Malaysia: Malaysian Federal Court And English Court Of Appeal Issue Rare Anti-Arbitration Injunctions

On July 1, 2019, in Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & Ors (Federal Court Civil Appeal No. 02(i)-83-09/2018(W)) (“Jaya Sudhir Jayaram”), the Federal Court of Malaysia granted an application by a non-party to an arbitration agreement seeking to restrain the parties to the agreement from taking part in an ongoing (likely Malaysian-seated) arbitration, in order to allow the non-party to attempt to enforce its proprietary rights through litigation. Shortly thereafter, on July 12, in Sabbagh v Khoury & Ors [2019] EWCA 1219 (“Sabbagh v Khoury”), the English Court of Appeal granted an injunction restraining a Lebanese-seated arbitration. Because of strong pro-arbitration public policy in most jurisdictions, such anti-arbitration injunctions are exceedingly rare, and these Malaysian and English judgments may have potential ramifications for how such injunctions are used in the future.

The Principle of Judicial Non-Intervention in Arbitration Proceedings

Modern arbitral regimes aim, as a matter of policy, to minimize judicial intervention in arbitral proceedings.1 This principle of judicial non-intervention is reflected in Article 5 of the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”), which provides “[i]n matters governed by this Law, no court shall intervene except where so provided in this Law.” Commentators have described Article 5 as “a key provision of the Model Law,2 and critical to ensuring certainty for parties.3   

In England, this principle of judicial non-intervention is embodied in section 1(c) of the English Arbitration Act 1996 (“EAA”), which provides that courts shall not intervene in arbitrations unless provided for in the EAA itself.  Coupled with section 9(4) (providing that courts shall stay court proceedings in respect of a dispute if that dispute is subject to an arbitration agreement) and section 30(1) (providing that an arbitral tribunal has the competence to rule on its own jurisdiction), the arbitration regime in England protects arbitral proceedings from excessive court scrutiny and intervention. This same principle is found in section 8 of the Malaysian Arbitration Act 2005 (“MAA”), which replicates Article 5 of the Model Law. Like the EAA, the MAA contains materially similar provisions governing the stay of court proceedings (section 10) and the competence of tribunals to rule on their own jurisdiction (section 18).

Because of the strong overarching policy of leaving arbitrations undisturbed except in prescribed situations, it is extremely rare for courts to issue anti-arbitration injunctions, which makes the decisions in Jaya Sudhir Jayaram and Sabbagh v Khoury all the more interesting.

Malaysian Anti-Arbitration Injunction:  Jaya Sudhir Jayaram

Factual Background

In March 2013, Malaysian companies Nautical Supreme and Azimuth Marine formed joint venture Nautilus Tug & Towage (“Nautilus”) in Malaysia. The shareholders of Nautilus were Azimuth Marine (which held an 80% shareholding) and Nautical Supreme (which held a 20% shareholding). Nautical Supreme, Azimuth Marine and Nautilus entered into a Shareholders’ Agreement containing an arbitration agreement. The Shareholders’ Agreement restricted transfers to third parties. On December 16, 2015, Azimuth transferred 10% of the shares in Nautilus to a Malaysian individual, Jaya Sudhir Jayaram (“Jaya”). Nautical Supreme commenced arbitration under the auspices of the Kuala Lumpur Regional Centre for Arbitration (impliedly, in Malaysia) against Azimuth Marine and Nautilus in October 2016 pursuant to the Shareholders’ Agreement, contending that the transfer to Jaya was in contravention of the agreed equity structure.

Jaya claimed that he had agreed with Nautical Supreme and Azimuth Marine to invest in Nautilus, which required funds to carry out services for a port and maritime project. He alleged a collateral understanding with Nautical Supreme and Azimuth Marine that: (a) Azimuth Marine would hold 80% of the shares in Nautilus, and Jaya would be the beneficial owner of part of this 80%; and (b) Jaya would be entitled to participate in Nautilus’s equity, either directly, or through Azimuth Marine’s shareholdings.  Jaya emphasized that although he was not a named shareholder of Nautilus, he had participated in the business and operational matters of Nautilus in accordance with the alleged collateral understanding. This, he contended, cemented his belief that the other two parties had acknowledged his beneficial ownership. Nautical Supreme denied the alleged collateral understanding

In an action before the Malaysian High Court, which was subsequently appealed to the Court of Appeal and then to the Federal Court, Jaya sought to enforce his alleged proprietary rights and sought inter alia an injunction to restrain the commencing or continuing of legal or arbitral proceedings which affects the rights attached to the 10% and 70% shares without the presence of Jaya as a party to such proceedings.

The Federal Court Decision

Following appeals from the High Court and the Court of Appeal, the Federal Court, which is the highest and final appellate court in Malaysia, was called upon to decide whether to grant Jaya an anti-arbitration injunction on the ground that his interests as a third party may be affected by the ongoing arbitration.

As a threshold issue, the Federal Court examined sections 8 and 10 of the MAA and found that the MAA did not apply to a party who was neither a signatory to the arbitration agreement nor a party to the arbitration itself. On this basis, the Federal Court reasoned that the stay provisions of section 10 of the MAA did not apply to the matter before it (being a dispute between non-party Jaya and parties Nautical Supreme, Azimuth Marine and Nautilus). As such, the Federal Court rejected any requirement that the arbitration agreement be “null and void, inoperative or incapable of being performed,” and held that it was not bound by the policy of minimal court intervention in section 8 of the MAA. Instead, the Federal Court held, it was required to determine the “fairest approach” for all parties and its approach “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.”  

That being the case, the Federal Court reasoned that priority should be given for the matter to be dealt with by the court given: (a) the similarities between the issues to be tried in arbitration and litigation; and (b) the potential risks of not giving priority for the matter to be heard in court (e.g., risk of inconsistent findings between the two sets of proceedings, the risk of delay, and the risk of increased costs). The Federal Court decided unanimously to issue an anti-arbitration injunction restraining Nautical Supreme, Azimuth Marine and Nautilus from taking part in the ongoing arbitration.

English Anti-Arbitration Injunction:  Sabbagh v Khoury

Factual Background

The Sabbagh and the Khoury families were the owners of Consolidated Contractors Group SAL (“CCG”), which was the holding company of Consolidated Contractors Company, the largest engineering and construction business in the Middle East. CCG’s articles of association contained an arbitration agreement providing for arbitration seated in Lebanon. After the death in January 2010 of Hassib Sabbagh, one of Consolidated Contractors Company’s founders, his two sons, Samir and Suheil, and his daughter Sana were each entitled under Lebanese inheritance law to a third of his shares in CCG.  However, by an agreement dated July 2006, prior to Mr. Sabbagh’s passing, Mr. Sabbagh’s shares in CCG were transferred to Hassib Holdings SAL (“HH”), a company owned and controlled by Samir and Suheil. The transfer was later confirmed through a series of general meetings of CCG members held in July 2010 confirming HH as the holder of the shares in question.  

In July 2013, Sana issued proceedings in the English courts against her brothers Samir and Suheil, CCG, HH, two companies named Consolidated Contractors Group SAL and Consolidated Contractors International Company SAL, the Khoury family, and another individual (collectively the “Defendants”), accusing them of conspiring to misappropriate her father’s assets and depriving her of the CCG shares she was entitled to under Lebanese inheritance law. In March 2014, Samir and Suheil, CCG, and HH commenced arbitral proceedings against Sana in Lebanon pursuant to the articles of association to seeking determinations: (a) as to the entitlements of Sana, Suheil, Samir, and HH to shares in CCG; and (b) of the balance of monies owed by CCG on Mr. Sabbagh’s shareholder’s account. Sana declined to take part, asserting that the claims advanced in the arbitration did not fall within the scope of the arbitration agreement in the articles of association and that, Sana not being a shareholder of CCG, she was not bound by the arbitration agreement in any event.

In the English proceedings, the Defendants challenged the jurisdiction of the English courts and, in the alternative, sought a stay of the English proceedings under section 9 of the EAA. The application was unsuccessful: the Court of Appeal held that neither of the claims advanced in the English proceedings fell within the arbitration agreement and refused a stay of the English proceedings on that basis (the “2017 Judgment”). Following the 2017 Judgment, Sana applied for an anti-arbitration injunction on the basis that the ongoing Lebanese arbitration was vexatious and oppressive.  At first instance, the English High Court granted Sana’s application and granted an anti-arbitration injunction restraining the defendants from pursuing the Lebanese arbitration. The Defendants appealed to the Court of Appeal.

The Court of Appeal Decision

On July 12, 2019, the Court of Appeal issued its decision. It dismissed the Defendants’ argument that the EAA and the New York Convention prevented English courts from issuing anti-arbitration injunctions, but opined that such power must be exercised sparingly. The Court of Appeal further rejected an argument that the English courts would be empowered to grant an anti-arbitration injunction only if England was the “natural forum” for the dispute.

The Court of Appeal considered each of the claims in the arbitration. The Court ruled that Samir, Suheil, CCG, and HH’s claims relating to Sana’s entitlement to shares in CCG fell within the arbitration agreement in the articles of association, and lifted the High Court’s anti-arbitration injunction with respect to those claims. Applying the Court of Appeal’s previous decision in the 2017 Judgment, the Court held that Sana’s claims in the English lawsuit regarding misappropriation of assets and deprivation of shares did not fall within the arbitration agreement.  The Court noted that the claim advanced in the arbitration regarding the balance of monies owed by CCG on Mr. Sabbagh’s shareholder’s account corresponded to Sana’s claim of misappropriation of assets. In the circumstances,  the Court concluded that it would be “vexatious and oppressive” to allow arbitration to proceed in respect of claims not falling within the arbitration agreement, and agreed with the High Court’s assessment of relevant discretionary factors in arriving at that decision. Thus, the Court of Appeal partially confirmed the High Court’s decision to issue an anti-arbitration injunction to restrain Samir, Suheil, CCG, and HH from pursuing arbitration against Sana in Lebanon regarding the balance of monies owed by CCG.

The Court of Appeal recognized the exceptional character of its ruling, which interferes with a foreign-seated arbitration. However, it emphasized that there were cases where it would appropriate to determine issues relating to a foreign-seated arbitration, for example, where the English courts were considering a stay application under section 9 of the EAA, as was the case in the 2017 Judgment.

Implications of Jaya Sudhir Jayaram and Sabbagh v Khoury 

Clearly, neither decision sits well with the principle of judicial non-intervention and each gives cause for concern in its own way. The English Court of Appeal in Sabbagh v Khoury effectively usurped the roles of the tribunal and the Lebanese supervisory court by interpreting the scope of the (likely Lebanese law-governed) arbitration agreement, forming a view on the tribunal’s jurisdiction and then restricting the scope of those proceedings. Meanwhile, in Jaya Sudhir Jayaram, the Malaysian Federal Court enjoined arbitration of claims admittedly subject to an arbitration agreement, something the Court in Sabbagh v Khoury noted would be “wholly contrary to the fundamental principle underpinning the New York Convention and the 1996 Act of respecting and giving effect to arbitration agreements.”

In finding that it was not bound by the principle of minimal court intervention in arbitral proceedings, Malaysia’s Federal Court adopted an overly restrictive interpretation of section 8 of the MAA. Although the Federal Court was correct that the proceedings before it were not a matter subject to an arbitration agreement and, thus, section 10 did not apply to stay those proceedings, the arbitration between Nautical Supreme, Nautilus, and Azimuth Marine, which the anti-arbitration injunction restrained, was unquestionably a matter governed by the MAA. It clearly does violence to the principle of minimal curial intervention for the Malaysian courts to intervene in arbitration through the backdoor on the rationale that the proceedings before it do not concern a dispute itself directly subject to an arbitration agreement. The decision tells contracting parties that the Malaysian courts may ignore their arbitration agreements if a third party asserts ancillary rights—a disconcerting message, which may well result in future attempts to derail ongoing arbitrations.

The English Court of Appeal’s decision raises different concerns. It is extraordinary for a court to enjoin a foreign-seated arbitration based on its own determination that the claims advanced in the foreign-seated arbitration fall outside the relevant arbitration agreement, particularly when this involves interpreting an arbitration agreement governed by (presumably) a foreign law. Doing so usurps the roles of both the tribunal and the supervisory courts and sits poorly with principles of competence-competence and of comity. Coupled with the Court of Appeal’s holding that it is not a prerequisite that England be the natural forum for the dispute in question, the ruling in Sabbagh v Khoury might well encourage parties to invite English courts to police foreign-seated arbitrations through anti-arbitration injunctions. Here, the more appropriate recourse for applicant Sana would have been to challenge the jurisdiction of the tribunal during the arbitration and/or by means of a setting aside application or during the enforcement stage.

Footnotes

1 Born, G., International Commercial Arbitration, 77–78, 135 (Kluwer, 2nd ed. 2014)

2 UNCITRAL 2012 Digest of Case Law on the Model Law on International Commercial Arbitration, 20 (United Nations, 2012)

3 H. M. Holtzmann & J. E. Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary, 216 (Kluwer, 1989)

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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