Consequences for third parties
Multi-tiered dispute resolution clauses
Termination and breach
This article is part of a series on arbitration agreements in Malaysia.(1)
Consequences for third parties
The general rule is that an arbitration agreement is not binding on a non-party or strangers to the agreement. However, it is worth noting that a third party may be a person claiming under or through a party to an agreement. Examples of this are the novation of an agreement to a third party, a guarantee or where multiple parties may give a right to the third party to participate in the proceedings.(2)
In relation to a guarantor, a party to the contract may not be able to commence arbitration against the guarantor directly as the guarantor is not a party to the arbitration agreement and it follows that the arbitration award against the principal will usually not be binding on the guarantor.(3) In this case, perhaps a guarantee should contain a clause to provide for participation by the guarantor in the arbitration proceedings between the principal and the contracting party and to honour the same to avoid the difficulties normally faced in such a situation.
Where assignment occurs, a party to a contract containing an arbitration clause can assign its rights under the contract to a third party and the third party then becomes the assignee and is bound by the arbitration clause.(4)
In 2010, the Court of Appeal in Renault SA v Inokom Corp Sdn Bhd & Anor and other appeals stressed that the courts must not encourage the attempt by one party to circumvent an arbitration agreement and litigate a dispute at court contrary to the express words of the arbitration agreement by naming one or more parties as co-defendants to the action.(5) The Court further affirmed that where arbitration has been agreed upon by the contracting parties as the mechanism for dispute resolution, such an agreement must be honoured.(6)
In Juaramedic Sdn Bhd v MRCB Engineering Sdn Bhd, the High Court considered the effect of an arbitration clause in a main agreement on a third party that was not privy to the main agreement itself and that had subsequently entered into a separate agreement with a party which was privy to the main agreement.(7) Accordingly, where the separate or subordinate agreement that was entered into between a party to the main agreement and the third party refers to the arbitration clause in the main agreement and its applicability in the separate agreement, that arbitration clause is then intrinsically connected with the main agreement and hence "imported" into the separate agreement.(8) On such occasions, the third party is bound by the arbitration clause in the main agreement and must refer disputes to arbitration, even where there remains some doubt as to whether the arbitration agreement of the main agreement was incorporated by reference into the separate or subordinate agreement. This is because the courts will lean in favour of arbitration.(9)
Multi-tiered dispute resolution clauses
Parties may sometimes agree to insert condition precedent clauses in their arbitration agreement, which may have the effect of precluding any party from referring a dispute to arbitration where the contract stipulates that a party must fulfil several preconditions before there can be a valid referral to arbitration. In Usahasama SPNB-LTAT Sdn Bhd v Abi Construction Sdn Bhd,(10) the High Court was faced with such a condition precedent clause in a contract. The clause stipulated that the defendant would have to first refer any dispute or differences to the superintending officer named in the appendix for a decision before the dispute was referred to arbitration. The plaintiff stated that, as such, the notice of arbitration dated 12 February 2014 was premature and, accordingly, the arbitrator had no jurisdiction to decide the dispute between the parties. The arbitrator dismissed the plaintiff's application, holding that he had the jurisdiction to decide the dispute between the parties. Dissatisfied, the plaintiff appealed under section 18(8) of the Arbitration Act 2005(11) on the basis that the defendant would have to first refer the dispute to the superintending officer before the dispute was referred to the arbitration in accordance with the condition precedent clause, which was mandatory.
In allowing the appeal, the High Court laid down several guidelines as to how condition precedent clauses within a contract are to be treated in the courts, as follows:
- A precondition or condition precedent is a condition that must be fulfilled before a right accrues. Once it is contractually agreed upon, the parties should be held to the bargain unless such an agreement is prohibited by law or it is too vague for enforcement. It had not been suggested that there was a statutory prohibition in this case.(12)
- Where both parties had agreed contractually that a precondition be fulfilled before there could be a valid reference to arbitration, the arbitrator concerned could not assume jurisdiction until and unless the contractually agreed conditions were fulfilled. (In this instance, the requirement that the contractor must first refer the dispute or difference to the employer's superintending officer, the managing director of the plaintiff, for a decision before the dispute was referred to the arbitration in accordance with clauses 54(a) and (b) of the contract was clearly in the form of a condition precedent to clause 54(c) and must be fulfilled beforehand. Moreover, there was no good reason not to hold them to the bargain struck.)(13)
- Where there was a sufficiently clear reference to the superintending officer for a decision before proceeding to arbitration, as in the nature of a precondition or condition precedent, both the intention of the parties captured in the clear words of the contract as well as public interest would operate to constrain the courts to enforce such a clause.(14)
An arbitration agreement may be terminated by agreement, express or implied. Termination will only be inferred where:
- the clear inference to be drawn from the claimant's inactivity is that he did not wish to proceed provided that the respondent also agreed not to proceed;
- the clear inference to be drawn from the respondent's inactivity is that he consented to the abandonment; and
- these inferences do not conflict with the respondent's actual understanding of the position.(15)
For further information on this topic please contact Tan Sri Dato' Cecil Abraham, Dato' Sunil Abraham, Aniz Ahmad Amirudin or Syukran Syafiq at Cecil Abraham & Partners by telephone (+60 3 2726 3700) or email ([email protected], [email protected], [email protected] or [email protected]). The Cecil Abraham & Partners website can be accessed at cecilabraham.com.
Endnotes
(1) For earlier articles in the series, see "Arbitration agreements in Malaysia: types and validity" and "Arbitration agreements in Malaysia: enforcement".
(2) See sections 6 and 17 of the Arbitration Act 1952. For details of the current arbitration legislation in Malaysia, see "Introduction to arbitration in Malaysia: history and current legislation".
(3) Daunt v Lazard (1858) 27 LJ Ex 399; Ex parte Young, ReKitchen (1881) 17 Ch D 668; Thermistocles Navegacion SA v Langton, The Queen Frederica (1978) 2 Lloyd's Rep 164; Saberno Pty Ltd v De Groot (1992) 8 BCL 128; Alfred McAlpine Construction v Unex Corp [1994] NPC 16.
(4) For example, see Harris Adacom Corporation v Perkom Sdn Bhd [1994] 3 MLJ 504.
(5) [2010] 5 MLJ 394 at [16] (KN Segara JCA).
(11) For details of the current arbitration legislation in Malaysia, see "Introduction to arbitration in Malaysia: history and current legislation".
(12) Ibid [17] (Lee Swee Seng J).
(13) Ibid [18] (Lee Swee Seng J).
(14) Ibid [29] (Lee Swee Seng J).
(15) See Sundra Rajoo, Law, Practice and Procedure of Arbitration, Lexis Nexis (2003) p 166.