Malaysia: ‘Optional' Arbitration Clauses: Use Of ‘Shall' Or ‘May'

In recent years, an increasing number of Malaysian and foreign companies have embraced arbitration as an alternative means for resolving their commercial disputes. With careful drafting, the parties to a contract can tailor the arbitration process to meet their specific needs and circumstances. Because of this trend towards arbitration, courts are routinely asked to determine whether arbitration is compulsory under a given contract.[1] Interestingly, while the Malaysian courts uniformly answer this question in the affirmative for arbitration agreements containing the word "shall", the presence of the term "may" does not render an arbitration clause permissive.

Anzen

The Privy Council decision in Anzen[2] has important implications for the drafting of arbitration clauses. In that case, the Privy Council addressed the issue of whether an arbitration clause in a shareholders' agreement — which provided that in the event of an unresolved dispute, "any party may submit the dispute to binding arbitration" — constituted a binding agreement to arbitrate.

The Privy Council described the appeal as raising "interesting points on interpretation of an arbitration clause", and concluded that there were three possible analyses which could be adopted:[3]

  1. Analysis I — the words "any party may submit the dispute to binding arbitration" are not only permissive, but exclusive, if a party wishes to pursue the dispute by any form of legal proceedings;
  2. Analysis II — the words are purely permissive, leaving it open to one party to commence litigation, but giving the other the option of submitting the dispute to binding arbitration, such option being exercisable either by commencing an ICC arbitration, as the respondent submitted and Bannister J and the Court of Appeal held; or
  3. Analysis III — the option may be exercised by requiring the party which has commenced the litigation to submit the dispute to arbitration, by making an unequivocal request to that effect and/or by applying for a corresponding stay, as the appellants had done.

Rationale of the decision ('The hallmark of arbitration is consent'[4])

The Privy Council concluded that[5] the arbitration clause could amount to a binding commitment to arbitrate if one party chose to rely upon it, either i) by commencing arbitration proceedings, or ii) by applying to stay litigation in favour of arbitration. The Privy Council held that:

  1. "Clauses depriving a party of the right to litigate should be expected to be clearly wordedB there is an obvious linguistic difference between a promise that disputes shall be submitted to arbitration and a provision that 'any party may submit the dispute to binding arbitration'."[6] The Privy Council rejected Analysis I and considered the clause as an optional arbitration clause;
  2. Analysis II was commercially nonsensical as it requires the party on the receiving end of the proceedings to have to commence its own arbitration, where it may be seeking nothing more than a declaration of non-liability;
  3. Analysis III should be preferred because it enables a party wishing for a dispute to be arbitrated, either to commence arbitration itself, or to insist on arbitration, before or after the other party commences litigation, without itself actually having to commence arbitration.

Comment

It is arguable that the relevant provision in Malaysia,[7] which is in pari materia with the legislation under consideration in Anzen, is wide enough to permit a stay, without requiring a party to actually submit the dispute to arbitration. However, it is advisable for commercial parties with the intention to arbitrate all disputes under the relevant agreement to draft arbitration agreements that provide exclusivity for arbitration and preclude recourse to litigation.

Footnotes

[1] Arbitration Act 2005, s 10; Rules of Court 2012, O 69, r 10

[2] Anzen Limited and others v Hermes One Limited (British Virgin Islands) [2016] UKPC 1. Although not binding as a matter of Malaysian law, judgments by the Privy Council are of persuasive authority in Malaysian courts if similar clauses are to be interpreted under Malaysian law

[3] Paragraph 9 of the judgment

[4] Ibid, para 34

[5] This judgment overturned the decision in the Court of Appeal which had upheld the decision of Bannister J of the Eastern Caribbean Supreme Court (British Virgin Islands) that the clause did not entitle the appellants to a stay of proceedings commenced by the respondent, under s 6(2) of the BVI Arbitration Ordinance 1976, without the appellants having commenced arbitration

[6] Paragraph 13 of the judgment

[7] Arbitration Act 2005, s 10

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