MALAYSIA Trends and Developments Contributed by: Rabindra S. Nathan, Rodney Gomez, K. Shanti Mogan and Alexius Lee, Shearn Delamore & Co
in the High Court to recover an outstanding sum. The defendant applied for a stay of court proceedings by relying on an arbitration clause in the contract. The High Court refused the stay, ruling that the arbitration agreement had become inoperative as the company had been wound up and was subject to insolvency protection. However, the decision of the High Court was recently overturned by the Court of Appeal i n Peninsula Edu- cation (Setia Alam) Sdn Bhd (formerly known as Segi International Learning Alliance Sdn Bhd) v Biaxis (M) Sdn Bhd (in liquidation) [2024] 5 MLJ 388 (“Penin - sula”). The Court of Appeal ruled that an arbitration agreement does not automatically become inopera - tive when a party to the same goes into liquidation. In this regard, the Court of Appeal affirmed the doctrine of separability, and held that even though the winding- up of a company had the effect of terminating agree - ments which the liquidator may not want to continue with, the arbitration agreement would survive such a termination. The Court of Appeal further held matters such as delay or cost of the arbitration are not suf - ficient to render an arbitration agreement inoperative. Clarification on Validity and Effect of Option Clauses in Arbitration Agreements Arbitration clauses sometimes include option clauses, which give parties the flexibility to resolve disputes either through arbitration or litigation. The Court of Appeal in Setia Awan Management Sdn Bhd v SPNB Aspirasi Sdn Bhd [2025] MLJU 1264 provides signifi - cant guidance on the enforceability of such clauses in arbitration agreements. In this case, the dispute arose from a development and contra transaction (DACT) agreement between Setia Awan Management Sdn Bhd (“the Defendant”) and SPNB Aspirasi Sdn Bhd (“the Plaintiff”). Clause 18 of the agreement contained an arbitration clause stating: “In the event that any dispute or difference whatso - ever shall arise between parties touching or concern - ing this Agreement … the same may be referred to any court in Malaysia or to arbitration in accordance with the provisions of the Arbitration Act 2005.”
The Plaintiff initiated court proceedings in the High Court. The Defendant, in turn, applied for a stay under Section 10 of the AA, seeking to refer the matter to arbitration. The High Court dismissed the stay appli - cation, holding that (i) the clause lacked essential pro - cedural details, rendering it uncertain and void; and (ii) the use of the word “may” suggested arbitration was merely optional, and not mandatory, thereby under - mining the binding nature of the agreement. On appeal, the Court of Appeal overturned the High Court decision and allowed the stay application. In doing so, the Court of Appeal made three observa - tions: • First, the Court of Appeal clarified that there is no requirement under the AA for parties to set out detailed procedural terms like the seat of arbitra - tion or number of arbitrators within the arbitration clause itself. Where the agreement is silent, the statute provides a default procedural framework that applies. Therefore, the clause was not void merely because it omitted procedural specifics. • Second, the Court of Appeal rejected the sug - gestion that the inclusion of an option between litigation and arbitration necessarily invalidates the clause. The Court of Appeal emphasised that giving parties a choice does not render the clause uncertain; rather, it reflects the parties’ intent to preserve flexibility in the event both parties agree to litigate the matter. As the statutory definition of an arbitration agreement in Section 9 of the AA was broad enough to encompass clauses where arbitration was contingent upon a party’s election, the Court of Appeal held that although the word “may” is permissive, once the option is exercised to proceed further in the arbitration agreement, it becomes exclusive in that the only route open in going forward is that of arbitration and it becomes mandatory to stay court proceedings. • Third, the Court of Appeal highlighted the judicial policy in Malaysia of favouring arbitration as a dis - pute resolution mechanism. This policy is consist - ent with international trends and is reflected in the doctrine of kompetenz-kompetenz, which allows arbitral tribunals to determine their own jurisdiction. Even where ambiguities exist, courts should lean
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