Federal Court rules that Arbitration Act provisions do not apply to non-parties to arbitration agreements

In Jaya Sudhir Jayaram v Nautical Supreme Sdn Bhd(1), the Federal Court held that Sections 8 and 10 of the Arbitration Act 2005 do not apply to a non-party to an arbitration agreement.

Facts

The appellant commenced an action in the high court against the first to third respondents. The claim concerned 10% of the shares in the third respondent, which had been registered in the second respondent’s name but subsequently transferred to the appellant.

The appellant pleaded that the third respondent was a joint venture company formed to undertake a project by Vale Malaysia Minerals Sdn Bhd, with the first and second respondents as its initial shareholders.

The appellant claimed that as the third respondent needed funds for the Vale Project, he had invested pursuant to a collateral understanding with the first and second respondents. Under that understanding, 10% of the shares were to be transferred from the second respondent to the appellant.

The first respondent alleged that the transfer contravened the shareholders’ agreement and commenced arbitration proceedings under the agreement’s arbitration clause.

The appellant applied for an injunction to restrain the first respondent from commencing or continuing legal proceedings or arbitration affecting his 10% shares without his presence (the injunction application). The high court granted the injunction, but the Court of Appeal later set it aside.

Appeal to the Federal Court

The appellant was granted leave to appeal on two questions of law:

Whether Section 10 applies to a party seeking to restrain arbitration proceedings to which it is not a party but which affect its proprietary rights.
Whether Section 8 applies to party litigants who are not parties to an arbitration agreement or arbitration proceedings.

Section 8: “No court shall intervene in matters governed by this Act, except where so provided in this Act.”
Section 10: “A court before which proceedings are brought in respect of a matter which is a subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”

The critical question: Can the appellant, a non-party to arbitration, have his claim heard first and restrain the respondents from proceeding with arbitration?

Federal Court Decision

The first respondent argued that Sections 8 and 10 prevent non-parties from interfering with arbitration.

The Federal Court examined Section 10 and held:

The term “proceedings” refers to court proceedings brought in respect of a matter under an arbitration agreement.
Mandatory stay applies only to parties to arbitration and matters covered by the arbitration agreement.

Based on the facts:

The appellant was not a party to the arbitration agreement.
The appellant’s claim was not the subject matter of the arbitration agreement.
The appellant was not a party to the arbitration proceedings.

Thus, Sections 8 and 10 were not applicable.

Anti-Arbitration Injunction Test

The Court of Appeal had applied the J Jarvis & Sons Limited v Blue Circle Dartfort Estates Limited(3) test (higher threshold) instead of the general interlocutory injunction test in Keet Gerald Francis Noel John v Mohd Noor(2).

The Federal Court held the higher threshold was misapplied, as the appellant was a non-party. The correct test was the Keet Gerald Francis test.

Result: The Federal Court restored the high court’s injunction and answered both leave questions in the negative.

Comment

The J Jarvis test remains relevant when a party to arbitration seeks to restrain proceedings.
The decision relied on the facts that the appellant:
- Was not a party to the arbitration agreement.
- His claim was not the subject matter of the arbitration.
- Was not involved in the arbitration proceedings.
A different outcome could arise if a non-party’s claim was within the scope of an arbitration agreement and the non-party agreed to join the arbitration.