Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2020 MarsdenLR 724

FEDERAL COURT PUTRAJAYA
TINDAK MURNI SDN BHD – Appellant
Versus
JUANG SETIA SDN BHD & ANOTHER APPEAL – Respondent
[Civil Applications Nos: 03-2-11-2018 (B) & 02(i)-104-11-2018 (B)]

Petitioner Advocates:Justin Voon,Cheng Sing Yih ,Respondent Advocate: Chew Chang Min,Liza Chan Sow Keng,Shareen Tan Sze Ying

A judgment in default cannot override a binding arbitration agreement, necessitating disputes to be referred to arbitration as per the agreement.

Headnote:(A) Arbitration Act 2005 – Section 10 – The issue before the court was whether a judgment in default could prevail over a binding arbitration agreement when disputes were raised for arbitration by the defendant. The court held that the arbitration agreement must be honored and the judgment set aside. (Paras 1-2, 37-49)

(B) Validity of Arbitration Agreement – The court determined that despite the judgment in default, the arbitration agreement was valid and enforceable, and must be adhered to by both parties. (Paras 12, 26, 72)

(C) Subordination of Judicial Judgments – The court ruled that a judgment obtained in breach of an arbitration agreement does not negate the right to arbitration; hence such a judgment cannot take precedence over agreed arbitration provisions. (Paras 51-72)

Facts of the case: The appellant, a contractor, initiated court action despite a valid arbitration clause in their building construction contract. A judgment in default was secured, which was later contested by the employer through an application to set it aside. (Paras 6-8)

Findings of Court: The High Court upholding the arbitration agreement prevailed despite the judgment in default, restoring the earlier decision to allow arbitration. (Paras 73-74)

Issues: The primary questions were whether the arbitration agreement was superior to a judgment in default, and the consideration of merits under a valid arbitration clause. (Paras 1-2)

Ratio Decidendi: The court ruled that the existence of a valid arbitration agreement takes precedence over any judgment rendered in default of appearance in court, thereby requiring disputes to be referred to arbitration as agreed. (Paras 37, 73)

Result: Both appeals were allowed, overturning the Court of Appeal's decision and reinstating the High Court's order.

Judgement Key Points

Key Points: - (!) - (!) The court must stay proceedings and refer to arbitration if there is an arbitration agreement, under s 10 AA 2005. - (!) - (!) Arbitration agreements may be in contract clauses (cl 34) fulfilling s 9(1)-(2); such clauses mandate arbitration for disputes arising under the contract. - (!) - (!) s 10 limits the court to checking existence and validity of the arbitration agreement, not merits, when staying proceedings. - (!) - (!) The court must refer to arbitration if a valid arbitration agreement exists; judgment in default cannot override the arbitration clause. - (!) - (!) The Court of Appeal erred by not applying s 10 coherently across both appeals; the arbitration clause prevails, and the stay/arbitration should be ordered. - (!) - (!) The Federal Court answers: Question 1 - negative; Question 2 - negative; i.e., judgment in default cannot sustain against arbitration, and merits should not be considered when s 10 applies. - (!) - (!) The Supreme Court reinstates High Court order staying proceedings and referring to arbitration.

What is the effect of a valid arbitration agreement on a judgment in default under Arbitration Act 2005 s.10?

What is the appropriate approach under s.10 of the Arbitration Act 2005 when both a judgment in default and a stay pending arbitration are involved?

Should a court subordinate a judgment in default to an arbitration agreement when disputes have been raised for arbitration pursuant to that clause?

Judgment

Nallini Pathmanathan FCJ:

Introduction

[1] When the governing contract between two parties provides for an agreement to arbitrate, should that arbitration agreement be subordinated to a judgment in default obtained in court proceedings, contrary to the terms of the governing contract and effectively rendering the agreement to arbitrate, nugatory?

[2] This was the issue in the two related appeals before us. It necessarily involves a comprehension and application of s 10 of the Arbitration Act 2005 .

[3] In the instant case, one of the contracting parties initiated court proceedings, notwithstanding the existence of an arbitration clause. As no appearance was entered by the other party, judgment in default was obtained. When an application to set aside the judgment in default fell to be determined, together with an application for a stay pending arbitration, the issues before the courts below included the following:

(a) Whether the arbitration agreement or the proceedings in court obtained despite the agreement to arbitrate took precedence; and
(b) Whether the judgment in default ought to be set aside.

[4] On 19 September 2019, we heard both appeals one after the other in relation to the following questions of law:

1) Can a judgment in default in court be sustained when the plaintiff who obtained the judgment in default is bound by a valid arbitration agreement/clause and the defendant has raised disputes to be ventilated vide arbitration pursuant to the arbitration clause?
2) Should the court in hearing an application to set aside the judgment in default where a valid arbitration clause is binding on parties consider the "merits" or "existence" of the disputes raised by the defendant?

[5] We allowed both appeals, answered both questions in the negative, and restored the decision of the High court. Below we set out our full reasons for doing so.

Salient Factual Background And Chronology Of court proceedings Leading To These Appeals

[6] The appellant before us, Tindak Murni Sdn Bhd was the defendant in the High court at Shah Alam in Civil Suit No: BA-22NCVC-70-02-2017('the civil suit'). The respondent, Juang Setia Sdn Bhd, was the plaintiff that initiated the civil suit.

[7] As stated earlier Tindak Murni Sdn Bhd, the employer ('Employer') and defendant in the civil suit, entered into a Building Construction Contract with Juang Setia Sdn Bhd, the contractor ('Contractor') and plaintiff in the civil suit.

[8] The building contract is dated 1 June 2015. It related toa project for the construction of the remaining portions of a main access road, earthworks and infrastructure works in relation to 428 condominium units in Dengkil, Selangor. It is a standard form Pertubuhan Akitek Malaysia ('PAM') contract. Disputes arose between the parties resulting in the Contractor initiating the civil suit. The suit was initiated not withstanding the clear and unambiguous provision requiring parties to refer any dispute or difference arising between them in relation to any matter arising in connection with the contract, to arbitration.

Salient Clauses Of The Building Contract

[9] Clause 34 of the contract provides for an agreement to arbitrate in respect of any and all disputes arising between the parties in relation to the contract.

[10] Clauses 34.2 to 34.6 provide for the process of arbitration and the provision of an award, which is binding on the parties.

[11] Clause 34.4 stipulates that the Arbitrator shall have power to open up, review and revise any, inter alia , certificate and to determine all matters in dispute submitted to him as if no such certificate had been given.

The Dispute

[12] Works proceeded under the contract. On 29 January 2016,the architect issued a Certificate of Practical Completion certifying that the works were satisfactorily completed.

[13] The Contractor maintained that the Employer failed to make payment of a sum totalling RM1,702,870.37 due to it. The parties entered into negotiations in respect of this dispute, but failed to r

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