Arbitration: Stay of proceedings - Action based on insurance claim - Liability admitted but quantum disputed by insurer - Whether action should be stayed pending arbitration - Whether arbitration agreement null and void, inoperative or incapable of being performed - Whether ancillary reliefs sought could be dealt with by arbitral court - Arbitration Act 2005, ss 8, 10(1), 18 - Rules of Court 2012, O 69 r 10(3)

Civil Procedure: Stay of proceedings - Action based on insurance claim - Liability admitted but quantum disputed by insurer - Whether action should be stayed pending arbitration - Whether arbitration agreement null and void, inoperative or incapable of being performed - Whether ancillary reliefs sought could be dealt with by arbitral court - Arbitration Act 2005, ss 8, 10(1), 18 - Rules of Court 2012, O 69 r 10(3)

This was the appellant's appeal against the decisions of the High Court and the Court of Appeal, which allowed the respondent's application for stay of proceedings of the appellant's action against the respondent pending arbitration. The appellant, an aluminium smelting plant company, brought the action against the respondent, an insurance company, following an insurance claim for its machinery breakdown and loss of profits as a result of a temporary shutdown of its plant that stemmed from a power outage in Sarawak. The respondent admitted liability but did not agree to the sum of RM125 million claimed by the appellant. The respondent relied on various exclusion clauses in the insurance policy executed between them ("the policy") to substantially reduce the amount to RM3.7 million. In its action, the appellant sought, inter alia, for full indemnity in respect of all losses and damages suffered as a result of the incident. The appellant also prayed for various declaratory orders, damages for breach of the terms of the policy and/or fraud committed by the respondent in respect of the issuance of the policy. The respondent then applied for the stay of the proceedings pursuant to s 10(1), Arbitration Act 2005 ('the 2005 Act') contending that the matter should be arbitrated as the sole issue in the action was in relation to the quantum to be paid, liability being admitted. The appellant, on the other hand, contended that there was no arbitration agreement as the purported arbitration clauses were not part of the policy but of a previous policy that had expired. The issues raised were whether: (1) the requirements of s 10(1) of the 2005 Act were fulfilled; (2) a valid arbitration agreement existed; (3) the claim for ancillary reliefs could be dealt with by an arbitral tribunal; and (4) cl 4.9(b) of the policy deemed as the court clause and O 69 r 10(3), Rules of Court 2012 ("ROC") were applicable.

Held (dismissing the appellant's appeal):

(1) Section 10(1) of the 2005 Act was amended vide Act A1395 which came into force on 1 July 2011 ('the 2011 Amendment'). Paragraph (b) of s 10(1) was completely repealed by the 2011 Amendment. Previously, there must be in existence a dispute between the parties with regard to the matter referred before a court was empowered to make an order under s 10(1). With the deletion of para (b), the only remaining exception under the present s 10(1) was that the arbitration agreement between the parties was null and void, inoperative or incapable of being performed. Prior to the 2005 Act, the applicable law was the Arbitration Act 1952. The issue of stay of proceedings in the 1952 Act was dealt with under s 6 thereof. The clear effect of the present s 10(1) of the 2005 Act was to render a stay mandatory if the court found that all the relevant requirements were fulfilled while under s 6 of the repealed 1952 Act, the court had discretion whether to order a stay or otherwise. (paras 28-32)

(2) What the court needed to consider in determining whether to grant a stay order under s 10(1) of the 2005 Act (after the 2011 Amendment) was whether there was in existence a binding arbitration agreement or clause between the parties, which agreement was not null and void, inoperative or incapable of being performed. The court was no longer required to delve into the details of the dispute. The question as to whether there was a dispute in existence was no longer a requirement to be considered in granting a stay under s 10(1). It was an issue to be decided by the arbitral tribunal. (para 33)

(3) Sections 8 and 18 of the 2005 Act must be considered in respect of the legal effect of s 10(1) of the same. The purpose of s 8 was to limit court intervention to situations specifically covered by the 2005 Act and to discourage the use of inherent powers by court. Section 18 dealt with the jurisdiction of the arbitral tribunal. The court must acknowledge the competency of an arbitral tribunal to decide on its own jurisdiction without interference. The intention of Parliament was therefore clear. Sections 8, 10 and 18 which were read together indicated that Parliament had given the arbitral tribunal much wider jurisdiction and powers, and such powers extended to cases where even its own jurisdiction or competence or the scope of its authority, or the existence or validity of the arbitration agreement or clause, was challenged. To comply with the requirements of s 10(1), the court should restrict its enquiry only to the issue of whether there was in existence, a binding arbitration agreement or clause between the parties and whether the arbitration agreement or clause was null and void, inoperative or incapable of being performed. If the court was satisfied that the arbitration agreement or clause did not fall into any of those exceptions, it must order a stay of proceedings and refer the matter to arbitration. (paras 35-38)

(4) A challenge to the jurisdiction of an arbitrator must be made during the arbitration proceedings itself, but not at the court hearing of an application for a stay under s 10(1) of the 2005 Act (s 18(5)). It was the arbitrator who decided the issue of jurisdiction. Any ruling of the arbitrator that he had jurisdiction, could be appealed to the High Court, which would finally decide on the matter (s 18(8)). (para 40)

(5) The trial judge found that there was an arbitration agreement between the parties herein. The previous expired Jerneh insurance policy that contained an arbitration clause in relation to both machinery breakdown and loss of profits was effectively incorporated into the subsequent policy. The trial judge's findings on the validity of the arbitration agreement were findings of fact consistent with the provisions of s 9 of the 2005 Act, particularly subsection (5) thereof which provided that a reference in an agreement to a document containing an arbitration clause shall constitute an arbitration agreement; and that the agreement was in writing and the reference was as such to make that clause as part of the agreement. Parties were bound by the terms of the arbitration agreement which they had voluntarily executed and that included reference to another document where those terms could be found, whether they took the trouble of reading them or not. There was imputed knowledge that the terms of arbitration agreement in a document referred to, in an agreement, were binding as if they were written in the subsequent agreement itself. (paras 47-53)

(6) An applicant for stay under s 10(1) of the 2005 Act must establish that the matters in question were within the scope of the arbitration submission. The respondent's liability as the insurer under the policy was to indemnify the appellant, as the insured, by payment in cash, in respect of any loss or damage suffered by the appellant as a result of the incident that occurred. That was clearly provided for by the relevant clauses in the policy. The amount of indemnity to be paid by the respondent to the appellant under the policy shall not exceed the amount specified in respect of each of the items listed in the schedule thereto or in the whole, the total sum of RM300 million as insured. However, such payment of indemnity was subject to the exclusion clauses as provided under the policy. (paras 57-63)

(7) The liability in the matter was admitted, leaving in dispute only the issue of the quantum to be paid. Such admission of liability by the respondent was sufficient to bring the dispute within the ambit of the arbitration clauses. The dispute did not relate to liability. Liability was effectively admitted by the respondent, which triggered the arbitration clauses that bound the parties. (para 64)

(8) There was clearly a vast difference between the sum of RM125 million claimed by the appellant and the sum of RM3.7 million offered by the respondent. The difference covered claims under certain exclusion of items provided in the terms of the policy. Applying the principles laid down by the relevant cases, the exclusions, which related to the question of quantum of indemnity, also related to the interpretation of the terms of the policy, on what items were to be included or excluded in the coverage. Therefore, the claims by the appellant, whether included or excluded by the respondent, were matters within the ambit of the arbitration clauses between the parties. Ultimately, that would determine the quantum to be paid under the policy. (paras 79-80)

(9) The court should lean more towards granting stay pending arbitration under s 10(1) of the 2005 Act, even in cases where the court was in doubt about the validity of the arbitration clause or where it was arguable whether the subject matter of the claim fell within or outside the ambit of the arbitration clause. In determining what was the dispute that the parties intended to submit to arbitration, the arbitration clause ought to be interpreted widely, based on its express terms and the intention of the parties, taking into consideration the commercial reality and the purpose for which the agreement was made. A proper approach to construction required the court to give effect, so far as the language used by the parties in the arbitration clause would permit, to the commercial purpose of the arbitration clause, the principle of which was adopted in Fiona Trust & Holding Corporation & Ors v. Privalov & Ors. The approach in that case should be adopted and followed by the courts in dealing with an application under s 10(1) of the 2005 Act. The answer to the question as to whether a particular dispute fell within an agreement to arbitrate depended primarily on the proper construction of that agreement in the circumstances of the particular case. (paras 91-93)

(10) Ancillary matters such as declaratory orders, damages and fraud could be dealt with by an arbitral tribunal. Such ancillary matters were not sufficient basis to deny stay of proceedings pending arbitration. The case authorities clearly established that an arbitrator could decide on those matters. (paras 94-101)

(11) Clause 4.9(b) of the policy referred to as the court clause was not applicable. That clause talked about "commencement" of an action in court within three months after the disclaimer by the respondent. The action by a plaintiff must be filed in court within the stipulated time. Section 10(1) of the 2005 Act was only applicable to proceedings already filed in court. An application for stay of proceedings could only be filed by a defendant after the plaintiff commenced proceedings in court but before the defendant took any other step in the proceedings. Stay of proceedings meant stay of proceedings already filed in court. Clause 4.9 did not in any way help the appellant in its case. (para 107)

(12) Order 69 r 10(3) ROC was a procedural subsidiary legislation whilst s 10(1) of the 2005 Act was a substantive provision in an Act of Parliament. Therefore, O 69 r 10(3) ROC could only be interpreted in a manner consistent with the mandatory provisions of s 10(1) of the 2005 Act. In any event, O 69 r 10(1) ROC provided an option for the court, either to "decide that question" or "give direction to enable it to be decided" and "may order the proceedings to be stayed pending its decision". The mandatory provisions of s 10(1) of the 2005 Act must prevail. The matter ought to be stayed pending arbitration if all the necessary requirements under the section were fulfilled. (paras 109-110)

(13) There existed valid arbitration clauses between the parties herein. The respondent effectively admitted liability to indemnify the appellant, leaving only the issue of quantum to be determined which triggered the said clauses. There was nothing to show that the arbitration agreement between the parties was null and void, inapplicable, inoperative or incapable of being performed. The arbitrator had jurisdiction to deal with all the matters specified in the appellant's claim on quantum, liability and coverage and ancillary matters such as declaratory orders, damages for breach of the policy and fraud, if any, in the issuance of the policy. The respondent's application for stay fulfilled all the requirements under s 10(1) of the 2005 Act. The High Court and the Court of Appeal were correct in granting the stay pending arbitration. The error by the Court of Appeal in relying on the repealed para (b) of s 10(1) of the 2005 Act had no effect on its decision. (paras 111-114)

Case(s) referred to:

AED Oil Ltd & Anor v. Puffin FPSO Ltd [2010] VSCA 37 (refd)

Albilt Resources Sdn Bhd v. Casaria Construction Sdn Bhd [2009] 4 MLRA 488; [2010] 3 MLJ 656; [2010] 7 CLJ 785 (affd)

Ashville Investment Ltd v. Elmer Contractors Ltd [1988] 2 All ER 577 (refd)

Caledonian Insurance Company v. Andrew Gilmour [1893] AC 85 (refd)

Cunningham-Reid and another v. Buchanan-Jardine [1988] 2 All ER 438 (refd)

Dalian Hua Liang Enterprise Group Co Ltd v. Louis Dreyfus Asia Pte Ltd [2005] 4 SLR 646 (refd)

Dell Computer Corporation, Appellant v. Union des consommateurs and Oliver Dumoulin, respondents, and Canadian Internet Policy and Public Interest Clinic, Public Interest Advocacy Centre, ADR Chambers Inc ADR Institute of Canada and London Court of International Arbitration, Interveners [2007] SCJ No 34 (refd)

Electra Air Conditioning BV v. Seeley International Pty Ltd [2008] FCAFC 169 (refd)

Fiona Trust & Holding Corporation & Ors v. Privalov & Ors [2007] 4 All ER 951 (foll)

Heyman & Anor v. Darwins Ltd [1942] HL (E) 356 (refd)

KNM Process Systems Sdn Bhd v. Mission Biofuels Sdn Bhd [2012] MLRHU 1540; [2013] 1 CLJ 993 (refd)

Monro v. Bognor Urban Council [1915] CA 167 (refd)

Rondabosh International Limited v. China Ping an Insurance (Hong Kong) Company Limited [2010] HKCU 8 (refd)

Rowe Bros & Co Ltd v. Crossley Bros Ltd [1912] 108 LT 11 (refd)

TNB Fuel Services Sdn Bhd v. China National Coal Group Corp [2013] 4 MLRA 601; [2013] 4 MLJ 857 (refd)

Scott v. Avery [1843-60] All ER Rep 1 (refd)

Smith v. Pearl Assurance Co [1939] 1 All ER 95 (refd)

Sulamerica Cia Nacional De Seguros S A & Ors v. Enesa Engenharia SA & Ors [2012] EWCA Civ 638 (refd)

Tjong Very Sumito and Ors v. Antig Investments Pte Ltd [2009] SGCA 41 (refd)

TN Rao v. Balabhadra [1954] AIR Mad 71(refd)

Legislation referred to:

Arbitration Act 2005, s 10(1)

Arbitration (Amendment) Act 2011 (Act A1395), s 4

International Arbitration Act (2002 Rev Ed), s 6(2)

Rules of Court 2012, O 69 r 10(3)

Other(s) referred to:

Halsbury's Laws of England, 4th edn, p 292, para 566

Counsel:

For the appellant: Lim Kian Leong (Justin Voon, Alvin Lai & Goh Gin Jhen with him); M/s Justin Voon Chooi & Wing

For the respondent: Anad Krishnan (Navamalar with him); M/s Anad & Noraini