Malaysia - Arbitration Clause: Incorporation By Reference.
Legal News & Analysis - Asia Pacific - Malaysia - Dispute Resolution
12 February, 2020
The recent High Court decision of Pandan Etika Sdn Bhd v Liang Builders Sdn Bhd demonstrates the inclination of the Malaysian courts to give effect to an arbitration clause that had been referentially incorporated into an agreement, notwithstanding that the other parts of the document in which the arbitration clause is contained are devoid of details and may potentially be void for uncertainty.
The dispute between the parties arose from the plaintiff’s (“Pandan Etika”) refusal to make payment to the defendant (“Liang Builders”) for the renovation services rendered by Liang Builders to Pandan Etika pursuant to a Letter of Award dated 21 June 2017. Liang Builders alleged that the Letter of Award, which purportedly appointed Liang Builders as the main contractor for renovation works on a three storey bungalow belonging to Pandan Etika, was executed by Pandan Etika. Pandan Etika, on the other hand, did not dispute the appointment but denied having executed the Letter of Award.
Clause 3 of the Letter of Award referentially incorporated the standard form building contract, namely the Agreement & Conditions of PAM Contract (2006) (With Quantities) (“PAM Contract”) as part of the agreement. Clause 34.5 of the PAM Contract contains a standard arbitration clause, requiring any disputes arising from the contract to be referred to arbitration.
Pursuant to the arbitration clause in the PAM Contract, Liang Builders issued a Notice of Arbitration against Pandan Etika on 28 May 2019. Pandan Etika replied on 13 June 2019 and denied that the parties have entered into any arbitration agreement in respect of the said project. Pandan Etika then filed an Originating Summons on 18 June 2019, seeking for, inter alia, a declaration that no arbitration agreement exists between the parties and an injunction restraining Liang Builders from taking any or further steps in the arbitration.
Pandan Etika raised four main arguments before the High Court. In relation to the arbitration agreement that is the subject of this note, Pandan Etika contended that it never executed the Letter of Award dated 13 June 2019 and, therefore, there is no arbitration agreement between the parties.
Pandan Etika also asserted that even if it had signed the Letter of Award, the parties did not intend for the PAM Contract to apply, as evident from the conduct of the parties. In addition, Pandan Etika argued that Liang Builders was estopped from contending that the relationship between the parties was governed by the PAM Contract because Liang Builders conducted itself as if the PAM Contract never applied throughout the implementation of the project.
Finally, it was also contended by Pandan Etika that the PAM Contract was incomplete and lacking in material terms, such as the identity of the architect, engineer and quantity surveyor for the said project. The PAM Contract was therefore void for uncertainty, and it followed that the arbitration clause was also void for uncertainty.
In response, Liang Builders contended that the Letter of Award dated 13 June 2019 was executed by the director and shareholder of Pandan Etika and was therefore binding between the parties. Given that the PAM Contract was referentially incorporated by clause 3 of the Letter of Award, the arbitration clause in the PAM Contract constituted an arbitration agreement between the parties within the meaning of section 9 of the Arbitration Act 2005 (“AA 2005”) and any disputes arising between the parties must accordingly be referred to arbitration. Liang Builders also contended that any jurisdictional question in relation to the arbitration agreement and/or the dispute between the parties should be determined by the arbitral tribunal, and not by the Court.
Decision of the High Court
The High Court found in favour of Liang Builders and dismissed Pandan Etika’s application.
First and foremost, the High Court held that the case turned on the issue of whether there was a written agreement between the parties in the form of the Letter of Award. If so, it then followed from clause 3 of the Letter of Award which referentially incorporated the PAM Contract that there was an arbitration agreement between the parties.
The High Court then went on to assess the parties’ respective account of the facts. Pandan Etika’s contention was that it did not sign the Letter of Award whereas Liang Builders exhibited a Letter of Award which appeared to contain the signature of a director and shareholder of Pandan Etika.
On a balance of probabilities, the High Court accepted Liang Builders’ account of the facts. This is because notwithstanding Pandan Etika’s contention that it did not sign the Letter of Acceptance, Pandan Etika did not explain the signature which appears on the Letter of Award produced by Liang Builders. There was no averment of fraud or forgery made Pandan Etika, neither did Pandan Etika conduct any investigations or lodge a police report in light of the seriousness of the matter. Instead, Pandan Etika put forth an argument in the alternative, that was on the assumption that Pandan Etika had indeed signed the Letter of Acceptance. This gave rise to doubts as to the bona fides of Pandan Etika’s allegation that it did not sign the Letter of Award.
The High Court went on to consider the contention that the PAM Contract was devoid of essential details. Nevertheless, the High Court held that the arbitration clause in the PAM Contract has been incorporated by reference, pursuant to clause 3 of the Letter of Award. In this regard, the High Court found support from the decision of Albilt Resources Sdn Bhd v Casaria Construction Sdn Bhd, which held:
“the agreement itself need not have an arbitration clause in it as long as the agreement refers to an arbitration clause in another document and the agreement is in writing and the reference incorporates the said clause into the agreement.”
The arbitration clause constituted the arbitration agreement between the parties independently of the other terms in the PAM Contract.
Finally, since an arbitration proceeding was already afoot, the High Court held that it is for Pandan Etika to raise any matter which pertains to the jurisdiction of the arbitral tribunal in the arbitration itself as provided under section 18 AA 2005.
In this regard, the High Court applied the Federal Court decision in Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd which held that: “a challenge to the jurisdiction of an arbitrator must be made during the arbitration proceedings itself, and not at the court hearing an application for a stay” as the arbitrator has jurisdiction to deal with the same.
In the premises, the High Court held that the parties are bound by the arbitration clause in the PAM Contract and must refer their disputes to arbitration.
This case is a prime example of the inclination of the court to give effect to an arbitration clause referentially incorporated into an agreement, even though the other clauses in which the arbitration clause was contained were devoid of details. The decision also reiterates that once the arbitration has commenced, the issue of the jurisdiction of the arbitrator ought to be determined by the arbitrator, and not by the Court.
This case also serves as a useful reminder to all contracting parties that if they do not wish to be bound by any arbitration provision, they need to ensure that there is no arbitration clause in the agreement itself, and also in all other documents which are incorporated by reference into the agreement. Otherwise, the arbitration clause referentially incorporated will be given effect even if the other clauses in the document in which the arbitration clause is found are devoid of details and may not be enforceable.
For further information, please contact:
Lyness Lim Wei Xeng, Shearn Delamore & Co