Topic: Pre-conditions for stay of proceedings in the Arbitral Tribunal

Introduction

Arbitrations in Malaysia are governed by the Arbitration Act 2005 (Act 646) (the ‘Act’) and the Arbitration Act 1952 (Act 93). The Arbitration Act 2005 (Act 646) was enacted on 30 December 2005 to bring about wholesale reform of the arbitral regime. It was based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. The Act came into force on 15 March 2006 and repealed the Arbitration Act 1952 as well as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985 (Act 320) ) which enacts the New York Convention dealing with the recognition and enforcement of international awards. However, the Arbitration Act 1952 continues to apply to arbitrations commenced prior to the date of commencement of the Act.

Arbitration is a form of dispute resolution which is private and judicial determination of a dispute by an independent third party. Arbitration begins with an agreement, made either when a contract is made, or after a dispute has arisen, that certain matters which are or may be in contention between the two parties will be resolved by submitting them to arbitration and not at least in the first instance to the courts. In that agreement it is usually stated that the parties will honour the valid award of the arbitrator in respect of matters referred to him in accordance with that arbitration agreement. If a party fails to honour the award, then the other party may still seek relief from the courts.

In Malaysia, alternative dispute resolution, in particular arbitration is facilitated by the Kuala Lumpur Regional Centre of Arbitration. This Centre was set up in 1978 pursuant to a decision taken by the Asian African Legal Consultative Committee. The Malaysian government gave assurance that it would respect the independent functioning of the Centre as an International Arbitration Centre.

Pre-conditions for stay of proceedings in the Arbitral Tribunal

According to Arbitration Act 2005, Arbitral Tribunal is means a sole arbitrator or a panels of arbitrators. Arbitral tribunal is governed either by the arbitration agreement or by the Act where parties are free to choose the number of arbitrators which constitutes the arbitral tribunal. A sole arbitrator is presumed for domestic arbitrations and three for international arbitrations if they fail to determine an agreed number.

Under Section 10 arbitration agreement and substantive claim before court in Arbitration Act 2005, the court has no power to hear cases where the claim is substantive subject to few conditions. This section provides for a mandatory stay of court proceedings where there is an arbitration agreement unless the arbitration agreement is null and void, inoperative or incapable of being performed; or there is in fact no dispute between the parties with regard to the matters to be referred.

Stay of court proceedings can be explained as one party may refer the dispute to the court initially so the other party look like lost the right to arbitrate but actually the other party still has the option to refer the dispute to arbitration. Therefore the legal action initiated by claimant would be stayed temporarily awaiting the arbitration and will continue after award is made. This is to avoid large quantity of proceedings at one time.

Another condition for stay of court proceeding is the existing of arbitration agreement. There must be an agreement made within two parties and it is enforceable. To make sure an agreement is enforceable; the agreement must be valid which is signed by both parties with consent. Besides that, the agreement also operative which mean it is not contrary to the public policy and it is capable of performance for example the plaintiff was unable to afford the cost of arbitration.

The courts have allowed a mandatory stay for arbitrations held in Malaysia as seen in the cases of Standard Chartered Bank Malaysia Bhd v City Properties Sdn Bhd & Anor [2008] 1 MLJ 233; Sunway Damansara Sdn Bhd v Malaysia National Insurance Bhd & Anor [2008] 3 MLJ 872; CMS Energy Sdn Bhd v Poscon Corporation [2008] 6 MLJ 561; Borneo Samudera Sdn Bhd v Siti Rahfizah Mihaldin & Ors [2008] 6 MLJ 817; [2008] 5 CLJ 435; Majlis Ugama Islam dan Adat Resam Melayu Pahang v Far East Holdings Bhd & Anor [2007] 10 CLJ 318.

The requirement of section 10(1) of the Malaysian Arbitration Act 2005 is the party seeking the stay shall apply before taking any other steps in the proceedings. Section 10(2) is a new feature which gives the court the power to impose conditions on the granting of the stay. The courts should bear in mind that the policy of honoring and supporting the arbitration agreement and not to impose conditions which may overpower the arbitral process. A legitimate exercise of this power would be to impose conditions on the granting of a stay to ensure that the party seeking the stay will proceed expeditiously with the arbitration.

The opponent can object to the courts’ proceedings even one of the parties chooses to bring his dispute to the court. The court has the duty to stop the proceedings or also called stay of proceedings. Arbitration proceeding can be stopped by any parties who had interest or participated in the dispute, however before stay of proceeding is ordered, certain conditions must be fulfilled by the applicant, the purported agreement and the dispute arising from the agreement.

Time-limits prevent a party from purposely putting off the arbitration process and mitigate the deleterious harm that might be incurred by the claimant as the result of intentional delays from the other side. The stay of proceeding must within a time limit that means is before or after entering an appearance and before delivery of a pleadings or taking another step in the proceedings, before the delivery of the defense and counterclaim and before the oral hearing on the substance. A step in proceedings can be considered the same as the waiver of the right of submission to arbitration when one initiates court’s action against the other party It is viewed that he has lost the right to arbitrate although the existence of an agreement for arbitration.

Power of the Arbitral Tribunal

Arbitral tribunal has power to make award for any dispute which relates to contractual parties. However, in certain situation the party may allege that the arbitration agreement signed before is invalid. Thus, the arbitral tribunal has the power to determine whether or not a contract is valid. Section 18 of Arbitration Act 2005 which follows article 16 of the Model Law and is also similar to s. 30 of the English Act, 1996 requires the arbitral tribunal to decide on its own jurisdiction based on the doctrines of Kompetenz-Kompetenz and doctrine of separability based on the subsection 18(2).

Section 18(2) provides for the separability or autonomy of the arbitration clause which seeks to preserve the arbitral process. It means that the arbitration clause in the contract is to be considered a separate agreement, detached from the main contract, and therefore has to be treated as an agreement independent of the other terms of the contract. [1] The validity of the arbitration clause does not depend on the validity of the contract because the arbitration agreement within the contract is separate from that of the contract. Any disputes or differences between them should be referred to arbitration.

The doctrine of separability or autonomy of the arbitration clause as provided in section 18(2) is the legal basis for the appointment of the arbitrator. If an arbitrator is to decide on his own jurisdiction, he must first assume jurisdiction. It allows the question of a total jurisdictional challenge then to be decided by the arbitration as provided in the rest of Section 18. [2] Subsection 18(8) stated that any ruling by the arbitral tribunal under this section is subject to the rights of appeal to the High Court.

The parties may challenge the arbitrator’s jurisdiction whether partially or wholly. When the claims or counterclaims do not fall within the jurisdiction of the arbitrator then the partial challenge arise. However, a total challenge occurs when it is contended that the arbitrator has no jurisdiction to determine any of the claims or counterclaims which have been submitted to it.

The Act by virtue of section 18 grants the arbitral tribunal the authority to rule on its own jurisdiction, including on matters related to the validity of the arbitration agreement. Section 18 of the Act also provides for the procedures and time limits imposed for raising an objection as to the arbitral tribunals’ jurisdiction. It also stipulates the manner of an appeal to the court (which shall have the final say) in regard to the arbitral tribunal’s ruling on the issue of its jurisdiction.

There are several cases which show that the validity or existence of arbitration agreement is determined by the arbitral tribunal itself. In the case Rio Algom Limited v. Sammi Steel Co., this section restricts the court's role in arbitrations to determine whether arbitration clause is null and void. Any determination of the arbitrator's jurisdiction is made by the arbitrator pursuant to article 16. Rio as the plaintiff commenced an action in court challenging jurisdiction of the arbitrator and seeking an order staying the arbitration proceedings.

In the case of Standard Chartered Bank Malaysia Bhd v City Properties Sdn Bhd & Anor [3] , the court observed as follows:

“Parliament has clearly given the arbitral tribunal much wider jurisdiction and powers. And, such powers would extend to cases even when its own jurisdiction or competence or scope of its authority, or the existence or validity of the arbitration agreement is challenged. A further point to note is that even when an arbitral tribunal holds that an agreement is null and void, it “shall not ipso jure entail the invalidity of the arbitration clause" since “an arbitration clause which forms part of an agreement shall be treated as an agreement independent of the other terms of the agreement".

The court in Standard Chartered Bank Malaysia Bhd v City Properties Sdn Bhd & Anor [2008] 1 MLJ 233 held that the arbitral tribunal had wider jurisdiction and powers under s 18 when its jurisdiction, competence and scope of authority was challenged and when the agreement was null and void.

In the case of CMS Energy Sdn Bhd v Poscon Corp [4] , the court stated as below:

“ […] the language used in that section (Section 18) confers on the arbitration broad and wide powers to decide on issues raised before it - not only the substantive issues but also on the point of preliminary objections as to its jurisdiction. That section also allows any party to the arbitration who is not happy with the preliminary rulings by the arbitrator to appeal to the High Court against such rulings within 30 days of its receipt."

The court in CMS Energy Sdn Bhd v Poscon Corp held that section 18 confers broad and wide powers on the arbitral tribunal to determine substantive issues and preliminary objections to its jurisdiction. There are relevant time limits for raising it where the High Court has the final say on the issue of an arbitral tribunal’s jurisdiction and no appeal lies against it. Section 18 allows any party not happy with the preliminary rulings of the arbitral tribunal to appeal to the High Court within 30 days of its receipt. As such, there can be no irreparable prejudice to the parties if they submit to arbitration proceedings.

In section 18 (1), stated that the arbitrators have the power to decide on their jurisdiction without the support of the court. Besides, it discourages the court to determine the validity of agreement or its existence. Actually the arbitrators have three options in deciding his jurisdiction.

He has no jurisdiction at all which the lack of jurisdiction is proven by evident eventually the arbitral proceedings will be terminated without the concern of court.

The arbitrators may determine that whether he has the jurisdiction in issuing an interim award. The party or parties may challenge the award under the relevant legislation or rules.

The arbitrators may also continue the arbitral proceedings without applying the courses above until the order from competent court.

However, if the dispute matter is not covered by the arbitration clauses then section 18 (1) cannot be applied. According to Deco Automotive Inc. v. G.P.A. Gesellschaft Fur Pressenautomation MbH, Deco (plaintiff) claimed that the agreement had involved fraud by GPA (defendant) and thereafter challenged the jurisdiction of the I.C.C (court of arbitration) the judge concluded that the subject matter of the action commenced by Deco which included damages for misrepresentation (fraudulent or otherwise) are not fall within the arbitration clauses so the section 18 cannot be applied.

In the case of Fung Sang Trading Limited v. Kai Sun Sea Products and Food Company Limited, it is the jurisdiction of arbitral tribunal to recognize the autonomy or separability of the arbitration clause except in the case of ab initio illegality of the contract, the court stated that the decision of the arbitral tribunal was neither final nor exclusive. Another case which indicates that the agreements contained arbitration clauses, but the plaintiffs claimed that arbitration clauses did not apply because the defendants had engaged in fraudulent misrepresentations at the time of contracting, the court confirmed the separability thesis according to which the claimed nullity of the underlying contract does not affect the independent validity of the arbitration clause included in the contract. Moreover, the determination of scope of arbitration clause is properly done by the arbitrator unless the dispute is fall outside the terms of arbitration provision.

There are two types of application or pleas of the arbitral tribunal’s lack of jurisdiction. The first type is concern on non-existence of arbitral tribunal’s jurisdiction, which must be raised not later than the submission of the statement of defense (section 18(3)) meanwhile the second type is the arbitral tribunal is exceeding the scope of its existing authority (for example by entertaining an amendment to the pleading outside the scope of the initial reference), which should be made as soon as the matter complained of becomes an issue.

According to the section 18(3) plea that the arbitral tribunal has no jurisdiction has shown in the case of Presidium of the Supreme Court of the Russian Federation, the arbitral tribunal did not have the jurisdiction to hear the given dispute but the respondent raised an objection to the jurisdiction of the Maritime Arbitration Commission (MAC) only after it had granted the arbitral award so he has have waived his right to object.

In section 18 (5) stated that a plea that the arbitral tribunal had exceeded the scope of its authority has to be raised as soon as the matter which is alleged. This has shown in the case of Quintette Coal Ltd. v. Nippon Steel Corp., the arbitral tribunal had exceeded its jurisdiction in declaring that the parties had, by agreement, conferred to it the power to issue interim measures and in declaring that it had jurisdiction to determine the question of whether it had such power. The court then observed that an arbitral tribunal, if its jurisdiction was challenged or questioned, was competent to decide on its own jurisdiction.

Although not expressly stated in the Model Law, section 18 (6) indicates that the party who fails to raise the plea as required by article 16(2) [the equivalent of s. 18(3) and (5)] or within the time limit is implicitly precluded from raising such objections not only during the later stages of the arbitral proceedings but also in other contexts such as in setting aside or enforcement proceedings. However, the objection relates to defects such as violation of public policy or non arbitralility can be raised during the arbitration proceedings or afterwards in setting aside procedures where such defects cannot be cured by submission to the proceedings and therefore are not subject to the time limits.

From section 18 (7) to (10) are all about the procedures that has to be followed for the two types of pleas. The arbitral tribunal has no power of final decision which means if the arbitral tribunal rules that it has jurisdiction as a preliminary question then the party may request the High Court to make final decision within 30 days. In the case of Compagnie nationale Air France v. Libyan Arab Airlines, The Supreme Court also clarified that the power of a party to appeal a decision taken by the arbitral tribunal on a preliminary question before a court was excluded by the UNCITRAL Arbitration Rules the parties had agreed upon.

Section 19 allows the arbitral tribunal to order interim measures such as security for costs, discovery of documents and interrogatories, giving of evidence by affidavit and preservation, interim custody or sale of any property which is the subject matter of the dispute. It corresponds with parallel powers given to the High Court under section 11.

Conclusion

In conclusion, unlike the previous Arbitration Act 1952 which does not allow the arbitral tribunal to determine its own jurisdiction unless the parties confer the power on it to do so, section 18 Arbitration Act 2005 now provides a workable framework and fulfils most of the requirements for a modern approach to arbitration which requires the arbitral tribunal to decide on its own jurisdiction based on the doctrines of Kompetenz-Kompetenz and separability. However the amendment should be reviewed frequently to make the Act better still.