Federal Court Grants Anti-Arbitration Injunction to a Non-Party to the Arbitration

The Federal Court in its grounds of judgment dated 1 July 2019 reinstated the injunction of a non-party to an arbitration. The anti-arbitration injunction was made against the parties to an ongoing arbitration to restrain them from proceeding and continuing with the arbitration proceedings, pending the parallel Court proceedings.

The Federal Court ruled on the questions of law that sections 8 and 10 of the Arbitration Act 2005 (AA 2005) would not apply to a party litigant who is not a party to the arbitration agreement and/or arbitration proceedings. Section 8 of the AA 2005 essentially states that no court shall intervene in matters governed by the AA 2005. Section 10 of the AA 2005 allows for the court to stay court proceedings and refer parties to arbitration.

In this decision, the Federal Court allowed a non-party to the arbitration to resort to the Court’s inherent jurisdiction to grant an anti-arbitration injunction to restrain the arbitrating parties from proceeding with the arbitration. The test to be applied is the American Cyanamid-like test of a serious issue to be tried (or as applied in Malaysia via the Keet Gerald Francis test) instead of a higher threshold in the English High Court decision in J Jarvis v Blue Circle Dartfort Estates [2007[ EWHC 1262 (TCC).

Where there are parallel court proceedings involving some parties in an arbitration and non-parties to an arbitration, this Federal Court decision appears to favour giving primacy to the court proceedings and to allow an injunction or stay of the arbitration proceedings.

Brief Facts

The facts are obtained from a reading of both the Federal Court and the Court of Appeal decision, which is reported as Nautical Supreme Sdn Bhd v Jaya Sudhir a/l Jayaram & Ors [2019] 3 MLJ 166 and with the grounds of judgment here.

Nautilus Tug & Towage Sdn Bhd (Nautilus) is a joint venture company. It was formed to undertake a project for the provision of harbour tug services. The two shareholders of Nautilus and their percentage shareholding was: Nautical Supreme Sdn Bhd (Nautical Supreme) as the minority shareholder with 20%, and Azimuth Marine Sdn Bhd (Azimuth) as the majority shareholder with 80%.

The plaintiff who commenced the High Court suit, Jaya Sudhir, claimed that Nautilus was in need of funds to carry out this project. His claim was that he played the role of a white knight to invest in this project premised on a collateral understanding between himself, Nautical Supreme and Azimuth.

As part of this collateral understanding, Jaya Sudhir essentially claimed that the terms would be that Azimuth would hold the 80% shareholding in Nautilus with part of the shares held on trust for him. Further, the understanding was that Jaya Sudhir could participate in the equity of Nautilus either directly or through Azimuth’s shareholding in Nautilus. Also, it was claimed that Nautical Supreme agreed to this participation and no further consent was required for Azimuth to divest any part of its shares.

Another litigant in the proceedings was Dato’ Seri Timor Shah Rafiq, a director of Nautilus and the nominee director for Nautical Supreme.

Jaya Sudhir contended that Dato’ Seri Timor was aware of the collateral understanding as he had negotiated the terms on behalf of Nautical Supreme.

In March 2013, Nautical Supreme, Azimuth, and Nautilus entered into a shareholders agreement. Subsequently, in April 2013, Nautilus entered into a harbour tug services agreement for the project.

Jaya Sudhir contended that based on the collateral understanding, he had participated in the business of Nautilus for the project. He claimed that 10% of Nautilus’ shares held in Azimuth’s name was transferred to him in December 2015.

However, Dato’ Seri Timor and Nautical Supreme disagreed with Jaya Sudhir’s contentions. They denied the existence of any collateral understanding. They were also aggrieved with the transfer of shares to Jaya Sudhir and claimed that this was in breach of the shareholders agreement.

Arbitration Proceedings

Nautical Supreme then issued a notice of breach of the shareholders agreement and in October 2016, commenced arbitration proceedings against Azimuth and Nautilus.

Nautical Supreme essentially sought declarations in the arbitration that the transfer of that 10% shareholding to Jaya Sudhir was in breach of the shareholders agreement, that Nautical Supreme is entitled to purchase the 10% transferred shares, and that Nautical Supreme is entitled to purchase Azimuth’s remaining 70% shares in Nautilus.

Parallel Court Proceedings

Between July 2016 to February 2017, Nautical Supreme initiated court proceedings against Azimuth and Nautilus. Briefly, the first action was Nautical Supreme’s injunction to restrain Azimuth from disposing its 70% shareholding and to restrain Jaya Sudhir from disposing his 10% shareholding, pending the disposal of the arbitration.

The second action was Nautical Supreme’s application to restrain Nautilus from proceeding with an EGM to, among others, to remove Dato’ Seri Timor as a director of Nautilus.

The third action was Nautical Supreme’s suit against Jaya Sudhir for the tort of inducing of breach of the shareholders agreement by Azimuth and Nautilus.

Jaya Sudhir’s Suit

In May 2017, Jaya Sudhir filed a civil suit against Dato’ Seri Timor, Nautical Supreme, Azimuth and Nautilus. He essentially sought declarations that, among others, Dato’ Seri Timor is bound by the terms of the collateral agreement, to uphold the 10% shareholding transferred to himself, and an injunction to restrain Nautical Supreme from commencing and continuing any legal proceedings or arbitration which affects or impacts upon the rights attached to the 10% shareholding and the 70% shareholding.

By this time, the arbitration proceedings had reached an advanced stage and with the hearing fixed in November 2017.

Jaya Sudhir applied for an interim injunction to restrain Nautical Supreme, Azimuth and Nautilus from continuing with the arbitration proceedings. Azimuth and Nautilus consented to the injunction while Nautical Supreme opposed the injunction.

High Court Decision

On 6 November 2017, the High Court allowed the application for the anti-arbitration injunction. The High Court applied the American Cyanamid-test as set out in Keet Gerald Francis. There were serious issues to be tired on the existence of the collateral understanding and on Jaya Sudhir’s participating in the project. Damages would not be an adequate remedy as the shares are not readily available on the market. The balance of convenience was in favour of the injunction to avoid multiplicity of proceedings and to remove the risk of inconsistent findings between the court and the arbitrator.

Court of Appeal Decision

The Court of Appeal essentially decided on three key points.

First, the Court of Appeal decided that section 10 of the AA 2005, for a stay of court proceedings, should only apply to parties to the arbitration. Nonetheless, it did not mean that a non-party to an arbitration was at liberty to derail pending arbitration proceedings on the premise that the AA 2005 did not apply to him. The Court of Appeal suggested that the AA 2005 could apply to Jaya Sudhir’s application.

Second, a non-party to arbitration proceedings could restrain arbitration proceedings. The Court of Appeal held that the general test for a Court to restrain arbitration proceedings is the test set out in the English High Court case of J Jarvis. This test set out that an injunction to restrain arbitration proceedings must be exercise sparingly. Two conditions must be satisfied: the injunction does not cause injustice to the claimant in the arbitration, and the continuation of the arbitration would be oppressive, vexatious, unconscionable or an abuse of process. Inordinate delay could also be a material factor. The case of J Jarvis was where a party to the arbitration applied for the Court to grant an anti-arbitration injunction to restrain the continuation of the arbitration proceedings.

Third, the Court of Appeal decided that there could not be a higher threshold test for a party to the arbitration, and a lower threshold for a non-party to the arbitration. That would lead to the absurd position that it would be easier for a non-party to arbitration proceedings to obtain an injunction to restrain arbitration proceedings than a party to arbitration proceedings would.

Federal Court: Answers to the Questions of Law

Leave to appeal to the Federal Court was granted on two questions of law. Set out below are the questions of law and the answers.

Question 1: Whether the requirements of section 10 of the AA 2005 must be met by a party litigant seeking an injunction to restrain the prosecution of an arbitration to which he is not a party but which would affect his proprietary rights.

Answered in the negative.

Question 2: Whether section 8 of the AA 2005 applies to a party litigant who is not a party to an arbitration agreement and/or arbitration proceedings.

Answered in the negative.

More important however is the Federal Court’s reasoning and the law that has now been decided by the apex court.

Federal Court’s Reasoning

The Federal Court quite quickly was able to decide that sections 10 and 8 of the AA 2005 would not apply to a non-party to an arbitration. This was on a plain reading of those sections.

The Federal Court then proceeded to deal with other related issues beyond the questions of law posed to the Federal Court.

First, the Federal Court looked at the J Jarvis case. In the J Jarvis line of cases, the parties seeking the anti-arbitration injunction were the contracting parties to the arbitration agreement. It was not a case of a non-party to the arbitration proceedings.

The Federal Court did not outright adopt the J Jarvis test for cases involving contracting parties to an arbitration agreement. But the Court did find that it would be a logical and sensible requirement to impose a higher or different test or threshold on parties to arbitration proceedings if the parties sought to restrain the arbitration (see [48] of the grounds of judgment).

Essentially, the Federal Court draw an analogy with an exclusive jurisdiction clause when looking at the arbitration agreement. Therefore, in an anti-arbitration injunction, or for an anti-suit injunction to prevent a party from bringing a claim in any forum other than the agreed forum by the parties, strong reasons are required to displace the contractual obligation entered into in relation to an arbitration clause or an exclusive jurisdiction clause (see [52] of the grounds of judgment).

Second, based on this case where it was a non-party applying for an anti-arbitration injunction, the Federal Court held that the J Jarvis test would not apply to a non-party to arbitration proceedings (see [57] of the grounds of judgment).

Third, the Federal Court focused on the issue of multiplicity of proceedings and the risk of inconsistent findings. The Federal Court continued to adopt the principles set out in earlier appellate cases decided under the previous regime of the Arbitration Act 1952. The Federal Court adopted the reasoning in the Court of Appeal case of Bina Jati [2002] 2 MLJ 71 and Federal Court case of Chase Perdana [2007] 7 MLJ 677. Where some are parties and others are not parties to the arbitration, it is best that their disputes be dealt with by the court. The disputes should not be divided so that part is dealt with by arbitration and another part in court (see [60] of the grounds of judgment). The Court held that “the courts may decline to give effect to the exclusive jurisdiction clause or arbitration clause where interest of third parties are involved or where there is a risk of parallel proceedings and inconsistent decisions arising out of the conduct of an arbitration.”

Fourth, the Federal Court went on the emphasise that once there was a duplication in two proceedings, the court must consider the intersection of two powerful considerations. First, the desire of courts to hold commercial parties to their bargain. Second, the desire of courts to avoid disruption and multiplicity or duplicity of litigation, and to avoid causing inconvenience to third parties (see [61] of the grounds of judgment).

Fifth, and significantly, the Federal Court agreed that where issues relate to any party who is not subjected to arbitration, priority should be given for the matter to be dealt with by the court (see [69] of the grounds of judgment).

Sixth, the Federal Court agreed with the approach in the earlier Court of Appeal case in Protasco Bhd [2018] 5 CLJ 299 (with the Court of Appeal grounds of judgment here). Protasco had sued three defendants. The claim against the first defendant was subject to an arbitration agreement and was stayed. Protasco’s claims against the second and third defendants were not subject to any arbitration agreement. The Court of Appeal held that Protasco’s claims against the second and third defendants in the court proceedings should proceed first in time over the arbitration between Protasco and the first defendant. The Court ordered a stay of the arbitration proceedings (see [73] and [74] of the grounds of judgment).

Seventh, the Federal Court also shut the door on having parallel court proceedings and arbitration proceedings. The Court referred to case law and found it would be inappropriate and undesirable for the suit and the arbitration proceedings to run concurrently (see [79] of the grounds of judgment).

Eighth, the Federal Court also agreed with the High Court decision that there was no inordinate delay on the part of Jaya Sudhir in applying for the injunction (see [83] of the grounds of judgment).

In conclusion, the Federal Court held that there were serious issues to be tried and the balance of convenience lied in favour of the High Court suit over the arbitration.

Comments

I am still fully digesting the impact of this far-reaching decision. But here are some of my immediate takeaways:

  1. It would seem that the Federal Court, by way of obiter, does recognise the ability for parties to an arbitration to apply for an anti-arbitration injunction. This is despite the AA 2005 not having any provision that allows for this and despite the application of section 8 of the AA 2005 (i.e. the court shall not intervene in matters governed by the AA 2005).
  2. It is clear that a non-party to an arbitration can apply for an anti-arbitration injunction to restrain the arbitration between the parties. The test is the serious issue to be tried and other elements under American Cyanamid / Keet Gerald Francis.
  3. The Federal Court’s approach was to favour court proceedings (involving non-parties and parties to an arbitration) taking precedence over the arbitration involving the arbitrating parties. Concurrent court and arbitration proceedings would also appear to be not allowed once there is the risk of inconsistent findings.
  4. This opens the risk of tactical filing of Court claims and where anti-arbitration injunctions can be obtained to stifle or delay arbitration proceedings. Even if the seat of arbitration is outside of Malaysia, this would not prevent the Malaysian Courts from granting such anti-arbitration injunctions.
  5. The position in Malaysian law is that it is now easier for a non-party to arbitration proceedings to obtain an anti-arbitration injunction than a party to arbitration proceedings would.

 

 

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