The Setia Awan Management Case: Not So Optional After All As Court Enforces Hybrid Arbitration Clause

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The recent Court of Appeal decision in Setia Awan Management Sdn Bhd v SPNB Aspirasi Sdn Bhd [2025] CLJU 982 has added a significant dimension to Malaysian arbitration jurisprudence.

This decision affirms that an arbitration clause which provides an option to litigate or arbitrate is nonetheless a valid arbitration agreement once a party exercises the option to arbitrate. This ruling is a strong endorsement of party autonomy and judicial minimalism, reinforcing Malaysia's pro-arbitration stance in line with the UNCITRAL Model Law and global best practices.

Background Facts

The parties entered into a Development and Contra Transaction Agreement (DACT) on 17 May 2018 concerning a residential project in Sitiawan, Perak. The agreement contained an arbitration clause (Clause 18), which stated that any disputes "may be referred to any court in Malaysia or to arbitration in accordance with the Arbitration Act 2005."

Following disputes arising from the non-transfer of identified plots and delays, Setia Awan terminated the agreement and demanded compensation exceeding RM 311 million. SPNB Aspirasi responded by filing a civil suit in the High Court. Setia Awan, in turn, filed an application to stay proceedings under Section 10 of the Arbitration Act 2005 (AA 2005) seeking to invoke the arbitration clause.

The High Court dismissed the stay application, holding that:

(a) Clause 18 was not mandatory and additionally, it failed to identify key arbitral elements (seat, number of arbitrators, appointment mode);

(b)   SPNB had opted for litigation, thereby excluding arbitration; and

(c)    No notice of arbitration was issued.

Setia Awan appealed to the Court of Appeal.

Key Legal Issues

The Court of Appeal addressed three central questions:

(a) Is an agreement that gives parties the option to choose between litigation or arbitration a valid arbitration agreement under section 9 of the AA 2005?[SK1] 

(b) Does the failure to specify key arbitral components (seat, tribunal composition) invalidate such a clause?

(c)  Once litigation is commenced, is the right to arbitrate extinguished?

Decision Of The Court of Appeal

The Court of Appeal reversed the High Court's decision and allowed Setia Awan to stay the proceedings under Section 10 of AA 2005. The court reaffirmed the enforceability of optional arbitration clauses and held that such clauses do not become void or inoperative merely because of their permissive language or lack of procedural detail.

Validity Of Optional Arbitration Clauses

The Court of Appeal held that a clause offering a choice between litigation or arbitration was still a valid arbitration agreement. The permissive word "may" does not undermine the validity of the clause but reflects party autonomy in choosing the dispute resolution forum.

Relying on the Privy Council's decision in Hermes One Ltd v Everbread Holdings Ltd [2016] 1 WLR 4098 and the Australian High Court's decision in PMT Partners Pty Ltd v Australian National Parks and Wildlife Service (1995) 184 CLR 301, the court found that the statutory definition of an arbitration agreement in Section 9 of the AA 2005 was broad enough to encompass clauses where arbitration was contingent upon a party's election.

Procedural Deficiencies Are Not Fatal

The Court of Appeal rejected the High Court's decision that failure to specify arbitral seat, tribunal size or appointment procedure rendered the arbitration clause inoperative. Instead, it held that such omissions are cured by the default provisions in the AA 2005:

(a) Section 22 provides the default rule for seat of arbitration;

(b) Section 12 specifies the default number of arbitrators (one for domestic arbitrations); and

(c)Section 13 outlines the appointment mechanism through AIAC (or even the High Court).

As the clause expressly referred to arbitration under the AA 2005, all procedural uncertainties were resolved by statute.

Electing To Litigate Does Not Extinguish Right To Arbitrate

The court rejected the argument that SPNB’s decision to commence litigation precluded Setia Awan from invoking arbitration. The timing of the election is not determinative. The Court of Appeal emphasised that Section 10 of the AA 2005 mandates a stay once a valid arbitration agreement exists (unless the agreement is null, void, inoperative, or incapable of being performed). The court adopted the Federal Court’s holdings in Far East Holdings Bhd & Anor v Majlis Ugama Islam dan Adat Resam Melayu Pahang and other appeals [2018] 1 CLJ 693 and Press Metal Sarawak Sdn Bhd v. Etiqa Takaful Bhd [2016] 9 CLJ 1 that Section 10 requires the court to grant a stay once the prerequisites are satisfied.

The court went further to state that recognising the first-mover advantage would encourage parties to rush into litigation to defeat arbitration clauses. Such a practice would frustrate the very purpose of including arbitration clauses and defeat the objectives of the AA 2005.

Kompetenz-Kompetenz And Judicial Minimalism

The Court of Appeal also addressed the interplay between Section 10 and Section 18 of the AA 2005, which enshrines the kompetenz-kompetenz principle. While the court is tasked with prima facie assessment under Section 10, it is the arbitral tribunal that ultimately decides on its jurisdiction.

The court aligned its reasoning with the Cockett Marine Oil v MISC [2022] 6 MLJ 786 decision, which applied the prima facie test, i.e. whether there appears to be a valid arbitration agreement on the face of the documents. Any further analysis of enforceability or jurisdiction should be left to the arbitral tribunal.

Practical Implications

This case significantly shifts the risk calculus for parties using hybrid or optional dispute resolution clauses. The main takeaways are:

(a) Drafters of contracts must understand that permissive language does not defeat enforceability. “May refer to arbitration” will be enforced once invoked;

(b) Court litigation does not necessarily trump arbitration merely because it was commenced first;

(c) Courts will interpret arbitration clauses purposively, favouring arbitration where possible; and

(d) Technical omissions (e.g. no agreed seat or tribunal) are not tenable basis to challenge the validity of arbitration clauses as these have been provided in the AA 2005.

The Setia Awan Management case is a pivotal decision that promotes certainty, reinforces party autonomy and enhances Malaysia’s reputation as an arbitration-friendly jurisdiction. The Court of Appeal has clarified that an option to arbitrate becomes mandatory when exercised and that such clauses will be upheld if they fall within the statutory framework of the AA 2005. The judgment discourages opportunistic litigation strategies and advances the legislative intent of minimal court intervention in arbitrable matters.

Going forward, should any contracts contain optional dispute resolution clauses, the court will likely uphold an election to arbitrate. Thus, commercial parties must carefully weigh their choice of dispute resolution mechanisms at both the drafting and enforcement stages. This decision aligns Malaysian arbitration jurisprudence with international trends and provides clear guidance to both courts and practitioners on the treatment of optional arbitration clauses under the AA 2005.

27 June 2025