Introduction
The Court of Appeal’s decision in Apex Communications Sdn Bhd v Sumber Khazanah Sdn Bhd provides important guidance on the enforceability of arbitration clauses against downstream subcontractors and the proper interpretation of arbitration clause read together with exclusive jurisdiction clause. The judgment is particularly relevant in construction projects involving multi-tier subcontracting and contractual assignments.
Brief Facts
1st Subcontract[1]:
UEM Construction Sdn Bhd appointed Apex Communications Sdn Bhd (“Apex”) as 1st layer subcontractor to execute and complete a project known as Package S8: Construction and Completion of Elevated Stations and other Associated Works at Saujana Impian, Bandar Kajang and Kajang (“S8 Package”) via 1st subcontract.
2nd Subcontract[2]:
Apex in turn appointed Ikatan Engineering Sdn Bhd (“IESB”) as the 2nd layer subcontractor to execute and complete the S8 Package (“2nd Subcontract”). The 2nd Subcontract contains Arbitration Clause (Clause 38) and an Exclusive Jurisdiction Clause (Clause 39).
3rd Subcontract[3]:
IESB subsequently appointed Sumbertech Ventures Sdn Bhd (“SVSB”) as the 3rd layer subcontractor via a letter of appointment (“IESB LA”), whose position was later assigned to Sumber Khazanah Sdn Bhd (“SKSB”). In accepting the assignment, SKSB covenanted to strictly follow and comply with all terms and conditions of the 2nd Subcontract (without excluding the Arbitration Clause or the Exclusive Jurisdiction Clause).
Direct Payment[4]:
Following the assignment of IESB’s LA from SVSB to SKSB, IESB requested Apex to make all payments directly to SKSB. Apex agreed to the same.
Arbitration Clause and Exclusive Jurisdiction Clause[5]:
The Arbitration Clause reads as follows:
38. ARBITRATION
38.1 If any dispute or difference shall arise between APEX and the Sub-Contractor, either during the progress or after completion of the S8 Works Package – Structural Steel Works, or after the determination of the Sub-Contractor’s employment or breach of this Agreement, as to:
(a) the construction of this Agreement;
(b) any matter or thing of whatsoever nature arising under this;
(c) the withholding by the P.D. of any certificate to which the Sub-Contractor may claim to be entitled, then such dispute or difference shall be referred to the officer named in-Appendix 1 for a decision.
38.2 The decision of the officer named in Appendix 1 which is to be in writing shall subject to sub-clause 38.5 hereof be binding on the parties until after the completion of the S8 Works Package Structural Steel Works and shall forthwith be given effect by the Sub-Contractor who shall proceed with the S8 Works Package-Structural Steel Works with all due diligence whether or not notice of dissatisfaction is given by him.
38.3 If the officer named in Appendix 1 fails to give a decision for a period of forty-five (45) days after being requested to do so by the Sub-Contractor or if the Sub-Contractor be dissatisfied with any decision of the officer named in Appendix 1, then in any such case the Sub-Contractor may within forty-five (45) days after the expiration of the forty-five (45) days after he had made his request to the officer named in Appendix 1 or forty-five (45) days after receiving the decision of the officer named in Appendix 1, as the case may be, require that such dispute or difference be referred to a single Arbitrator agreed for that purpose, or in default of agreement appointed by the Director of the Regional Centre for Arbitration Kuala Lumpur.
The Exclusive Jurisdiction Clause reads as follows:
Law Governing This Agreement
39.1 This Agreement shall be deemed to be a Malaysian Contract and shall accordingly be construed according to the laws for the time being in force in Malaysia and the Malaysian Courts shall have exclusive jurisdiction to hear and determine all actions and proceedings arising out of this Agreement and the sub contractor hereby submits to the jurisdiction of the Malaysian Courts for the purposes of any such actions and proceedings.
(emphasis added)
High Court Proceeding[6]:
SKSB commenced its action at the High Court against Apex for alleged unpaid works for the sum of RM33mil and for the release of Performance Bond in the sum of RM1.8mil. After Apex entered its Memorandum of Appearance, Apex requested for 2 extensions of time to review documents, prepare defence and to obtain instructions.
Apex then filed an application for stay pending reference to arbitration pursuant to section 10 of the Arbitration Act 2005. The High Court dismissed the said application on these grounds:
a. Apex’s conduct of seeking 2 EOTs does not constitute an act of abandonment of right to arbitration.
b. The terms of IESB LA clearly adopted and incorporated all of the terms of the 2nd Subcontract without any exceptions or exclusion of the Arbitration Clause or the Exclusive Jurisdiction Clause. Thus the Arbitration Clause applies as against SKSB.
c. Although the Arbitration Clause applies, the wordings and the harmonious reading with the Exclusive Jurisdiction Clause effectively covenanted that reference to arbitration was optional and SKSB can opt to litigate the dispute before the Court pursuant to the Exclusive Jurisdiction Clause.
Appeal against High Court’s Decision[7]:
Apex filed its Partial Appeal specifically against the High Court’s finding that the reference to arbitration under the Arbitration Clause was optional. SKSB filed its Partial Appeal specifically against the High Court’s finding that the 2 months EOT requested by Apex was not an “act” in furtherance of the Court proceedings (or not an abandonment of right to arbitrate the dispute).
3 Issues to be determined before the Court of Appeal[8]:
Issue 1: Whether the High Court was correct in finding that the arbitration clause and exclusive jurisdiction clause within the 2nd Subcontract were enforceable against SKSB in view of the express incorporation and adoption of the second subcontract within the IESB LA.
Issue 2: Whether the High Court was correct in its reading and interpretation of both the arbitration clause and the exclusive jurisdiction clause and concluding that the reference to arbitration was only optional (not mandatory).
Issue 3: Whether the High Court was correct to find that Apex’s requests for extensions of time did NOT effectively denote that Apex had abandoned its right to refer the dispute to arbitration.
Findings of the Court of Appeal:
Issue 1 was answered in positive[9] – The Court of Appeal affirmed that the Arbitration Clause and Exclusive Jurisdiction Clause within the 2nd Subcontract were enforceable against SKSB in view of the express incorporation and adoption of the 2nd Subcontract within the IESB LA. The Court held that the arrangement amounted to a contractual assignment rather than novation. By undertaking to comply with “all terms” of the 2nd Subcontract, SKSB had stepped into the shoes of IESB and was bound by the Arbitration Clause and the Exclusive Jurisdiction Clause. The Court further held that SKSB was estopped from denying the applicability of the arbitration clause while simultaneously asserting rights under the same subcontract.
Issue 2 was answered in negative[10] – The Court of Appeal overturned the High Court’s finding that arbitration was optional. Reading Clause 38 as a whole, the Court held that the word “may” in Clause 38.3 did not confer a choice between arbitration and litigation. Instead, it reflected the SKSB’s choice whether to accept the decision of the appointed officer as binding or, if dissatisfied, to refer the dispute to arbitration as the sole further dispute resolution mechanism.
Further, in respect of SKSB’s reliance on the Exclusive Jurisdiction Clause, the Court of Appeal held that the Exclusive Jurisdiction Clause did not undermine the arbitration agreement. Rather, it simply means that for all the statutory remedies that SKSB can pursue before the court under the Arbitration Act 2005, SKSB must necessarily seek those remedies in an action before the Malaysian High Court and not any other court of another jurisdiction.
Issue 3 was answered in positive[11] – The Court of Appeal upheld the High Court’s finding that Apex’s requests for extension of time did not effectively denote that Apex had abandoned its right to refer the dispute to arbitration. Relying on the recent decision in Airbus Helicopters Malaysia Sdn Bhd v Aerial Power Lines Sdn Bhd [2024] 4 CLJ 243, the Court held that a mere request for extensions of time to file a defence does not, without more, amount to “taking any other steps in the proceeding” so as to preclude a stay under section 10 of the Arbitration Act 2005.
Conclusion
This decision reinforces the Malaysian courts’ consistent pro-arbitration stance and their support of arbitration as an alternative dispute resolution mechanism, including their readiness to uphold arbitration agreements agreed between parties. The Court of Appeal also confirmed that exclusive jurisdiction clauses do not dilute mandatory arbitration regimes and that courts will adopt a contextual and commercially sensible approach in interpreting dispute resolution clauses. For parties involved in multi-tier construction contracts, the case underscores the importance of careful drafting, incorporation and enforcement of arbitration agreements across all contractual layers.
Key Takeaways
- Downstream subcontractors who expressly adopt “all terms” of an upstream subcontract are likely to be bound by its arbitration clause.
- The use of the word “may” in an arbitration clause does not render arbitration optional; clauses must be read contextually and as a whole.
- Exclusive jurisdiction clauses can coexist with arbitration clauses and typically operate to identify the supervisory court.
- Requests for extensions of time, without more, do not amount to an abandonment of the right to arbitrate.
Disclaimer: The contents do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such.
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For further information, please contact:
T. Kuhendran, Partner, ZUL RAFIQUE & partners
devan@zulrafique.com.my
[1] See paragraph 6 of the case
[2] See paragraph 6 of the case
[3] See paragraph 6 of the case
[4] See paragraph 6 of the case
[5] See paragraph 25 of the case
[6] See paragraph 6 of the case
[7] See paragraph 6 of the case
[8] See paragraph 7 of the case
[9] See paragraphs 8 to 24 of the case
[10] See paragraphs 25 to 55 of the case
[11] See paragraphs 56 to 65 of the case
