Malaysia’s Federal Court Grants Third Party Anti-Arbitration Injunction

Herbert Smith Freehills review the decision in Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & Ors (Federal Court Civil Appeal No. 02(i)-83-09/2018(W)), where the applicant Jaya, although not a signatory to the shareholders’ agreement containing the arbitration clause, nevertheless sought to enforce both contractual and beneficial rights under it.  Malaysia’s Federal Court granted an anti-arbitration injunction restraining Malaysian arbitration proceedings in favour of litigation in Malaysian courts, to prevent a non-party from being left without meaningful remedy. In doing so, the Federal Court set out limited circumstances where it would allow a third party to restrain arbitration proceedings.

In its judgment, the Federal Court opined that where the dispute in the arbitration affects a non-party, priority should be given for the dispute to be litigated in court. The Federal Court espoused a ‘fairness’ test, in which “the primary consideration on whether to grant the injunction to restrain the arbitration proceedings where the rights of a non-party thereto are involved is what would be the fairest approach to all parties. It must not result in any party suffering a severe disadvantage and for the ends of justice to be met, the benefits must outweigh the advantage.”

The Federal Court also made clear its preference for litigation over arbitration where the rights of non-parties are involved, and set out the following guidelines: (i) A court may decline to give effect to an arbitration agreement where there is a risk of parallel proceedings and inconsistent decisions arising; (ii) Where there are competing claims in court and arbitration proceedings, and not all parties are before both forums, court proceedings should take precedence; (iii) In the case of non-parties, the judicial policy of avoiding parallel proceedings, the risk of inconsistent findings and inconvenience to third parties, triumphs over the policy of upholding arbitration agreements.

The authors note that the decision demonstrates that third parties can disrupt arbitration proceedings whenever their rights are potentially affected but that the Federal Court did not definitively determine whether arbitration clauses can, in certain circumstances, bind third parties in Malaysia, serving as an important reminder that parties should consider the complex issues created by multi-party and multi-contract scenarios when drafting their agreements to avoid multiplicity of proceedings and ensure that potential disputes could be dealt with in an efficient way in arbitration.

Note for Hong Kong practitioners: a non-party to a contract containing an arbitration clause who sought to enforce a contractual right under that agreement was held to be bound by any conditions integral to the exercise of the right, which includes the agreement to arbitrate (see Dickson Valora Group (Holdings) Co Ltd v Fan Ji Qian [2019] HKCFI 482).

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About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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