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Court of Appeal: Optional arbitration clause is a valid arbitration agreement once either party elects to arbitrate

22 July 2025

“Even if there be an iota of doubt as to the validity of the arbitration agreement or some traces of ambiguity in a less than clear arbitration agreement, the court would still pivot in favour of arbitration” - per Lee Swee Seng JCA.
 
 
The Court of Appeal in Setia Awan Management Sdn Bhd v SPNB Aspirasi Sdn Bhd [2025] 4 MLJ 181 (“Setia Awan”) upheld that a hybrid arbitration clause with an option to arbitrate or litigate is a valid arbitration agreement once either party exercises the option to arbitrate.
 
Background
 
The parties entered into a Development and Contra Transaction Agreement (“DACT Agreement”) for a residential development project in Sitiawan, Perak. Under the DACT Agreement, the defendant was to develop the project, and the plaintiff was to purchase 20 plots of land and transfer 1,169 units as part of the financing. Disputes arose between the parties with the defendant alleging that the lands identified were not transferred to it and so, the defendant terminated the DACT Agreement and demanded compensation of RM311,897,723.00.
 
The plaintiff filed a suit against the defendant for damages for the defendant’s breach of the DACT Agreement. The defendant filed an application to stay proceedings pending reference to arbitration under section 10(1) of the Arbitration Act 2005 (“AA 2005”).
 
Clause 18 of the DACT Agreement contains the arbitration clause:
 
“In the event that any dispute or difference whatsoever shall arise between parties touching or concerning this Agreement or its construction or effect or as to the rights, duties or liabilities of either party or of parties hereto under this Agreement in connection with the subject matter of this Agreement the same maybe (sic) referred to any court in Malaysia or to arbitration in accordance with the provisions of the Arbitration Act 2005 or any statutory modification or re-enactment thereof.”
 
Section 10(1) of the AA 2005 provides that:
 
“A court before which proceedings are brought in respect of a matter which is the 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.”
 
Decision of the High Court
 
The High Court (“HC”) dismissed the stay application and held that the arbitration clause was null and void, inoperative and incapable of performance on the basis that: 
  1. the key components of an arbitration agreement had not been agreed (seat, the number of arbitrators and the mode of their appointment); 
  2. a clause with an option to proceed with litigation or arbitration is not a binding arbitration agreement that clearly requires the dispute to be resolved exclusively through arbitration; 
  3. the permissive word “may” indicates a discretion vested on the parties and non-mandatory language of reference to arbitration which makes the clause unenforceable; and 
  4. no notice of arbitration was issued to trigger arbitration proceedings. 
Decision of the Court of Appeal
 
The defendant appealed against the HC’s decision. In reversing the HC’s decision, the Court of Appeal (“CA”) primarily dealt with the following issues: 
  1. Whether there is a valid arbitration requiring the Court to grant a stay of proceedings. 
  2. Whether an option to arbitrate or litigate renders the arbitration agreement null and void. 
  3. Whether the doctrine of ‘kompetenz-kompetenz’ is such that the arbitral tribunal itself is to rule on the validity of the arbitration agreement 
The aforesaid issues will be dealt with in further detail below.
 
Whether there is a valid arbitration requiring the Court to grant a stay of proceedings
 
The CA started by reviewing Clause 18 of the DACT Agreement to assess whether there is a valid arbitration agreement when the components such as the seat of arbitration, number of arbitrators and mode of their appointment have not been agreed upon in the arbitration agreement. The CA found that there is no requirement under section 9 of the AA 2005, which deals with the definition and form of arbitration agreement, that parties to the arbitration agreement must agree on the aforesaid components in order to satisfy the definition of an “arbitration agreement”. Further, the CA noted that there are default provisions under the AA 2005 which deal with the seat of arbitration (section 22), number of arbitrators (section 12), and mode of appointing an arbitrator (section 13). The Court added that at the stage of a stay under section 10 of the AA 2005, the court is tasked with making a finding as to whether there is a valid arbitration agreement which is a pure question of interpretation which is a question of law.
 
The Court then examined the meaning of the word “may” as is found in Clause 18 of the DATC Agreement with respect to the parties’ right to choose arbitration as the preferred mode to resolve any disputes. The CA found that while the word “may” is not the language of compulsion, parties are not mandatorily required to pursue arbitration each time they cannot amicably resolve their dispute. The CA added that it is only when they want to proceed further in resolving their disputes or differences that arbitration is specifically spelt out as the route that the parties may choose. The CA drew the following analogies in coming to its conclusion: 
  1. Usage of the word “shall” cannot mean that parties are compelled to proceed with arbitration the moment they cannot resolve their disputes. The CA referred to a Privy Council case1 which held that the arbitration agreement which provided that “any party may submit the dispute to binding arbitration” is valid and words like “should” or “shall” cannot be taken literally as there is no obligation to commence arbitration if a party decides to do nothing. 
  2. Usage of the word “may” in a stand-alone arbitration agreement means that it is not mandatory that one must proceed with arbitration the moment there is a dispute, but should one want to proceed, the only route open is via arbitration. 
  3. Usage of the word “may” in section 418 of the National Land Code which provides that any person or body aggrieved by any decision of the state director, registrar or land administrator may appeal to the court within three months from the decision. Here, it is not mandatory to appeal but should they decide to appeal, they may not do so outside the three month period. 
Lee Swee Seng JCA held that even if there is doubt in the language used or the conflict with other clauses in the same contract, the moment there is a trace of an intention to proceed to arbitration, the court would lean in favour of upholding arbitration unless the arbitration agreement is “so pathological as to be incapable of saving”. In support of this arbitration centric approach, his Lordship referred to the following findings made in Malaysian and foreign cases which upheld the validity of the arbitration clauses: 
  1. Reference to a non-existent arbitration institution and its rules does not render the arbitration agreement invalid even when several agreements between the parties refer to different rules of arbitration.2 
  2. Where the parties have evinced a clear intention to settle any dispute by arbitration, the court should give effect to an intention to arbitrate even if certain aspects of the agreement may be ambiguous, inconsistent, incomplete or lacking in certain particulars.3 
  3. Even a single word “arbitration”, in context, in an agreement may suffice.4 
  4. The court would still pivot in favour of arbitration and uphold the validity of the clause where the arbitration agreement was said to be ambiguous because the arbitration clause ended with “but shall otherwise be referred to the English Courts”.5 
  5. A clause with an option to arbitrate or litigate is not ambiguous and even if there is ambiguity, it is for the arbitral tribunal to decide on this issue as provided under section 18 of the AA 2005 on the doctrine of ‘kompetenz-kompetenz’.6 
In summary, on this point, the CA concluded that there is an arbitration agreement once either one of the two parties exercises the option to arbitrate, and the court would hold the parties to the bargain struck and grant a stay of the court proceedings so that the contractual rights of the party electing for arbitration may be enforced. 
 
Whether an option to arbitrate or litigate renders the arbitration agreement null and void?
 
The CA looked at the following three scenarios in which a matter has come to court pursuant to section 10 of AA 2005: 
  1. when a party intends to avoid arbitration though both parties had earlier agreed in the arbitration agreement; 
  2. when one party to the arbitration agreement has the unilateral option to refer the dispute to court or arbitration and the option elected by that party is to go to court; and 
  3. when both parties to the arbitration agreement have the option to refer the dispute to court or arbitration and one party has proceeded to court while the other party elects to proceed to arbitration. 
The Court noted that in all three scenarios, the test is the same, which is whether there is a valid arbitration agreement which is not null and void or inoperative or not capable of performance and once this is shown, the court would gravitate towards granting a stay. The CA further held that this approach is supported by section 8 of AA 2005 which constrains the court to take a hands-off approach when dealing with matters under the AA 2005.  
 
In ultimately finding that Clause 18 of the DACT Agreement is a valid arbitration agreement, the CA reasoned as follows: 
  1. The mere availability of an option does not mean that the parties’ intention to proceed with an arbitration is less certain and not mandatory. Before the option is exercised, either party could potentially opt for arbitration but, once either party opts for arbitration, an arbitration agreement would have come into existence. 
  2. There is no basis to say that once an option to go to court is exercised, the option for the other party is extinguished. To say that the first to opt for going to court would prevail over a subsequent choice by the other party to opt for arbitration would be to prioritise one option over the other when both could be validly exercised. If the court was to decide on the basis of which right is exercised first, this would have the effect of rewarding a party who is quick to litigate without making any effort to negotiate or mediate. 
  3. The gravitation towards upholding arbitration is because when comparing the right to go to court and the right to go for arbitration, the former is a default right which need not be expressly stated in the contract while conversely, the latter has to be provided for by agreement. 
  4. When confronted with two equally valid options, the court would have to apply the test under section 10 of AA 2005. However the CA further reasoned that the court does not have to choose which option to uphold because the section 10 test is skewed in favour of arbitration. Therefore, the court ought to decide from the perspective of whether the right to arbitrate has been validly exercised and not on the basis of which right is exercised first. 
  5. The CA heavily relied on the Supreme Court of Victoria’s case of Manningham City Council v Dura (Australia) Constructions Pty Ltd [1999] VSCA 158 involving an appeal to determine whether the disputes between the parties are to be resolved by litigation or arbitration bearing in mind the hybrid dispute resolution clause providing for both as options. In particular, the finding that whilst the agreement contemplates that a dispute may be resolved by litigation, it remains an agreement that parties are bound to have their disputes arbitrated if certain conditions are fulfilled (i.e., notice and security for costs). 
  6. The test is not whether there is a valid agreement to go to court for that is an inherent right in the absence of an agreement to arbitrate. The test is whether any one of the parties has opted for arbitration at which instance an arbitration agreement has come into being. The Court added that the test is whether there is an arbitration agreement within the meaning of section 9 of the AA 2005 and if the requirements of section 10(1) have been fulfilled when a stay of the court proceedings is applied for.  
The CA concluded on this point that the arbitration agreement in question giving the parties the option to proceed to court or to arbitration is a valid arbitration agreement once a party opts for arbitration and as such is an agreement that is valid, clear and unambiguous and is not null and void nor is it inoperative or incapable of being performed.
 
Whether the doctrine of ‘kompetenz-kompetenz’ is such that the arbitral tribunal itself is to rule on the validity of the arbitration agreement
 
The CA started by highlighting that Section 18 of the AA 2005 expressly empowers the arbitral tribunal to rule on whether it has jurisdiction to hear the matter raised before it which covers the existence as well as extent of the arbitration agreement.
 
The Court noted that in the instant case, the dispute is not on the existence of an arbitration agreement but whether such an arbitration clause is a valid arbitration agreement that is not null and void. This was considered to be a question of interpretation of the arbitration clause.
 
The CA found that while the court’s finding on whether an arbitration agreement is null and void would only be made after hearing both parties, such a decision is an interim decision made on a prima facie basis as the same issue can be raised before the arbitral tribunal as envisaged in section 10(3) of the AA 2005. After a prima facie determination is made by the court and the matter proceeds to arbitration, the arbitral tribunal may then deal with the jurisdictional issue as a preliminary question or on an award on its merits. Subsequently, this matter may come up again for decision by way of an appeal to the High Court from a “full merits” argument from the arbitral tribunal’s ruling under section 18(8) of the AA 2005.
 
Reference was made to the UK case of Albon (trading as NA Carriage Co) v Naza Motor Trading Sdn Bhd and another (No 3) [2007] 2 All ER 1075 which provided four possible approaches for the court to choose from when the conclusion of an arbitration agreement is in issue. The court may (1) decide the issue on the available evidence that the arbitration agreement was made and grant the stay; (2) give directions for the trial by the court of the issue; (3) stay the proceedings on the basis that the arbitrator will decide the issue; and (4) decide the issue on the available evidence that the arbitration agreement was not made and dismiss the stay application.
 
The CA citing Macsteel International Far East Ltd v Lysaght Corrugated Pipe Sdn Bhd and other appeals [2023] 4 MLJ 551, found that our Court of Appeal has kept the options open as to which approach to take and thus, have coined the “just and convenient” test. The CA reasoned that there may be instances, such as forgery cases, where there is a necessity for witness testimony and such factors tip the balance for the court to follow an approach akin to “full merits test” and not prima facie test. The CA emphasised keeping a flexible approach depending on the factual matrix of each case. This is in line with the UK authorities and their Order 62 rule 8(3) Civil Procedure Rules on arbitration proceedings which is similar to Malaysia’s Order 69 rule 10(3) of the Rules of Court 2012. Both provisions enable the court to decide or give directions to enable it to decide on questions as to whether an arbitration agreement has been concluded.
 
The CA concluded on this point that whether it is a prima facie finding or a finding on a full merits of the case, there is no difference in the result as even a prima facie finding of a valid arbitration agreement is sufficient for the grant of a stay as the plaintiff could not show that the arbitration agreement is otherwise null and void, inoperative or incapable of performance.
 
Comments
 
It is noted that some of the earlier CA cases have taken a different approach when faced with agreements that had both an arbitration agreement and an option to litigate.
 
In the CA case of Lembaga Pelabuhan Kelang v Kuala Dimensi Sdn Bhd and another appeal [2011] 2 MLJ 606, due to the conflict between the arbitration clause in the principal agreement and the reference to the court’s jurisdiction in later supplemental agreements, the court found that they contradicted each other, and it was impossible to have a concurrent and combined situation of arbitration and litigation. Thus, the Court found that the arbitration clause had been rendered null and void, inoperative or incapable of being performed under section 10(1) by virtue of ‘the submission to the court jurisdiction clauses’.
 
In the CA case of Asia Pacific Higher Learning Sdn Bhd (registered owner and licensee of the Higher Learning Institution Lincoln University College) v Stamford College (Malacca) Sdn Bhd [2024] MLJU 1712 (“Asia Pacific”), similar to Setia Awan, the clause was that “Any dispute under this agreement between the parties to this agreement shall be settled by a single arbitrator mutually as agreed by the partied to this agreement or under the courts of Malaysia”. The court found that the hybrid clause is ambiguous and inoperative because it gives the choice or option to parties to resolve their disputes by arbitration or litigation in court thus, there is no imperative and binding obligation to mandatorily refer the dispute via arbitration. Put simply, it was concluded that parties have not unequivocally agreed to have their dispute solely referred to arbitration.
 
Based on the above, there appears to be conflicting decisions from different panels of the CA on the operability of an arbitration agreement where there is an option to arbitrate or to go to court. However, it is crucial to note that the Federal Court in Federal Court Civil Appeal 02(i)-24–07 of 2024(B) allowed the appeal against the CA case of Asia Pacific and found that there is no ambiguity in the arbitration agreement where there is an option to arbitrate or litigate. This was relied upon by the CA in Setia Awan. The Federal Court’s decision remains unreported.
 
The CA’s decision in Setia Awan marks a further shift towards upholding arbitration agreements even when the contract provides that parties “may” refer to arbitration or that both parties have the option to resolve their disputes through arbitration or court proceedings. It is therefore essential that contract drafters bear this in mind when drafting the dispute resolution clause to avoid uncertainties when determining the parties’ intent.   
 
Case Note by Loshini Ramarmuty (Partner) and Laarnia Rajandran (Senior Associate) of the Construction and Engineering Practice of Skrine.
 
 
 
1 Hermes One Ltd v Everbread Holdings Ltd and others [2016] 1 WLR 4098.
2 Uzma Engineering Sdn Bhd v Khan Co Ltd & Anor [2023] MLJU 1561.
3 Singapore Court of Appeal case of Insigma Technology Co Ltd v Alstom Technology Ltd [2009] 3 SLR 936.
4 Hong Kong Court of Appeal case of Acada Developments Co Ltd v Epco Industrie-Ausruestungen GMBH [1985] 1 HKC 465.
5 UK Queen’s Bench Division case of Lobb Partnership Ltd v Aintree Racecourse Co Ltd [1999] 69 ConLR 79.
6 Unreported decision of the Federal Court in allowing the appeal against the Court of Appeal’s decision in Asia Pacific.

This article/alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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