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Who Decides The Validity Of An Arbitration Agreement?






The doctrine of kompetenz-kompetenz is reflected in Section 18 of the Arbitration Act 2005[1], in which the arbitral tribunal may rule on its own jurisdiction including determining the existence of the arbitration agreement.

However, it is pertinent to note that the foundation of an arbitrator’s jurisdiction is the agreement entered into between the disputants. If such an agreement is absent, then, there is no jurisdiction[2].


Hence, if the validity of the arbitration agreement is in question, who should decide it? Is it the arbitral tribunal by virtue of kompetenz-kompetenz? Or is it the court given that the arbitral tribunal does not have jurisdiction if there is no arbitration agreement in the first place? The recent Court of Appeal decision in Macsteel International Far East Ltd v Lysaght Corrugated Pipe Sdn [2023] 4 MLJ 551 proposed a flexible approach to determine this issue.  


Background Facts


Lysaght Corrugated Pipe Sdn Bhd (LCP) and Lysaght Galvanised Steel Berhad (LGS) entered into multiple supply contracts with Popeye Resources Sdn Bhd (PR) to purchase imported hot rolled coils. The hot rolled coils were produced by Macsteel International Far East Limited (MIFE).


In September 2020, LCP and LGS received an e-mail from MIFE demanding for payment in relation to the supply of hot rolled coils on the basis that there were contracts between the parties. LCP and LGS denied the existence of such contracts and lodged a police report as they claimed that they only contracted with PR for the imported hot rolled coils and not MIFE.


MIFE commenced arbitration proceedings against LCP and LGS in Hong Kong to recover the alleged unpaid amounts. Consequently, LCP and LGS commenced proceedings against PR and MIFE at the High Court in Kuala Lumpur. MIFE filed an application to stay the proceedings under Section 10 of the Arbitration Act (Section 10 stay application) and meanwhile, LCP and LGS filed an application to injunct the arbitration (anti-arbitration injunction applications).


The Court of Appeal upheld the High Court’s decision[3] in dismissing the stay application and granting the anti-arbitration injunction.


Analysis


As the Federal Court in Press Metal held, the first thing to determine in a Section 10 stay application is the existence of the arbitration agreement. However, two question arises as a result, i.e. who can determine such validity and the threshold to fulfil to determine its validity.


Who determines the validity of the arbitration agreement – the court or the arbitral tribunal?        


The Court of Appeal held that both the High Court and the arbitral tribunal have concurrent jurisdiction and power to investigate and conclude the validity of the arbitration agreement.


In coming to its decision, the Court of Appeal referred to the guidelines laid out in Nigel Peter Albon v Naza Motor Trading Sdn Bhd [2007] 2 All ER 1075 which set out 4 options for an application for a stay where the conclusion of the arbitration agreement was in issue:


(I)to decide the issue on the available evidence presently before the court that the arbitration agreement was made and grant the stay (Option I).


(II)to give directions for the trial by the court of the issue (Option II).


(III)to stay the proceedings on the basis that the arbitrator will decide the issue (Option III).


(IV)to decide the issue on the available evidence that the arbitration agreement was not made and dismiss the application for the stay (Option IV).


The Court of Appeal could not determine whether there was a concluded arbitration agreement based on the existing affidavit evidence before it, and as such, it could not invoke Option I and Option IV. Hence, since there was a need for more investigation, the Court of Appeal held that the High Court could do so pursuant to Option II premised upon Section 10(1) or by the arbitral tribunal pursuant to Option III premised upon Sections 18(1) and 18(2) of the Arbitration Act 2005.


Hence, where there was concurrent jurisdiction, the Court of Appeal proposed a flexible approach that the appropriate forum to investigate and determine the validity of the arbitration agreement would be the one which was on balance ‘more just and convenient’ in light of the facts. Therefore, since the impugned contracts emanated from Malaysia ‘probably through the participation’ of the Malaysian based PR, if the High Court investigates, it has the power to compel PR’s attendance through a subpoena and this would not be available to the Hong Kong arbitration. Further, pending the investigation by the High Court, the status quo must be preserved and as such, the anti-arbitration injunction was warranted as well.


Prima Facie or Full Merits Approach?


MIFE relied on Singaporean authorities[4] and the Canadian case of Dell Computer Corp v Union des consommateurs [2007] SCJ No 34 for the application of the prima facie test. This means if the party applying for the stay could show on a prima facie basis that the arbitration agreement existed, then the matter would go on to the arbitral tribunal to decide whether such existence could be established on the usual civil standard. Whereas LCP and LCS relied on the English decision of Nigel Peter Albon and advanced for the full merits test. This test requires the court to decide based on the evaluation and findings of fact from the evidence adduced to the court that the arbitration agreement was concluded, thereby applying the civil standard of balance of probability.


The High Court’s reasoning for the application of the full merits test was that while the court should be slow to interfere with the arbitral tribunal’s jurisdiction, it did not mean that it should readily grant a stay application under Section 10 of the Arbitration Act 2005 when the existence of the arbitration agreement itself was in question without evaluating the facts and evidence based on the full merits approach.


Further, the High Court noted how the Federal Court in Press Metal had approved the lower court’s findings of fact and evaluation based on the evidence adduced. Therefore, the High Court found that such an evaluation of evidence was not consistent with the prima facie test as the Federal Court took a more thorough approach in assessing the evidence. However, it is observed that the Federal Court did not directly state that it adopted the full merits approach.


The High Court’s decision observed that there was no Malaysian case which has applied the prima facie test in respect of an application for stay under Section 10 of the Arbitration Act 2005. However, subsequently on November 2022, the Court of Appeal in Cockett Marine Oil (Asia) Pte Ltd v MISC Bhd [2022] 6 MLJ 786 held that in relation to Section 10, the court’s jurisdiction was limited to identifying whether there was a prima facie existence of an arbitration agreement and once a prima facie determination was made, the matter was to be stayed and referred to arbitration for a full determination on whether there was in fact a binding arbitration agreement.


Conclusion


The flexible approach proposed by the Court of Appeal should not be seen as an attempt by the court to encroach upon the arbitral tribunal’s jurisdiction. As the Court of Appeal was careful in not overstepping the boundaries of the arbitral tribunal by emphasizing that the investigation to be conducted by the High Court was only limited to determining the validity of the arbitration agreement and not the entire determination of the unpaid payment claims by MIFE. This is also in line with the Federal Court’s decision in Press Metal which found that despite the arbitral tribunal’s competence to determine the existence of the arbitration agreement, the court should restrict its enquiry only to the issue of whether there exists a binding arbitration agreement between the parties. Thus, the gates of the courts are not automatically shut in the face of such an issue.


Finally, in light of Cockett Marine Oil, there are now contradictory decisions on whether the prima facie or full merits approach would apply, and until the Federal Court steps in to clarify, it remains to be seen which approach applies.

[1] Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd [2016] 5 MLJ 417 [2] Bauer (M) Sdn Bhd v Daewoo Corp [1999] 4 MLJ 545[3] Lysaght Corrugated Pipe Sdn Bhd & Anor v Popeye Resources Sdn Bhd & Anor [2022] MLJU 165 [4] Malini Ventura v Knight Capital Pte Ltd and others [2015] 5 SLR 707; Tomolugen Holdings Ltd v Silica Investors Ltd [2016] 1 SLR 373



6 September 2023

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