Stay of Proceedings for Arbitration: Application and Chances for it to be Dismissed

Previously, the grant of a stay of proceedings for arbitration is at the discretion of the Court. Counsels will have to satisfy the judge on the grounds for a stay to be granted. This has changed since the enactment of the Arbitration Act 2005 (‘AA 2005’).

Section 10 (1) AA 2005 provides that:

“A court before which proceedings are brought in respect ofa matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inOperative or inCB] able of being performed.“

The use of the word ‘shall’ in this piece of legislation indicates that the grant of a stay of proceedings for arbitration is now mandatory save where the court finds the arbitration agreement zo be” null and void, inoperative or incapable of being performed', as held by the Federal Court in Press Metal Sarawak Sdn Bhd v Etiqa TakafuI Bhd[2016)MLJU 404wñi Ist interpreting s.10 AA 2005.

The limitation on the intervention by the Court is further enforced by s. 8 AA 2005, which stipulates the following:

“No court shall intervene in matters governed by this Act, except where so provided in this Act.“

Although Order ó9 Rule 10(3) of the Rules of Court 2012 (’ ROC 2012’) stated that:

Where a question arises as to whether-

1. An arbitration agreement has been concluded, or
2. The dispute which is the subject matter of the proceeding falls within the terms of such agreement, the Court may decide that question or give directions to enable it to be decided and may order the proceeding to be stayed pending its decision.

The ROC 2012 is a procedural subsidiary legislation secondary to AA 2005 which is an Act of Parliament that shall prevail.

Application for Stay

However, the grant of a stay of proceedings for arbitration does not occur automatically. The party intending zo refer the case to arbitration and for any disputes to be resolved therein shall make an application to the court via a Notice of Application and an Affidavit in Support. More importantly, such application shall be made prior to the party taking any steps in the proceedings (ie. filing a defence) as that would mean that the party has submitted jurisdiction to the Court.

Order 69 Rule 10 (1) of the ROC 2012 requires that “an application seeking a stay of legal proceedings under s.10 AA 2005 shall be served on all parties to those proceedings who have given an address for service".

Arbitration Agreement Null and Void, Inoperative or Incapable of Performance

This then brings us to the question of: when will the Court find an arbitration agreement to be “nuIl and void, inoperative or incapable of being performed”?

An arbitration agreement is defined by s.9 (1) AA 2005 as "an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or tort” and is usually in the form of an arbitration clause within the contract between the parties.

When the contract originally entered into between the parties is being terminated or frustrated, the contract ceases to exist and rightfully the arbitration agreement between the parties would have been terminated or frustrated forthwith.

However, it is trite that an arbitration clause contained in a contract is severable from the entire contract, independent and capable of forming an agreement between parties on its own (refer s.18(2) AA 2005). Therefore, the arbitration agreement between the parties will still be valid notwithstanding the fact that the contract between the parties on which the arbitration clause was founded on has been terminated or frustrated.

But what if the contract entered into between the parties itself is null and void or has never came into existence? Or the parties entered into an agreement subject to a contract and there is no arbitration clause in the latter? Or where the contract originally containing an arbitration clause has been superseded by another that does not require the parties to refer their disputes to arbitration?

Where the validity of the contract between the parties is disputed, including when fraud is alleged, the Court will still order for the matter to be referred to arbitration. However, where the Court finds that there is no binding contract and hence no arbitration agreement between the parties or when the original contract has been superseded by one without an arbitration clause, then the application for stay will be dismissed (THHE Fabricators Sdn. Bhd. VZen End Resources Sdn. Bhd. [2019] MLJU 998).

Another possibility in which the grant of stay of the proceedings for arbitration may be refused is when the dispute between the parties does not fall within the ambit of the arbitration clause and is therefore outside the jurisdiction of the arbitral tribunal. In this regard, the Court will look into the wording of the arbitration agreement between the parties and construe the agreement accordingly. According to Viscount Simon L.C. in Heyman v Darwins Ltd[1942] AC 356:

“The answer to the question whether a dispute falls within an arbitration clause in ac contract must depend on (a) what is the dispute and (b) what disputes the arbitration clause covers.”

Section 18 (1) AA 2005 specifically provides for the arbitral tribunal to rule on its own jurisdiction:

“The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement."

Conclusion

Therefore, the Court is generally reluctant to refuse the grant of stay of proceedings for arbitration, even where the Court has doubt as to the validity of the arbitration clause or where the parties are in dispute as to whether the subject matter of the claim is within the ambit of the arbitration clause.

The only instance in which the grant of a stay will be refused is when the arbitration agreement between the parties is null and void, inoperative or incapable of performance when there is no contract between the parties or when the contract has been amended or superseded by another that does not provide jurisdiction to the arbitral tribunal.