In the construction industry, especially for smaller projects, it is common for parties to have a brief “letter of award” to record the agreement between parties to carry out construction work. In some cases, there is no letter of award at all. Problems arise when the documentation between the parties do not clearly or fully reflect the agreed terms and conditions.
In the case of Pandan Etika Sdn Bhd v Liang Builders Sdn Bhd (Originating Summons No. WA-24C(ARB)-27-06/2019) (11 December 2019), the High Court recently had to consider the issue of whether an arbitration agreement in a PAM standard contract can be incorporated by reference.
Brief Facts
- The Plaintiff appointed the Defendant as the main contractor for renovation works (“Works”) of a 3 storey bungalow. How the appointment came about is one of the main issues in dispute.
- The Defendant alleged that the Plaintiff had issued a letter of award (“LOA”) to the Defendant for the Works. The LOA was a two page document with only 6 clauses. Among other things, Clause 3 of the LOA stated:
“the terms and conditions of the contract shall be PAM (2006) Agreement & Conditions of Building Contract Private Edition With Quantities.”
- The Defendant carried out the Works, but alleged that the Plaintiff refused to make payment to the Defendant.
- In turn, the Plaintiff refuted the Defendant’s demand, and alleged among other things, that the Defendant failed to complete the Works in a good and workmanlike manner, and failed to rectify defective works.
- The Defendant issued a notice of arbitration pursuant to Clause 34.5 of the Agreement & Conditions of PAM Contract (2006) (With Quantities) (“PAM Contract”) as referred in Clause 3 of the LOA.
- The Plaintiff filed an originating summons in the High Court, seeking, among other things, declaration that parties did not enter into an arbitration agreement and that the Defendant was therefore not entitled to refer the dispute to arbitration.
The Plaintiff’s arguments
The main thrust of the Plaintiff’s argument was that there was no intention of parties to make the arbitration clause in the PAM Contract as part of the agreement.
The Plaintiff stated that the absence of the intention of parties to be bound by the PAM Contract can be seen from the conduct of parties, since the Defendant did not comply with other provisions of the PAM Contract (such as the submission of interim claims for approval and issuance of architect’s certificates).
Further, since the PAM Contract referred to in the LOA was just a standard contract, it was incomplete and lacking in material terms such as who is the architect, engineer, and quantity surveyor for the project. The LOA could not supplement the omissions and therefore the PAM Contract and the arbitration clause therein is void for uncertainty.
The Court’s Findings
The High Court held that the terms and conditions of the PAM Contract may be incorporated by reference, even though the PAM Contract was devoid of certain details in the articles of agreement. The Court referred to the case of Albilt Resources Sdn Bhd v Casaria Construction Sdn Bhd [2010] 7 CLJ 785, which held that an agreement itself does not need to have an arbitration clause in it so long as the agreement “refers to an arbitration clause in another document and the agreement is in writing and the reference incorporates the said clause into the agreement”.
In any event, the Court found that since the notice of arbitration has been issued, the arbitral tribunal is competent to rule on its own jurisdiction. The Plaintiff is entitled to raise their objections to the validity or existence of the arbitration agreement before the arbitral tribunal itself, pursuant to Section 18 of the Arbitration Act 2005.
As such, the High Court dismissed the Plaintiff’s originating summons.
Commentary
The Federal Court in Ajwa for Food Industries Co (Migop), Egypt v Pacific Inter-Link Sdn Bhd previously held that Section 9(5) of the Arbitration Act 2005 allows a situation where, instead of including an arbitration clause in the agreement, parties may include a reference to a document containing an arbitration agreement or clause. The reference need only be to the document containing the arbitration clause and does not need to explicitly refer to the arbitration clause itself. There is also no requirement that the document referred to needs to be signed by the parties. Although the High Court here did not make reference to the Federal Court’s decision in Ajwa, its ruling is consistent.
Section 9(5) of the Arbitration Act provides that “a reference in an agreement to a document containing an arbitration clause shall constitute an arbitration agreement, provided that the agreement is in writing and the reference is such as to make that clause part of the agreement”.
The High Court’s decision is unsurprising, and is in line with the courts’ general approach of non-intervention of arbitral proceedings. Typically, challenges as to the validity or existence of an arbitration agreement before the tribunal have to be taken up to the tribunal, as the Arbitration Act 2005 empowers the tribunal to rule on its own competency and jurisdiction.
A key takeaway from this case is the importance of good drafting. Disputes like this often arise when contracts do not clearly express the intention of the parties, or where standard contracts are used or referred to without full understanding of the legal implications.
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This article was written by Donovan Cheah. Donovan is an advocate and solicitor of the High Court of Malaya. He is a Fellow at the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and the Asian Institute of Alternative Dispute Resolution. He is also a registered foreign lawyer with the Singapore International Commercial Court.
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