EXPORT-IMPORT BANK OF MALAYSIA BERHAD v Lim Yaw Boon

Case Significance

Instructive on when an arbitration clause is optional rather than mandatory under section 10 of the Arbitration Act 2005, and on how such a clause becomes inoperative to compel a stay once a party exercises a contractually preserved right to litigate.

This High Court decision in the Commercial Division at Kuala Lumpur concerns an application under section 10 of the Arbitration Act 2005 to stay court proceedings pending reference of the dispute to arbitration. The plaintiff, Export-Import Bank of Malaysia Berhad, sued the defendant on a Personal Guarantee Agreement of August 2016, seeking to enforce the defendant's obligations following an alleged default by the borrower under a related facility agreement. A judgment in default of appearance had first been entered against the defendant and then set aside, and the defendant, granted leave to enter appearance, applied to stay the proceedings, relying on clause 9.14 of the Guarantee Agreement as a binding arbitration agreement that obliged the court to stay and refer the dispute to arbitration. The court, per Muhammad Adam @ Edward bin Abdullah JC, set out the framework of section 10, which requires a court to stay proceedings and refer the parties to arbitration where a party applies before taking any other step, unless the arbitration agreement is null and void, inoperative or incapable of being performed, and applied the Federal Court's guidance in Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd that an arbitration clause must be construed according to its language and the circumstances in which it was made. Construing clause 9.14, the court held that it did not impose a mandatory obligation on the plaintiff to resolve disputes exclusively by arbitration, but expressly preserved the plaintiff's right to commence proceedings in court, and that once the plaintiff exercised that contractual right to litigate, the arbitration clause was rendered inoperative for the purpose of compelling a stay; to hold otherwise would rewrite the parties' bargain by depriving the plaintiff of a right it had expressly negotiated and retained. The court emphasised that its task was to give effect to the contract as written and not to impose a different dispute-resolution regime under the guise of promoting arbitration. The defendant's stay application was accordingly held to be misconceived and was dismissed with costs. The judgment is instructive on when an arbitration clause is optional rather than mandatory and becomes inoperative once a preserved right to litigate is exercised.