June Ong writes this update on the Malaysian High Court decision applying the “full merits” test in determining the existence of an arbitration agreement.
The High Court in Lysaght Corrugated Pipe Sdn Bhd and Anor v Popeye Resources Sdn Bhd and Anor (Kuala Lumpur High Court Civil Suit No.: WA-22NCC-109-03/2021) (grounds of judgment dated 10 February 2022) set out the requirements for a stay of proceedings pending arbitration under section 10 of the Arbitration Act 2005. This is in particular when evaluating the existence of an arbitration agreement. Further, in dismissing the stay, the Court granted an anti-arbitration injunction to restrain a Hong Kong arbitration.
Summary of Decision and Significance
Grounds by: Muhammad Amin JC
The Court dismissed the application for stay of proceedings pending arbitration pursuant to section 10 of the Arbitration Act 2005. Instead, the Court allowed the application for an injunction to restrain arbitration proceedings (also known as an “anti-arbitration injunction”).
#1: For a stay to be granted under section 10 of the Arbitration Act 2005, there must first be an agreement between the parties to refer their dispute to arbitration. The existence of an arbitration agreement must first be established.
#2: The test to be applied in evaluating whether there was an arbitration agreement in existence in the first place is the full merits test, rather than the prima facie test.
#3: There are two sets of tests for an interim anti-arbitration injunction. The first is to fulfil the test in the English House of Lords decision of American Cyanamid Co v Ethicon Ltd  1 All ER 504 (“American Cyanamid”). Second, an application for an anti-arbitration injunction must also fulfil the conditions set out in the English High Court decision of J Jarvis & Sons Ltd v Blue Circle Dartfod Estates Ltd  EWHC 1262 (“J Jarvis”) before the Court will grant an interim anti-arbitration injunction.
Lysaght Corrugated Pipe Sdn Bhd and Lysaght Galvanised Steel Berhad (collectively known as “Lysaght”) and Popeye Resources Sdn Bhd (“Popeye”, the first defendant) were in a buyer-seller relationship where Lysaght bought raw materials from Popeye. Lysaght had duly paid all sums due and owing to Popeye under the purchase contracts.
One day, Lysaght suddenly received emails from Macsteel International Far East Limited (“Macsteel”, the second defendant) claiming overdue payment for several contracts allegedly entered into between Lysaght and Macsteel (“Impugned Contracts”). Upon discovering that the Impugned Contracts were forged, Lysaght lodged police reports.
Despite the allegation of forgery by Lysaght in respect of the Impugned Contracts, Macsteel proceeded to initiate arbitration against Lysaght (“the Hong Kong Arbitration”) because the Impugned Contracts contained an arbitration clause to submit to the Hong Kong International Arbitration Centre (“HKIAC”).
Lysaght put on record to Macsteel and the HKIAC that the Impugned Contracts are forgeries and they have never agreed to any arbitration agreement and that they should not be compelled to participate in the arbitration proceedings.
Lysaght then commenced legal action at the Kuala Lumpur High Court (“KLHC”) and applied for an injunction to restrain proceedings at the HKIAC.
In response, Macsteel applied to the KLHC for a stay of the court proceedings pursuant to section 10 of the Arbitration Act 2005.
Decision on Key Issues
#1: Existence of an arbitration agreement must first be established
In the High Court, Macsteel submitted that the court must not or should be slow to interfere with matters which parties have agreed to resolve by way of arbitration. Macteel submitted that an arbitral tribunal is competent to rule in the first instance on a dispute as to its own jurisdiction, including a dispute as to the very existence of an arbitration agreement pursuant to section 18 of the Arbitration Act 2005; otherwise known as the kompetenz-kompetenz principle.
The High Court agreed with the legal principle that where the dispute or matter is within the arbitral tribunal’s preview, generally, the court should not interfere with the tribunal’s jurisdiction.
However, the High Court went on to hold that for a stay to be granted under section 10 of the Arbitration Act 2005, there must first be an agreement between the parties to refer their dispute to arbitration. This is made clear from the words “unless it finds that the agreement is null and void, inoperative or incapable of being performed” in section 10 of the Arbitration Act 2005.
This is reinforced by the quote made in the Court of Appeal case of Capping Corp Ltd & Ors v Aquawalk Sdn Bhd & Ors  6 MLJ 579 which held “on matters relating disputes agreed to be resolved by arbitration”.
Applying the interpretations in the English High Court decision of Albon (trading as NA Carriage Co) v Naza Motor Trading Sdn Bhd and another (No 3)  2 All ER 1075 (“Albon”) and the English Court of Appeal decision Sun Life Assurance Co of Canada v. CX Reinsurance Co Ltd  EWCA Civ 283, the High Court summarised the position as follows:
(1) There must be a “concluded” arbitration agreement (that it must exist and is valid) before section 10(1) of the Arbitration Act 2005 can operate. If not, the application for stay would be outside the scope of section 10(1) of the Arbitration Act 2005 and cannot apply or if there is no “concluded” arbitration agreement (or that it does not exist or is invalid) the application for stay may still fall within section 10(1) of the Arbitration Act 2005 but the arbitration agreement is “null and void”. In either case, if the court finds there is no “concluded” arbitration agreement, the stay application under section 10(1) of the Arbitration Act 2005 would not succeed.
(2) There are two threshold requirements for an application for stay under section 10 of the Arbitration Act 2005:
(a) That there is a concluded arbitration agreement (the existence of an arbitration agreement). This also goes to the validity of the arbitration agreement; and
(b) That the issue in the proceedings is a matter which under the arbitration agreement is to be referred to arbitration or otherwise the scope of the arbitration agreement.
#2: Full merits test, rather than prima facie test
Macsteel submitted that the standard of review a court should adopt when hearing a stay pending arbitration application is the prima facie test. This follows the Singapore position in the High Court decision of Malini Ventura v Knight Capital Pte Ltd and others  SGHC 225 (“Malini Ventura”) and the Court of Appeal decision of Tomolugen Holdings Ltd v Silica Investors Ltd  SGCA 57 (“Tomolugen”).
However, Muhammad Amin JC noted that there was no Malaysian case cited that refers to or applied the prima facie test.
With regards to the position taken in Singapore which adopted the prima facie test, Muhammad Amin JC referred to the Federal Court case of Master Mulia Sdn Bhd v Sigur Ros Sdn Bhd  9 CLJ 213 which held “…the courts must be mindful against importing principles advocated by foreign jurisdictions without careful considerations of the foreign law in question and our Arbitration Act 2005”.
The High Court stated that the Federal Court in Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd  9 CLJ 1 (“Press Metal Sarawak”) adopted a threshold that is not consistent with the prima facie test with regards to the issue of the existence of a valid and binding arbitration agreement. In paragraph 51 of Press Metal Sarawak, the Federal Court held that in relation to determining the existence of a valid and binding arbitration agreement or clause, they will make findings of fact based on the evidence adduced before the court.
The Federal Court in Press Metal Sarawak did not speak of a superficial or cursory method of evaluation evidence or otherwise a non-detailed method of examining the evidence in an application under Section 10 of the Arbitration Act 2005 where the existence of an arbitration agreement is in issue. On the contrary, it seems to support a more thorough approach in assessing the evidence.
This is in line with the approach adopted in the English High Court case of Albon which used the words “on the available evidence on the application as to whether the arbitration agreement was concluded”.
Taking both the principles enunciated in Press Metal Sarawak and Albon, the High Court held that such principles point to the adoption of the full merits test in determining the existence of an arbitration agreement in an application for stay under section 10 of the Arbitration Act 2005.
On the issue of reconciling the jurisdictional issue of an arbitral tribunal and the court and the doctrine of kompetenz-kompetenz, the High Court referred to Justice Lightman’s judgement in Albon. Albon held that while the doctrine of kompetenz-kompetenz provides that the arbitral tribunal shall have jurisdiction to determine whether the arbitration agreement was ever concluded, it does not preclude the court itself from determining that question. A Court should be slow to interfere with the jurisdiction of an arbitral tribunal.
Nevertheless, this does not mean that the Court should readily grant a stay application under section 10(1) of the Arbitration Act 2005 when the arbitration agreement itself is disputed. The Court will evaluate the existence of the arbitration agreement using the full merits test.
#3: Requirements of an interim anti-arbitration injunction
The Court confirmed that there are two sets of tests for an anti-arbitration injunction and they are as follows:
(a) Test 1 – This would be the interlocutory injunction requirements as laid down in American Cyanamid.
The four requirements of an interlocutory injunction in American Cyanamid are as follows:
- There is a serious question to be tried.
- The balance of convenience lies in favour of the applicant.
- Damages are not an adequate remedy.
- An undertaking as to damages by the applicant.
These requirements were applied in the Court of Appeal case of Keet Gerald Francis Noel John v Mohd Noor bin Abdullah & Ors  1 MLJ 193.
(b) Test 2 – This would be the conditions set out in J Jarvis which was recognised in the Federal Court decision of Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & Ors  5 MLJ 1 (case update here). The Court also referred to the English High Court decision of Claxton Engineering Services Limited v TXM Olaj-Es Gazkutato KTF  EWHC 345 (Comm) (“Claxton”) which set out an additional condition.
Therefore, the conditions for an anti-arbitration injunction are as follows:
- The injunction does not cause injustice to the claimant in the arbitration;
- The applicant’s legal or equitable rights have been infringed or threatened by the continuation of the arbitration; or
- The continuation of the arbitration proceeding will be vexatious, oppressive and unconscionable.
The Court found that both Test 1 (American Cyanamid requirements) and Test 2 (J Jarvis and Claxton conditions) were satisfied in the current proceedings.
Firstly, the issue of forgery and fraud were deemed to be serious questions to be tried given that the authenticity and validity of the arbitration agreement cannot be determined by way of affidavit evidence.
Secondly, the balance of convenience lies in favour of granting the injunction as if the HKIAC proceeds with the action, there would be parallel proceedings of both the HKIAC and the Court in determining the authenticity of the Impugned Contracts.
Thirdly, the harm or loss to Lysaght would not reasonably be adequately compensated by an award of damages.
Fourthly, Lysaght was able to provide an undertaking as to damages.
Fifthly, the injunction does not cause injustice to Macsteel as Macsteel can still proceed with the Hong Kong Arbitration if the Court determines that the Impugned Contracts are valid and enforceable.
Sixthly, if the Impugned Contracts are found to be forged, Lysaght’s legal and/or equitable rights would be infringed by the continuation of the Hong Kong Arbitration.
Finally, the continuation of the arbitration proceeding will be vexatious, oppressive and unconscionable as if the Hong Kong Arbitration was to proceed together with the present case, it will result in duplicity in terms of the work, costs and effort as well as conflicting decisions delivered by the Court and HKIAC. Therefore, the Court granted the anti-arbitration injunction.
In relation to the standard of review a court should adopt when hearing a stay pending arbitration application, this decision in Lysaght Corrugated Pipe adopts a different test from the position taken in other jurisdictions.
Based on this decision, Malaysia currently adopts the full merits test while the courts in other jurisdictions adopt the prima facie test.
Besides the Singapore cases of Malini Ventura and Tomolugen cited above, other examples of jurisdictions adopting the prima facie test include the Hong Kong SAR Court of Appeal decision of Star (Universal) Co Ltd v Private Company “Triple V” Inc  2 HKLR 62, the Canadian Supreme Court decision of Dell Computer Corp v Union des consommateurs  2 SCR 801 and New Brunswick Court of Appeal decision of Harrison v UBS Holding Canada Ltd  418 NBR (2d) 328.
June Ong is a pupil-in-chambers with the boutique litigation firm, Lim Chee Wee Partnership. She obtained her LL.B. (First Class) from the University of Warwick, her LL.M. in Bar Professional Training Course (Distinction for the LL.M., Outstanding for the BPTC) from City, University of London, her Bachelor of Civil Law (Distinction) from the University of Oxford and is a Barrister-at-Law (Gray’s Inn). June was awarded the Rhodes Scholarship in the year 2020 and the Honourable Society of Gray’s Inn Jean Southworth Scholarship in the year 2019.