Doctrine of separability
This article is part of a series on conducting arbitration in Malaysia.
The position at common law is that the subsequent termination of a principal contract does not by itself put an end to an arbitration clause contained in the principal contract. An arbitration clause is separable from the principal contract and is not affected by termination of the principal contract. However, there would therefore be no survival of the arbitration clause if the principal contract is void ab initio. The doctrine of separability is now part of Malaysian law through section 18(2) of the Arbitration Act 2005 (the 2005 Act) and remains unaffected by the Arbitration (Amendment) Act 2018 (No. 2) (the 2018 Amendment Act).(1)
Pursuant to section 18 of the 2005 Act, the arbitral tribunal has the power to determine its own jurisdiction. This encompasses article 16 of the United Nations Commission of International Trade Law (UNCITRAL) Model Law (the Model Law). There is no equivalent provision in the now repealed Arbitration Act 1952 (the 1952 Act). However, Part 1, rule 20 of the Asian International Arbitration Centre Arbitration Rules 2021 provides that an arbitrator can rule on their own jurisdiction.
Two types of pleas may be raised by the challenging party pursuant to section 18 of the 2005 Act:(2)
- the non-existence of the arbitral tribunal's jurisdiction; and
- the arbitral tribunal exceeding the scope of its existing authority.
The arbitral tribunal can rule on both either as a preliminary question or in an award on the merits.(3) It should also be noted that there are time-limits given in the 2005 Act to raise such objections.(4)
Interaction of national courts and tribunals
Under the 1952 Act, an arbitrator could not determine their own jurisdiction unless the parties gave them that power, and therefore their decisions on jurisdiction would not be binding on the parties.
The 2005 Act expressly incorporates the doctrine of "competence-competence" into Malaysian law. Section 18(1) of the 2005 Act recognises the notion of "positive competence-competence" by enabling arbitral tribunals to "rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement", while section 10(1) of the 2005 Act embraces "negative competence-competence" by requiring domestic courts to stay proceedings and refer the parties to arbitration unless the arbitration agreement is deemed "null and void, inoperative or incapable of being performed".
The 2005 Act provides that the arbitrator can determine their own jurisdiction,(5) and that their decision on the issue of jurisdiction can be challenged in court by way of an appeal.(6) Vincent Ng J explained section 18 of the 2005 Act in the case of Standard Chartered Bank Malaysia Bhd v City Properties Sdn Bhd & Anor(7) as follows:
The only conclusion I can draw from the import of this entirely new provision in s 10 when read with s 18 of the 2005 Act, is that with this new Act, 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.' Most noteworthy is that even where its own jurisdiction or competence or its scope of authority is challenged, it may rule on such plea either as a preliminary question or in an award on the merits. And, where the tribunal rules against the challenge on such a plea as a preliminary question any party may appeal to the High Court against such ruling but while the appeal is pending the arbitral tribunal may continue with the arbitral proceedings and make an award. With the view to preventing any inordinate delay in resolution of disputes the Legislature has decreed that no further appeals shall lie from the High Court against a challenge on jurisdiction of an arbitral tribunal.
In CMS Energy Sdn Bhd v Poson Corporation,(8) Judge Dato' Abdul Aziz Bin Abdul Rahim held that section 18 confers on the arbitrator broad and wide powers to decide on the issues raised before them, not only in relation the substantive issues but also in relation to preliminary objections to their jurisdiction. Similarly, in Wintrip Maincon Sdn Bhd v Urun Plantations Sdn Bhd,(9) it was held that the court need not ensure that the dispute between the parties is a genuine dispute, because, if the court were to embark on this exercise, it would involve a critical examination of the claim, which would be outside the scope of the 2005 Act as it is the arbitrator's duty to do so. In Capping Corp Ltd & Ors v Aquawalk Sdn Bhd & Ors,(10) the Court of Appeal restated the regime under the 2005 Act that dictates minimal interference by the courts as reflected in section 18 and gives the arbitrator the power to rule on their jurisdiction.
The incorporation of the doctrine of competence-competence into Malaysian law under sections 10(1) and 18(1) of the 2005 Act has resulted in an extensive judicial deference to arbitrators on matters of jurisdiction as the courts are generally willing to order stays of court proceedings to enable arbitrators to determine jurisdictional questions first. This position was aptly summarised by the Court of Appeal in TNB Fuel Servicers Sdn Bhd v China National Coal Group Corporation(11) as follows:
It is generally accepted that the effect of the amendment is to render a stay mandatory unless the agreement is null and void or impossible of performance. The court is no longer required to delve into the facts of the dispute when considering an application for stay. Indeed, following the decision of the court in CMS Energy Sdn Bhd v Poscon Corp, a court of law should lean towards compelling the parties to honour the 'arbitration agreement' even if the court is in some doubt about the validity of the 'arbitration agreement'. This is consistent with the 'competence principle' that the arbitral tribunal is capable of determining its jurisdiction, always bearing in mind that recourse can be had to the High Court following the decision of the arbitral tribunal.
It is noteworthy, however, that the domestic courts are inclined to undertake extensive determinations of arbitral jurisdiction where there are concurrent jurisdiction and arbitration clauses, particularly where an arbitration clause is worded such as to potentially confer a mere discretionary right to arbitration as opposed to a mandatory one through the use of words such as "may".(12)
The general rule is that all persons are bound by the contracts they enter into, the exceptions being minors or persons of unsound mind.(13) However, it should be noted that a minor may be bound by an arbitration clause if it is found to be for their benefit. It is arguable that the person who entered into the agreement on their behalf, such as a parent or guardian, may bind the minor to the agreement.
Companies are bound by the contracts they enter into; the company may still be bound even if the purpose of the contract is outside the company's memorandum of association. Therefore, contracts that are entered into in good faith and that contain arbitration clauses are enforceable against a company.(14)
State and state entities
Section 30 of the 1952 Act provides that the Act shall apply to any arbitration to which the Federal government or the government of any state is a party. As such, the government is bound by an agreement like any other party to arbitration. The position is the same under section 30 of the 2005 Act.
The attorney general has the necessary powers to represent the government in all legal proceedings and similarly can agree to bind the government. Under the 2005 Act, the minister is defined to be the minister charged with the responsibility for arbitration.(15)
Section 4(1) of the 2005 Act provides that "any dispute which the parties have agreed to submit to arbitration under an arbitration agreement may be determined by arbitration unless the arbitration agreement is contrary to public policy". It should be noted that, unlike the Model Law, arbitration agreements under the 2005 Act are not limited to commercial disputes. Further, section 9(1) of the 2005 Act makes it clear that an arbitration agreement may include references which arise from a relationship "whether contractual or not", which may overcome the issues faced under the 1952 Act on whether tortious claims are arbitrable.
Following the 2018 Amendment Act, section 4(1) of the 2005 Act now expressly declares that subject matters of disputes which are "not capable of settlement by arbitration under the laws of Malaysia" are non-arbitrable, in addition to non-arbitrable matters on public policy grounds.
The scope of arbitrability under section 4 of the 2005 Act is not extensively litigated. In one notable case, the Court of Appeal held that fraud is an arbitrable dispute,(16) in addition to several civil disputes, including those relating to any act, duty or functions carried out by a statutory body in the exercise of its statutory powers.(17) In Arch Reinsurance Ltd v Akay Holdings Sdn Bhd,(18) the Federal Court held that matters falling within the scope of the summary determination procedure for defaults on a registered charge under the National Land Code 1965 are non-arbitrable on public policy considerations – namely, because the statutory right of the chargee to indefeasible title default and to sell the charged security in the event of default by the charger cannot be taken away by means of a private agreement between the parties.(19) However, save for the aforementioned cases, there remains a lack of judicial and legislative guidelines as to what claims are non-arbitrable on grounds of public policy.
It has been suggested, however, that it is possible to identify potentially non-arbitrable disputes based on the facts of the case, the framing of the claim and the relief sought.(20) Claims with potential legal repercussions on a wide class of non-parties and claims that are remediable only by means of an exclusive judicial relief are non-arbitrable.(21)
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.
(1) For details of the current arbitration legislation in Malaysia, see "Introduction to arbitration in Malaysia: history and current legislation".
(2) See sections 18(3) to (6) of the 2005 Act.
(3) See section 18(7) of the 2005 Act.
(4) See sections 18(3) and 18(5) of the 2005 Act.
- Majlis Perbandaran Alor Gajah v Sunrise Teamtrade Sdn Bhd  7 MLJ 570; and
- R Kathiravelu a/l Ramasamy v American Home Assurance Co Malaysia  1 MLJ 572, CA.
See also China State Construction Engineering Corp Guangdong Branch v Madiford Ltd  1 HKC 320 (Hong Kong) as a comparative study in UNCITRAL Model Law jurisdictions.
(13) Sections 11 and 12 of the Contracts Act 1950.
(14) However, it should be noted that once the company ceases to exist, any arbitration agreement entered into comes to an end – see Baytur SA v Finagro Holding SA  QB 610.
(15) See Gazette notification issued on 8 March 2006, pursuant to section 1(2) of the 2005 Act.
(16) See Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd  5 AMR 30.
(17) See Pendaftar Pertubuhan Malaysia v Establishmen Tribunal Timbangtara Malaysia & Ors  6 CLJ 684.
(18) See Arch Reinsurance Ltd v Akay Holdings Sdn Bhd  5 MLJ 186. A charge registered under the National Land Code gives the chargee an interest in the land with a statutory right to enforce its security by way of a sale of land under section 253 of that Code, or by taking possession thereof under section 271 in the event of the chargor's default. The legal title in the land remains vested in the registered proprietor of the land until the sale or taking of possession.
(20) Dato' Nikin Nadkarni and Lim Tze Wei, "Jurisdiction" in Datuk Professor Sundra Rajoo and Philip Koh, Arbitration in Malaysia: A Practical Guide (Sweet and Maxwell Publications 2016) page 170.