Introduction
What is arbitration? The root word of arbitration is ‘arbitrate’ which means ‘judge’, ‘determine’ or ‘settle’. Thus, to arbitrate a dispute is to have a dispute resolved by a third party who acts as a judge or an umpire. For decades - or even centuries - parties who became embroiled in disputes had been resorting to arbitration for resolution. Nonetheless, arbitration does not exist in a vacuum; litigation or court action as we know it has been in existence for as long as arbitration is prevailing. So the question is, is arbitration a choice, an adjunct to litigation, or more tellingly, an obligation?
Features of an arbitration
Arbitration is a contractual dispute resolution process whereby parties who have a dispute agree to submit it for determination by an independent tribunal. Consisting of either just 1 or 3 arbitrators, this tribunal, called the arbitral tribunal, renders decisions that bind the parties. The party in whose favour an arbitral award is given may then enforce it in the country in which the arbitration is seated, and in the context of international arbitration, in any country that is a signatory to the New York Convention 1958.
There are 3 main elements that underpin arbitration’s uniqueness. The first is confidentiality. Arbitral proceedings are not open to the public. The award rendered by the arbitral tribunal is not published. Secondly, the parties retain a great deal of autonomy over the conduct of the proceedings. The rules and laws applicable to the dispute and its resolution are determined by the parties; so is the appointment of the arbitrators. Thirdly, arbitral awards are final. Ordinarily, there is no further avenue of appeal, giving the parties a sense of certainty and finality. These benefits have prompted commercial parties to choose arbitration over litigation as the preferred dispute resolution mechanism in some instances.
Reference to arbitration
As arbitration is contractual in nature, parties wishing to arbitrate their dispute must make a reference to arbitration. This can be done in one of two ways: one, by incorporating an arbitration agreement in their contract in anticipation of a potential dispute; two, by entering into a submission agreement to submit their dispute accordingly after it has arisen.
Under the Arbitration Act 2005 ("AA 2005”), only an arbitration agreement is defined. s.9(1) of the Act provides that:
“[…] “arbitration agreement” means 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 […]”
ss.9(2) and 9(3) go on to state that such an agreement may be in the form of an arbitration clause in an agreement or in the form of a separate agreement and that it shall be in writing. Nevertheless, it has been made clear in Standard Chartered Bank Malaysia Bhd v City Properties Sdn Bhd & Anor [2008] 1 MLJ 233 (HC) (“Standard Chartered”) that the agreement in question need not be a separate agreement. Despite the writing requirement, it may be in the form of an exchange of letters, telex, facsimile or any other means of communication or written record which evinces the fact that such an agreement existed between the parties. Therefore, parties wishing to go for arbitration must have intended to arbitrate by putting down such an intention in writing in whatever form, either before or after a dispute has arisen.
It is clear that parties do have a choice in opting for arbitration as a means of dispute resolution. A question then arises as to whether the arbitration agreement takes away the court’s jurisdiction to entertain such a dispute. In other words, whether parties are bound by their arbitration agreement and must only settle the underlying dispute by arbitration? The High Court answered in the affirmative in Standard Chartered. A similar conclusion was reached by the Federal Court recently in Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd [2016] 5 MLJ 417 (FC) (“Press Metal”) and in Tindak Murni Sdn Bhd v Juang Setia Sdn Bhd and another appeal [2020] 3 MLJ (FC) (“Tindak Murni”). Hence, while parties do have a choice to refer a dispute to arbitration, once an agreement to that effect has been made, what follows is an obligation on them to resolve their dispute in that manner. The next question then is, how is this obligation enforced?
Stay of court proceedings
When one party seeks to litigate an ‘arbitration dispute’, the counterparty may apply to stay the court proceedings. s.10 of the AA 2005 provides that:
“A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application [...] stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void [...].”
On this point, the case of Tindak Murni is illustrative. There, a party to an arbitration agreement had entered a judgment in default against its counterparty who then applied to set it aside before applying for a stay of proceedings pursuant to s.10 of the AA 2005. Both applications were allowed by the High Court. The Court of Appeal reversed both decisions. Later, the Federal Court unanimously set aside the Court of Appeal’s decision and reinstated the High Court’s decisions. Instructively, the Federal Court held that:
“[48] ...[It is] incumbent upon the court, notwithstanding the initiation of the civil suit […], to carry out its function as set out in s.10, namely to refer the dispute to arbitration unless the arbitration agreement is null, void or inoperative. The court carries out its prescribed statutory duty by ascertaining: a. whether there is an agreement to arbitrate the dispute;
b. whether the arbitration agreement is valid or null, void or inoperative. Having done so, the following consequences ensue from s.10: a. if there is a valid agreement to arbitrate then the court must refer the dispute to arbitration; and
b. if the agreement to arbitrate is null, void or inoperative then the matter/suit need not be referred to arbitration.”
Therefore, it is mandatory for a court to grant a stay of proceedings on the application under s.10 unless the arbitration agreement is null and void or impossible of performance (TNB Fuel Services Sdn Bhd v China National Coal Group Corp [2013] 4 MLJ 857(HC); Press Metal). Significantly, the Court said that the role of the court is not to delve into the facts of the case to determine if there is indeed a dispute subsisting between the parties in considering a stay application. This decision has sought to give effect to an agreement to arbitrate by way of an automatic stay of court proceedings brought in breach of such an agreement.
Conclusion
Coming back to the main question of this article - is arbitration a choice or an obligation? It is both. It is a choice in that the parties are at liberty to decide to refer their dispute to arbitration; it is an obligation in that where an agreement to arbitrate is evident and valid, the parties must go for arbitration, and the court will recognise the same.
References:
New York Convention 1958, Article 1
Arbitration Act 2005, ss. 9(1),(2),(3) & 10
Standard Chartered Bank Malaysia Bhd v City Properties Sdn Bhd & Anor [2008] 1 MLJ 233 (HC) [11]
Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd [2016] 5 MLJ 417 (FC) [53]-[56]
Tindak Murni Sdn Bhd v Juang Setia Sdn Bhd and another appeal [2020] 3 MLJ (FC) [48]
TNB Fuel Services Sdn Bhd v China National Coal Group Corp [2013] 4 MLJ 857(HC) [24]
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