Tindak Murni Sdn Bhd v Juang Setia Sdn Bhd and another appeal [2020] 3 MLJ 545

Federal Court (Putrajaya)

Breach of construction contract between employer and contractor 

1. The Appellant and Respondent entered into a construction contract which contained an arbitration clause requiring any disputes arising under the contract to be resolved through arbitration.  Despite this clause, the Respondent filed a civil suit in the High Court to recover amounts allegedly owed under three interim certificates.  Since the Appellant did not enter an appearance, the Respondent obtained a judgment in default (JID).
2. The Appellant later applied to set aside the JID, arguing that it had a valid defence because the Respondent’s work was defective.  The registrar accepted that the Appellant had shown a genuine dispute and set aside the JID.
3. After the JID was set aside, instead of filing a defence, the Appellant applied for a stay of the court action so that the dispute could be referred to arbitration in accordance with the contract.  The stay application and the Respondent’s appeal against the registrar’s decision were heard by a High Court judge, who upheld the setting aside of the JID and granted a stay pending arbitration.
4. The Respondent then appealed to the Court of Appeal.  The Court of Appeal reversed both rulings. It upheld the JID on the basis that the sums claimed under the interim certificates were conclusive and undisputed, and it did not address the arbitration clause or the stay application.
5. The Appellant argued that the Court of Appeal erred in its decision as it ignored sections 8 and 10 of the Arbitration Act 2005, failed to recognise that the arbitration clause and the existence of disputes constituted a valid defence, and wrongly allowed court proceedings despite the respondent having breached the agreement by suing instead of arbitrating.
6. The Appellant then appealed to the Federal Court.

Whether priority should be given to the arbitration agreement or to the Court proceedings commenced despite that agreement; and whether the default judgment ought to be set aside.

Whether priority should be given to the arbitration agreement or to the Court proceedings commenced despite that agreement; and whether the default judgment ought to be set aside.

1. The Federal Court began its analysis by examining whether the parties were bound by a valid arbitration agreement.  Clause 34 of the construction contract, read in line with section 9 of the Arbitration Act 2005, constituted a binding arbitration agreement requiring all disputes arising under the contract to be referred to arbitration.  Because of this, section 10 of the Arbitration Act 2005 became the operative statutory provision.
2. Section 10 expressly obliges the Court to stay legal proceedings and refer parties to arbitration once an application is made, unless the arbitration agreement is null, void, inoperative, or incapable of being performed.  The Federal Court emphasised that compliance with section 10 is mandatory.  The Court cannot disregard an arbitration clause merely because a party has already obtained a judgment in default.
3. The Federal Court held that the existence of a default judgment does not diminish the force of the arbitration agreement.  When the Respondent commenced litigation despite agreeing to arbitrate, it amounted to a breach of the arbitration agreement.  However, this breach did not terminate or invalidate the clause, as the employer did not accept any repudiation and instead sought to enforce arbitration rights through an application to stay proceedings.
4. To reinforce this, the Federal Court referred to section 65 of the Contracts Act 1950 and explained that breach of a term does not automatically discharge the contract unless accepted by the innocent party.
5. The Federal Court also found the Court of Appeal’s approach to be fundamentally flawed.  The Court of Appeal dealt only with the validity of the judgment in default and failed to consider the stay application, thereby ignoring the jurisdictional significance of section 10.  The Appellate Court should have addressed the arbitration issue first because it determined the proper dispute forum.  Failure to do so resulted in an incorrect ruling that deprived the appellant of its contractual right to arbitrate.
6. The Federal Court further noted that disputes relating to interim certificates were arbitrable.  The Federal Court held that clause 30.3(ii) expressly allowed disagreements regarding withheld sums, set-offs, or defective workmanship to be referred to arbitration.  This provision was omitted in argument before the Court of Appeal, which the Federal Court criticized as contrary to counsel’s duty of candour.  In reaffirming counsel’s duty as officers of the court, the Federal Court cited Jaginder Singh & Ors v Attorney-General [1983] 1 MLJ 71, observing that counsel must not misrepresent or distort contractual provisions.
7. The Federal Court rejected the Respondent’s reliance on res judicata and the doctrine of merger.  It distinguished Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2013] 4 All ER 715, explaining that res judicata presupposes adjudication on merits, whereas a default judgment does not involve factual determination.  Hence, neither doctrine prevented arbitration.
8. Ultimately, the Federal Court held that once disputes are shown to fall within the ambit of the arbitration clause, Courts must refrain from examining their merits.  This position aligns with the principle in TNB Fuel Services Sdn Bhd v China National Coal Group Corp [2013] 4 MLJ 857, where the Court of Appeal clarified that the amended section 10 renders stay applications mandatory.

The Federal Court reaffirmed that when parties have agreed to resolve disputes through arbitration, the courts must honour that agreement. Even if one party has already obtained a judgment in default, this does not override or defeat a valid arbitration clause.