In circumstances where an arbitration clause expressly includes only some, but not all, of the parties to a transaction, and a dispute arises between all concerned, naturally, only those parties included in the arbitration clause may participate in the arbitration, leaving the other parties to seek redress from the courts. The question is what the non-parties to the arbitration can do if the arbitration touches upon their interests?
In Jaya Sudhir Jayaram v Nautical Supreme Sdn Bhd & Ors, the Federal Court of Malaysia confirmed that non-parties to arbitration can obtain injunctions to restrain arbitration proceedings (also known as anti-arbitration injunctions).
In this case, the third respondent was a joint venture company (owned by the first and second respondents) which was formed to undertake a project to build, own and manage tug boats. It was, however, in need of funds. The appellant (the plaintiff) claimed that there was a collateral understanding that it would come in as an investor. Pursuant to this, the appellant requested for the transfer of 10% shares in the third respondent from the second respondent to himself. The first respondent alleged that the second and third respondents acted in breach of the terms and conditions of the shareholders’ agreement which prohibits the transfer of shares to a third party. This shareholders’ agreement contained an arbitration clause. Pursuant to issuing a notice of breach, the first respondent commenced arbitration proceedings as well as three civil suits against the appellant and second and third respondents. The appellant was not a shareholder and thus not a party to the underlying arbitration agreement. Following this, the appellant applied to court for an anti-arbitration injunction against the first to third respondents.
The High Court granted the anti-arbitration injunction on the basis that the legal requirements for the court to grant an interim injunction as laid down in the case of Keet Gerald Francis Noel John v Mohd Noor bin Abdullahwere satisfied. In particular, the High Court found that as there were overlapping issues between those issues raised in the arbitration proceedings and in the civil suit, it would be undesirable if the civil suit and the arbitration proceedings were allowed to take place concurrently, giving rise to a possibility of conflicting outcomes.
On appeal, the Court of Appeal, however, declined to uphold the anti-arbitration injunction. In arriving at its decision, the Court applied a different legal test, that is, the test to restrain arbitration proceedings as set out in the English High Court case of J Jarvis and Sons Ltd v Blue Circle Dartford Estates Ltd. The plaintiff’s application was ultimately refused on the ground that the injunction to restrain the arbitration proceedings was only sought some 10 months after the plaintiff had become aware of the proceedings, and no reasonable explanation was given to justify such delay.
In reversing the Court of Appeal’s decision, the Federal Court upheld the grant of the anti-arbitration injunction. Most notably, the Federal Court made the following observations:
a) the relevant provisions of the Malaysian Arbitration Act 2005 do not apply to non-parties to an arbitration;
b) the Court distinguished the case of J Jarvis (supra) on the ground that, in that case, the parties seeking the anti-arbitration injunction were the contracting parties to the arbitration agreement. The J Jarvis (supra) test therefore would not apply to non-parties to arbitration. The correct test to be applied is still that of Keet Gerald Francis (supra);
c) where issues relate to any party who is not subject to the arbitration, priority should be given for the matter to be dealt with by the court;
d) the courts may decline to give effect to the exclusive jurisdiction clause or the arbitration clause where third party interests are involved or where there is a risk of parallel proceedings and inconsistent decisions arising out of the conduct of an arbitration; and
e) there was no inordinate delay on the part of the plaintiff in applying for the injunction.
The Federal Court’s decision is significant for its revamping of the Malaysian law on anti-arbitration injunctions. Where a non-party makes a request for an anti-arbitration injunction, the court’s primary aim will now be to achieve the fairest approach to all concerned. This will entail a balancing exercise of the equities of the case, in which the pro-arbitration ethos of the Malaysian Arbitration Act 2005 is not a relevant consideration.
It is unclear whether this will necessarily result in a greater
propensity towards the grant of anti-arbitration injunctions, or perhaps the
risk of tactical filing of anti-arbitration injunctions to stifle or delay
arbitration proceedings. This is surely
a space to be watched.
  7 CLJ 395 (FC).
  1 MLJ 193 (COA).
  All ER (96).