It is common for agreements to have clauses that provide for termination upon the liquidation of a party to that agreement. However, the Court of Appeal case of Peninsula Education (Setia Alam) Sdn Bhd (previously known as Segi International Learning Alliance Sdn Bhd) v Biaxis (M) Sdn Bhd (In Liquidation) [2024] MLJU 1896 held that the arbitration agreement/clause in the main agreement remains operative and enforceable notwithstanding the liquidation of one of the parties.
Facts of the Case
- The employer, Peninsula Education (Setia Alam) Sdn Bhd (“Peninsula Education”), appointed the contractor, Biaxis (M) Sdn Bhd (“Biaxis”), to undertake construction work..
- Subsequently, Biaxis went into liquidation, and Peninsula Education terminated the contract with Biaxis.
- Biaxis, through its liquidator, subsequently initiated court proceedings to recover outstanding payments claimed to be owed by Peninsula Education.
- In response, Peninsula Education applied for a stay of the court proceedings pending arbitration under Section 10 of the Arbitration Act 2005 as there is an arbitration agreement under the contract.
- Biaxis, however, opposed the application, arguing that the arbitration agreement had become inoperative due to the liquidation and therefore, the dispute should continue via a court action.
High Court Decision
- The High Court ruled in favour of Biaxis, holding that the arbitration agreement was inoperative due to Biaxis’ liquidation.
- The High Court was also persuaded by Biaxis’ argument that a stay is not justified given the high costs of arbitration.
- Consequently, the High Court refused to stay the court proceedings, allowing Biaxis to continue with the claim in court.
Court of Appeal Decision
- The Court of Appeal reversed the High Court’s decision by holding that liquidation does not automatically render an arbitration agreement inoperative.
- The Court of Appeal underscored the principle of separability, which dictates that an arbitration agreement is independent of the main contract and can survive the termination or invalidity of that contract, even in the context of insolvency.
- Although Biaxis’ liquidator is not a party to the arbitration agreement with Peninsula Education, the liquidator “steps into the shoes of the company in liquidation” when he initiates the claim on behalf of Biaxis.
- The principle in granting a stay of proceedings pending arbitration applies regardless of whether the party is in liquidation. The liquidation of the party does not change the parties’ intention to arbitrate as contained in the arbitration agreement.
- That the cost of arbitration is prohibitive and would drain away the limited company’s fund and/or assets available are not valid reasons to refuse a stay. When parties entered into the arbitration agreement, they would have known about these costs and as such, the role of the Courts is to uphold freedom of contract and lean in favour of non-interference of arbitration matters in line with Section 8 of the Arbitration Act 2005.
Key Takeaways
The Court of Appeal’s decision demonstrates the fundamental doctrine of separability in arbitration agreements. Simply put, this principle means that the arbitration agreement stands on its own, separate from the main contract. So, if something happens to the main contract — like it being terminated due to a company’s liquidation — the arbitration agreement within the main contract is still valid. This means that even if the main contract ends, the promise to resolve disputes through arbitration remains enforceable unless proven otherwise.
This case therefore reaffirms the Court’s commitment to upholding the freedom of contract and the parties’ intention to resolve disputes through arbitration, reinforcing Malaysia’s arbitration-friendly legal environment.
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This article was written by Sean Ferdinand Ng (Senior Associate) from Donovan & Ho’s dispute resolution practice.
Donovan & Ho is a law firm in Malaysia. Our dispute resolution provides advice and legal representation in the civil and industrial courts. We also represent clients in both domestic and international arbitration, as well as other forms of alternative dispute resolution. Our experienced lawyers are also able to assist in commercial and civil disputes (such as debt recovery, shareholders’ or directors’ disputes, breach of contract and claims for injunctive relief), constructive disputes (arbitration and/or adjudication proceedings, disputes relating to delays, liquidated damages, defects and rectification work) and employment disputes (unfair dismissal claims, judicial review proceedings, and employment-related civil claims). Have a question? Please contact us.
