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Jaya Sudhir A/L Jayaram v Nautical Supreme Sdn Bhd¹

A case note by Vong Sze Xin.

Background facts

Nautilus Tug & Towage Sdn Bhd (“Nautilus”) was a joint venture company formed to undertake a project for the provision of harbour tug services. Its shareholders were Azimuth Marine (“Azimuth”) and Nautical Supreme Sdn Bhd (“Nautical Supreme”). The plaintiff, Jaya Sudhir Jayaram (“Jaya”), was not a shareholder of Nautilus but claimed that he had agreed to invest in the project based on his collateral understanding with Nautical Supreme and Azimuth that:

• Azimuth would hold part of its shares in Nautilus in trust for Jaya; and
• Jaya would be entitled to participate in Nautilus’s equity.

Jaya contended that Azimuth and Nautical Supreme had acknowledged his beneficial ownership to the shares and 10% of the shares in Nautilus had, in fact, been transferred by Azimuth to Jaya. Nautical Supreme denied the existence of such collateral understanding and commenced arbitration proceedings against Azimuth and Nautilus in accordance with the arbitration clause in the shareholders’ agreement.

Nautical Supreme contended that the transfer of shares in Nautilus to Jaya was in breach of the shareholders’ agreement. Jaya was not a party to the shareholders’ agreement, hence, was not a party to the arbitration proceedings.

Alongside the arbitration proceedings instituted by Nautical Supreme, Jaya commenced a claim in Court against Nautical Supreme, Azimuth, Nautilus and Nautilus’s directors to enforce the collateral understanding. Jaya also applied for an interim injunction to restrain Nautical Supreme, Azimuth and Nautilus from continuing with the arbitration proceedings (“Jaya’s Suit”).               

Findings by the High Court

The pressing issue before the High Court was whether Jaya, who was not a party to the arbitration proceedings, should be given the right to have his claim on the shares heard first through Jaya’s Suit, and restrain Nautical Supreme from proceeding with the arbitration proceedings. In this regard, the High Court ruled in favour of Jaya and made the following observations:

• Jaya was not a party to the shareholders agreement, hence, could not seek recourse through the arbitration proceedings. Jaya could only ventilate his claim through civil proceedings in Court.
• The provisions in the Arbitration Act 2005 have no bearing on Jaya’s Suit as Jaya was not a party to the arbitration proceedings.
• The applicable test in relation to the injunction application in Jaya’s Suit is the test set out in Keet Gerald Francis Noel John v Mohd Noor bin Abdullah², namely that there must be a serious issue to be tried, damages would not be an adequate remedy and the balance of convenience lies with granting the injunction.
• The learned High Court Judge found that the test in Keet Gerald was satisfied. Firstly, there were serious issues to be tried as the existence of the collateral undertaking could only be determined after a full trial. Secondly, damages would not be an adequate remedy as Nautilus’s shares were not readily in the market. Thirdly, the balance of convenience was in favour of Jaya’s injunction proceeding over Nautical Supreme’s arbitration. This is because the issues raised in the arbitration proceedings overlapped with the issues in Jaya’s Suit, and it would not be desirable if Jaya’s Suit and the arbitration proceedings were to run concurrently, giving rise to a possibility of conflicting outcomes.
• The advantage of having the Court proceedings take priority is obvious, as all relevant parties are involved in the Court proceedings and the contesting claims can be ventilated in the Court proceedings.

Findings by the Court of Appeal

Aggrieved by the High Court’s decision, Nautical Supreme appealed to the Court of Appeal which eventually found in its favour. In setting aside the High Court’s decision, the Court of Appeal held that:

• Where there are pending arbitration proceedings, the Court should have due regard to the objectives of the Arbitration Act 2005 as a whole to uphold party autonomy and to limit judicial interference with arbitration.
• The Court of Appeal considered that the correct legal test for a third party to restrain arbitration proceedings should be as set out in the case of J Jarvis and Sons Ltd v Blue Circle Dartford Estates Ltd³, which is that the injunction does not cause injustice to the claimant in the arbitration and the continuance of the arbitration would be oppressive, vexatious, unconscionable or an abuse of process. According to J Jarvis, inordinate delay is also a material factor and can be fatal to an application for an injunction. In other words, a non-party to arbitration would have to satisfy a higher threshold to merit an injunction to arbitration proceedings than that required of a party to arbitration.
• Applying the aforementioned test, the Court of Appeal found that Jaya only sought the injunction to restrain the arbitration proceedings some 10 months after he became aware of it, and Jaya gave no reasonable explanation to justify such delay. On this ground, the Court of Appeal held that Jaya’s application should fail.

Findings by the Federal Court

Jaya appealed the Court of Appeal’s decision to the Federal Court which reversed the Court of Appeal’s decision and reinstated the High Court’s decision. Most notably, the Federal Court made the following observations:

• The Arbitration Act 2005 should not apply to a party who does not fall within the scope of the legislation. As Jaya was not a party to the arbitration proceedings, he should not be affected by the Arbitration Act 2005.
• Where a non-party applies for an anti-arbitration injunction, the applicable test is that laid down in Keet Gerald, and the test in J Jarvis is of no relevance. The Court of Appeal’s basis for the imposition of a higher threshold on a non-party to an arbitration is flawed. This is because in J Jarvis, the party that sought an injunction to restrain arbitration proceedings was a contracting party to the arbitration agreement and it is a logical requirement for a party to arbitral proceedings who seeks to restrain the continuance of the arbitration proceedings to be subjected to a higher or different threshold given the contractual obligations entered into by the party seeking to restrain the arbitral proceedings. This was not the case in Jaya’s Suit.
• The primary consideration on whether to grant the injunction to restrain the arbitration proceedings where the rights of a non-party thereto are involved is “what would be the fairest approach to all parties. It must not result in any party suffering a severe disadvantage and for the ends of justice to be met, the benefits must outweigh the advantage”.
• The Court of Appeal had erred in holding that Jaya’s delay of 10 months was not reasonably justified. In fact, the learned High Court Judge had considered the affidavit of Jaya and found that the chronology of events justified the filing of the application for the injunction was filed at the material time.
• In circumstances where some are parties and others are not parties to the arbitration proceedings, it is best that their disputes be dealt with by the Court. The disputes cannot be divided, with some dealt with by arbitration and some by the Court. In this regard, the Court may decline to give effect to the arbitration clause where the interests of third parties are involved or where there is a risk of parallel proceedings and inconsistent decisions arising out of the conduct of an arbitration.

Conclusion

The decision of the Federal Court demonstrates that a non-party to an arbitration can apply for an anti-arbitration injunction to restrain the arbitration between the parties and would not be left out in the cold and if his rights would be affected.

VONG SZE XIN
DISPUTE RESOLUTION PRACTICE GROUP

[1] (Federal Court Civil Appeal No. 02(i)-83-09/2018(W)).
[2] [1995] 1 MLJ 193.
[3] [2007] All ER (D) 96 (Jul).