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The chicken & egg question of arbitration: should the court or the arbitral tribunal decide on the existence of an arbitration agreement?
May 2024

Judith Prakash J (as she then was) in the case of Malini Ventura v Knight v Capital Pte Ltd and others[1] stated that the question of whether the Courts or the Arbitral Tribunal shall be the proper forum to decide on the existence an arbitration agreement while facing with an application for stay of proceedings pending arbitration, is akin to the ‘brain teaser’ of which came first, the chicken or the egg?

 

The Malaysian Court of Appeal (‘COA’) recently had the opportunity to answer this question in the case of Macsteel International Far East Ltd v Lysaght Corrugated Pipe Sdn Bhd and other appeals[2].

 

a)             Brief Facts

The Respondents namely Lysaght Corrugated Pipe Sdn Bhd and Lysaght Galvanized Steel Berhad had around 2019 to 2020 entered into several supply contracts with one, Popeye Resources Sdn Bhd (‘Popeye’) for the supply of hot rolled coils. Goods were received from Popeye and all payments were made by LCP and LGS to Popeye.

 

Around September 2020, the Respondents received demands from Macsteel International Far East Ltd (‘MIFE’) for overdue payment of hot rolled coils that were allegedly supplied to the Respondents. MIFE’s claim is based on 8 contracts supposedly entered into by the Respondents.

 

The Respondents contested on the validity of these contracts and claimed that the contracts produced by MIFE were products of forgery (‘Impugned Contracts’). The Impugned Contracts contained an arbitration clause which provides for any dispute to be resolved in the Hong Kong International Arbitration Centre (‘HKIAC’). As the Respondents did not comply with MIFE’s demand, MIFE commenced an arbitration proceeding against the Respondent in Hong Kong to recover the alleged overdue payment.

 

As a result, the Respondents initiated a suit before the Kuala Lumpur High Court (‘HC’) claiming for, amongst others: (i) a declaration that the Impugned Contracts are forged and/or fraudulently prepared; (ii) a declaration that as a result of the forgery, the Impugned Contracts are null and void and/or inoperative; and (iii) a permanent injunction prohibiting MIFE from proceeding with the arbitration proceeding against the Respondents in Hong Kong.

The Respondents further sought from the HC for an interlocutory injunction against MIFE to injunct MIFE from proceeding with the arbitration until disposal of the suit. On the other hand, MIFE filed an application to stay the proceedings pursuant to section 10 of the Arbitration Act (‘AA 2005’).

 

The HC dismissed MIFE’s stay application and granted an interlocutory injunction against MIFE. As a result, MIFE had appealed against the decision to the Court of Appeal.

 

Although, the Courts’ decisions concern both the issue of stay of proceeding under s. 10 of the AA 2005 and anti-arbitration injunction, this article will only explore the decision in respect of stay of proceeding.

b)             High Court’s Decision[3]

As the dispute centrals around the issue of forgery, the very existence of the Impugned Contracts is in doubt. Therefore, the primary issue that was to be decided by the High Court was whether the Courts or the Arbitral Tribunal would be the proper forum to make a decision on the existence of an arbitration at first instance.

 

Two opposing positions were advanced by the parties, which may be summarised as: (i) prima facie approach (adopted in Malini Ventura); or (ii) approach in Nigel Peter Albon v Naza Motor Trading Sdn Bhd[4] (a.k.a. the full merits approach[5]).

 

Under the prima facie approach, Courts ought to grant a stay if it is satisfied on first glance that an arbitration agreement exists, and it is the role of the arbitral tribunal to make a final finding on the existence of an arbitration agreement. In contradiction, the full merits approach requires the Court to first make a determination on the existence of an arbitration agreement before a stay may be granted.

 

Upon proper examination of the parties’ contentions, the HC adopted the full merits approach. Albeit acknowledging the principle of kompetenz-kompetenz, the HC held that Courts should not automatically grant a stay under s. 10 of AA 2005 when the existence of the arbitration agreement itself is in question. Some of the considerations taken by the HC are as follows:

a. s. 10 of AA 2005 is similar to s. 9 of the English Arbitration Act 1996, the existence of an arbitration agreement is the cornerstone of a stay application;

b. with reference to the Federal Court (‘FC’) case of Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd[6], it was held that the first issue to be determined in a s. 10 application is whether there is in existence a valid and binding arbitration agreement. The FC further agreed with the findings of the trial judge based on evidences adduced before the Court. As a result, the FC did not take a cursory method suggested by the prima facie approach.

 

​The HC finds instructive 4 options set out in the Albon case as guideline for situation where the existence of an arbitration agreement is in dispute:

  1. decide based on available evidence that an arbitration agreement exists and grant the stay;

  2.  give directions for trial by court of the issue;

  3.  stay the proceedings and allow the arbitrator to decide on the issue; or

  4.  decide based on available evidence that an arbitration agreement was not made and dismiss the stay application.

 

Based on the facts and circumstances of the case, it was held by the HC that the best option going forward is option (2) and ordered for an expedited trial.

 

Albeit deciding that the full merits approach is applicable in Malaysia, the HC made further findings that even considering the facts on a prima facie basis, MIFE has not proven the existence of an arbitration agreement.  

c)             COA’s Findings

On appeal to the COA, the “chicken and egg question” was once again raised. In determining the question, the COA first made a finding that the High Court’s decision primarily involved an exercise of discretion.

 

In deciding whether to grant a stay of proceedings, the issue remains whether there is in existence an arbitration agreement that is not null and void, inoperative or incapable of being performed. Therefore, to answer the question on which forum should determine the issue at first instance, the COA examined the interplay between s. 10(1) and (4) and s. 18(1) and (2) of AA 2005.

It was held that both options (2) and (3) as set out of the Albon case were envisaged in ss. 10 and 18 of AA 2005. As a result, the COA found that the Courts and the Arbitral Tribunal shares a concurrent jurisdiction to investigate and conclude on the existence and/or validity of an arbitration agreement. Therefore, in situation where the Courts are unable to make a decision on the existence of an arbitration agreement based on the available evidence, the Courts are vested with the discretion to elect either option (2) or (3).  

 

Guided by the above, the COA finds that the factor to be considered in adopting option (2) or (3) shall be the forum that is on balance more just and convenient with regard to facts and circumstances of the case. Based on the facts of the case, it was held that the HC is proper forum to assess the existence and/or validity of the arbitration agreement as all the Impugned Contracts emanated from Malaysia as well as Popeye being based in Malaysia.  

d)             Key Takeaways

From the discussion above, the COA did not expressly adopt the prima facie approach or full merits approach. Instead, the COA examined the wordings of the AA 2005 which had provided power and jurisdiction for a determination to be made either by the Courts or Arbitral Tribunal on the existence and/or validity of an arbitration agreement.

 

Having concurrent jurisdiction, the appropriate forum should be decided based on the balance of convenience and justice with regard to the facts and circumstances of each individual case. Therefore, there is no hard and fast rule on which fora would have the absolute right to determine the issue on first instance. This case provides a new insight to the “chicken and egg” question that was met with mixed interpretation by various jurisdictions.

*The Respondents were represented by Partner Cindy Goh Joo Seong. Reach out to our Dispute Resolution and Arbitration Practice Group for more information.

**This article is prepared with the assistance of Associate Loh Heng Yeong.

[1] [2015] 5 SLR 707

[2] [2023] 4 MLJ 551

[3] [2022] MLJU 165

[4] [2007] 2 All ER 1075

[5] Tomolugen Holdings Ltd v Silica Investors Ltd [2015] SGCA 57 at

[6] [2016] 5 MLJ 417

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