By Muhammad Iman Hakim bin Abdul Rahman
ABSTRACT
In any commercial engagement, disputes between parties whether big or small is sometimes inevitable especially in a big scale project. While parties could always solve their dispute internally, at times it may ended up in a costly litigation with a point of no return for parties to continue their business engagement. To counter this, a multi-tier dispute resolution clause is often inserted in a contract to give a clear path for parties to resolve their dispute amicably without incurring or even preventingunnecessary cost of litigating the dispute. Recently, there has been quite a number of new developments regarding a multi-tier dispute resolution clause in other jurisdictions in terms of the enforceability of the clause and the effect of non-compliance of the clause. Against this backdrop, it is worth a while to make a comparison between these latest developments with the cases in Malaysia and to see whether Malaysian court are following these developments.
Keywords: Arbitration, multi-tier dispute resolution clause, enforceability, admissibility, jurisidiction.
ABSTRAK
Dalam mana-mana penglibatan komersial, pertikaian antara pihak-pihak sama ada besar atau kecil kadangkala tidak dapat dielakkan terutamanya dalam projek berskala besar. Walaupun pihak-pihak sentiasa boleh menyelesaikan pertikaian mereka secara dalaman, ada kalanya ia berakhir dengan litigasi yang menelan kos yang tinggi sehingga pihak-pihak tidak lagi dapat meneruskan kerjasama perniagaan mereka Bagi menangani perkara ini, klausa penyelesaian pertikaian berbilang peringkat (multi-tier dispute resolution) sering dimasukkan ke dalam kontrak untuk memberikan laluan yang jelas kepada pihak-pihak bagi menyelesaikan pertikaian mereka secara baik tanpa menanggung, atau bagi mengelakkan, kos litigasi yang tidak diperlukan.Kebelakangan ini, terdapat beberapa perkembangan baharu berkaitan klausa penyelesaian pertikaian berbilang peringkat di bidang kuasa lain dari segi kebolehkuatkuasaan (enforceability) klausa tersebut dan kesan ketidakpatuhan terhadapnya. Dengan latar belakang senario ini, adalah wajar untuk membuat perbandingan antara perkembangan terkini tersebut dengan kes-kes di Malaysia dan melihat sama ada mahkamah di Malaysia mengikuti perkembangan tersebut.
Kata Kunci: Arbritasi, klausa penyelesaian pertikaian berbilang peringkat, kebolehenfuan, kebolehterimaan (admissibility), bidang kuasa (jurisdiction).
Introduction
It is almost common nowadays that in any major commercial contract that are drafted by professional to have a multi-tier dispute resolution clause. The clause is essentially a clause that exist in a contract which provides the steps for parties to resolve their dispute with the incorporation of multiple alternative dispute resolution method such as negotiation, mediation, expert determination and cooling off period before going to the final steps which usually involve arbitration. The clause itself may have different names such as escalation clause, pre-arbitration clause or condition precedent clause.
There are many reasons for parties to incorporate such clause in their contract, with the most obvious one being its commercial practicality in the sense that it reduced or prevent unnecessary litigation that may be costly and required a plenty of time. Moreover, parties may intend that any dispute between them to be resolved internally to keep some information confidential since going to court would mean the dispute will be known to the public. Not only that, going straight to court or arbitration would mean that the business relation between the parties is practically irreparable since a decision by the tribunal or court will be against one of the parties. Consequently, by having the clause in a contract, parties could very well preserve their trust and business relation as the steps in the clause are designed to preserve such relation.
Despite all the commercial benefits that the clause may bring, issues may arise as to its enforceability and effect of non-compliance with the clause that are often overlooked. As of now, it seems that Malaysia is moving towards a strict compliance where the clause is treated as mandatory precedent or precondition to having jurisdiction.
Enforceability of the clause
The first obstacle in a multi-tier dispute resolution clause is whether the clause is enforceable because unenforceable and non-binding dispute resolution clause would mean that the clause is no use and parties could straight away go to the final steps of instituting action in arbitration or court proceeding. Usually, this problem would arise due to uncertainty, unclear and ambiguous dispute resolution clause.
It is important that in every term in the contract —including dispute resolution clause —are drafted with sufficient certainty otherwise it will be at risk of being unenforceable. The requirement certainty in dispute resolution or arbitration clause was made clear in the case of Malaysian Newsprint Industries Sdn Bhd v Bechtel International, Inc & Anor where it was mentioned that:
The parties are at liberty to decide on how to word the arbitration agreement provided it is clear and certain. The agreement to arbitrate is just like a contract and it must be clear and certain. It will be construed to be void for uncertainty if its meaning is so ambiguous that it is incapable of being construed to give the agreement a certain degree of certainty.
Take the case of Marc Marine Sdn Bhd v JMN Harbour Services Sdn Bhd & Ors, as an example of uncertainty where the arbitration clause provides 3 options for parties to choose, which they failed to agree on any one of the options, and without stating any applicable law or seat of the arbitration which is crucial for any arbitration proceedings. It was held in this case that the dispute resolution clause is unenforceable for being uncertain and ambiguous.
Aside from the arbitration agreement itself, the preconditions or steps before going to arbitration must also be sufficiently certain for it to be enforceable. These preconditions as mentioned before, may consist of negotiation, expert determination, mediation and cooling off period which its certainty may be challenged.
In the case of Sulamerica Cia Nacional de Serguros S.A. & ors v Enesa Engenharia S.A, the insurers argued that they have validly commenced arbitration and the mediation clausewhich constitute a precondition to arbitration was unenforceable due to its uncertainty. The court in case agreed with the insurers and held that for a mediation clause to be sufficiently certain, it must contain essential ingredients which, inter alia, a defined mediation process and a specific mediation provider. Similarly, in Walford v. Miles, mere agreement to negotiate in good faith when dispute arises would not be enforceable since it would amount to an agreement to agree in the sense that parties did not have a clear obligation and outcome.
Conversely, in the case of Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, a clause that require parties to first seek to resolve a dispute by friendly discussion with a limited duration or time constitute an enforceable precondition to arbitration. The judge make a distinction with the above cases since in Walford v Miles, the negotiation clause obliging parties to seek to settle a dispute which constitute an agreement to agree while in this case the parties are only oblige to have a friendly discussion and then wait for the prescribe period to elapse. Moreover, the judge stated that unlike an agreement to agree, a “negotiation in good faith” clause is certain enough to be enforced because parties had clearly undertaken to participate in a negotiation to find a compromise to settle their dispute.
Malaysian jurisprudence as reflected in the case of Usahasama SPNB-LTAT Sdn Bhd v Abi Construction Sdn Bhd, favour the position to enforce a multi-tier dispute resolution clause despite not having a specific or sophisticated term. In this case the judge cited with approval few cases that dealt with the uncertainty of the clause including Emirates Trading Agency LLC and even consider the public interest that comes with it and conclude that such clauses is enforceable.
Other than the uncertainty of the clause, some may argue that the usage of non-mandatory word such as “may” instead of “shall” could mean that the clause was merely intended to recommend a direction for parties to settle their dispute rather than having any binding effect. In the case of Anzen Ltd & ors v Hermes One Ltd, where the arbitration clause providing that “any Party may submit the dispute to binding arbitration”was held to give an option for parties to either settle their dispute by referring the matter to arbitration or by commencing it in court. However, it was stated by the court that the wording suggest that any party may still insist on arbitration provided that it asked for the court for a stay.
On the other hand, in a Malaysian case of Maya Maju (M) Sdn Bhd v Putrajaya Homes Sdn Bhd, the court held the clause that mentioned “as the case may be, require that such dispute or difference be referred to arbitration and final decision of a person to be agreed between the parties to act as the Arbitrator”, upon looking at its context and proper construction, reflect the intention of the parties to make it mandatory for parties to resolve their dispute in arbitration as the final steps and it is not open for parties to litigate the matter in court.
The key takeaway from these cases is that the steps in a multi-tier dispute resolution clause needs to be sufficiently certain by containing a properly defined procedure or at the very least, a limited period or a time frame for parties to engage in the process. By having these, the obligation and the outcome that the clause seek to achieve can be certainly determine and thus making it enforceable. Additionally, it must be noted that despite the usage of the permissive word “may” it could sometimes be interpreted as giving a mandatory effect on the arbitration agreement.
Effect of non-compliance
In some cases, even with a binding and enforceable multi-tier dispute resolution clause, party to a contract may still decide to jump to the final steps of the clause by going straight to arbitration. An issue may arise before the arbitration is whether the non-compliance of the steps or conditions precedent to the final steps will affect the jurisdiction of the tribunal. On this, there are two conflicting views, one being that the tribunal still have the jurisdiction to hear the dispute despite non compliance and it is only a matter admissibility of the dispute (“admissibility”), while the other view says that non compliance would render the tribunal not to have jurisdiction to hear the dispute (“jurisdiction”). For the first view it means that the tribunal may either decide to stay the arbitration and let parties fulfil the arbitration or continue to hear the dispute despite the non-compliance. While for the latter view, the tribunal’s hands are tied and have no other choice but to dismiss the case for lack of jurisdiction and the award given is under the risk of being set aside by the court for lack of jurisdiction.
The first view which only concern the admissibility of the dispute seems to be the dominant view across multiple common law jurisdiction. Starting with the position in the English court, where at first, the decision seems to favour the view on jurisdiction rather than admissibility as seen in the case of Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, where the court set aside the arbitration award due to lack of jurisdiction after parties failed to fulfil the condition precedent to arbitration. However, this position changed recently starting with the case of Republic of Sierra Leone v SL Mining, and later in NWA & FSA v NVF & others, in which the court in both of these cases, after referring to prominent writers such as Gary Born and Professor Jan Paulsson, held that breach of condition precedent to arbitration is a matter of admissibility of the claim rather than affecting the jurisdiction of the tribunal.Similarly in Singaporean case of DRO v DRP, the court found that the effect of non-compliance with the preconditions is a matter of admissibility, not jurisdiction of the tribunal. In BG Group v Republic of Argentina decided by the US Supreme Court way back in 2002 — without referring to admissibility and jurisdiction argument — already mentioned that a dispute about a procedural condition precedent to arbitration is a question that should be resolved by the arbitration, not the court.
However, the position is different in Malaysia. Malaysian court favour the latter view whereby non-compliance with the condition precedent would mean that the tribunal lack any jurisdiction to hear the dispute. One of the earliest cases that deal with a breach of multi-tier dispute resolution is the case of Usahasama SPNB-LTAT Sdn Bhd v Abi Construction Sdn Bhd, where the parties had agreed to refer any dispute between them to a supervising officer for a decision before parties could proceed to arbitration. However, in this case, the defendant proceeds straight to arbitration in which the arbitrator decides that it has jurisdiction to hear the dispute. Dissatisfied with the decision, the plaintiff appeal against the decision under section 18(8) of the Arbitration Act and it was held that the tribunal did not have the jurisdiction to hear the dispute since the condition precedent to the arbitration — that parties have agreed upon — was not fulfilled. More recently in Petronas Carigali (Turkmenistan) Sdn Bhd v Ishengir Individual Enterprise, it was argued that a breach of condition precedent to arbitration, namely negotiations, will go to the admissibility of the claim rather affecting the jurisdiction of the tribunal. However, the court dismiss the argument and said that Malaysian court has not made any distinction between jurisdiction and admissibility and inclined to follow the decision in Usahasama SPNB, thus held that the tribunal did not have jurisdiction to hear the case.
The case of Petronas Carigali (Turkmenistan) Sdn Bhdcould be said as a missed opportunity for the court to change the position from jurisdiction to admissibility so as to make the jurisprudence consistent with the other common law countries and the latest development in arbitration. Moreover, by changing the position to admissibility, the court in Malaysia will be seen as a pro-arbitration because under admissibility view, arbitral tribunal could determine any challenge on the procedure leading to arbitration — the preconditions —that could affect its jurisdiction without any interference from the court and subsequently give appropriate order such as a stay of proceeding. In addition to that, even the latest AIAC rules 2026, particularly rule 5, is leaning towards the admissibility view. Although rule 5.1 (g) provides that a notice of arbitration must be accompanied with a confirmation that all precondition to arbitration have been satisfied, rule 5.7 outline that any controversy with respect to the sufficiency of the notice shall be resolved by the arbitral tribunal. This means that the tribunal could determine and rule on any non-satisfaction of precondition to arbitration that constitute an insufficient notice of arbitration.
Conclusion
Overall, a multi-tier dispute resolution that may consist of multiple alternative dispute resolution method may come in handy especially for business entities due to the commercial benefits that may come with it. Nonetheless, it is the upmost importance for parties that intended to have the clause in their agreement to make sure that the clause is drafted with sufficient certainty or otherwise may be at risk of being unenforceable. Also, parties to the agreement must also consider the different position taken by the Malaysian court in terms of non-compliance of the clause since it may constitute a condition precedent to the final steps of a dispute resolution mechanism. For arbitral tribunal with the seat of arbitration in Malaysia, any breach of condition precedent means that it has no other choice but to dismiss the case all together. Rendering any award may risking it to be set aside by the Malaysian court for lack of jurisdiction.
0 Comments