs’ anti-arbitration injunction.

The Appeal

Dissatisfied, the second Defendant appealed against the High Court’s decision but the appeal was dismissed by the Court of Appeal. In doing so, the Court of Appeal adapted the full merits test, now renamed as the “Just and Reasonable Test” where the application of the guidelines laid down in Albon would depend on the facts and circumstances of the case. The Court of Appeal then applied option (2) from Albon and ordered that the issue on the validity of the arbitration agreement be tried before another High Court judge on the basis that it was just and reasonable to do so since further evidence was needed in cases of forgery.

In a nutshell, where the validity of the arbitration agreement is challenged, the applicable test would be the Just and Reasonable Test as laid down by the Court of Appeal, which is akin to the full merits test in Albon.

Written by: Irdina Edzylzam ([email protected]), pupil reading in the chambers of Chan Kheng Hoe ([email protected]).

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